<PAGE>
Filed Pursuant to Rule 424B4
Registration No. 333-04343
Sterling Chemicals, Inc.
(a subsidiary of Sterling Chemicals Holdings, Inc.
and formerly STX Chemicals Corp.)
LOGO
$275,000,000 11 3/4% Senior Subordinated Notes Due 2006
Sterling Chemicals Holdings, Inc.
(the survivor of the merger of
Sterling Chemicals, Inc. and STX Acquisition Corp.)
$191,751,000 Representing 191,751 Units
each Unit consisting of
One 13 1/2% Senior Secured Discount Note Due 2008
and
One Warrant to Purchase Three Shares of Common Stock
-----------
The Securities offered hereby will be issued upon consummation of the merger
("Merger") of STX Acquisition Corp. ("STX Acquisition") with and into
Sterling Chemicals, Inc. (the "Company"), which upon consummation of the
Merger will be renamed Sterling Chemicals Holdings, Inc. ("Holdings").
STX Chemicals Corp. ("Chemicals"), to be renamed Sterling Chemicals,
Inc. upon consummation of the Merger, is offering (the "Notes
Offering") $275,000,000 in aggregate principal amount of 11 3/4%
Senior Subordinated Notes Due 2006 (the "Notes"), and STX
Acquisition is offering (the "Units Offering") 191,751 Units
consisting of $100,000,064 in initial proceeds ($191,751,000
in aggregate principal amount at maturity) of 13 1/2%
Senior Secured Discount Notes Due 2008 (the "Discount
Notes") and Warrants (the "Warrants") to purchase an
aggregate of 575,253 shares of common stock, par
value $.01 per share, of Holdings ("Holdings Common
Stock") at an exercise price of $.01 per share.
The Notes and the Units are collectively
referred to herein as the "Securities" and
the Notes Offering and the Units Offering
are collectively referred to herein as
the "Offerings."
The Notes are unsecured senior subordinated obligations of Chemicals ranking
subordinate in right of payment to all existing and future Senior Debt
(as defined) of Chemicals and will be effectively subordinated to all
Debt (as defined) and other liabilities of the subsidiaries of
Chemicals (including trade obligations). Chemicals has not
issued, and does not have any firm arrangement to issue, any
significant Debt that would be subordinate to the Notes.
As of June 30, 1996, on a pro forma basis after giving
effect to the Transaction (as defined), the
aggregate amount of Senior Debt of Chemicals
would have been approximately $361.9 million.
The Discount Notes will be senior secured obligations of Holdings ranking
pari passu with other Senior Debt of Holdings, and will be effectively
subordinated to all Debt and other liabilities of Chemicals and its
subsidiaries (including trade obligations). Holdings has not
issued, and does not have any firm arrangement to issue, any
significant Debt that would be subordinate to the Discount
Notes. As of June 30, 1996, on a pro forma basis after
giving effect to the transaction, Holdings would have
had no Debt other than the Discount Notes, and the
aggregate liabilities (consisting of Debt and
trade payables) of Chemicals and its
subsidiaries would have been approximately
$697.5 million (including the Notes and
the Credit Facility). See
"Capitalization." The Discount
Notes will be secured, on a second
priority basis, by a pledge of all
of the capital stock of Chemicals.
(continued on next page)
-----------
FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE SECURITIES, SEE "RISK FACTORS" BEGINNING ON PAGE 15.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR AD- EQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public(1) Commissions Issuer(1)(2)
------------ ------------- ------------
<S> <C> <C> <C>
Per Note................................... 100% 3% 97%
Total...................................... $275,000,000 $8,250,000 $266,750,000
Per Unit................................... $521.51 $15.65 $505.86
Total...................................... $100,000,064 $3,000,002 $97,000,062
</TABLE>
(1) Plus accrued interest on the Notes and accrued original discount on the
Discount Notes, if any, from August 21, 1996.
(2) Before deducting expenses payable by Holdings and Chemicals, estimated at
$1,000,000.
-----------
The Securities are being offered by the several Underwriters when, as and if
issued, delivered to and accepted by the Underwriters and subject to their
right to reject orders in whole or in part. It is expected that delivery of
Securities will be made on or about August 21, 1996 against payment in
immediately available funds.
CS First Boston Chase Securities Inc.
The date of this Prospectus is August 16, 1996.
<PAGE>
(continued from previous page)
STX Acquisition is a Delaware corporation formed in April 1996 by an
investor group led by The Sterling Group, Inc. ("TSG") and The Unicorn Group,
L.L.C. ("Unicorn") to effect the Merger. At the time of the Merger, Chemicals,
a Delaware corporation formed in May 1996 as a wholly owned subsidiary of STX
Acquisition, will become a wholly owned subsidiary of Holdings and will
acquire all of the operating assets of the Company. Upon completion of the
Merger, the Discount Notes will be obligations of Holdings and the Notes will
be obligations of Chemicals. The proceeds of the Offerings will be used to
partially finance the Merger. The sale of the Securities offered hereby is
subject to the consummation of the Merger, the closing of all financing
therefor and the acquisition by Chemicals of the operating assets of the
Company, all of which will occur concurrently.
Interest on the Notes is payable semiannually on February 15 and August 15
of each year, commencing February 15, 1997. Except as described below, the
Notes are not redeemable at the option of Chemicals prior to August 15, 2001.
Thereafter, the Notes will be redeemable, in whole or in part, at the option
of Chemicals, at the redemption prices set forth herein, together with accrued
and unpaid interest, if any, to the date of redemption. Up to 35% of the
original principal amount of the Notes will be redeemable on or prior to
August 15, 1999, at the option of Chemicals, from the net proceeds of one or
more Public Equity Offerings (as defined) at a redemption price equal to
111.75% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of redemption. Upon a Change of Control (as
defined), each holder of Notes may require Chemicals to purchase all or a
portion of such holder's Notes at 101% of the principal amount thereof,
together with accrued and unpaid interest, if any, to the date of purchase.
There can be no assurance that Chemicals will be able to raise sufficient
funds to meet this obligation should it arise. For a more complete description
of the Notes, see "Description of the Notes."
Each Unit consists of $1,000 principal amount at maturity of Discount Notes
of Holdings and one Warrant to purchase three shares of Holdings Common Stock.
The Discount Notes and the Warrants will not become separately transferable
until the earlier of (i) 30 days following the closing of the Units Offering
and (ii) such date as the Underwriters may, in their discretion, deem
appropriate.
The Discount Notes are being offered at a substantial discount from their
principal amount at maturity. The initial issue amount of each Discount Note
will be $521.51 per $1,000 principal amount at maturity, representing a yield
to maturity of 13.5% (computed on a semiannual bond equivalent basis)
calculated from August 21, 1996. Cash interest will not accrue on the Discount
Notes prior to August 15, 2001 at which time cash interest will accrue on the
Discount Notes at a rate of 13.5% per annum. Interest on the Discount Notes is
payable semiannually on February 15 and August 15 of each year, commencing
February 15, 2002. BECAUSE THE DISCOUNT NOTES DO NOT ACCRUE CASH INTEREST
PRIOR TO AUGUST 15, 2001, THE DISCOUNT NOTES ARE NOT SUITABLE INVESTMENTS FOR
INVESTORS SEEKING CURRENT INCOME. Except as described below, the Discount
Notes are not redeemable at the option of Holdings prior to August 15, 2001.
Thereafter, the Discount Notes will be redeemable, in whole or in part, at the
option of Holdings, at the redemption prices set forth herein together with
accrued and unpaid interest, if any, to the date of redemption. Up to 35% of
the Accreted Value (as defined) of the Discount Notes will be redeemable on or
prior to August 15, 1999, at the option of Holdings, from the net proceeds of
one or more Public Equity Offerings at a redemption price equal to 113.5% of
the Accreted Value thereof, together with accrued and unpaid interest, if any,
to the redemption date. Upon the occurrence of a Change of Control, each
holder of Discount Notes may require Holdings to purchase all or a portion of
such holder's Discount Notes at a purchase price in cash equal to 101% of the
Accreted Value thereof, together with accrued and unpaid interest, if any, to
the date of purchase. There can be no assurance that Holdings will be able to
raise sufficient funds to meet this obligation should it arise. For a more
complete description of the Discount Notes, see "Description of the Units."
Each Warrant will entitle the holder, commencing August 21, 1997, to
purchase three shares of Holdings Common Stock at an exercise price of $.01
per share. Upon consummation of the Transaction, the Warrants will initially
entitle the holders thereof to acquire, in the aggregate, approximately 5.0%
of outstanding Holdings Common Stock on a fully diluted basis.
For information regarding the applicability of the reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") following
the Transaction, see "Available Information."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE SECURITIES
AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR
ACCOUNTS OF OTHERS IN THE SECURITIES PURSUANT TO EXEMPTIONS FROM RULES 10B-6,
10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
2
<PAGE>
[Flow chart depicting feedstocks for the Company's products, intermediates (the
Company's products), downstream uses for the Company's products and key end
markets.]
<PAGE>
[PHOTOS APPEAR HERE]
SODIUM CHLORATE OPERATIONS IN BUCKINGHAM, QUEBEC.
FACILITY DETAIL
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1995
CURRENT -------------------------
OPERATING ANNUAL RATED UTILIZATION
UNIT/PRODUCT LOCATION CAPACITY(A) PRODUCTION(A) RATE(B)
- ------------ -------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
PETROCHEMICALS Texas City, Texas
Styrene(c) 1,700 1,433 96%
Acrylonitrile 740 711 96
Acetic Acid(d) 800 644 107
Methanol(e) 150 NA NA
Plasticizers 280 282 101
Tertiary Butylamine 21 13 62
Sodium Cyanide 100 59 59
PULP CHEMICALS
Sodium Chlorate Buckingham, Quebec 137 127 96%
Grande Prairie, Alberta 55 54 98
Thunder Bay, Ontario 57 50 94
Vancouver, British Columbia 101 101 101
Valdosta, Georgia(f) 110 NA NA
----- ----- ---
Total 460 332 97%
Sodium Chlorite Buckingham, Quebec 3.7 3.3 97%
</TABLE>
- -------
(a) Petrochemicals in millions of pounds and pulp chemicals in thousands of
tons, unless otherwise noted.
(b) Utilization rates based on 1995 rated capacities.
(c) Styrene capacity has increased from 1,500 million pounds in 1995 to 1,700
million pounds effective in 1996; the 1995 utilization rate is based on a
production capacity of 1,500 million pounds.
(d) Acetic acid capacity has increased from 600 million pounds in 1995 to
approximately 800 million pounds effective June 1996; the 1995 utilization
rate is based on a production capacity of 600 million pounds.
(e) Capacity in millions of gallons. The methanol facility is scheduled to
begin production by September 1996.
(f) The Valdosta, Georgia facility is scheduled to begin production by late
1996.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. At the time of the Transaction, the
Company will change its name to Sterling Chemicals Holdings, Inc., Chemicals
will change its name to Sterling Chemicals, Inc. and the Company's operating
assets will be conveyed to Chemicals. See "The Transaction." As used herein,
the term "STX Acquisition" refers to STX Acquisition Corp. prior to the
consummation of the Transaction, and the term "Holdings" refers to the
surviving corporation in the Merger. The term "Company" refers both to Sterling
Chemicals, Inc. and its subsidiaries prior to the consummation of the
Transaction and, thereafter, to Holdings and its subsidiaries. The term
"Chemicals" refers to STX Chemicals Corp., which after the Transaction will be
a wholly owned subsidiary of Holdings known as Sterling Chemicals, Inc. Certain
operating and industry terms are defined in the Glossary included herein.
This Prospectus contains certain forward-looking statements with respect to
the business of the Company and the industry in which it operates. These
forward-looking statements are subject to certain risks and uncertainties which
may cause actual results to differ significantly from such forward-looking
statements. See "Risk Factors."
THE COMPANY
The Company is one of North America's leading producers of selected commodity
petrochemicals, used in the production of a wide array of consumer goods and
industrial products, and pulp chemicals used in paper manufacturing. The
Company ranks among the top three North American producers in terms of rated
production capacity for each of its primary products, including styrene,
acrylonitrile, acetic acid and sodium chlorate. Other products manufactured by
the Company include methanol, plasticizers, tertiary butylamine, sodium cyanide
and sodium chlorite. The Company manufactures all of its petrochemicals at a
single facility in Texas City, Texas (the "Texas City Plant"), and believes
that the large scale of this facility and its location on the U.S. Gulf Coast
provides it with certain cost advantages. The Company's pulp chemicals are
currently produced at four plants in Canada. A fifth plant, under construction
in Valdosta, Georgia, is scheduled to begin production in late 1996. The
Company believes that its pulp chemical plants benefit from their proximity to
key customers in the pulp industry and their access to competitively priced
electricity, which represents the most significant production cost in sodium
chlorate manufacturing.
In recent years, the Company has pursued a strategy of growth and product
diversification. In 1992, the Company acquired its pulp chemicals business
which has current sodium chlorate production capacity of 350,000 tons. In 1995,
the Company began a three-year, $200 million capacity expansion and upgrade
program, which is expected to be approximately 80% complete by the end of
fiscal 1996. Through this program, the Company will have expanded its total
petrochemical production capacity by approximately 1.4 billion pounds,
including capacity additions of 200 million pounds of styrene, 200 million
pounds of acetic acid and 150 million gallons (approximately 995 million
pounds) of methanol. In addition, the Company is expanding its sodium chlorate
production capacity by 110,000 tons, or 30%, by constructing a new facility in
Valdosta, Georgia. Through this strategy, the Company has sought to capitalize
on the continuing secular growth in global demand for its key products, while
reducing its sensitivity to the cyclicality of the markets for any particular
product. The following table sets forth the total revenues for the Company by
its primary products.
<TABLE>
<CAPTION>
NINE
MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
---------------- ---------
1993 1994 1995 1995 1996
---- ---- ------ ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Petrochemicals:
Styrene............................................ $144 $288 $ 467 $398 $249
Acrylonitrile...................................... 124 138 251 210 124
Acetic acid........................................ 64 76 94 75 50
Other.............................................. 68 76 74 54 64
---- ---- ------ ---- ----
400 578 886 737 487
Pulp Chemicals....................................... 119 123 144 106 114
---- ---- ------ ---- ----
Total.............................................. $519 $701 $1,030 $843 $601
==== ==== ====== ==== ====
</TABLE>
3
<PAGE>
Styrene. The Company is the third largest North American producer of styrene,
a chemical intermediate utilized in the production of plastic and synthetic
rubbers used in packaging, housewares, automotive components, luggage, toys and
building products. The Company's styrene unit is one of the largest in the
world and has an annual rated production capacity of 1.7 billion pounds,
following a recent debottlenecking, which represents approximately 12% of total
North American capacity. In fiscal 1995, the styrene unit operated at an
average utilization rate of 96% and generated revenues of $467 million, which
represented approximately 45% of the Company's total revenues.
Acrylonitrile. The Company is the second largest global producer of
acrylonitrile, the principal raw material for acrylic fibers used in textiles
and industrial applications. The Company's acrylonitrile unit has an annual
rated production capacity of 740 million pounds, which represents approximately
21% of total North American capacity. In fiscal 1995, the acrylonitrile unit
operated at an average utilization rate of 96% and generated revenues of $251
million, which represented approximately 24% of the Company's total revenues.
Acetic Acid. The Company is the third largest North American producer of
acetic acid, a product made from carbon monoxide and methanol. Acetic acid is
primarily used in the manufacture of intermediate products, such as vinyl
acetate monomer, which are used to produce various consumer products, including
adhesives, glue, cigarette filters and surface coatings. Following a 200
million pound capacity expansion completed in June 1996, the Company's acetic
acid unit has an annual rated production capacity of approximately 800 million
pounds, which represents approximately 17% of total North American capacity. In
fiscal 1995, the acetic acid unit operated at an average utilization rate of
107% and generated revenues of $94 million, which represented approximately 9%
of the Company's total revenues.
Sodium Chlorate. Upon completion of its Valdosta, Georgia plant, the Company
will be the second largest North American producer of sodium chlorate, which is
converted to chlorine dioxide for use in the pulp bleaching process. The
Company's four sodium chlorate plants have an aggregate annual rated production
capacity of 350,000 tons, and the Valdosta, Georgia plant, scheduled to begin
production in late 1996, will increase the Company's total annual capacity by
30% to approximately 460,000 tons. Following completion of the Valdosta plant,
the Company will account for approximately 22% of North American sodium
chlorate capacity. In addition, the Company's ERCO Systems Group is the
worldwide leader in the design, sale and technical service of large scale
chlorine dioxide generators, which are used to convert sodium chlorate to
chlorine dioxide. Since the mid-1980s, North American demand for sodium
chlorate has grown at an average annual rate of approximately 10%, as pulp
manufacturers are substituting chlorine dioxide for elemental chlorine in
bleaching applications in anticipation of environmental regulations that would
eliminate the use of elemental chlorine in pulp manufacturing. In fiscal 1995,
the Company's sodium chlorate plants operated at a weighted average utilization
rate of 97% and its pulp chemicals business generated revenues of $144 million,
which represented approximately 14% of the Company's total revenues.
4
<PAGE>
RECENT TRENDS
The primary markets in which the Company competes, especially styrene and
acrylonitrile, are cyclical and sensitive to changes in the balance between
supply and demand, the price of feedstocks and the level of general economic
activity. Historically, these markets have experienced alternating periods of
tight supply and rising prices and profit margins, followed by periods of large
capacity additions resulting in oversupply and declining prices and margins.
Global styrene and acrylonitrile markets experienced strong demand growth and
rising prices and profit margins from the end of fiscal 1994 through most of
fiscal 1995. During the fourth quarter of fiscal 1995 and into the first half
of fiscal 1996, styrene and acrylonitrile prices declined as a result of a
general slowdown in global economic growth, inventory drawdowns by customers
and reduced imports of petrochemicals and plastics by China, a major merchant
market purchaser. In recent months, however, prices for styrene and
acrylonitrile have stabilized after declines in the first six months of fiscal
1996, and the Company anticipates that pricing and profitability for its
styrene and acrylonitrile products will be relatively stable for the remainder
of fiscal 1996. Thereafter, anticipated expansions in worldwide production
capacity of styrene in 1997 and 1998 are expected to affect pricing of this
product for a period until global demand increases sufficiently to absorb such
additional production capacity. The Company currently expects acrylonitrile
market conditions to remain relatively stable through fiscal 1997.
Sodium chlorate sales prices and profit margins strengthened throughout
fiscal 1995 and into fiscal 1996 as a result of strong demand growth. In recent
months, weakness in the pulp and paper markets has resulted in somewhat slower
demand growth for sodium chlorate. However, sodium chlorate demand in the
remainder of fiscal 1996 and in fiscal 1997 is expected to benefit from the
anticipated promulgation of environmental regulations which would mandate the
elimination of elemental chlorine use in pulp bleaching applications.
The Company believes that it has developed an operating strategy to allow it
to compete effectively in periods of both rising and declining product prices.
During periods of peak demand, the experience and skill of its management has
allowed the Company to operate its petrochemical units at utilization rates
above its rated capacities, enhancing the Company's earnings generation during
favorable market conditions. During cyclical downturns, the Company believes
that the profitability of its operations is supported by its long-term sales
contracts and conversion agreements which accounted for approximately 53% of
its petrochemical sales volumes in fiscal 1995, as well as management's
emphasis on minimizing fixed costs such as selling, general and administrative
expenses.
BUSINESS STRATEGY
The Company's business strategy is to capitalize on its competitive market
position to take advantage of periods of tight supply and high prices and
margins for its primary products, which historically have occurred on a
cyclical basis, and to expand its production capacity to capture future growth
opportunities in the petrochemical and pulp chemical industries. Key elements
of the Company's business strategy are to: (i) maintain a competitive cost
position in petrochemicals by investing in new technology and equipment; (ii)
pursue low cost expansions in petrochemicals, such as its recent 30% expansion
of acetic acid capacity and construction of a world-scale 150 million gallon
methanol plant; (iii) pursue growth opportunities in pulp chemicals through the
current construction of additional capacity; (iv) continue to build strong
industry partnerships in petrochemicals through securing long-term supply
contracts with key customers; and (v) implement a focused acquisition strategy,
targeting chemical businesses and assets which would strengthen the Company's
existing market positions, provide upstream or downstream integration or
produce complementary chemical products.
5
<PAGE>
THE TRANSACTION
The proceeds of the Offerings will provide a portion of the funding required
for the acquisition by the stockholders of STX Acquisition, including an
investor group formed by TSG and Unicorn, of a controlling interest in the
Company. Pursuant to an Amended and Restated Agreement and Plan of Merger dated
as of April 24, 1996 (the "Merger Agreement") between STX Acquisition and the
Company, STX Acquisition will be merged with and into the Company (the
"Merger"). Current stockholders of the Company will have the option with
respect to each share of common stock, par value $.01 per share, of the Company
("Company Common Stock") to elect to receive $12.00 cash or to retain their
Company Common Stock ("Rollover Shares"). The aggregate number of Rollover
Shares is limited to 5.0 million, the maximum number of Rollover Shares.
Consequently, stockholders who elect to retain their shares of Company Common
Stock may be subject to proration. Certain stockholders of the Company executed
an Inducement Agreement with the Company (the "Inducement Agreement") which
provides that such stockholders will make elections to receive Rollover Shares
rather than cash (amounting to an aggregate of approximately 2.3 million
Rollover Shares, the minimum number of Rollover Shares). Consummation of the
Merger is subject to numerous conditions, including the consummation of the
Offerings and the other financing transactions described herein. The Merger and
the related financings are referred to herein as the "Transaction." See "The
Transaction."
The sale of the Securities offered hereby is subject to the consummation of
the Merger, the closing of a bank credit facility and a private placement of
equity and the conveyance to Chemicals of the operating assets of the Company,
all of which will occur concurrently.
Seven putative class action complaints have been filed relating to the
proposed Merger and the events leading up to the recommendation of the approval
thereof by the Board of Directors of the Company. The complaints generally
allege that the course of conduct taken by the directors in considering the
Company's strategic alternatives and in recommending the Merger was in
violation of their fiduciary duties to the Company's stockholders and seek
injunctive relief and unspecified damages. The Company believes that these
actions are without merit and has instructed legal counsel to vigorously defend
such actions. See "Business--Legal Proceedings--Shareholder Lawsuits."
Credit Facility. Upon consummation of the Merger, Chemicals will enter into a
bank credit facility (the "Credit Facility") with a syndicate of lenders led by
Texas Commerce Bank National Association, as administrative agent, and Credit
Suisse and Chase Securities Inc. as co-arrangers. The Credit Facility will
consist of (i) a six and one half year $100.0 million revolving credit facility
(the "Revolving Credit Facility"), (ii) a six and one half year $200.0 million
term loan and an eight year $150.0 million term loan (collectively, the "Term
Loans") and (iii) a four year $6.5 million term loan (the "ESOP Term Loan") to
fund a new Employee Stock Ownership Plan (the "New ESOP"). See "Management--
Compensation of Executive Officers" and "Description of the Credit Facility."
Equity Private Placement. Upon consummation of the Merger, STX Acquisition
will complete a private placement of shares of its Common Stock (the "Equity
Private Placement"), which will represent an equity contribution of
approximately $103.1 million, assuming the minimum number of Rollover Shares.
Purchasers of shares in the Equity Private Placement are expected to include an
investor group formed by TSG and Unicorn and the New ESOP. The New ESOP will
acquire its shares with the proceeds from a $6.5 million loan from Chemicals
(the "Chemicals ESOP Loan").
Upon consummation of the Transaction, the investors in the Equity Private
Placement, including principals of TSG and Unicorn, and certain principal
stockholders of the Company will control the Company through the ownership of
at least approximately 75% of the outstanding shares of Holdings Common Stock,
assuming the maximum number of Rollover Shares.
6
<PAGE>
The following table sets forth the estimated sources and uses of funds to
effect the Merger, as if the Merger had occurred on June 30, 1996.
<TABLE>
<CAPTION>
SOURCES OF FUNDS DOLLARS IN MILLIONS
---------------- -------------------
<S> <C>
Revolving Credit Facility............................. $ 5.4
Term Loans............................................ 350.0
ESOP Term Loan........................................ 6.5
Notes offered hereby.................................. 275.0
Units offered hereby.................................. 100.0
Equity Private Placement (a).......................... 103.1
------
Total............................................... $840.0
======
<CAPTION>
USES OF FUNDS
-------------
<S> <C>
Purchase of Company Common Stock (b).................. $640.7
Purchase of other equity interests (c)................ 14.6
Refinance outstanding debt............................ 138.2
Chemicals ESOP Loan (d)............................... 6.5
Estimated Transaction expenses and fees (e)........... 40.0
------
Total............................................... $840.0
======
</TABLE>
- --------
(a) Represents proceeds from the sale of STX Acquisition Common Stock to
investors in the Equity Private Placement, assuming the minimum number of
Rollover Shares. The amount of cash provided through the Equity Private
Placement may be reduced to $70.7 million if the maximum number of Rollover
Shares is retained by existing stockholders.
(b) Represents the funding of the purchase of Company Common Stock, at $12.00
per share, from stockholders who elect to receive cash in the Merger,
assuming the minimum number of Rollover Shares. The amount of funding
required to purchase the Company Common Stock may be reduced to $608.3
million if the maximum number of Rollover Shares is retained by existing
stockholders.
(c) Pursuant to the terms of the Merger Agreement, stock appreciation rights,
phantom stock and restricted stock will be converted at the time of
consummation of the Merger into rights to receive cash. See "The
Transaction-- The Merger."
(d) For a description of the Chemicals ESOP Loan, see "Management--Compensation
of Executive Officers."
(e) Estimated expenses and fees include Underwriters' discounts, advisory fees,
bank fees, legal and accounting fees, printing costs and other Transaction
expenses.
7
<PAGE>
ORGANIZATIONAL CHART
The following chart depicts the summary organizational structure of the
Company and its operating entities after the Transaction and the sources of
financing for the Merger, assuming the minimum number of Rollover Shares.
[Organizational chart depicting Sterling Chemicals Holdings, Inc.; Sterling
Chemicals, Inc.; Sterling Canada Inc.; and Sterling Pulp Chemicals, Ltd.]
8
<PAGE>
THE OFFERINGS
NOTES:
Issuer...................... Sterling Chemicals, Inc. (a subsidiary of
Sterling Chemicals Holdings, Inc. and formerly
STX Chemicals Corp.).
Securities Offered..........
$275,000,000 aggregate principal amount of 11
3/4% Senior Subordinated Notes Due 2006.
Maturity Date...............
August 15, 2006.
Interest Payment Dates......
February 15 and August 15 of each year,
commencing February 15, 1997.
Optional Redemption.........
The Notes will be redeemable at the option of
Chemicals, in whole or in part, at any time on or
after August 15, 2001 at the redemption prices
set forth herein, plus accrued interest to the
date of redemption. In addition, Chemicals may,
at its option, redeem prior to August 15, 1999,
up to 35% of the original principal amount of the
Notes at 111.75% of the principal amount thereof,
plus accrued interest to the date of redemption,
with the net proceeds of one or more Public
Equity Offerings.
Ranking..................... The Notes will constitute unsecured senior
subordinated indebtedness of Chemicals and will
be subordinated in right of payment to all
present and future Senior Debt of Chemicals,
including borrowings under the Credit Facility.
Chemicals has not issued, and does not have any
firm arrangements to issue, any significant Debt
that would be subordinate to the Notes. As of
June 30, 1996, after giving pro forma effect to
the Transaction, Chemicals would have had
approximately $361.9 million in Senior Debt. In
addition, the holders of the Notes will
effectively rank junior to all creditors of
Chemicals' subsidiaries, including trade
creditors.
Change of Control........... Upon a Change of Control (as defined herein),
Chemicals will be required to make an offer to
purchase the Notes at 101% of the principal
amount thereof, plus accrued interest to the date
of purchase. There can be no assurance that
Chemicals will be able to raise sufficient funds
to meet this obligation should it arise.
Certain Covenants........... The Notes Indenture (as defined herein) will
contain certain covenants that, among other
things, limit the ability of Chemicals to pay
dividends or make certain other restricted
payments, incur additional indebtedness, engage
in transactions with affiliates, incur liens and
engage in asset sales. The Notes Indenture will
also restrict Chemicals' ability to consolidate
or merge with, or transfer all or substantially
all of its assets to another person. See
"Description of the Notes--Certain Covenants."
Use of Proceeds............. The proceeds from the Notes Offering will be used
to fund, in part, the Merger.
9
<PAGE>
UNITS:
Issuer...................... Sterling Chemicals Holdings, Inc. (the survivor
of the merger of Sterling Chemicals, Inc. and STX
Acquisition Corp.).
Securities Offered..........
Units consisting of $100,000,064 in initial
proceeds and $191,751,000 in aggregate principal
amount at maturity of 13 1/2% Senior Secured
Discount Notes Due 2008 and Warrants to purchase
575,253 shares of Holdings Common Stock. Each
Unit consists of $1,000 principal amount at
maturity of Discount Notes and one Warrant to
purchase three shares of Holdings Common Stock.
Separability................ The Discount Notes and the Warrants will not
become separately transferable until the earlier
of (i) 30 days following the Closing Date and
(ii) such date as the Underwriters may, in their
discretion, deem appropriate.
Use of Proceeds............. The proceeds from the Units Offering will be used
to fund, in part, the Merger.
Discount Notes:
Discount Notes Offered......
$191,751,000 aggregate principal amount at
maturity of 13 1/2% Senior Secured Discount Notes
Due 2008 ($100,000,064 aggregate initial Accreted
Value).
Maturity Date...............
August 15, 2008.
Interest Payment Dates......
The Discount Notes will be issued at a
substantial discount from their principal amount
at maturity, and there will not be any payment of
interest on the Discount Notes prior to February
15, 2002. From and after August 15, 2001, the
Discount Notes will bear cash interest at the
rate per annum set forth on the cover page of
this Prospectus, payable semi-annually on each
February 15 and August 15. For the nine months
ended June 30, 1996, on a pro forma basis after
giving effect to the Transaction, Holdings would
have had a ratio of earnings to fixed charges of
1.1 to 1.0. There can be no assurance that
Holdings will have adequate cash available at the
time of the scheduled interest payments.
Original Issue Discount.....
For federal income tax purposes, the Discount
Notes will be issued with original issue
discount. Each holder of a Discount Note must
include in gross income for federal income tax
purposes a portion of such original issue
discount for each day during each taxable year on
which a Discount Note is held, even though cash
interest does not begin to accrue until August
15, 2001 and no cash interest will be payable
until February 15, 2002. As a result, holders of
Discount Notes will accrue amounts in gross
income before receiving cash payments
attributable to such gross income. See "Certain
United States Federal Income Tax Consequences."
Optional Redemption.........
The Discount Notes will be redeemable, at the
option of Holdings, in whole or in part, at any
time after August 15, 2001 at the redemption
prices set forth herein, plus accrued interest to
the date of redemption. In addition, Holdings
may, at its option, redeem prior to August 15,
1999, up to 35% of the Accreted Value of the
10
<PAGE>
Discount Notes at 113.5% of the Accreted Value
thereof, plus accrued interest to the date of
redemption, with the net proceeds of one or more
Public Equity Offerings.
Security.................... The Discount Notes will be secured, on a second
priority basis, by a pledge of all of the capital
stock of Chemicals. Lenders under the Credit
Facility will have a first priority lien on the
capital stock of Chemicals.
Ranking..................... The Discount Notes will be senior secured
obligations of Holdings and will rank pari passu
in right of payment with all senior indebtedness
of Holdings and will be senior in right of
payment to any future subordinated indebtedness
of Holdings. Holdings has not issued, and does
not have any firm arrangement to issue, any
significant Debt that would be subordinate to the
Discount Notes. As a result of the holding
company structure after the Merger, the holders
of the Discount Notes will effectively rank
junior to all creditors of Chemicals and its
subsidiaries, including the lenders under the
Credit Facility, holders of the Notes and trade
creditors. As of June 30, 1996, on a pro forma
basis after giving effect to the Transaction, the
Discount Notes would have been effectively
subordinate to $697.5 million of aggregate
liabilities (consisting of Debt and trade
payables) of Chemicals and its subsidiaries. In
addition, in the event of a default or similar
occurrence there can be no assurance that the
second priority security interest in the capital
stock of Chemicals will be available or
sufficient to satisfy claims by holders of the
Discount Notes.
Change of Control........... Upon a Change of Control (as defined), Holdings
will be required to make an offer to purchase the
Discount Notes at 101% of the Accreted Value
thereof, plus accrued interest, if any, to the
date of purchase. There can be no assurance that
Holdings will be able to raise sufficient funds
to meet this obligation should it arise.
Certain Covenants........... The Discount Notes Indenture (as defined herein)
will contain certain covenants that, among other
things, limit the ability of Holdings to pay
dividends or make certain other restricted
payments, incur additional indebtedness, engage
in transactions with affiliates, incur liens,
engage in asset sales and engage in sale and
leaseback transactions. The Discount Notes
Indenture will also restrict Holdings' ability to
consolidate or merge with, or transfer all or
substantially all of its assets to another
person. See "Description of the Units--
Description of Discount Notes--Certain
Covenants."
Warrants:
Exercise Price.............. $.01 per share of Holdings Common Stock.
Expiration..................
The Warrants are exercisable beginning on the
first anniversary of the Closing Date and at any
time thereafter prior to August 15, 2008.
Anti-Dilution............... The number of shares of Holdings Common Stock to
be acquired upon exercise of each Warrant will be
adjusted upon, among other things, certain
dividends or other distributions of Holdings
Common Stock and a combination or
reclassification of Holdings.
Voting Rights............... Warrant holders will have no voting rights.
11
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER INFORMATION
The summary consolidated financial information set forth below has been
derived from previously published consolidated financial statements of the
Company, certain of which appear elsewhere in this Prospectus, and should be
read in conjunction with, and is qualified in its entirety by reference to,
such consolidated financial statements and their accompanying notes. The
consolidated financial information set forth below (i) as of year end and for
each of the years in the five-year period ended September 30, 1995 has been
derived from audited consolidated financial statements of the Company and (ii)
as of June 30, 1995 and June 30, 1996 and for the nine-month periods then ended
has been derived from unaudited consolidated financial statements of the
Company, which, in the opinion of management, have been prepared on a basis
consistent with the audited consolidated financial statements of the Company
and contain all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of the interim financial position and results
of operations.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
--------------------------------------- -------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ -------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $542.7 $430.5 $518.8 $700.8 $1,030.2 $843.1 $600.7
Cost of goods sold...... 472.4 402.6 477.9 606.9 758.6 597.7 508.7
------ ------ ------ ------ -------- ------ ------
Gross profit.......... 70.3 27.9 40.9 93.9 271.6 245.4 92.0
Selling, general and
administrative
expenses............... 9.7 10.3 25.5 24.4 31.7 24.5 23.8
SAR program expense
(benefit).............. -- -- -- 21.8 (2.8) 1.6 6.2
------ ------ ------ ------ -------- ------ ------
Income from
operations............ 60.6 17.6 15.4 47.7 242.7 219.3 62.0
Interest and debt
related expenses, net
of interest income..... 6.1 8.4 22.4 22.1 14.6 12.7 4.4
Other (income) expense.. -- -- -- (2.6) -- -- 3.7
------ ------ ------ ------ -------- ------ ------
Income (loss) before
taxes and
extraordinary item... 54.5 9.2 (7.0) 28.2 228.1 206.6 53.9
Provision (benefit) for
income taxes........... 17.7 4.7 (1.6) 9.1 75.0 68.5 18.3
------ ------ ------ ------ -------- ------ ------
Income (loss) before
extraordinary item
and change in
accounting principle. 36.8 4.5 (5.4) 19.1 153.1 138.1 35.6
Cumulative effect of
change in accounting
for post-retirement
benefits other than
pensions............... -- (10.4) -- -- -- -- --
Extraordinary item, loss
on early extinguishment
of debt, net of tax.... -- -- -- -- (3.1) (3.1) --
------ ------ ------ ------ -------- ------ ------
Net income (loss)..... $ 36.8 $ (5.9) $ (5.4) $ 19.1 $ 150.0 $135.0 $ 35.6
====== ====== ====== ====== ======== ====== ======
OTHER DATA:
EBITDA (a).............. $ 78.5 $ 41.0 $ 52.5 $108.6 $ 281.4 $251.7 $ 99.6
Depreciation and
amortization (b)....... 17.9 23.4 37.1 39.1 41.5 30.8 31.4
Capital expenditures.... 34.4 16.0 12.2 12.3 54.0 26.8 73.0
OPERATING DATA:
Revenues:
Styrene................ $ 257 $ 151 $ 144 $ 288 $ 467 $ 398 $ 249
Acrylonitrile.......... 155 137 124 138 251 210 124
Acetic acid............ 69 66 64 76 94 75 50
Sodium chlorate........ -- 9 81 83 102 73 82
Annual capacity at
period end (MM lbs):
Styrene................ 1,500 1,500 1,500 1,500 1,500 1,500 1,700
Acrylonitrile.......... 700 700 700 700 740 740 740
Acetic acid............ 600 600 600 600 600 600 800
Sodium chlorate (000
tons)................. -- 340 340 340 350 340 350
Sales volume (MM lbs):
Styrene................ 1,495 1,213 1,191 1,460 1,433 1,150 1,295
Acrylontrile........... 663 573 528 668 739 604 475
Acetic acid............ 557 620 578 599 635 487 346
Sodium chlorate (000
tons)................. -- 26 248 294 336 248 233
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
---------------------------------- -------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $ 28.6 $ 56.8 $ 31.0 $ 20.8 $ 74.6 $ 88.3 $ 83.0
Net property, plant and
equipment.................... 230.6 343.8 314.3 291.1 309.1 289.0 350.8
Total assets.................. 362.5 608.5 546.8 580.9 609.9 620.6 659.0
Total long-term debt
(including current portion).. 78.7 326.5 291.9 226.4 121.4 128.6 138.2
Stockholders' equity.......... 112.2 87.3 70.3 89.7 239.3 222.2 273.1
</TABLE>
- --------
(a) EBITDA represents income from operations before taking into consideration
depreciation and amortization and the impact of accruals for the Company's
stock appreciation rights ("SAR") program. See footnote (b). The SAR
program will not be continued after the Transaction. EBITDA is presented
because it is a widely accepted financial indicator of a company's ability
to incur and service debt. EBITDA should not be considered by an investor
as an alternative to net income or income from operations, as an indicator
of the operating performance of the Company or as an alternative to cash
flows as a measure of liquidity.
(b) Depreciation and amortization expense included herein excludes the
amortization of deferred debt financing costs which is included in interest
expense.
13
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The pro forma statement of operations presented below for the year ended
September 30, 1995 and the nine months ended June 30, 1996 have been derived
from the unaudited pro forma financial statements included elsewhere herein,
and give effect to the Transaction as if it had occurred on October 1, 1994.
The pro forma consolidated balance sheet data at June 30, 1996 presented below
has been derived from the unaudited pro forma consolidated balance sheet of
Chemicals and Holdings included elsewhere herein and give effect to the
Transaction as if it had occurred on June 30, 1996.
The summary pro forma financial data do not necessarily represent what
Chemicals' or Holdings' financial position and results of operations would have
been if the Transaction had actually been completed as of the dates indicated
and are not intended to project Chemicals' and Holdings' financial position or
results of operations for any future period. The summary pro forma financial
data should be read in conjunction with the historical consolidated financial
statements of the Company, the pro forma financial statements of Chemicals and
Holdings, "Selected Historical Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.
The pro forma adjustments were applied to the respective historical financial
statements to reflect and account for the Transaction as a recapitalization.
Accordingly, the historical basis of the Company's assets and liabilities has
not been impacted by the Transaction.
<TABLE>
<CAPTION>
CHEMICALS HOLDINGS
---------------------- ----------------------
NINE NINE
MONTHS MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, JUNE 30,
1995 1996 1995 1996
------------- -------- ------------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $1,030.2 $600.7 $1,030.2 $600.7
Cost of goods sold............... 759.0 509.0 759.0 509.0
-------- ------ -------- ------
Gross profit..................... 271.2 91.7 271.2 91.7
Selling, general and
administrative expenses......... 31.7 23.8 31.7 23.8
-------- ------ -------- ------
Income from operations.......... 239.5 67.9 239.5 67.9
Interest expense, net............ 65.4 47.3 79.7 58.0
Other expense.................... -- 3.7 -- 3.7
-------- ------ -------- ------
Income from continuing
operations before income taxes. 174.1 16.9 159.8 6.2
Provision for income taxes....... 56.1 5.3 51.1 1.6
-------- ------ -------- ------
Income from continuing
operations.................... $ 118.0 $ 11.6 $ 108.7 $ 4.6
======== ====== ======== ======
Earnings per share from
continuing operations........... $ 9.95 $ 0.42
OTHER DATA:
EBITDA........................... $ 281.4 $ 99.6 $ 281.4 $ 99.6
Depreciation and amortization.... 41.9 31.7 41.9 31.7
Cash interest expense, net....... 61.4 44.3 61.4 44.3
Ratio of EBITDA to interest
expense, net.................... 4.3x 2.1x 3.5x 1.7x
Ratio of EBITDA to cash interest
expense, net.................... 4.6x 2.2x 4.6x 2.2x
Ratio of earnings to fixed
charges......................... 3.5x 1.3x 2.9x 1.1x
BALANCE SHEET DATA:
Working capital.................. $103.7 $103.7
Net property, plant and
equipment....................... 350.8 350.8
Total assets..................... 691.4 694.4
Total long-term debt (including
current portion)................ 636.9 730.0
Total stockholders' equity....... (179.2) (269.3)
</TABLE>
14
<PAGE>
RISK FACTORS
Prospective purchasers of the Securities offered hereby should consider the
specific risk factors set forth below, as well as the other information set
forth in this Prospectus.
FORWARD-LOOKING STATEMENTS MAY NOT PROVE ACCURATE
When used in this Prospectus, the words "anticipate," "estimate," "project"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially
from those anticipated, estimated or projected.
Among the key factors that have a direct bearing on the Company's results of
operations and the industry in which it operates are the availability and
prices of raw materials for production of the Company's products, the cyclical
nature of the markets for the Company's products, global economic conditions,
competition from other petrochemical companies, the availability of attractive
acquisition opportunities, demand for the Company's products and risks
inherent in foreign operations. These and other factors are discussed below
and elsewhere in this Prospectus.
HIGH FINANCIAL LEVERAGE
If the closing of the Transaction had occurred at June 30, 1996, Holdings,
on a consolidated basis, would have had indebtedness of $730.0 million and
stockholders' equity of $(269.3) million, and Chemicals would have had
indebtedness of $636.9 million and stockholders' equity of $(179.2) million.
In addition, on a pro forma basis for the nine months ended June 30, 1996,
Holdings would have had a ratio of earnings to fixed charges of 1.1 to 1.0.
Holdings will not be required to make cash interest payments on the Discount
Notes prior to February 15, 2002, but there can be no assurance that Holdings
will have adequate cash available at that time and thereafter to make the
scheduled semi-annual interest payments. The high degree of leverage of
Holdings and Chemicals will have important consequences to holders of the
Units and the Notes, including the following: (i) the ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes, if needed, may be
impaired; (ii) a substantial portion of cash flow from operations will be
dedicated to cover cash interest requirements ($47.7 million on a pro forma
basis for the nine months ended June 30, 1996, or approximately 95% of pro
forma cash flow from operations, before cash interest requirements, for such
period), thereby reducing the funds available for operations and any future
business opportunities; and (iii) the degree of leverage may make the Company
more vulnerable to a downturn in its business or the economy generally. As of
June 30, 1996, on a pro forma basis Holdings' total indebtedness as a
percentage of total capitalization would have been 158%. See "Pro Forma
Consolidated Financial Statements and Other Information" and "Description of
the Credit Facility." Any inability of Holdings or Chemicals to service their
respective obligations could have a significant adverse effect on the market
value and marketability of the Securities.
SUBSTANTIAL RESTRICTIONS AND COVENANTS
The Credit Agreement and the Notes Indenture and the Discount Notes
Indenture (collectively, the "Indentures") contain numerous financial and
operating covenants, including, but not limited to, restrictions on Holdings'
and Chemicals' ability to incur indebtedness, pay dividends, create liens,
sell assets, engage in certain mergers and acquisitions and refinance existing
indebtedness. These covenants may limit the Company's ability to pursue its
planned acquisition strategy. See "--Ability to Complete Acquisitions." In the
event of a Change of Control, Holdings and Chemicals will be required, subject
to certain conditions, to offer to purchase all outstanding Discount Notes and
Notes, respectively, at a price equal to 101% of the Accreted Value, with
respect to the Discount Notes, and 101% of the principal amount thereof, with
respect to the Notes, plus accrued interest. There can be no assurance that
Holdings or Chemicals will be able to raise sufficient funds to meet their
respective obligations in connection with a Change of Control Offer. The
ability of Holdings and Chemicals to comply with the covenants and other terms
of the Credit Agreement and the Indentures, to make cash payments with respect
to the Discount Notes and the Notes and to satisfy its other debt obligations
will depend on the
15
<PAGE>
future performance of the Company. In the event the Company fails to comply
with the various covenants contained in the Credit Agreement or the
Indentures, it would be in default thereunder, and in any such case the
maturity of substantially all of its long-term debt could be accelerated. A
default under either Indenture is an event of default under the Credit
Agreement. The Credit Agreement will prohibit the repayment, purchase,
redemption, defeasance or other payment of any of the principal of the
Discount Notes and the Notes at any time prior to their stated maturity. See
"Description of the Notes," "Description of the Units" and "Description of the
Credit Facility."
HOLDING COMPANY STRUCTURE
Holdings will be a holding company whose only material asset will be the
capital stock of Chemicals. The Discount Notes will be an obligation of
Holdings and the holders of Discount Notes will have no direct recourse to the
assets of Chemicals. Holdings will conduct no business and will be dependent
on distributions from Chemicals in order to meet its debt service obligations,
including any obligations with respect to the Discount Notes. In addition, due
to the conveyance of assets and liabilities from Holdings to Chemicals
immediately after the Merger, Holdings will not have any material assets other
than the stock of Chemicals but will remain obligated under many of its
contracts as the assignor of such interests. Because of the substantial
leverage of both Holdings and Chemicals, and the dependence by Holdings upon
the operating performance of Chemicals to generate distributions to Holdings,
there can be no assurance that any such distributions will be adequate to fund
Holdings' obligations when due. In addition, the Credit Facility, the Notes
Indenture and applicable state law will impose restrictions on the payment of
dividends and the making of loans by Chemicals to Holdings. For a further
description of the contractual restrictions on Chemicals, see "Description of
the Notes" and "Description of the Credit Facility." As a result of the
foregoing restrictions, Holdings may be unable to gain access to the cash flow
or assets of Chemicals in amounts sufficient to pay interest on the Discount
Notes when interest thereon first becomes payable in cash on February 15, 2002
and principal of the Discount Notes when due or in the event of a Change of
Control or other required principal payment. In that event, Holdings may be
required to (i) refinance the Discount Notes, (ii) seek additional debt
financing or additional equity financing, (iii) refinance all or a portion of
the indebtedness of Chemicals with indebtedness containing covenants allowing
Holdings to gain access to such cash flow or assets, (iv) obtain modifications
of the covenants restricting access to cash flow or assets contained in the
then existing indebtedness of Chemicals, (v) merge Chemicals with Holdings,
which merger would be subject to compliance with applicable debt covenants or
obtaining necessary lender consents or (vi) pursue a combination of the
foregoing actions. The measures Holdings may undertake to gain access to
sufficient cash flow to meet its future debt service requirements on the
Discount Notes will depend on general economic and financial market
conditions, as well as the financial condition of Holdings and Chemicals and
other relevant factors existing at the time. No assurance can be given that
any of the foregoing measures can be accomplished.
SUBORDINATION; RANKING
The Notes will be general unsecured obligations of Chemicals and will be
subordinated in right of payment to all Senior Debt, including all
indebtedness of Chemicals under the Credit Facility. As of June 30, 1996,
after giving pro forma effect to the Transaction, approximately $361.9 million
of Senior Debt would have been outstanding. The Notes Indenture permits
Chemicals to incur additional Senior Debt, provided certain conditions are
met, and Chemicals expects from time to time to incur additional Senior Debt.
In addition, the Notes Indenture permits Senior Debt to be secured. By reason
of the subordination provisions of the Notes Indenture, in the event of the
insolvency, liquidation, reorganization, dissolution or other winding-up of
Chemicals, holders of Senior Debt must be paid in full before the holders of
the Notes may be paid. In addition, no payment may be made with respect to the
Notes during the continuance of a payment default under any Designated Senior
Debt (as defined). Accordingly, there may be insufficient assets remaining
after such payments to pay amounts due on the Notes. Furthermore, if certain
non-payment defaults exist with respect to Designated Senior Debt, the holders
of such Designated Senior Debt will be able to prevent payments on the Notes
for certain periods of time. See "Description of the Notes--Ranking."
16
<PAGE>
The Discount Notes will be senior secured obligations of Holdings and will
rank pari passu in right of payment with all Senior Debt of Holdings and
senior in right of payment to any future subordinated indebtedness of
Holdings. As a result of the Company's holding company structure, the holders
of the Discount Notes will effectively rank junior to all creditors of
Chemicals and its subsidiaries, including the lenders under the Credit
Facility, holders of the Notes and trade creditors. In the event of the
dissolution, bankruptcy, liquidation or reorganization of Holdings or
Chemicals, the holders of the Discount Notes may not receive any amounts with
respect to the Discount Notes until after the payment in full of all claims of
the creditors of Chemicals and its subsidiaries. At June 30, 1996, after
giving pro forma effect to the Transaction, Holdings would have had no
indebtedness other than the Discount Notes, and the indebtedness of Chemicals
would have been $636.9 million. See "Capitalization." In addition, although
the Discount Notes are secured on a second priority basis by a pledge of the
capital stock of Chemicals, the lenders under the Credit Facility will have a
first priority lien on such capital stock and, therefore, there can be no
assurance that the security will be available or sufficient to satisfy any
claims by holders of the Discount Notes.
RAW MATERIAL PRICES AND AVAILABILITY
For each of the Company's products, the cost of raw materials and utilities
is far greater than all other costs of production combined. Therefore, an
adequate supply of raw materials at reasonable prices is critical to the
success of the Company's business. The Company does not produce many of its
major raw materials (benzene, ethylene, propylene, ammonia and methanol),
although the Company has a methanol plant under construction at the Texas City
Plant which is expected to begin production by September 1996. These materials
are all commodity petrochemicals and the price for each can fluctuate widely
for a variety of reasons, including changes in the availability of these
products because of major capacity additions or significant plant operating
problems. A number of the Company's raw material suppliers provide the Company
with a significant amount of its raw materials, and if one significant
supplier or a number of significant suppliers were unable to meet their
obligations under present supply arrangements, or if such arrangements could
not be renewed upon expiration, the Company could be required to incur
increased costs for its raw materials. The ability to pass on increases in raw
material prices to the Company's customers is, to a large extent, dependent on
market conditions. There may be periods of time in which increases in
feedstock prices are not recovered by the Company due to an inability to
increase the selling prices of its products because of weakness in demand for,
or oversupply of, such products, and therefore, certain increases in raw
materials prices may have a material adverse effect on the results of
operations of the Company.
CYCLICAL MARKETS FOR PRODUCTS; DEPENDENCE ON KEY PRODUCTS
The Company's business consists of the production and sale of styrene,
acrylonitrile, acetic acid and other petrochemicals, as well as certain pulp
chemicals. The Company's two primary petrochemical products are styrene and
acrylonitrile, which accounted for 45% and 24% of the Company's 1995 revenues,
respectively. See "Business--Products." Historically, the prices of the
Company's petrochemical and pulp chemical products have been cyclical and
sensitive to overall supply relative to demand, the level of general business
activity and the availability and price of feedstocks. In the past, the
Company's products have experienced market tightness accompanied by higher
prices and periods of oversupply accompanied by lower prices. Certain styrene
producers have announced plans to add significant production capacity over the
next several years, particularly in the Far East. Current global production
capacity for styrene is estimated to be approximately 40 billion pounds and
the Company believes that approximately 7.2 billion pounds of capacity will be
added by competitors in the next two years, including an estimated 3.5 billion
pounds in 1997 and 3.7 billion pounds in 1998. Although less than 5% of such
additional capacity is expected to be added on the U.S. Gulf Coast, where the
Company operates, the Company expects that prices for styrene will decline
from current levels until global demand for styrene increases sufficiently to
absorb such additional production capacity, and such declines could adversely
affect the Company's results of operations. In addition, the Company expects
competitors to increase production capacity of acrylonitrile during the next
two years, and such increases could adversely affect prices for acrylonitrile.
In any event, the prices for the Company's products are expected to fluctuate
in the future, and any prolonged or
17
<PAGE>
severe softness in the market for any of its principal products will adversely
affect the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
HIGHLY COMPETITIVE INDUSTRY
The industry in which the Company operates is highly competitive. Many of
the Company's competitors, particularly in the petrochemical industry, are
larger and have substantially greater financial resources than the Company.
Among the Company's competitors are some of the world's largest chemical
companies that have their own raw material resources. In addition, a
significant portion of the Company's business is based upon widely available
technology. The entrance of new competitors into the industry and the addition
by existing competitors of new capacity may reduce the Company's ability to
maintain profit margins or its ability to preserve its market share, or both.
Such developments could have a negative impact on the Company's ability to
obtain higher profit margins, even during periods of increased demand for the
Company's products. See "--Cyclical Markets for Products; Dependence on Key
Products."
DEPENDENCE ON TEXAS CITY PLANT
All of the Company's petrochemicals, including all of its styrene and
acrylonitrile, are produced at the Texas City Plant. Significant unscheduled
downtime at the Texas City Plant due to equipment breakdowns, interruptions in
the supply of raw materials or natural gas, power failures, natural forces or
any other cause, including the normal hazards associated with the production
of petrochemicals, could materially adversely affect the Company. Although the
Company maintains insurance, including business interruption insurance, that
it considers to be adequate under the circumstances, there can be no assurance
that a significant interruption in the operation of a facility would not have
a material adverse effect on the Company's financial condition and results of
operations. See "Business--Insurance."
ABILITY TO COMPLETE ACQUISITIONS
A significant element of the Company's business strategy is to pursue
strategic acquisitions that either expand or complement the Company's products
or markets. The financing for such acquisitions will likely affect the
Company's debt or equity capitalization. There can be no assurance that the
Company will be able to identify and make acquisitions on terms favorable to
it or that the Company will be able to obtain financing for such acquisitions
on terms the Company finds acceptable. In addition, the Indentures and the
Credit Facility will substantially limit the Company's ability to incur
additional debt to finance such acquisitions. See "Description of the Notes,"
"Description of the Units" and "Description of the Credit Facility."
ENVIRONMENT AND SAFETY
The Company's operations involve the handling, production, transportation
and disposal of materials classified as hazardous or toxic and are subject to
extensive federal, state and local regulatory requirements relating to
environmental affairs, waste management, health and safety and chemical
products. Operating permits are or may be required for the operation of some
of the Company's operating units and chemical waste disposal operations, and
these permits are subject to revocation, modification and renewal.
Governmental authorities have the power to enforce compliance with these
regulations and permits, and violators are subject to fines, injunctions or
both. Third parties may also have the right to sue to enforce compliance.
Management believes that the Company's operations are in compliance in all
material respects with applicable environmental laws. However, the operations
of a chemical manufacturing facility entail some risk of environmental damage,
and there can be no assurance that material costs or liabilities will not be
incurred. Moreover, it is possible that other developments, such as
increasingly strict requirements of environmental laws and enforcement
policies, could bring into question the handling, manufacture, use, emission
or disposal of substances or pollutants by the Company. There can be no
assurance that past or future operations will not result in exposure to injury
or claims of injury by employees or the public due to toxic or hazardous
materials. In addition, a catastrophic event at the Company's facilities could
result in liabilities to the Company substantially in excess of its insurance
coverages. See "Business--Insurance."
18
<PAGE>
The Company's pulp chemical business is sensitive to potential environmental
regulation. In general, environmental regulations support substitution of
chlorine dioxide, which is produced from sodium chlorate, for elemental
chlorine in the pulp bleaching process. Certain environmental groups are
encouraging passage of regulations which restrict the amount of Absorbable
Organic Halides ("AOX") or chlorine derivatives in bleach plant effluent.
Increased substitution of chlorine dioxide for elemental chlorine in the pulp
bleaching process significantly reduces the amount of AOX and chlorine
derivatives in bleach plant effluent. As long as there is no outright ban on
chlorine containing compounds, regulation restricting AOX or chlorine
derivatives in bleach plant effluent should favor the use of chlorine dioxide,
thus sodium chlorate. However, any significant ban on chlorine containing
compounds could have a material adverse effect on the Company's financial
condition and results of operations.
For further information on environmental and safety matters, see "Business--
Environmental and Safety Matters."
LONG-TERM CONTRACTS AND SIGNIFICANT CUSTOMERS
The Company sells substantial portions of its styrene and acrylonitrile
production under long-term contracts, and sells all of its acetic acid,
plasticizers, tertiary butylamine ("TBA") and sodium cyanide production under
long-term contracts with single customers. These contracts are intended to
provide some stability if demand for or prices of the Company's products
decline significantly, but also limit the Company's ability to take full
advantage of attractive market conditions during periods of higher prices for
these products. During fiscal 1995 a significant portion of the Company's
production from the Texas City Plant was dedicated to multi-year contracts
with Monsanto Company ("Monsanto"), subsidiaries of The British Petroleum
Company P.L.C. ("BP"), BASF Corporation ("BASF"), Mitsubishi International
Corporation ("Mitsubishi"), Flexsys America L.P. (a joint venture between
Monsanto and Akzo Nobel NV) ("Flexsys") and E.I. du Pont de Nemours and
Company ("DuPont"). Revenues from BP and Mitsubishi accounted for
approximately 16% and 13%, respectively, of the Company's fiscal 1995
revenues. Under certain market conditions, the loss of one or more of these
customers or a material reduction in the amount of product purchased by one or
more of them could have a material adverse effect on the Company. See
"Business--Sales and Marketing" and "--Contracts."
FOREIGN OPERATIONS, COUNTRY RISKS AND EXCHANGE RATE FLUCTUATIONS
Approximately 14% of the Company's fiscal 1995 revenues were derived from
its Canadian operations and approximately 52% were derived from export sales.
International operations and exports to foreign markets are subject to a
number of special risks, including currency exchange rate fluctuations, trade
barriers, exchange controls, national and regional labor strikes, political
risks and risks of increases in duties, taxes and governmental royalties, as
well as changes in laws and policies governing operations of foreign-based
companies. In addition, earnings of foreign subsidiaries and intercompany
payments are subject to foreign income tax rules that may reduce cash flow
available to meet required debt service and other obligations of the Company.
Since the Company derives most of its pulp chemicals revenues from
production and sales by subsidiaries within Canada, the Company has organized
its subsidiary structure and its operations in part based on certain
assumptions about various Canadian tax (including, among others, income tax
and withholding tax) laws, currency exchange and capital repatriation laws and
other relevant laws. While the Company believes that such assumptions are
correct, there can be no assurance that Canadian taxing or other authorities
will reach the same conclusion. If such assumptions are incorrect, or if
Canada were to change or modify such laws or the current interpretation
thereof, the Company may suffer adverse tax and financial consequences.
A portion of the Company's expenses and sales are denominated in foreign
currencies, and accordingly, the Company's revenues, cash flows and earnings
may be affected by fluctuations in certain foreign exchange rates, principally
between the United States dollar and the Canadian dollar, which may also have
adverse tax effects. In addition, because a portion of the Company's sales,
cost of goods sold and other expenses are denominated in Canadian dollars, the
Company has a translation exposure to fluctuations in the Canadian dollar
against the U.S.
19
<PAGE>
dollar. These currency fluctuations could have a material impact on the
Company as increases in the value of the Canadian dollar have the effect of
increasing the U.S. dollar equivalent of cost of goods sold and other expenses
with respect to the Company's Canadian production facilities. The Company
enters into forward foreign exchange contracts to hedge such exposure for
periods consistent with its committed exposure, but does not engage in
currency speculation.
FRAUDULENT CONVEYANCE RISKS
The incurrence by Holdings of the indebtedness evidenced by the Discount
Notes and by Chemicals of the indebtedness evidenced by the Notes is subject
to review under relevant federal and state fraudulent conveyance statutes
("Fraudulent Conveyance Statutes") in a bankruptcy case or a lawsuit by or on
behalf of creditors of Holdings or Chemicals. Under these statutes, if at the
time the Discount Notes and Notes were issued and the obligations due
thereunder incurred, (i) Holdings issued the Discount Notes or Chemicals
issued the Notes with actual intent to hinder, delay or defraud creditors or
(ii) Holdings or Chemicals received less than a reasonably equivalent value in
exchange for the obligations incurred under the Discount Notes or Notes,
respectively, and if at the time such obligations were incurred, Holdings or
Chemicals (a) was insolvent or rendered insolvent by reason of such
transactions, (b) was engaged or was about to engage in a business or
transaction for which its assets were unreasonably small in relation to such
business or transaction or its remaining assets constituted unreasonably small
capital or (c) intended to incur, or believed or reasonably should have
believed that it would incur, debts beyond its ability to pay as they matured
(as the foregoing terms are defined in or interpreted under the Fraudulent
Conveyance Statutes), such court could subordinate all or a part of the
Discount Notes or Notes to existing and future indebtedness of Holdings or
Chemicals, recover any payments made on the Discount Notes or Notes or take
other action detrimental to the holders of the Discount Notes or Notes,
including, under certain circumstances, invalidating the Discount Notes or
Notes.
Based upon financial and other information currently available to it, STX
Acquisition and Chemicals believe that the indebtedness evidenced by the
Discount Notes and Notes will be incurred and the proceeds of the Discount
Notes and Notes will be used for proper purposes and in good faith. Certain
courts have held, however, that a company's purchase of its own capital stock
does not constitute reasonably equivalent value or fair consideration for
incurring indebtedness. Each of STX Acquisition and Chemicals believes that,
at the time of, and after giving effect to, the incurrence of the indebtedness
evidenced by the Discount Notes and Notes, it will be solvent and will have
sufficient capital to carry on its business and that it will be able to pay
its debts as they mature. No assurance can be given, however, that a court
would concur with such beliefs and positions.
Depending upon the law of the jurisdiction being applied, a company may be
considered insolvent for these purposes if the company is generally not paying
its debts as they become due, or if the sum of the company's debts is greater
than all of the company's property at a fair valuation. It is impossible to
predict which jurisdiction would govern any bankruptcy case by or on behalf of
Holdings or Chemicals.
DEFERRED CASH INTEREST PAYMENTS ON DISCOUNT NOTES AND CERTAIN FEDERAL INCOME
TAX CONSEQUENCES
The Discount Notes will be issued at a substantial discount from their
stated principal amount payable on the Discount Notes at final maturity.
Consequently, although cash interest will not accrue on the Discount Notes
prior to August 15, 2001 and there will be no periodic payments of cash
interest on the Discount Notes prior to February 15, 2002, original issue
discount will be includable in the gross income of a holder of Discount Notes,
for federal income tax purposes, in advance of the receipt of cash payments on
the Discount Notes. Since a portion of the issue price of the Units will be
allocated, for federal income tax purposes, to the Warrants, the amount of
original issue discount will be greater than the difference between the
principal amount at final maturity of the Discount Notes and the purchase
price of the Units. See "Certain United States Federal Income Tax
Consequences" for a more detailed discussion of the federal income tax
consequences to the holders of the Discount Notes regarding the purchase,
ownership and disposition of the Discount Notes.
If a bankruptcy case is commenced by or against Holdings under the United
States Bankruptcy Code after the issuance of the Discount Notes, the claim of
a holder of Discount Notes with respect to the principal amount
20
<PAGE>
thereof may be limited to an amount equal to the sum of (i) the portion of the
initial issue price of the Units allocated, for federal income tax purposes,
to the Discount Notes and (ii) that portion of the original issue discount
which is not deemed to constitute "unmatured interest" for purposes of the
United States Bankruptcy Code. Any original issue discount that was not
amortized as of any such bankruptcy filing would constitute "unmatured
interest."
CONTROL BY CERTAIN STOCKHOLDERS
Upon consummation of the Transaction, the investors in the Equity Private
Placement, including principals of TSG and Unicorn, and certain principal
stockholders of the Company will control the Company through the ownership of
at least approximately 75% of the outstanding shares of Holdings Common Stock,
assuming the maximum number of Rollover Shares. See "Principal Stockholders."
In addition, such investors and stockholders will enter into a Stockholders
Agreement, the effect of which will be to restrict transfers of shares outside
of the control group. See "Description of Capital Stock--Transfer
Restrictions." Accordingly, such stockholders collectively will have the
ability to exercise control over the business and affairs of the Company,
including the ability to elect all of the Board of Directors, the power to
determine the management of the business and the power to determine the
outcome of corporate actions requiring stockholders' approval. TSG and
Unicorn, affiliates of which will be principal stockholders of the Company,
will receive consulting fees in connection with the Transaction. See "Certain
Transactions."
ABSENCE OF A PUBLIC MARKET FOR THE SECURITIES
The Securities are new securities for which there currently is no trading
market and there can be no assurance as to the liquidity of any market for any
of the Securities that may develop, the ability of holders of the Securities
to sell their Securities, or the prices at which holders of the Securities
would be able to sell their Securities. If such markets were to exist, the
Securities could trade at prices higher or lower than their initial purchase
prices depending on many factors, including prevailing interest rates, the
Company's operating results and the market for similar securities. Although
the Underwriters have informed the Company and STX Acquisition that the
Underwriters currently intend to make a market in the Securities, such
Underwriters are not obligated to do so, and any such market making may be
discontinued at any time without notice. Accordingly, there can be no
assurance as to the development or liquidity of any market for the Discount
Notes, the Warrants or the Notes. Holdings does not intend to apply for
listing of the Securities on any securities exchange or for quotation on the
Nasdaq National Market, and plans to withdraw the Common Stock from listing on
the New York Stock Exchange upon consummation of the Transaction.
RISKS ASSOCIATED WITH THE WARRANTS
The warrants are not exercisable until the first anniversary of the Closing
Date. Nevertheless, certain risks associated with the ownership of Common
Stock may be relevant to purchasers of Units, particularly upon the exercise
of Warrants. For example, it is expected that the liquidity of Holdings Common
Stock will be significantly limited after consummation of the Merger. In
addition, the high degree of financial leverage of Holdings will result in
negative stockholders' equity upon completion of the Transaction. See "Pro
Forma Consolidated Financial Statements and Other Information." Finally, the
terms of the Indentures and the Credit Facility will restrict the Company's
ability to pay dividends on the Holdings Common Stock, and it is not expected
that Holdings will pay such dividends for the forseeable future. Also, see "--
Control by Certain Stockholders," "--Absence of Public Market for the
Securities" and "Description of Capital Stock--Transfer Restrictions."
21
<PAGE>
THE TRANSACTION
THE MERGER
The following summary of the material provisions of the Merger Agreement is
subject to, and is qualified in its entirety by reference to, all of the
provisions of the Merger Agreement. The Merger Agreement is filed as an
exhibit to the Registration Statement of which this Prospectus is a part and
is available for inspection as described under "Available Information."
Capitalized terms used but not defined herein shall have the meanings set
forth in the Merger Agreement, and such defined terms are incorporated herein
by reference.
Pursuant to the Merger Agreement, at such time as the certificate of merger
is filed with the Secretary of State of the State of Delaware (the "Effective
Time"), STX Acquisition will merge with and into the Company, with the Company
as the surviving corporation. It is anticipated that the Effective Time will
occur as soon as practicable following the special meeting of the stockholders
of the Company called for the purpose of approving and adopting the Merger
Agreement (the "Special Meeting"). In the Merger, (a) each share of Company
Common Stock owned by the Company, any wholly owned subsidiary of the Company
or STX Acquisition will be canceled without any consideration being delivered
in exchange therefor; and (b) each other share of Company Common Stock, other
than shares held by stockholders exercising dissenters' rights, will either be
(i) retained by the holder thereof as Rollover Shares or (ii) converted into
the right to receive $12.00 in cash. The aggregate number of Rollover Shares
is limited to 5.0 million, consequently, stockholders electing to retain their
shares of Company Common Stock may be subject to proration. At the Effective
Time, each share of STX Acquisition Common Stock will be converted into shares
of Company Common Stock. Certain stockholders of the Company executed the
Inducement Agreement pursuant to which such stockholders have agreed to make
elections to receive Rollover Shares rather than cash with respect to all or a
portion of the Company Common Stock held by them.
In connection with the execution of the Merger Agreement, certain
stockholders of the Company have executed irrevocable proxies pursuant to
which each such stockholder appoints officers of STX Acquisition as his proxy
for the purpose of taking the actions necessary to approve the Merger
Agreement. Such irrevocable proxies represent approximately 18% of the
outstanding Company Common Stock.
The obligations of the Company and STX Acquisition to consummate the Merger
are subject to the satisfaction of certain conditions, including (a) approval
and adoption of the Merger Agreement by the stockholders of the Company at the
Special Meeting; (b) the absence of any action by any court, government or
governmental agency preventing the consummation of the Merger; (c) the
expiration or termination of the waiting period applicable to the consummation
of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations thereunder; (d) the effectiveness
under the Securities Act of 1933, as amended (the "Securities Act"), of each
registration statement required to be filed with the Securities and Exchange
Commission (the "SEC") in order to consummate the transactions contemplated by
the Merger Agreement; and (e) the receipt of all governmental consents, orders
and approvals required to consummate the Merger.
The obligations of the Company to consummate the Merger are subject to
additional conditions, including (a) the accuracy of all representations and
warranties of STX Acquisition and the compliance, in all material respects, by
STX Acquisition with all conditions and all material obligations, agreements
and covenants on the part of STX Acquisition contained in the Merger
Agreement; (b) the execution by the stockholders of STX Acquisition of a Tag-
Along Agreement that provides that if any of such stockholders propose to
transfer, sell or otherwise dispose of (a "transfer") in the aggregate 51% or
more of the Holdings Common Stock then issued and outstanding, all other
holders of Holdings Common Stock will have the right to participate in such
transfer on a pro rata basis and on the same terms and conditions; (c) the
receipt of customary legal opinions; and (d) certain other conditions. The
obligations of STX Acquisition to consummate the Merger are also subject to
additional conditions, including (i) the accuracy of all representations and
warranties of the Company and the compliance, in all material respects, by the
Company with all conditions and all material obligations, agreements
22
<PAGE>
and covenants on the part of the Company contained in the Merger Agreement;
(ii) the absence of any changes or events (including litigation developments)
that constitute a material adverse change in the business or prospects of the
Company; (iii) the obtaining by STX Acquisition of the related financings
described under "--Financing Arrangements;" (iv) the cancellation of all stock
options, SARs and phantom shares relating to Company Common Stock; (v) the
receipt of customary accountants' comfort letters and legal opinions; and (vi)
certain other conditions. Either the Company or STX Acquisition may extend the
time for performance of any of the obligations of the other or, to the extent
permissible, waive compliance with those obligations at its discretion.
Under the Merger Agreement, (i) each option, warrant or other right to
acquire equity interests in the Company and each security convertible into or
exchangeable for such equity interests or obligating the Company to enter into
any such option, warrant or other right will be automatically canceled as of
the Effective Time, with no consideration exchanged therefor, (ii) each SAR
will be converted as of the Effective Time into the right to receive a cash
payment in an amount equal to the excess, if any, of $12.00 over the base
price provided for in such SAR (unless the holder of any SAR, the Company and
STX Acquisition agree otherwise in writing), (iii) each share of outstanding
phantom stock relating to the Company will be automatically converted as of
the Effective Time into the right to receive a cash payment in the amount of
$12.00 and (iv) all outstanding shares of restricted stock will be immediately
and fully vested. Except as otherwise agreed to by the Company and STX
Acquisition, each arrangement providing for the issuance or grant of any
equity interest in the Company or any of its subsidiaries, including any stock
purchase plan, will terminate as of the Effective Time. See "Management--
Compensation of Executive Officers--After the Transaction."
ASSET TRANSFER
Pursuant to the terms of the Merger Agreement, at the Effective Time, the
Company will convey all of the assets and properties of the Company to
Chemicals. In connection with, and as partial consideration for, such
conveyance, Chemicals will expressly assume and agree to pay, perform and
discharge when due any and all liabilities of the Company related to such
assets and properties. If the conveyance of any particular asset or property
(i) would be ineffective as between the Company and Chemicals without the
consent of any third party, (ii) would cause the impairment or loss of
ownership of such asset or property, (iii) would result in any material
penalty or other detriment to the Company or Chemicals or (iv) is prohibited
by law or any judgment, order or decree of any government or governmental
agency, then such asset or property will not be conveyed until such time as
such consent has been obtained or such circumstance has been rectified.
FINANCING ARRANGEMENTS
Pursuant to the terms of the Merger Agreement, STX Acquisition and Chemicals
are required to consummate certain related financings simultaneously with the
closing of the Merger. The Company may terminate the Merger Agreement if STX
Acquisition has not arranged the required financing and satisfied the
applicable funding obligations by August 31, 1996. The financing for the
Merger will be provided through the Offerings made hereby, together with
borrowings pursuant to the Credit Facility and the proceeds from the Equity
Private Placement. All of such financings will be consummated simultaneously
with the closing of the Merger.
Pursuant to the Merger Agreement, Chemicals is required to negotiate and
enter into definitive loan documents for a bank credit facility with Texas
Commerce Bank National Association, as administrative agent, and Credit Suisse
and Chase Securities Inc. as co-arrangers. It is currently anticipated that
the Credit Facility will consist of (i) a six and one half year $100.0 million
revolving credit facility, (ii) a six and one half year $200.0 million term
loan, (iii) an eight year $150.0 million term loan and (iv) a four year $6.5
million ESOP Term Loan. See "Description of the Credit Facility." The terms of
the Credit Facility cannot be modified or amended in any material respect
without prior consultation with the Company.
Equity financing for the Transaction is to be provided pursuant to
commitments from a group of investors to purchase a maximum of $103.1 million
of Common Stock of STX Acquisition in the Equity Private
23
<PAGE>
Placement. Purchasers of shares in the Equity Private Placement are expected
to include an investor group formed by TSG and Unicorn and the New ESOP. It is
anticipated that upon consummation of the Transaction, the investors in the
Equity Private Placement, including principals of TSG and Unicorn and certain
principal stockholders of the Company, will own at least approximately 75% of
Holdings Common Stock, assuming the maximum number of Rollover Shares. The New
ESOP will acquire its shares with the proceeds of the Chemicals ESOP Loan. The
commitments to purchase in the Equity Private Placement may not be amended or
modified in any material respect without prior consultation with the Company.
See "Principal Stockholders" and "Underwriting."
TRANSACTION SPONSORS
TSG is a Texas-based private financial organization engaged in the
acquisition and ownership of operating businesses. Since its formation in
1982, TSG has completed 32 acquisitions for a total consideration of
approximately $5.5 billion. Eleven of such acquisitions, representing
approximately $3.5 billion in total consideration, have involved companies in
various segments of the chemical industry. TSG promotes employee ownership
through the use of employee stock ownership plans, direct equity ownership by
management and key employees as well as profit sharing plans which typically
include all full-time employees. Unicorn is a New Jersey-based private
financial organization engaged in the acquisition of businesses. Since its
formation in 1984, Unicorn has originated investments in over 40
entrepreneurial companies primarily in chemicals and related industries. Frank
Diassi, the current Managing General Partner of Unicorn, will be the Chairman
of the Board of both Holdings and Chemicals, and Frank Hevrdejs, the President
and a principal of TSG, and Hunter Nelson, a principal of TSG, will both be
directors of Holdings and Chemicals following the consummation of the
Transaction. See "Certain Transactions."
24
<PAGE>
USE OF PROCEEDS
The net proceeds from the Offerings are estimated to be $362.8 million,
after deducting original issue discount, underwriting discounts and
commissions and estimated offering expenses payable by the Company. Net
proceeds from the Offerings constitutes a portion of the financing required to
effect the Merger.
The following table sets forth the estimated sources and uses of funds to
effect the Merger, as if the Merger occurred on June 30, 1996.
<TABLE>
<CAPTION>
SOURCES OF FUNDS DOLLARS IN MILLIONS
---------------- -------------------
<S> <C>
Revolving Credit Facility............................. $ 5.4
Term Loans............................................ 350.0
ESOP Term Loan........................................ 6.5
Notes offered hereby.................................. 275.0
Units offered hereby.................................. 100.0
Equity Private Placement (a).......................... 103.1
------
Total............................................... $840.0
======
<CAPTION>
USES OF FUNDS
-------------
<S> <C>
Purchase of Company Common Stock (b).................. $640.7
Purchase of other equity interests (c)................ 14.6
Refinance outstanding debt (d)........................ 138.2
Chemicals ESOP Loan (e)............................... 6.5
Estimated Transaction expenses and fees (f)........... 40.0
------
Total............................................... $840.0
======
</TABLE>
- --------
(a) Represents proceeds from the sale of STX Acquisition Common Stock to
investors in the Equity Private Placement, assuming the minimum number of
Rollover Shares. The amount of cash provided through the Equity Private
Placement may be reduced to $70.7 million if the maximum number of
Rollover Shares is retained by existing stockholders.
(b) Represents the funding of the purchase of Company Common Stock, at $12.00
per share, from stockholders who elect to receive cash in the Merger,
assuming the minimum number of Rollover Shares. The amount of funding
required to purchase the Company Common Stock may be reduced to $608.3
million if the maximum number of Rollover Shares is retained by existing
stockholders.
(c) Pursuant to the terms of the Merger Agreement, SARs, phantom stock and
restricted stock will be converted at the time of consummation of the
Merger into rights to receive cash. See "The Transaction--The Merger."
(d) Consists of $107.2 million outstanding under the Company's current credit
facility, on which the Company paid interest of 7.37% as of June 30, 1996.
Such borrowings were incurred in 1995 to refinance existing indebtedness.
Also includes $31.0 million outstanding under a credit facility associated
with the Company's Valdosta, Georgia sodium chlorate plant, on which the
Company paid interest of 6.1% as of June 30, 1996. Such borrowings were
incurred in 1995 in connection with the construction of such plant. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources--Historical" and Notes to
Consolidated Financial Statements.
(e) For a description of the Chemicals ESOP Loan, see "Management--
Compensation of Executive Officers."
(f) Estimated expenses and fees include Underwriters' discounts, advisory
fees, bank fees, legal and accounting fees, printing costs and other
Transaction expenses.
25
<PAGE>
CAPITALIZATION
The following table sets forth (i) the unaudited consolidated historical
capitalization of the Company, (ii) the unaudited consolidated pro forma
capitalization of Chemicals as adjusted to give effect to the Transaction, and
(iii) the unaudited consolidated pro forma capitalization of Holdings as
adjusted to give effect to the Transaction. See "Pro Forma Consolidated
Financial Statements and Other Information" and the Company's consolidated
financial statements and their accompanying notes included elsewhere herein.
<TABLE>
<CAPTION>
JUNE 30, 1996(A)
------------------------------
ACTUAL AS ADJUSTED
----------- ------------------
THE COMPANY CHEMICALS HOLDINGS
----------- --------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Long-term debt:
Existing credit facility..................... $107.2 $ -- $ --
Construction loan facility................... 31.0 -- --
Revolving Credit Facility.................... -- 5.4 5.4
Term Loans................................... -- 350.0 350.0
ESOP Term Loan............................... -- 6.5 6.5
Notes........................................ -- 275.0 275.0
Discount Notes............................... -- -- 93.1
------ ------ ------
Total long-term debt (b)....................... 138.2 636.9 730.0(c)
Common stock held by New ESOP.................. -- -- 6.5
Less: Unearned compensation.................. -- -- (6.5)
Stockholders' equity:
Common stock (d)............................. 0.6 0.1 0.1
Warrants (e)................................. -- -- 6.9
Additional paid-in capital (deficit) (f)..... 33.2 (175.7) (562.5)
Retained earnings (deficit).................. 310.7 (3.6) 307.1
Pension adjustment........................... (1.6) -- (1.6)
Accumulated translation adjustment........... (19.3) -- (19.3)
Deferred compensation (g).................... (0.1) -- --
Treasury stock (h)........................... (50.4) -- --
------ ------ ------
Total stockholders' equity................. 273.1 (179.2) (269.3)
------ ------ ------
Total capitalization........................... $411.3 $457.7 $460.7
====== ====== ======
</TABLE>
- --------
(a) The Merger will be accounted for as a recapitalization due to the number
of Rollover Shares to be retained by existing stockholders. Consequently,
the Merger will have no impact on the historical basis of the Company's
assets and liabilities. In addition to the adjustments reflected in the
capitalization table, there will be adjustments to reduce current and
long-term accrued liabilities to reflect payments to employees and
directors of the Company for obligations under the Company's incentive
plans.
(b) Includes pro forma current maturities of approximately $8.7 million.
(c) Upon consummation of the Transaction, Chemicals will make a subordinated
loan to Holdings of approximately $448.7 million, representing the net
proceeds of the Notes Offering and amounts initially borrowed under the
Term Loans after repayment of existing indebtedness, purchase of certain
equity interests and payment of Transaction expenses. Such loan is
reflected in additional paid-in capital of Chemicals and eliminated in
consolidation.
(d) Represents the net effect of the Transaction on the 60.327 million shares
issued at $.01 par value per share. There will be 10.891 million shares
issued subsequent to the Transaction.
(e) Warrants issued in connection with the Units Offering, which have been
valued at $6.9 million.
(f) Reflects the consideration to be paid to the stockholders in the Merger
plus the canceled treasury stock and fees and expenses of the Transaction
which are allocated to equity accounts. Netted against these items are the
additional paid-in capital contributed by STX Acquisition, amounts
allocated to par value of Holdings Common Stock as a result of the Merger
and the historical amount of additional paid-in capital.
(g) Eliminates the unvested portion of the restricted stock which was issued
under the Company's Omnibus Stock and Incentive Plan.
(h) Treasury stock of the Company is eliminated in connection with the
Transaction.
26
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected consolidated financial information set forth below has been
derived from previously published consolidated financial statements of the
Company, certain of which appear elsewhere in this Prospectus, and should be
read in conjunction with, and is qualified in its entirety by reference to,
such consolidated financial statements and their accompanying notes. The
consolidated financial information set forth below (i) as of year end and for
each of the years in the five-year period ended September 30, 1995 has been
derived from audited consolidated financial statements of the Company and (ii)
as of June 30, 1995 and June 30, 1996 and for the nine-month periods then
ended has been derived from unaudited consolidated financial statements of the
Company, which, in the opinion of management, have been prepared on a basis
consistent with the audited consolidated financial statements of the Company
and contain all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of the interim financial
position and results of operations. The interim period results of operations
presented are not necessarily indicative of the results to be expected for the
full year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
---------------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ -------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $542.7 $430.5 $518.8 $700.8 $1,030.2 $843.1 $600.7
Cost of goods sold...... 472.4 402.6 477.9 606.9 758.6 597.7 508.7
------ ------ ------ ------ -------- ------ ------
Gross profit.......... 70.3 27.9 40.9 93.9 271.6 245.4 92.0
Selling, general and
administrative
expenses............... 9.7 10.3 25.5 24.4 31.7 24.5 23.8
SAR program expenses
(benefit).............. -- -- -- 21.8 (2.8) 1.6 6.2
------ ------ ------ ------ -------- ------ ------
Income from
operations........... 60.6 17.6 15.4 47.7 242.7 219.3 62.0
Interest and debt
related expenses, net
of interest income..... 6.1 8.4 22.4 22.1 14.6 12.7 4.4
Other (income) expense.. -- -- -- (2.6) -- -- 3.7
------ ------ ------ ------ -------- ------ ------
Income (loss) before
taxes and
extraordinary item... 54.5 9.2 (7.0) 28.2 228.1 206.6 53.9
Provision (benefit) for
income taxes........... 17.7 4.7 (1.6) 9.1 75.0 68.5 18.3
------ ------ ------ ------ -------- ------ ------
Income (loss) before
extraordinary item
and change in
accounting principle. 36.8 4.5 (5.4) 19.1 153.1 138.1 35.6
Cumulative effect of
change in accounting
for post-retirement
benefits other than
pensions............... -- (10.4) -- -- -- -- --
Extraordinary item, loss
on early extinguishment
of debt, net of tax.... -- -- -- -- (3.1) (3.1) --
------ ------ ------ ------ -------- ------ ------
Net income (loss)..... $ 36.8 $ (5.9) $ (5.4) $ 19.1 $ 150.0 $135.0 $ 35.6
====== ====== ====== ====== ======== ====== ======
Per share data:
Income (loss) before
extraordinary item and
change in accounting
principle............. $ 0.67 $ 0.08 $(0.10) $ 0.34 $ 2.76 $ 2.48 $ 0.64
Cumulative effect of
change in accounting
for post-retirement
benefits other than
pensions.............. -- (0.19) -- -- -- -- --
Extraordinary item..... -- -- -- -- (0.06) (0.06) --
------ ------ ------ ------ -------- ------ ------
Net income (loss) per
share................. $ 0.67 $(0.11) $(0.10) $ 0.34 $ 2.70 $ 2.42 $ 0.64
====== ====== ====== ====== ======== ====== ======
OTHER DATA:
EBITDA (a).............. $ 78.5 $ 41.0 $ 52.5 $108.6 $ 281.4 $251.7 $ 99.6
Depreciation and
amortization(b)........ 17.9 23.4 37.1 39.1 41.5 30.8 31.4
Capital expenditures.... 34.4 16.0 12.2 12.3 54.0 26.8 73.0
Ratio of earnings to
fixed charges(c)....... 7.1x 1.8x -- 2.1x 12.6x 13.7x 5.8x
Deficiency of earnings
to cover fixed charges. -- -- $ 7.3 -- -- -- --
OPERATING DATA:
Revenues:
Styrene................ $ 257 $ 151 $ 144 $ 288 $ 467 $ 398 $ 249
Acrylonitrile.......... 155 137 124 138 251 210 124
Acetic acid............ 69 66 64 76 94 75 50
Sodium chlorate........ -- 9 81 83 102 73 82
Annual capacity at
period end (MM lbs):
Styrene................ 1,500 1,500 1,500 1,500 1,500 1,500 1,700
Acrylonitrile.......... 700 700 700 700 740 740 740
Acetic acid............ 600 600 600 600 600 600 800
Sodium chlorate (000
tons)................. -- 340 340 340 350 340 350
Sales volume (MM lbs):
Styrene................ 1,495 1,213 1,191 1,460 1,433 1,150 1,295
Acrylontrile........... 663 573 528 668 739 604 475
Acetic acid............ 557 620 578 599 635 487 346
Sodium chlorate (000
tons)................. -- 26 248 294 336 248 233
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
---------------------------------- -------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $ 28.6 $ 56.8 $ 31.0 $ 20.8 $ 74.6 $ 88.3 $ 83.0
Net property, plant and
equipment.................... 230.6 343.8 314.3 291.1 309.1 289.0 350.8
Total assets.................. 362.5 608.5 546.8 580.9 609.9 620.6 659.0
Total long-term debt
(including current portion).. 78.7 326.5 291.9 226.4 121.4 128.6 138.2
Stockholders' equity.......... 112.2 87.3 70.3 89.7 239.3 222.2 273.1
</TABLE>
- --------
(a) EBITDA represents income from operations before taking into consideration
depreciation and amortization and the impact of accruals for the Company's
SAR program. See footnote (b). The SAR program will not be continued after
the Transaction. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to incur and service debt.
EBITDA should not be considered by an investor as an alternative to net
income or income from operations, as an indicator of the operating
performance of the Company or as an alternative to cash flows as a measure
of liquidity.
(b) Depreciation and amortization expense included herein excludes the
amortization of deferred debt financing costs which is included in
interest expense.
(c) For purposes of computing these ratios, earnings consist of income from
continuing operations before income taxes and fixed charges (excluding
capitalized interest). Fixed charges consist of interest expense on debt,
amortization of financing costs, capitalized interest and the portion
(approximately one-third) of rental expense that management believes is
representative of the interest component of rental expense.
28
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION
The pro forma statements of operations presented below for the year ended
September 30, 1995, and the nine months ended June 30, 1996, have been derived
from the financial statements included elsewhere herein and give effect to the
Transaction as if it had occurred on October 1, 1994. The pro forma
consolidated balance sheet at June 30, 1996, presented below has been derived
from the unaudited consolidated balance sheet included elsewhere herein and
gives effect to the Transaction as if it had occurred on June 30, 1996. The
summary pro forma consolidated financial data do not necessarily represent
what such entities' financial position or results of operations would have
been if the Transaction had actually been completed as of the dates indicated
and are not intended to project such entities' financial position or results
of operations for any future period or as of any date. The information
presented below should be read in conjunction with the historical Consolidated
Financial Statements of Sterling Chemicals, Inc. and its subsidiaries and the
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
The pro forma adjustments were applied to the respective historical
financial statements to reflect and account for the Transaction as a
recapitalization. Accordingly, the historical basis of Sterling Chemicals,
Inc.'s assets and liabilities has not been impacted by the Transaction.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THE HOLDINGS
COMPANY PRO FORMA CHEMICALS PRO FORMA PRO
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS FORMA
---------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues................ $1,030.2 $1,030.2 $1,030.2
Cost of goods sold...... 758.6 0.4 (a) 759.0 759.0
-------- ------ -------- ----- --------
Gross Profit.......... 271.6 (0.4) 271.2 271.2
Selling, general and
administrative
expenses............... 28.9 2.8 (b) 31.7 31.7
-------- ------ -------- ----- --------
Income from
operations........... 242.7 (3.2) 239.5 239.5
Interest expense, net... 14.6 50.8 (c) 65.4 14.3 (c) 79.7
-------- ------ -------- ----- --------
Income from continuing
operations before
income taxes......... 228.1 (54.0) 174.1 (14.3) 159.8
Provision (benefit) for
income taxes 75.0 (18.9)(d) 56.1 (5.0)(d) 51.1
-------- ------ -------- ----- --------
Income from continuing
operations........... $ 153.1 $(35.1) $ 118.0 $(9.3) $ 108.7
======== ====== ======== ===== ========
Income per share from
continuing operations.. $ 2.76 $ 9.95
Weighted average common
shares outstanding..... 55.674 10.924(e)
OTHER DATA:
EBITDA (f).............. $ 281.4 $ 281.4 $ 281.4
Depreciation and
amortization(g)........ 41.5 41.9 41.9
Cash interest expense,
net.................... 12.6 61.4 61.4
Ratio of EBITDA to
interest expense, net.. 19.3x 4.3x 3.5x
Ratio of EBITDA to cash
interest expense, net.. 22.3x 4.6x 4.6x
Ratio of earnings to
fixed charges (h)...... 12.6x 3.5x 2.9x
</TABLE>
See accompanying Notes to Pro Forma Consolidated Financial Statements
29
<PAGE>
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR NINE MONTHS ENDED JUNE 30, 1996
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THE HOLDINGS
COMPANY PRO FORMA CHEMICALS PRO FORMA PRO
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS FORMA
---------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues................ $600.7 $600.7 $600.7
Cost of goods sold...... 508.7 0.3 (a) 509.0 509.0
------ ------ ------ ----- ------
Gross Profit.......... 92.0 (0.3) 91.7 91.7
Selling, general and
administrative
expenses............... 30.0 (6.2)(b) 23.8 23.8
------ ------ ------ ----- ------
Income from
operations........... 62.0 5.9 67.9 67.9
Interest expense, net... 4.4 42.9 (c) 47.3 10.7 (c) 58.0
Other expense........... 3.7 3.7 3.7
------ ------ ------ ----- ------
Income (loss) from
continuing operations
before income taxes.. 53.9 (37.0) 16.9 (10.7) 6.2
Provision (benefit) for
income taxes........... 18.3 (13.0)(d) 5.3 (3.7)(d) 1.6
------ ------ ------ ----- ------
Income (loss) from
continuing
operations........... $ 35.6 $(24.0) $ 11.6 $(7.0) $ 4.6
====== ====== ====== ===== ======
Income per share from
continuing operations.. $ 0.64 $ 0.42
Weighted average common
shares outstanding..... 55.685 10.924 (e)
OTHER DATA:
EBITDA (f).............. $ 99.6 $ 99.6 $ 99.6
Depreciation and
amortization(g)........ 31.4 31.7 31.7
Cash interest expense,
net.................... 3.5 44.3 44.3
Ratio of EBITDA to
interest expense, net.. 22.6x 2.1x 1.7x
Ratio of EBITDA to cash
interest expense, net.. 28.5x 2.2x 2.2x
Ratio of earnings to
fixed charges (h)...... 5.8x 1.3x 1.1x
</TABLE>
See accompanying Notes to Pro Forma Consolidated Financial Statements
30
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
THE HOLDINGS
COMPANY PRO FORMA CHEMICALS PRO FORMA PRO
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS FORMA
---------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 6.5 $ -- $ 6.5 $ -- $ 6.5
Accounts receivable... 149.1 149.1 149.1
Inventories........... 47.6 47.6 47.6
Prepaid expenses...... 7.9 7.9 7.9
Deferred income taxes. 8.3 8.3 8.3
------ ------ ------ ------ ------
Total current
assets............. 219.4 -- 219.4 -- 219.4
Property, plant and
equipment, net......... 350.8 350.8 350.8
Other assets............ 88.8 32.4 (i) 121.2 3.0 (i) 124.2
------ ------ ------ ------ ------
Total............... $659.0 $ 32.4 $691.4 $ 3.0 $694.4
====== ====== ====== ====== ======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 60.6 $ -- $ 60.6 $ -- $ 60.6
Accrued expenses...... 57.9 (2.8)(j) 55.1 55.1
Current portion of
long-term debt....... 17.9 (17.9)(k) -- --
------ ------ ------ ------ ------
Total current
liabilities........ 136.4 (20.7) 115.7 -- 115.7
Long-term debt.......... 120.3 516.6 (k) 636.9 93.1 (k) 730.0
Deferred income taxes... 46.3 (5.3)(l) 41.0 41.0
Deferred credits and
other liabilities...... 82.9 (5.9)(j) 77.0 77.0
Common stock held by New
ESOP................... -- -- 6.5 (q) 6.5
Less: Unearned
compensation......... -- -- (6.5)(r) (6.5)
Stockholders' equity:
Common stock.......... 0.6 (0.5)(m) 0.1 0.1
Warrants.............. -- -- 6.9 (s) 6.9
Additional paid-in
capital (deficit).... 33.2 (208.9)(n) (175.7) (386.8)(t) (562.5)
Retained earnings
(deficit)............ 310.7 (314.3)(o) (3.6) 310.7 (u) 307.1
Pension adjustment.... (1.6) 1.6 (n) -- (1.6)(v) (1.6)
Accumulated
translation
adjustment........... (19.3) 19.3 (n) -- (19.3)(v) (19.3)
Deferred compensation. (0.1) 0.1 (j) -- --
------ ------ ------ ------ ------
323.5 (502.7) (179.2) (90.1) (269.3)
Treasury stock........ (50.4) 50.4 (p) -- --
------ ------ ------ ------ ------
Stockholders'
equity............. 273.1 (452.3) (179.2) (90.1) (269.3)
------ ------ ------ ------ ------
Total............... $659.0 $ 32.4 $691.4 $ 3.0 $694.4
====== ====== ====== ====== ======
</TABLE>
See accompanying Notes to Pro Forma Consolidated Financial Statements
31
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 1995 AND AS OF AND FOR THE NINE MONTHS ENDED
JUNE 30, 1996
(DOLLARS IN MILLIONS)
(UNAUDITED)
The pro forma financial data have been derived by the application of pro
forma adjustments to the Company's historical financial statements for the
periods noted. The Merger has been accounted for as a recapitalization which
will have no impact on the historical basis of assets and liabilities. The pro
forma financial data assume there are no dissenting shareholders to the
Merger.
(a) Represents the amortization of organization cost pursuant to the
Merger.
(b) Represents the elimination of compensation benefit (expense)
associated with the Company's SAR plan, which will be terminated in
connection with the Merger. The adjustment amounts represent the SAR plan
compensation benefit (expense) recorded in the Company's historical
financial statements.
(c) Represents the elimination of interest expense related to the
historical debt outstanding and the incurrence of interest expense related
to the issuance of the Credit Facility, the Notes, and the Discount Notes
as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
1995 1996
------------- -----------
<S> <C> <C>
Holdings
Discount Notes (i)........................... $ 13.5 $10.1
Amortization of deferred financing costs..... 0.2 0.2
Amortization of debt discount................ 0.6 0.4
------ -----
Total Holdings............................. $ 14.3 $10.7
====== =====
Chemicals
Interest expense on the Company's historical
debt........................................ $(14.8) $(6.9)
Amortization of historical deferred financing
costs....................................... (2.0) (0.9)
Interest expense on the Credit Facility (ii). 30.8 23.1
Interest expense on the Notes (iii).......... 32.3 24.2
Amortization of deferred financing costs..... 4.0 3.0
Commitment fee............................... 0.5 0.4
------ -----
Total Chemicals............................ $ 50.8 $42.9
====== =====
</TABLE>
--------
(i) For purposes of the pro forma statement of operations, the
effective annual interest rate is 13.5%. A 1% change in the interest
rate payable on the outstanding balance under the Discount Notes would
change annual interest expense and cash interest expense by $1.0
million and $0, respectively, before the effect of income taxes.
(ii) For purposes of the pro forma statement of operations, the
effective annual interest rate is assumed to equal 8.5%. A 1% change in
the interest rate payable on the outstanding balance under the Credit
Facility would change each of annual interest expense and cash interest
expense by $3.6 million before the effect of income taxes.
(iii) For purposes of the pro forma statement of operations, the
effective annual interest rate is 11.75%. A 1% change in the interest
rate payable on the outstanding balance under the Notes would change
each of annual interest expense and cash interest expense by $2.8
million before the effect of income taxes.
(d) Represents the tax effect of the pro forma adjustments at a 35%
statutory rate.
32
<PAGE>
(e) Weighted average shares outstanding after giving effect to the
Transaction represents the 10.891 million shares of Holdings Common Stock
issued, plus the 0.575 million shares of Holdings Common Stock which may be
purchased through the Warrants, less the 0.542 million shares of Holdings
Common Stock held by the New ESOP, which are not considered outstanding for
earnings per share calculations until they are allocated to New ESOP plan
participants.
(f) EBITDA represents income from operations before taking into
consideration depreciation and amortization and historical SARs benefit of
$2.8 million for the year ended September 30, 1995 and SARs expense of $6.2
million for the nine months ended June 30, 1996. See footnote (g). EBITDA
is presented because it is a widely accepted financial indicator of a
company's ability to incur and service debt. EBITDA should not be
considered by an investor as an alternative to net income or income from
operations, as an indicator of the operating performance of the Company or
as an alternative to cash flows as a measure of liquidity.
(g) Depreciation and amortization expense included herein excludes the
amortization of deferred debt financing costs and amortization of debt
discount which is included in interest expense.
(h) For purposes of computing these ratios, earnings consist of income
from continuing operations before income taxes and fixed charges (excluding
capitalized interest). Fixed charges consist of interest expense on debt,
amortization of financing costs, amortization of debt discount, capitalized
interest and the portion (approximately one-third) of rental expense that
management believes is representative of the interest component of rental
expense.
(i) Represents the capitalization of organization and deferred financing
costs related to the Merger, net of expensing the historical deferred
financing costs as follows:
<TABLE>
<S> <C>
Chemicals
Organization and debt financing costs........................ $35.4
Historical debt financing costs.............................. (3.0)
-----
Total Chemicals............................................ $32.4
=====
Holdings
Debt financing costs......................................... $ 3.0
=====
</TABLE>
(j) Represents the settlement of obligations pursuant to the Company's
SARs, phantom stock and restricted stock, which will be terminated in
connection with the Merger.
(k) Represents the repayment of the Company's historical debt outstanding
and the incurrence of debt relating to the Credit Facility, the issuance of
the Notes, and the issuance of the Discount Notes as follows:
<TABLE>
<S> <C>
Holdings
Discount Notes proceeds....................................... $ 100.0
Less: Warrants (s)............................................ (6.9)
-------
Total Holdings.............................................. $ 93.1
=======
Chemicals
Repayment of historical Debt outstanding...................... $(138.2)
Credit Facility............................................... 361.9
Notes......................................................... 275.0
-------
Total Chemicals............................................. $ 498.7
=======
</TABLE>
Subject to the borrowing base (as defined), the unused portion of the
$100 million Revolving Credit Facility will be available for working
capital and general corporate purposes, including funding $8.7 million of
current maturities on the Term Loans.
(l) Represents the deferred tax impact of expensing historical deferred
financing costs and settlement of obligations pursuant to the Company's
SARs, phantom stock and restricted stock.
33
<PAGE>
(m) Represents the net effect of the Transaction on the 60.327 million
shares issued at $.01 par value per share. There will be 10.891 million
shares issued subsequent to the Transaction.
(n) Represents (i) the contribution to Chemicals of the Company's net
assets, except for $0.1 million attributable to common stock; net of (ii)
cash advanced to Holdings, comprising the new debt proceeds, net of debt
issue and organization costs, repayment of historical Debt and settlement
of obligations pursuant to the Company's SARs, phantom stock and restricted
stock.
(o) Represents the contribution of the Company's net assets to Chemicals,
net of the write-off of historical deferred financing costs and settlement
of obligations pursuant to the Company's SARs, phantom stock and restricted
stock, after tax effects.
(p) Represents the cancellation of the 4.64 million shares of treasury
stock.
(q) Represents the proceeds from the purchase of 0.542 million shares of
Common Stock by the New ESOP in connection with the Transaction. Common
stock held by the New ESOP has been classified outside of permanent equity
because, under certain conditions, participants can require Chemicals to
purchase for cash common stock distributed to them by the New ESOP.
(r) Represents unearned compensation expense related to Common Stock held
by the New ESOP.
(s) Represents the Warrants issued in connection with the Units Offering,
which have been valued at $6.9 million.
(t) Represents amounts distributed to convert to cash 53.389 million
shares of the Company's common stock for total consideration of $640.7
million; net of the issuance of 8.048 million shares in the Equity Private
Placement for total consideration of $96.6 million; plus $1.6 million in
equity financing costs as a result of the Transaction; plus historical
amounts of retained earnings, pension adjustment and accumulated
translation adjustment; net of the cash advanced to Holdings per note (n).
The pro forma consolidated financial statements have been prepared under
the assumption that all outstanding shares of common stock are converted to
cash, except for the 2.301 million Rollover Shares, the minimum number of
Rollover Shares.
(u) Represents the Company's historical retained earnings.
(v) Represents reinstatement of historical amounts of pension adjustment
and accumulated translation adjustment.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The primary markets in which the Company competes, especially styrene and
acrylonitrile, are cyclical and are sensitive to changes in the balance
between supply and demand, the price of feedstocks, and the level of general
economic activity. Historically, these markets have experienced alternating
periods of tight supply and rising prices and profit margins, followed by
periods of large capacity additions resulting in oversupply and declining
prices and margins. However, the secular growth trend for major petrochemical
products globally has been, and is projected to continue to be, 1.3 to 2.0
times the gross domestic product growth rate. These growth rates are driven by
new applications and the substitution of petrochemical-based plastics and
fibers for materials such as metals, paper, glass, wood and cotton. In
addition, growth of petrochemicals and plastics consumption in the developing
regions of the world has been tied to increasing per capita usage of such
products, which historically has lagged behind that in the U.S. Demand from
the Far East, particularly China, tends to have a disproportionate impact on
the global markets for the Company's primary petrochemical products, due to
both volume and volatility of the region's demand. Although in the last three
fiscal years the Company's direct sales to China average less than 3% of total
revenues, much of the Company's Far Eastern petrochemical product demand is
ultimately driven by Chinese demand for downstream products.
The Company sells its products primarily pursuant to multi-year contracts
and spot transactions in both the domestic and export markets. This long-term,
high volume focus allows the Company to maintain relatively low selling,
general and administrative expenses relating to product marketing. Prices for
the Company's commodity chemicals are determined by global market factors,
including changes in the cost of raw materials, that are largely beyond the
Company's control, and, except with respect to certain of its multi-year
contracts, the Company generally sells its products at prevailing market
prices.
During the past five years, the Company's results of operations have varied
significantly from year to year primarily as a result of cyclical changes in
the markets for its primary products. The Company has attempted to stabilize
these fluctuations by manufacturing two product groups, petrochemicals and
pulp chemicals, which are subject to different market dynamics, including
timing differences in their respective cyclical upturns and downturns.
However, as prices for the Company's products are expected to continue to
fluctuate in the future, any prolonged or severe softness in the market for
any of its principal products, particularly styrene and acrylonitrile, will
adversely affect the Company. In addition, in petrochemicals, the Company
markets substantial volumes (approximately 60.0%, 50.5% and 53.7% of total
sales volumes in fiscal 1993, 1994 and 1995, respectively) and generates
substantial revenues (approximately 36.4%, 32.1% and 30.2% of total revenues
in fiscal 1993, 1994 and 1995, respectively) under conversion agreements
whereby the customer furnishes raw materials which the Company processes in
exchange for a fee designed to cover its fixed and variable costs of
production. These conversion agreements allow the Company to maintain lower
levels of working capital and, in some cases, to gain access to certain
improvements in manufacturing process technology. The Company believes its
conversion agreements help insulate the Company to some extent from the
effects of declining markets and changes in raw material prices while allowing
it to share in the benefits of favorable market conditions for most of the
products sold under these arrangements.
In recent years, the Company has pursued a strategy of growth and product
diversification. In 1992, the Company acquired its pulp chemicals business
which has current sodium chlorate production capacity of 350,000 tons. In
1995, the Company began a three-year, $200 million capacity expansion and
upgrade program. Approximately 80% of the capital expenditures are expected to
be completed by the end of fiscal 1996, and the balance will be completed in
fiscal 1997. Expenditures incurred after the Transaction are expected to be
funded from operating cash flow and borrowings under the Revolving Credit
Facility. Through this program, the Company will have expanded its total
petrochemical production capacity by approximately 1.4 billion pounds,
including capacity additions of 200 million pounds of styrene, 200 million
pounds of acetic acid and 150 million gallons (approximately 995 million
pounds) of methanol. In addition, the Company is expanding its sodium
35
<PAGE>
chlorate production capacity by 110,000 tons, or 30%, by constructing a new
facility in Valdosta, Georgia. Through this strategy, the Company has sought
to capitalize on the continuing secular growth in global demand for its key
products, while reducing its sensitivity to the cyclicality of the markets for
any particular product.
The Company believes that announced global capacity additions in styrene,
particularly in the Far East, will result in overcapacity for this market
during 1997-1998. However, the Company also believes that demand for styrene
will continue to grow at historical rates and that, over time, such potential
overcapacity will diminish. Notwithstanding the anticipated weakness in the
styrene markets, and despite the substantial interest payments payable on the
indebtedness incurred to finance the Transaction, the Company believes that
cash flow from operations, together with funds available under the Revolving
Credit Facility, will be adequate to make required payments of principal and
interest on the indebtedness that will be outstanding upon consummation of the
Transaction. See "Risk Factors--High Financial Leverage," "Risk Factors--
Cyclical Markets for Products; Dependence on Key Products" and "--Liquidity
and Capital Resources."
PETROCHEMICALS
Styrene
From 1991 to 1993, styrene's profitability was depressed because of industry
overcapacity and global recessionary pressures. However, the market for
styrene and its derivatives experienced strong growth in 1994 based primarily
on global economic growth. The U.S. economy and the economies of most Asian
countries expanded during fiscal 1994 while Europe's economy began to recover.
The strength of the U.S. automotive, housing and packaging markets also
contributed to the increased demand for styrene. By the spring of 1994,
increased demand for styrene had absorbed much of the excess capacity. In
addition, some competitors' styrene plants experienced operating difficulties
and scheduled shutdowns during the year which further tightened the market.
Most styrene plants were operating near full capacity during the last half of
fiscal 1994.
Global growth in demand for styrene and its derivatives, particularly in the
Far East, continued into fiscal 1995. Most styrene producers again operated
their plants at or near full capacity for most of fiscal 1995. A series of
significant price increases kept margins increasing into the third quarter of
fiscal 1995. During the fourth quarter of the year, however, average styrene
prices decreased 45% and average margins decreased approximately 75% from
their third quarter levels. The Company believes that demand began to weaken
in the third quarter as a result of a general slowdown in the worldwide
economic growth rate, prompting customers to begin utilizing their available
inventories and decreasing purchases of additional product, and due to
significantly decreased purchases of styrene and styrene derivatives by China.
From the fourth quarter of fiscal 1995 and continuing through the first
quarter of fiscal 1996, market conditions for styrene weakened largely as a
result of changes in China's enforcement of economic and tax policies and
monetary constraints that negatively affected its imports of styrene and its
derivatives. While it is impossible to predict when China's chemical imports
will return to previous levels, the Company anticipates that styrene pricing
and profitability will be relatively stable for the remainder of fiscal 1996.
Acrylonitrile
The acrylonitrile market exhibits characteristics in capacity utilization,
selling prices and profit margins similar to those of styrene. Moreover, as a
result of the Company's high percentage of export acrylonitrile sales, demand
for the Company's acrylonitrile is most significantly influenced by export
customers, particularly those that supply acrylic fiber to China. In recent
years the acrylic fiber market has been subject to volatility because of
fluctuations in demand from the Chinese market.
36
<PAGE>
The Company enjoyed strong demand for acrylonitrile during fiscal 1994
because of favorable economic conditions worldwide, including strong demand
for acrylic fiber in China and in most other Asian countries. In addition,
poor cotton crops in parts of the world contributed to increased demand for
all synthetic fibers, including acrylic fiber. By the end of fiscal 1994, most
acrylonitrile producers were operating at or near full capacity. As a result
of this tight supply, acrylonitrile profitability began increasing in the
fourth quarter of fiscal 1994 and continued through the third quarter of
fiscal 1995 as sales prices increased ahead of escalating raw material prices.
The improvement in market conditions for acrylonitrile into fiscal 1995 was
primarily due to continued improved demand, particularly in China, for acrylic
fiber and ABS resins, the largest derivatives of acrylonitrile.
Acrylonitrile demand began to weaken after the third quarter of fiscal 1995
for the same reasons that caused the significant negative changes in the
styrene market. Demand for acrylonitrile from export customers decreased
significantly in the fourth quarter of fiscal 1995, although export prices and
margins did not decrease significantly until the first quarter of fiscal 1996.
Market conditions for acrylonitrile weakened significantly in the first half
of fiscal 1996 primarily due to the changes in demand from China as described
above. In recent months, however, acrylonitrile prices have stabilized after
declines in the first six months of fiscal 1996 and the Company anticipates
that acrylonitrile pricing and profitability will be relatively stable for the
remainder of fiscal 1996.
PULP CHEMICALS
Historically, sodium chlorate has experienced cycles in capacity
utilization, selling prices and profit margins. Since the mid-1980s, North
American demand for sodium chlorate has grown at an average annual rate of 10%
as pulp mills have accelerated substitution of sodium chlorate-based chlorine
dioxide for elemental chlorine in bleaching applications. However, from 1990
through mid-1994, the industry operated well below rated capacity, resulting
in declining product prices, due to oversupply created by significant capacity
expansions from 1990 to 1992.
From mid-1994, sodium chlorate supply tightened considerably as sales
volumes increased because of (i) increased substitution of chlorine dioxide
for elemental chlorine in the bleaching process, in anticipation of
environmental regulations that would eliminate the use of elemental chlorine
in pulp manufacturing, and (ii) general improvement in pulp and paper market
conditions. As a result, during the fourth quarter of fiscal 1994, the Company
realized its first sodium chlorate price increase since acquiring the business
in 1992. Beginning in fiscal 1994, royalty revenues also increased because of
higher chlorine dioxide generator operating rates and new start-ups. Eight new
Company generators commenced operation in fiscal 1994, including the first
such generator in China. The Company also was awarded 10 new generator
contracts in fiscal 1994. Improved market conditions continued through fiscal
1995 and into fiscal 1996, resulting in higher revenues from sales of both
sodium chlorate and chlorine dioxide generators and from royalties. In recent
months, weakness in the pulp and paper markets has resulted in somewhat slower
demand growth for sodium chlorate. Nevertheless, the Company expects that
revenues and operating profits from its pulp chemicals operations for fiscal
1996 will exceed fiscal 1995 levels.
37
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth revenues, gross profit and operating income
for the Company's primary product groups for the years ended September 30,
1993, 1994 and 1995 and the nine months ended June 30, 1995 and 1996.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
--------------------- -------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Petrochemicals:
Styrene.................................. $ 144 $ 288 $ 467 $ 398 $ 249
Acrylonitrile............................ 124 138 251 210 124
Acetic Acid.............................. 64 76 94 75 50
Other.................................... 68 76 74 54 64
Pulp Chemicals............................ 119 123 144 106 114
------ ------ ------ ------ ------
$ 519 $ 701 $1,030 $ 843 $ 601
====== ====== ====== ====== ======
GROSS PROFIT:
Petrochemicals............................ $ 7 $ 58 $ 225 $ 212 $ 49
Pulp Chemicals............................ 34 36 47 33 43
------ ------ ------ ------ ------
$ 41 $ 94 $ 272 $ 245 $ 92
====== ====== ====== ====== ======
OPERATING INCOME:
Petrochemicals............................ $ (4) $ 37 $ 212 $ 200 $ 34
Pulp Chemicals............................ 19 11 31 19 28
------ ------ ------ ------ ------
$ 15 $ 48 $ 243 $ 219 $ 62
====== ====== ====== ====== ======
SALES VOLUME:
Petrochemicals (MMlbs.):
Styrene.................................. 1,191 1,460 1,433 1,150 1,295
Acrylonitrile............................ 528 668 739 604 475
Acetic Acid.............................. 578 599 635 487 346
Sodium Chlorate (000 tons)................ 248 294 336 248 233
</TABLE>
COMPARISON OF NINE MONTHS ENDED JUNE 30, 1996 TO NINE MONTHS ENDED JUNE 30,
1995
Revenues
Revenues for the first nine months of fiscal 1996 were $601 million compared
to revenues of $843 million for the first nine months of fiscal 1995, a
decrease of 29%. The decrease in revenues was primarily in the Company's
petrochemical business due to lower sales prices for styrene and
acrylonitrile, which was partially offset by increased revenues in the pulp
chemical business due to higher sodium chlorate sales prices.
Petrochemicals
For the first nine months of fiscal 1996, the Company's revenues from its
petrochemical business decreased 34% to $487 million when compared to the
first nine months of fiscal 1995 primarily due to decreases in styrene and
acrylonitrile average sales prices and lower acrylonitrile and acetic acid
sales volumes.
Styrene. Styrene revenues in the first nine months of fiscal 1996 decreased
approximately 37% to $249 million compared to the same period of fiscal 1995
due to lower styrene sales prices because of weak market conditions, partially
offset by higher sales volumes. Average sales prices for the first nine months
of fiscal 1996
38
<PAGE>
decreased by approximately 45%. Sales volumes in the first nine months of
fiscal 1996 increased by approximately 13% over the same period in fiscal 1995
when a shutdown for scheduled maintenance and catalyst replacement restricted
production. The Company's styrene unit operated at approximately 102% of its
rated capacity of 1.7 billion pounds for the first nine months of fiscal 1996,
compared to approximately 104% for the corresponding period in fiscal 1995.
Debottlenecking completed in December 1995 increased the Company's styrene
annual production capacity to 1.7 billion pounds. Percentages for 1995 are
based on a rated capacity of 1.5 billion pounds.
The prices of styrene's major raw materials, benzene and ethylene, were
substantially lower during the first nine months of fiscal 1996 compared to
the same period in fiscal 1995. Benzene prices were approximately 22% lower
while ethylene prices were approximately 30% lower. These decreases helped to
offset some of the decrease in selling prices discussed above, but styrene
margins still declined substantially.
Acrylonitrile. Acrylonitrile revenues in the first nine months of fiscal
1996 decreased approximately 41% to $124 million compared to the corresponding
period in fiscal 1995 primarily due to decreases of approximately 25% in
average sales prices and 21% in sales volumes. Reduced imports of
acrylonitrile derivatives by the Far East market (primarily acrylic fiber and
ABS) resulted in lower acrylonitrile sales volumes and prices.
The Company's acrylonitrile unit operated at approximately 82% of rated
capacity during the first nine months of fiscal 1996 compared to approximately
101% for the corresponding period of fiscal 1995. This reduction in operating
rate was attributable to an extended shutdown for most of March 1996 for
scheduled maintenance and installation of the first phase of a state-of-the-
art distributive control system. These operations were performed during a
period of reduced demand for acrylonitrile. As a result, profits decreased
because of higher fixed cost per pound produced. The shutdown has been
completed and should result in increased efficiencies and stronger operating
fundamentals in the future.
The prices of propylene and ammonia, which are the major raw materials used
to make acrylonitrile, were approximately 24% and 22% lower, respectively, in
the first nine months of fiscal 1996 than in the corresponding period in
fiscal 1995. These decreases helped to offset some of the lower selling prices
discussed above, but margins still declined substantially.
Acetic Acid. Acetic acid revenues in the first nine months of fiscal 1996
decreased approximately 33% to $50 million compared to the same period of
fiscal 1995 primarily due to a 29% decrease in sales volume related to a
shutdown of the acetic acid unit for expansion by 200 million pounds annual
capacity and for installation of a distributive control system. The expansion
of the acetic acid unit and the construction of the partial oxidation plant by
Praxair Hydrogen Supply, Inc. ("Praxair") at the Texas City Plant were
completed in June 1996. The partial oxidation plant will supply raw materials
to the Company's acetic acid unit and will allow the acetic acid unit to
operate at full capacity in future periods.
Other Petrochemical Products. Revenues during the first nine months of
fiscal 1996 from the Company's other petrochemical products (excluding $7
million of lactic acid revenues) increased approximately 30% to $57 million,
primarily due to increases in revenues from plasticizers. The Company ceased
production of lactic acid in May 1996. In the second and third quarters of
fiscal 1996, the Company wrote off the remaining net book value of the lactic
acid plant assets and expensed other related costs resulting in a $3.7 million
charge against earnings before taxes.
Pulp Chemicals
Revenues from the Company's pulp chemical business for the first nine months
of fiscal 1996 increased by approximately 8% to $114 million compared to the
first nine months of fiscal 1995 primarily due to an increase in sodium
chlorate average sales prices of approximately 19%, partially offset by a 6%
decrease in sales volumes. Sodium chlorate has experienced higher sales prices
as a result of improved demand due to increased chlorine dioxide utilization
in pulp bleaching. Royalty revenues in the first nine months of fiscal 1996
from installed generator technology increased approximately 5% over the first
nine months of fiscal 1995 as a result of higher customer operating rates and
increased capacity.
39
<PAGE>
The Company's sodium chlorate plants operated at approximately 89% of rated
capacity during the first nine months of fiscal 1996 compared to 98% for the
1995 period. The lower operating rate resulted from recent weakness in paper
demand.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the first nine
months of fiscal 1996 increased to $30 million compared to $26 million in the
first nine months of fiscal 1995 primarily due to an increase in expenses
related to the Company's SAR program of $4.6 million.
Income from Operations
Income from operations for the first nine months of fiscal 1996 was $62
million (before the effect of the $3.7 million pre-tax charge against earnings
relating to the write-off of the Company's lactic acid plant assets)
consisting of $34 million from petrochemical operations and $28 million from
pulp chemical operations. This amount represented a 72% decrease from the same
period of fiscal 1995, primarily due to weakness in the markets for styrene
and acrylonitrile discussed above, which resulted in significantly lower
margins during the first nine months of fiscal 1996 compared to the 1995
period. This weakness was partially offset by higher operating income from
pulp chemicals and other petrochemicals. In addition, the Company incurred
approximately $4.4 million in start-up expenses during the first nine months
of fiscal 1996 in connection with the construction of the methanol plant.
Interest and Debt Related Expenses
Interest expense for the first nine months of fiscal 1996 decreased $8.3
million compared to the 1995 period primarily due to lower outstanding debt in
fiscal 1996. The Company's average interest rate per annum on June 30, 1996,
and on June 30, 1995 was 7.1%.
Provision for Income Taxes
Provision for income taxes for the first nine months of fiscal 1996 was
$18.3 million, with an effective tax rate of 34%, compared to $68.5 million,
with an effective tax rate of 33%, for the same period of fiscal 1995. The
decrease was primarily the result of the significant decrease in the Company's
taxable income of $53.9 million for the first nine months of fiscal 1996 from
$206.6 million in the corresponding period of fiscal 1995.
Net Income
Due to the factors described above, including the $3.7 million pre-tax
charge against earnings relating to the write-off of the Company's lactic acid
plant assets, net income for the first nine months of fiscal 1996 was $35.6
million compared to $135.0 million for the same period of fiscal 1995.
COMPARISON OF FISCAL 1995 TO FISCAL 1994
Revenues
The Company's revenues for fiscal 1995 were $1.03 billion, an increase of
$329 million from fiscal 1994. Fiscal 1995 revenues were the highest in
Company history, achieved primarily through higher sales prices and volumes
for styrene and acrylonitrile due to improving conditions in the commodity
chemical markets in 1994 and 1995. The Company's pulp chemical business also
experienced record revenues in 1995 primarily due to increased sales prices
and volumes of sodium chlorate.
Petrochemicals
The financial performance of the Company's petrochemical business was
significantly better during fiscal 1995 than in fiscal 1994. Petrochemical
revenues increased 53% to $886 million from fiscal 1994, primarily as a result
of increased average styrene and acrylonitrile sales prices and higher
acrylonitrile sales volumes.
40
<PAGE>
Styrene. Styrene revenues increased 62% to $467 million in fiscal 1995
compared to fiscal 1994 primarily because of a 64% increase in average sales
prices. The styrene unit operated at approximately 96% of its 1.5 billion
pound capacity in fiscal 1995, slightly higher than in fiscal 1994, in spite
of two planned shutdowns for maintenance and catalyst replacement during
fiscal 1995 compared to no shut downs in the prior year. The second planned
shutdown, which occurred in the fourth quarter 1995, also included
modernization of the styrene unit's control instrumentation with state-of-the-
art distributive control systems.
During fiscal 1995, approximately 46% of the Company's styrene production,
representing approximately 61% of styrene revenues, was sold in the export
market. The average prices for styrene's primary raw materials, benzene and
ethylene, increased 5% and 40%, respectively, in fiscal 1995 compared to
fiscal 1994. However, the Company was able to increase styrene selling prices
and thereby margins through most of the fiscal year until the dramatic fall in
prices and margins in the fourth quarter of fiscal 1995.
Acrylonitrile. Acrylonitrile revenues for fiscal 1995 totaled $251 million,
an increase of 82% from fiscal 1994. The increased revenues primarily resulted
from an increase of 70% in average sales prices, peaking at unprecedented
levels in the third quarter of fiscal 1995, and an 11% increase in sales
volumes.
The Company's acrylonitrile unit operated at approximately 96% of capacity
during fiscal 1995, in spite of a planned shutdown for maintenance in the
first quarter and an approximately two-week unscheduled shutdown in the fourth
quarter of fiscal 1995 to correct a mechanical problem. During fiscal 1995,
most acrylonitrile producers, including the Company, were operating their
plants at or near full capacity in response to strong demand.
Acrylonitrile revenues from export sales constituted 93% of the Company's
total acrylonitrile revenues and 81% of its acrylonitrile production for 1995.
Almost all of the Company's domestic acrylonitrile revenues are from
conversion agreements. Average export acrylonitrile prices and margins were
significantly higher in fiscal 1995 than in fiscal 1994 as a result of the
strong demand during most of the year.
The average prices of acrylonitrile's primary raw materials, propylene and
ammonia, increased substantially in fiscal 1995 compared to fiscal 1994.
Average propylene prices were approximately 70% higher and average ammonia
prices increased by approximately 35%. However, the Company was able to
substantially improve margins for acrylonitrile during most of the year due to
increases in acrylonitrile sales prices, until the downturn in the fourth
quarter that negatively affected sales prices and margins.
Acetic Acid. Acetic acid revenues for fiscal 1995 totaled $94 million, an
increase of approximately 24% from fiscal 1994. The increase in revenues was
related to an increase in passed through raw material costs, specifically
methanol, during the period.
Other Petrochemical Products. Revenues in fiscal 1995 from plasticizers,
lactic acid, tertiary butylamine and sodium cyanide were approximately $74
million, a decrease of approximately 3% compared to fiscal 1994. The decline
was primarily attributable to lower lactic acid revenues.
Pulp Chemicals
Revenues from the Company's pulp chemical business increased by
approximately 17% to $144 million in fiscal 1995. The increase in revenues
resulted primarily from (i) a 14% increase in sodium chlorate sales volumes,
due to the substitution of sodium chlorate for elemental chlorine in the
bleaching process, and (ii) an 7% increase in average selling prices. Royalty
revenues from installed generator technology increased by 15% to $19 million
in fiscal 1995 as a result of higher customer operating rates and additional
installed capacity. Sales of generator technology were approximately the same
in 1995 as the previous year.
The increased sodium chlorate sales volumes in fiscal 1995 resulted in
increased capacity utilization, which contributed to lower per unit cost and
increased margins. The Company's sodium chlorate facilities operated at
approximately 97% of capacity in fiscal 1995, compared to 86% during fiscal
1994.
41
<PAGE>
Selling, General and Administrative Expenses
The Company's SG&A in fiscal 1995 were $29 million compared to $46 million
in fiscal 1994. A $25 million decrease in the expense related to the SAR
program, resulting from a 50% decrease in the number of SARs outstanding and a
decrease in the Company's stock price at the end of fiscal 1995 compared to
the end of fiscal 1994, was partially offset by a $4 million increase in
employee profit sharing, which was directly related to the Company's improved
earnings in fiscal 1995.
Income from Operations
Income from operations for fiscal 1995 was $243 million, consisting of $212
million from petrochemical operations and $31 million from pulp chemical
operations. This amount represented a 409% increase from fiscal 1994. The
increase was primarily the result of strength in the markets for styrene and
acrylonitrile discussed above, which resulted in significantly higher margins
and volumes during fiscal 1995 compared to fiscal 1994.
Interest and Debt Related Expenses
Interest expense decreased $7.5 million in fiscal 1995 primarily due to the
Company's repayment of $105 million of debt during the year. The Company's
average interest rates decreased to 7% per annum on September 30, 1995 from 8%
per annum on September 30, 1994 primarily due to the refinancing in April
1995.
Provision for Income Taxes
Provision for income taxes for fiscal 1995 was $75 million, with an
effective tax rate of 33%, compared to $9 million, with an effective tax rate
of 32% for fiscal 1994. The increase was primarily due to the significant
increase in the Company's taxable income of $228 million for fiscal 1995 from
$28 million in fiscal 1994, which was largely the result of higher earnings
from the pulp chemicals business.
Accounting Changes
Beginning in fiscal 1995, the Company adopted Financial Accounting Standards
Board Interpretation No. 39, "Offsetting of Amounts Related to Certain
Contracts" ("FIN 39"). That standard requires, among other things, that
insured liabilities of the Company be recorded separately as a liability and a
claim receivable. The Company previously recorded these items on a net basis.
The adoption of FIN 39 did not have a material effect on the Company's
financial position, results of operations or liquidity.
The Financial Accounting Standards Board has issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," which the Company is required to adopt by fiscal 1997. The
Company does not anticipate that the adoption of this Statement will have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
Net Income
Due to the factors described above, net income for fiscal 1995 was $150
million compared to $19 million for fiscal 1994.
COMPARISON OF FISCAL 1994 TO FISCAL 1993
Revenues
Revenues for fiscal 1994 totaled $701 million, an increase of $182 million
from fiscal 1993. The higher revenues resulted primarily from an increase in
styrene and acrylonitrile sales volumes and higher average styrene sales
prices. The pulp chemical business contributed $123 million to the Company's
revenues in fiscal 1994, an increase of $4 million over fiscal 1993.
42
<PAGE>
Petrochemicals
Petrochemical revenues in fiscal 1994 increased 45% to $578 million compared
to fiscal 1993 primarily due to increases in styrene sales volumes and prices.
Styrene. Styrene revenues increased 100% to $288 million in fiscal 1994
compared to fiscal 1993 because of a 63% increase in average sales prices, a
23% increase in sales volumes and a shift to more direct sales from conversion
sales. Approximately one-third of the Company's styrene was previously
marketed under one of its conversion agreements that expired late in 1993. In
fiscal 1994, this volume was successfully marketed under various sales
agreements and spot sales. Revenues recognized from a direct sale are
significantly greater than revenues recognized from an equivalent conversion
sale since in a direct sale, the Company supplies the raw materials and sells
the finished product at a price which includes the value of the raw materials.
The styrene unit operated at approximately 98% of its 1.5 billion pound
capacity in fiscal 1994 compared to about 75% of capacity in fiscal 1993. In
addition to increased demand, two planned shutdowns for maintenance and
installation of new and improved catalyst during fiscal 1993, compared to no
shutdowns in 1994, contributed to the increase in operating rates.
During fiscal 1994, approximately 55% of the Company's styrene production,
representing approximately 62% of styrene revenues, was sold in the export
market, which is typically more volatile than the domestic market. While the
prices for styrene's raw materials, benzene and ethylene, increased
significantly during the second half of the fiscal year, their average prices
for the year increased only slightly.
Acrylonitrile. Acrylonitrile revenues for fiscal 1994 totaled $138 million,
an increase of 11% from fiscal 1993, as a result of a 27% increase in sales
volumes which was partially offset by a 12% decrease in average sales prices.
Although average sales prices were lower in fiscal 1994 than in 1993,
acrylonitrile prices and margins increased significantly during the last half
of fiscal 1994. Acrylonitrile's profitability did not significantly improve
until the fourth fiscal quarter, however, because of increasing raw material
costs.
The Company's acrylonitrile unit operated at 96% capacity during fiscal 1994
compared to approximately two-thirds capacity in fiscal 1993. Average export
acrylonitrile prices were lower in fiscal 1994 than fiscal 1993, and the
average price of acrylonitrile's primary raw material, propylene, was slightly
higher. Acrylonitrile's performance benefited from lower per unit fixed costs
because of higher operating rates in fiscal 1994 compared to the prior year.
Export sales of acrylonitrile increased in 1994 and constituted the great
majority of revenues in fiscal years 1994 and 1993.
Acetic Acid. Acetic acid revenues totaled $76 million for fiscal 1994, a 19%
increase over fiscal 1993 due to higher sales volumes.
Other Petrochemical Products. Revenues from the Company's other
petrochemical products were $76 million in fiscal 1994, an increase of
approximately 12% compared to fiscal 1993, primarily due to higher sales
volumes of plasticizers.
Pulp Chemicals
Revenues from the Company's pulp chemical business increased 3% to $123
million, primarily because of increased sales volumes of sodium chlorate and
higher royalty revenues. Revenues from sodium chlorate increased 4% from
fiscal 1993 as higher sales volumes were partially offset by lower average
sales prices. The increased sales volumes resulted in increased capacity
utilization, which contributed to lower per unit cost and increased margins. A
3% decrease in the average cost of electricity, the predominant cost in the
manufacturing of sodium chlorate, also contributed to lower costs. The
Company's sodium chlorate facilities operated at approximately 86% of capacity
in fiscal 1994, compared to 75% during fiscal 1993.
43
<PAGE>
Selling, General and Administrative Expenses
The Company's SG&A increased solely because of expenses related to the SAR
program. The Company recognized expense of $22 million related to the SAR
program in fiscal 1994 because of the increase in the Company's stock price.
Prior to this accrual, SG&A was $1.1 million lower in fiscal 1994 compared to
1993, despite employee profit sharing expense of $1.7 million in fiscal 1994
compared to none in fiscal 1993. There were no expenses associated with the
SARs in fiscal 1993.
Income from Operations
Income from operations for fiscal 1994 was $48 million, consisting of $37
million from petrochemical operations and $11 million from pulp chemical
operations. This amount represented a 210% increase from fiscal 1993. The
increase was primarily the result of strength in the markets for styrene
discussed above, which resulted in significantly higher volumes and margins
during fiscal 1994 compared to fiscal 1993.
Provision (Benefit) for Income Taxes
Provision for income taxes for fiscal 1994 was $9.1 million, with an
estimated effective tax rate of 32%, compared to a benefit of $(1.6) million,
with an estimated effective tax rate of 22%, for the same period of fiscal
1993. The increase was primarily the result of the significant increase in the
Company's taxable income of $28 million during fiscal 1994 from a loss before
taxes of $(7) million in fiscal 1993, as well as $2.6 million of income from a
gain on the sale of assets.
Net Income (Loss)
Due to the factors described above, net income for fiscal 1994 was $19.1
million compared to a loss of $(5.4) million for fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
Historical
Net cash provided by operations decreased to $31 million during the first
nine months of fiscal 1996 compared to $128 million for the 1995 period
primarily due to decreased earnings partially offset by lower payments for
interest and income taxes. The Company's long-term debt increased by
approximately $17 million, net of repayments, during the first nine months of
fiscal 1996 due to borrowings of $31 million to finance the construction of
the Valdosta, Georgia sodium chlorate plant. In addition, approximately $41
million was disbursed over the first nine months of fiscal 1996 for the
capital spending program in the petrochemical business as discussed below.
Net cash provided by operations increased to $192 million for fiscal 1995
from $75 million in fiscal 1994. This increase resulted primarily from
increased earnings during fiscal 1995, partially offset by a change in working
capital. The Company utilized the increased cash from operations to reduce
long-term debt by $105 million during the year, and for capital expenditures
of approximately $54 million for various projects as a part of its three-year
capital program.
Net cash used in investing activities for the year ended September 30, 1995
was approximately $54 million, compared to $10 million in the prior year. For
the nine months ended June 30, 1996, net cash used in investing activities was
$73 million, compared to $27 million in the prior period. The net cash used in
investing activities in all of such periods was used for capital expenditures
as described below in "--Capital Expenditures." Net cash used in financing
activities for the year ended September 30, 1995 was approximately $109
million, compared to $65 million in the prior year. For the nine months ended
June 30, 1996, net cash provided by financing activities was $17 million,
primarily from proceeds, net of repayments, from long-term debt incurred in
such period, compared to net cash used in financing activities of $102 million
in the prior period, primarily for repayment of long-term debt.
44
<PAGE>
Historically, the Company has funded its working capital needs with cash
from operations and borrowings under its credit facilities. Working capital
was $83 million at June 30, 1996, up from $75 million at September 30, 1995.
Higher styrene sales volumes in June 1996 compared to September 1995 resulted
in a $37 million increase in accounts receivable. Lower raw material costs
contributed to an $11 million decrease in accounts payable. The higher styrene
and acrylonitrile sales volumes were the primary reasons for a $20 million
decrease in inventory. Cash and cash equivalents decreased $24 million
primarily as a result of expenditures in the first nine months of fiscal 1996
in connection with the Company's three-year $200 million capital program.
In April 1995, the Company entered into a credit facility consisting of a
revolving credit facility of $150 million and a term loan of $125 million. The
Company used the proceeds from such facility to refinance its existing debt.
Also in 1995, Sterling Pulp entered into a Cdn. $20 million revolving credit
facility, the proceeds of which were utilized to refinance the revolving debt
associated with such subsidiary, and a $60 million credit facility in
connection with the construction of its sodium chlorate plant in Valdosta,
Georgia. At June 30, 1996, the Company had indebtedness of $107 million under
the term loan and $31 million under the Valdosta credit facility. Upon
consummation of the Transaction, all of the outstanding borrowings under the
term loan, the Canadian revolver and the Valdosta credit facility will be
repaid.
Pro Forma for the Transaction
As a result of the Transaction, the Company will have significantly
increased cash requirements for debt service relating to the Credit Facility
and the Notes. If the Merger had occurred on June 30, 1996, the Company
estimates that, in addition to the proceeds from the Offerings, it would have
borrowed $355.4 million under the Credit Facility and $6.5 million under the
ESOP Term Loan with $94.6 million available for borrowings under the Revolving
Credit Facility, after giving effect to the borrowing base limitations. On a
pro forma basis for the year ended September 30, 1995, cash interest expense,
net, including interest on the Credit Facility and the Notes, would have
totalled approximately $61.4 million. After the Transaction, the Company will
rely on internally generated funds and, to the extent necessary, on borrowings
under the Revolving Credit Facility to meet cash requirements. The Company's
ability to incur additional debt is limited by terms of the Credit Facility
and the limitations in the Indentures. See "Description of Credit Facility,"
"Description of Notes" and "Description of Units."
Capital Expenditures
In fiscal 1995, the Company initiated a three-year capital spending program
of approximately $200 million. The program includes modernization of the Texas
City Plant, the new methanol plant at Texas City, the acetic acid expansion,
the new sodium chlorate plant at Valdosta, Georgia, debottlenecking projects
at its existing sodium chlorate facilities and various other projects.
Capital expenditures for fiscal 1995 were $54 million compared to $12
million in fiscal 1994. The fiscal 1995 capital expenditures were primarily
for plant instrumentation modernization and process improvements, the acetic
acid expansion, the new methanol plant and the new sodium chlorate plant. The
Company funded its fiscal 1995 capital expenditures from operating cash flow.
Capital expenditures for the first nine months of fiscal 1996 were $73 million
compared to $27 million in the same period last year. The capital expenditures
in the first nine months of fiscal 1996 were primarily for the expansion of
the acetic acid unit and the ongoing construction of the methanol plant and
the Valdosta, Georgia sodium chlorate plant. As of June 30, 1996, the Company
has spent approximately two-thirds of its three-year $200 million capital
plan. During the remainder of fiscal 1996, the Company expects to spend an
additional $25 million to $30 million on capital expenditures. The remaining
fiscal 1996 expenditures will primarily be for the methanol plant and for a
portion of the new sodium chlorate plant which will be completed by late 1996.
The Company expects to fund its remaining fiscal 1996 capital expenditures
after the Transaction from operating cash flow and its Revolving Credit
Facility, as needed.
Capital expenditures for fiscal 1996 are expected to be approximately $100
million, with about $50 million dedicated to the petrochemical business
primarily for the completion of the acetic acid expansion, construction of the
methanol plant and modernization of the plant instrumentation. The remainder
will be invested in the pulp
45
<PAGE>
chemical business primarily for construction of the Georgia sodium chlorate
plant. Capital expenditures for fiscal 1997 are expected to be approximately
$43 million, including approximately $29 million for replacement and
environmental compliance expenditures.
Environmental
As part of the capital spending program described above, the Company
anticipates capital expenditures of approximately $25 million over the next
five years for environmentally-related prevention, containment, process
improvements and remediation at the Texas City Plant. Specific classifications
of these expenditures are difficult to project, since an expenditure may be
made for more than one purpose. The Company's capital expenditures for
environmentally-related prevention, containment and process improvements were
$3 million and $2 million for fiscal years 1995 and 1994, respectively. During
both fiscal years, the Company did not incur any material expenditures to
remediate previously contaminated sites. The Company did not incur any other
infrequent or non-recurring material environmental expenditures which were
required under existing environmental regulations in fiscal years 1995 or
1994. See "Business--Environmental and Safety Matters."
The Company routinely incurs expenses associated with managing hazardous
substances and pollution in ongoing operations. These operating expenses
include items such as depreciation on its waste treatment facilities, outside
waste management, fuel, electricity and salaries. The amounts of these
operating expenses were approximately $45 million and $44 million for fiscal
years 1995 and 1994, respectively. The Company does not anticipate a material
increase in these types of expenses during fiscal 1996. The Company considers
these types of environmental expenditures normal operating expenses and
includes them in cost of goods sold.
Foreign Exchange
The Company does not engage in currency speculation. However, the Company
enters into forward foreign exchange contracts to reduce risk due to Canadian
dollar exchange rate movements. The forward foreign exchange contracts have
varying maturities with none exceeding 18 months. The Company makes net
settlements of U.S. dollars for Canadian dollars at rates agreed to at
inception of the contracts. The Company had a notional amount of approximately
$26 million and $20 million of forward foreign exchange contracts outstanding
to buy Canadian dollars at September 30, 1995 and 1994, respectively. The
deferred gain on these forward foreign exchange contracts at September 30,
1995 and 1994 was immaterial.
46
<PAGE>
BUSINESS
GENERAL
The Company is one of North America's leading producers of selected
commodity petrochemicals, used in the production of a wide array of consumer
goods and industrial products, and pulp chemicals used in paper manufacturing.
The Company ranks among the top three North American producers in terms of
rated production capacity for each of its primary products, including styrene,
acrylonitrile, acetic acid and sodium chlorate. Other products manufactured by
the Company include methanol, plasticizers, tertiary butylamine, sodium
cyanide and sodium chlorite. The Company manufactures all of its
petrochemicals at its Texas City Plant, and believes that the large scale of
this facility and its location on the U.S. Gulf Coast provides it with certain
cost advantages. The Company's pulp chemicals are currently produced at four
plants in Canada. A fifth plant, under construction in Valdosta, Georgia, is
scheduled to begin production in late 1996. The Company believes that its pulp
chemical plants benefit from their proximity to key customers in the paper
industry and their access to competitively priced electricity, which
represents the most significant production cost in sodium chlorate
manufacturing.
In recent years, the Company has pursued a strategy of growth and product
diversification. In 1992, the Company acquired its pulp chemicals business
which has current sodium chlorate production capacity of 350,000 tons. In
1995, the Company began a three-year, $200 million capacity expansion and
upgrade program, which is expected to be approximately 80% complete by the end
of fiscal 1996. Through this program, the Company will have expanded its total
petrochemical production capacity by approximately 1.4 billion pounds,
including capacity additions of 200 million pounds of styrene, 200 million
pounds of acetic acid and 150 million gallons (approximately 995 million
pounds) of methanol. In addition, the Company is expanding its sodium chlorate
production capacity by 110,000 tons, or 30%, by constructing a new facility in
Valdosta, Georgia. Through this growth, the Company has sought to capitalize
on the continuing secular growth in global demand for its key products, while
reducing its sensitivity to the cyclicality of the markets for any particular
product. The following table sets forth the total revenues and sales volumes
for the Company by its primary products.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
-------------------- -----------------
1993 1994 1995 1995 1996
------ ------ ------ -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
REVENUE
Petrochemicals:
Styrene.......................... $ 144 $ 288 $ 467 $ 398 $ 249
Acrylonitrile.................... 124 138 251 210 124
Acetic Acid...................... 64 76 94 75 50
Other............................ 68 76 74 54 64
------ ------ ------ -------- --------
400 578 886 737 487
Pulp Chemicals..................... 119 123 144 106 114
------ ------ ------ -------- --------
Total.............................. $ 519 $ 701 $1,030 $ 843 $ 601
====== ====== ====== ======== ========
SALES VOLUMES
Petrochemicals (MM lbs.):
Styrene.......................... 1,191 1,460 1,433 1,150 1,295
Acrylonitrile.................... 528 668 739 604 475
Acetic Acid...................... 578 599 635 487 346
Sodium Chlorate (000 tons)......... 248 294 336 248 233
</TABLE>
47
<PAGE>
BUSINESS STRATEGY
The Company's strategy is to capitalize on its competitive market position
to take advantage of periods of tight supply and high prices and margins for
its primary products, which historically have occurred on a cyclical basis,
and to expand its production capacity to capture future growth opportunities
in the petrochemical and pulp chemical industries. The expansion strategy
includes pursuing both internal growth opportunities, through capacity
additions and debottleneckings, as well as strategic acquisitions of chemical
businesses. Key elements of the Company's business strategy are as follows:
Maintain Competitive Cost Position in Petrochemicals. The Company is
currently upgrading and modernizing the Texas City Plant as part of its
strategy of increasing its competitiveness by investing in new technology and
equipment. The plant modernization effort at Texas City includes a significant
capital commitment for replacing the older control technology in the styrene,
acrylonitrile and acetic acid units with state-of-the-art distributive control
systems, which should result in increased efficiencies and stronger operating
fundamentals. The Company believes that the Texas City Plant enjoys certain
cost advantages due to economies of scale and its proximity to sources of its
principal raw materials.
Pursue Low Cost Expansions in Petrochemicals. The Company is finalizing
significant capacity expansions in its petrochemicals business, including the
expansion of its acetic acid unit and construction of a new methanol plant.
The acetic acid expansion was completed in June 1996 and increased capacity by
more than 30% to nearly 800 million pounds per year. In conjunction with this
expansion, the Company is constructing a world-scale 150 million gallon
methanol facility scheduled to begin production by September 1996. Capital
investment will be shared equally by the Company and BP. The Company will be
entitled to 60% of the methanol production and BP will be entitled to the
remaining 40% of production. Approximately one-half of the total methanol
production will be used as a raw material in the Company's acetic acid unit,
replacing methanol currently purchased from third parties. The Company
believes that both its acetic acid expansion and new methanol plant
construction will be completed for significantly less than the typical capital
cost of a new plant.
Pursue Growth Opportunities in Pulp Chemicals. The Company's strategy in
pulp chemicals is to capture a significant portion of the growing North
American demand for sodium chlorate derivatives in pulp bleaching
applications. To this end, the Company is constructing a new 110,000 ton per
year sodium chlorate plant in Valdosta, Georgia, scheduled to begin production
in late 1996. The new facility will increase the Company's total annual sodium
chlorate capacity by 30% to approximately 460,000 tons. The plant site was
selected because of its proximity to existing customers (currently being
supplied by the Company's Canadian plants) and its access to competitively
priced electricity, which represents the most significant variable production
cost in sodium chlorate manufacturing. In addition to the Valdosta plant, the
Company has recently debottlenecked each of its four Canadian sodium chlorate
plants to add incremental production capacity.
Continue to Build Strong Industry Partnerships in Petrochemicals. The
Company plans to build on its strategy of securing long-term supply contracts
with key customers. The Company believes that it must provide high quality
products and superior customer service to maintain these long-term
relationships and has implemented management practices to insure continuous
improvement in these areas. During fiscal 1995, approximately 25% of the
Company's styrene and 40% of acrylonitrile sales volumes were manufactured
under long-term conversion agreements and 100% of its acetic acid,
plasticizers and tertiary butylamine volumes were sold under long-term
contracts which provide for production cost reimbursement plus profit sharing.
The Company believes such agreements help insulate its operating performance,
to some extent, from the effects of declining markets and changes in raw
material prices, while allowing it to share in the benefits of favorable
market conditions. In addition, the Company's long-term, high volume focus
allows it to maintain relatively low selling, general and administrative
expenses.
Implement a Focused Acquisition Strategy. The Company plans to pursue a
disciplined acquisition strategy focusing on chemical businesses and assets
which produce either:
. The same products as the Company presently manufactures, further
strengthening the Company's market position and providing cost
efficiencies in its base businesses;
48
<PAGE>
. Products which provide upstream or downstream integration from the
Company's base businesses, enhancing the Company's manufacturing position
within a product chain; or
. Products which are complementary to the Company's base businesses,
further diversifying the Company's product and market positions and
reducing its overall sensitivity to economic cycles and pricing
fluctuations.
There can be no assurance that the Company will be able to obtain financing
for such acquisitions on terms the Company finds acceptable. In addition, the
Credit Facility and the Indentures will substantially limit the Company's
ability to incur additional debt to finance such acquisitions unless certain
coverage ratios are maintained. The Indentures will also restrict the
Company's ability to consolidate with or merge with or into any other entity
unless certain conditions are met. See "Description of the Notes,"
"Description of the Units" and "Description of the Credit Facility." Should
the Company be unable to finance proposed acquisitions, the Company's ability
to implement its acquisition strategy would be impaired. The Company believes,
however, that acquisitions are not required for it to continue to maintain its
competitive market position for its existing products.
PRODUCT SUMMARY
The Company's principal products and their primary end uses and raw
materials are set forth below.
<TABLE>
<CAPTION>
INTERMEDIATE
COMPANY PRODUCT PRODUCTS PRIMARY END PRODUCTS RAW MATERIALS
- --------------- ------------ -------------------- -------------
<S> <C> <C> <C>
PETROCHEMICALS
Styrene Polystyrene Building products, boat and Ethylene and Benzene
ABS/SAN resins automotive components,
Styrene butadiene rubber disposable cups and trays,
Styrene butadiene latex packaging and containers,
Polyester resins housewares, tires, audio and
video cassettes, luggage,
childrens' toys, paper
coating, appliance parts and
carpet backing
Acrylonitrile Acrylic fibers Apparel, furnishings, Ammonia, Air and Propylene
ABS/SAN resins upholstery, household
appliances, carpets;
plastics for automotive
parts and ABS and SAN
polymers
Acetic Acid Vinyl acetate monomer Adhesives, cigarette filters Methanol and Carbon
and surface coatings Monoxide
Methanol Acetic acid Adhesives, cigarette filters Natural Gas
MTBE and surface coatings;
Formaldehyde gasoline oxygenate and
octane enhancer; plywood
Plasticizers Polyvinyl chloride (PVC) Flexible plastics such as Alpha-Olefins, Carbon
shower curtains and liners, Monoxide,
floor coverings, cable Hydrogen, Orthoxylene and
insulation, upholstery and Air
plastic molding
TBA NA Pesticides, solvents, Isobutylene and the
pharmaceuticals and acrylonitrile
synthetic rubber co-product Hydrogen
Cyanide ("HCN")
Sodium Cyanide NA Electroplating and precious Sodium Hydroxide and co-
metals recovery product HCN
PULP CHEMICALS
Sodium Chlorate Chlorine dioxide Bleaching agent for pulp Salt, Water, Electricity
production; Downstream
products include high
quality office and coated
papers
Sodium Chlorite Chlorine dioxide Antimicrobial agent for Sodium Chlorate and
municipal water treatment, Hydrochloric Acid
disinfectant for fresh
produce
Chlorine Dioxide NA Chlorine dioxide for use in NA
Generators the bleaching of pulp
</TABLE>
For the nine months ended June 30, 1996, the Company's styrene,
acrylonitrile, acetic acid and other petrochemicals represented approximately
41%, 21%, 8% and 11%, respectively, of the Company's revenues, and pulp
chemicals represented approximately 19% of the Company's revenues.
49
<PAGE>
INDUSTRY OVERVIEW
General
The primary markets in which the Company competes, especially styrene and
acrylonitrile, are cyclical and are sensitive to changes in the balance
between supply and demand, the price of feedstocks, and the level of general
economic activity. Historically, these markets have experienced alternating
periods of tight supply and rising prices and profit margins, followed by
periods of large capacity additions resulting in oversupply and declining
prices and margins. However, the secular growth trend for major petrochemical
products globally has been, and is projected to continue to be, 1.3 to 2.0
times the gross domestic product growth rate. These growth rates are driven by
new applications and the substitution of petrochemical-based plastics and
fibers for materials such as metals, paper, glass, wood and cotton. In
addition, growth of petrochemicals and plastics consumption in the developing
regions of the world has been tied to increasing per capita usage of such
products, which historically has lagged behind that in the U.S.
Global styrene and acrylonitrile markets experienced strong demand growth
and rising prices and profit margins from the end of fiscal 1994 through most
of fiscal 1995. During the fourth quarter of fiscal 1995 and into the first
half of fiscal 1996, styrene and acrylonitrile prices declined as a result of
a general slowdown in global economic growth, inventory drawdowns by customers
and reduced import of petrochemicals and plastics by China, a major merchant
market purchaser. In recent months, however, prices for styrene and
acrylonitrile have stabilized after declines in the first six months of fiscal
1996 and the Company anticipates that pricing and profitability for its
styrene and acrylonitrile products will be relatively stable for the remainder
of fiscal 1996. Thereafter, anticipated expansions in worldwide production
capacity of styrene in 1997 and 1998 are expected to affect pricing of this
product for a period until global demand increases sufficiently to absorb such
additional production capacity. The Company currently expects acrylonitrile
market conditions to remain relatively stable through fiscal 1997.
Sodium chlorate sales prices and profit margins strengthened throughout
fiscal 1995 and into fiscal 1996 as a result of strong demand growth. In
recent months, weakness in the pulp and paper markets has resulted in somewhat
slower demand growth for sodium chlorate. However, sodium chlorate demand in
the remainder of fiscal 1996 and in fiscal 1997 is expected to benefit from
the anticipated promulgation of environmental regulations rules which would
mandate the elimination of elemental chlorine use in pulp bleaching
applications.
The Company believes that it has developed an operating strategy to allow it
to compete effectively in periods of both rising and declining product prices.
During periods of peak demand, the experience and skill of its operating
management has allowed the Company to operate at utilization rates above its
rated capacities for several key products, enhancing the Company's earnings
generation during favorable market conditions. During cyclical downturns, the
Company believes that the profitability of its operations is supported by
having long-term sales contracts and conversion agreements, which accounted
for approximately 53% of its petrochemical sales volumes in fiscal 1995, as
well as management's emphasis on minimizing fixed costs such as selling,
general and administrative expenses.
Styrene
From 1991 to 1993, styrene's profitability was depressed because of both
industry overcapacity and global recessionary pressures. By the spring of
1994, however, demand growth resulting from economic expansion had absorbed
much of the excess capacity. As a result, styrene prices and margins increased
substantially in fiscal 1994 and through most of fiscal 1995, and average
industry utilization rates exceeded rated capacity by the third quarter of
fiscal 1995. Shortly thereafter, styrene prices started decreasing as demand
weakened as a result of a general slowdown in the worldwide economic growth
rate, prompting customers to begin utilizing their available inventories and
decreasing purchases of additional product. The weakening market conditions
were accelerated in the fourth fiscal quarter of 1995 by significantly
decreased purchases of styrene and styrene derivatives by China, primarily as
a result of changes in China's enforcement of economic and tax policies and
monetary constraints that negatively affected its imports. China accounts for
a significant portion of global purchases of styrene and styrene derivatives.
Styrene prices reached a low in the first quarter of fiscal 1996, but have
rebounded somewhat since then. According to CMAI, spot prices for styrene
averaged approximately 19.4 cents
50
<PAGE>
per pound in the first quarter of fiscal 1996, approximately 23.2 cents per
pound in the second quarter and approximately 25.7 cents per pound in the
third quarter. While the industry cannot predict when China's chemical imports
will return to previous levels, the Company believes that fundamental demand
growth trends in the Far East for styrene remain positive.
According to CMAI, the North American styrene industry operated at
approximately a 97.8% utilization rate in fiscal 1995, and approximately 94.1%
in the first nine months of fiscal 1996. Certain styrene producers have
announced plans to add significant production capacity over the next several
years, particularly in the Far East. Current global production capacity for
styrene is estimated to be approximately 40 billion pounds and the Company
believes that approximately 7.2 billion pounds of capacity will be added by
competitors in the next two years, including an estimated 3.5 billion pounds
in fiscal 1997 and 3.7 billion pounds in fiscal 1998. Although less than 5% of
such additional capacity is expected to be added on the U.S. Gulf Coast, where
the Company operates, the Company expects that prices for styrene will decline
from current levels until global demand for styrene increases sufficiently to
absorb such additional production capacity.
The chart below details the average selling prices and capacity utilization
rates for the North American styrene industry during the period 1985 through
June 30, 1996.
NORTH AMERICAN STYRENE PRICES AND CAPACITY UTILIZATION
[Bar chart describing average selling prices and capacity obligation rates for
the North American styrene industry from 1995 through 1996 appears here.]
Source: CMAI.
Acrylonitrile
The acrylonitrile market exhibits characteristics in capacity utilization,
selling prices and profit margins similar to those of styrene. Moreover, as a
result of the Company's high percentage of export acrylonitrile sales, demand
for the Company's acrylonitrile is most significantly influenced by export
customers, particularly those that supply acrylic fiber to China. In recent
years the acrylic fiber market has been subject to volatility because of
fluctuations in demand from the Chinese market. During most of fiscal 1995,
strong demand for acrylic fiber
51
<PAGE>
and ABS, particularly in China, increased demand for acrylonitrile. However,
the Company believes that acrylonitrile demand began to weaken in the third
quarter of fiscal 1995 for the same reasons that caused the deterioration in
the styrene market. Demand for acrylonitrile from export customers decreased
significantly in the fourth quarter of fiscal 1995 as a result of these
developments, although export prices and margins did not decrease
significantly until the first quarter of fiscal 1996. According to CMAI,
export prices for acrylonitrile have increased from 35 cents per pound in the
second quarter of fiscal 1996 to 38 cents per pound in the third quarter of
fiscal 1996. While the industry cannot predict when China's chemical imports
will return to previous levels, the Company believes that fundamental demand
growth trends for acrylonitrile in the Far East remain positive.
According to CMAI, the North American acrylonitrile industry operated at
approximately a 96.9% utilization rate in fiscal 1995, and approximately 99.0%
in the first nine months of fiscal 1996. The Company believes that during
fiscal 1997 and 1998, global industry capacity will increase by approximately
940 million pounds or 9%. Although the Company believes demand growth will
match capacity in 1997, production capacity anticipated to be added in 1998
may result in lower utilization rates, prices and margins for acrylonitrile in
1998.
The chart below details the average selling prices and capacity utilization
rates for the North American acrylonitrile industry from the period 1985
through June 30, 1996.
NORTH AMERICAN ACRYLONITRILE PRICES AND CAPACITY UTILIZATION
[Bar chart describing average selling prices and capacity utilization rates
for the North American acrylonitrile industry from 1995 through 1996 appears
here.]
Source: CMAI.
52
<PAGE>
Sodium Chlorate
Historically, sodium chlorate has experienced cycles in capacity
utilization, selling prices and profit margins. From 1990 to 1994, the
industry had been operating well below rated capacity, resulting in declining
product prices, due to oversupply created by significant capacity expansion in
the period from 1990 to 1992. Since the mid-1980s, however, North American
demand for sodium chlorate has grown at an average annual rate of 10% as pulp
mills have accelerated substitution of sodium chlorate-based chlorine dioxide
for elemental chlorine in bleaching applications. Chlorine dioxide is a
powerful and highly selective oxidizing agent suitable for pulp bleaching with
the ability to substantially reduce hazardous substances, including dioxins
and furans, in bleach plant effluent as well as produce high-brightness pulp
with little or no damage to the cellulose fiber.
Substitution of chlorine dioxide for elemental chlorine is driven by
environmental concerns. Through the end of 1995, approximately 80% to 85% of
Canadian plant capacity and approximately 60% to 65% of U.S. plant capacity
has been converted to chlorine dioxide. The Environmental Protection Agency
has published draft regulations which, if enacted, are likely to mandate the
elimination of elemental chlorine usage in bleaching applications, resulting
in complete substitution to chlorine dioxide by the North American pulp
industry.
PRODUCTS
The Company ranks among the top three North American producers in terms of
rated production capacity for each of its primary products: styrene,
acrylonitrile, acetic acid and sodium chlorate. Other products manufactured by
the Company include methanol, plasticizers, TBA, sodium cyanide and sodium
chlorite. The Company manufactures all of its petrochemicals at its Texas City
Plant. The Company's pulp chemicals are produced at four plants in Canada. A
fifth plant under construction in Valdosta, Georgia, is scheduled to begin
production in late 1996. The Company also designs and provides technology for
large-scale chlorine dioxide generators for the pulp and paper industry.
PETROCHEMICALS
Styrene. The Company manufactures styrene from ethylene and benzene. Styrene
is principally used in the manufacture of intermediate products such as
polystyrene, ABS/SAN resins, synthetic rubbers, SBLatex and unsaturated
polyester resins. These intermediate products are used to produce various
consumer products, including building products, boat and automotive
components, disposable cups and trays, packaging and containers, housewares,
tires, audio and video cassettes, luggage, children's toys, paper coatings,
appliance parts and carpet backing.
The Company is the third largest North American producer of styrene. The
Company's styrene unit is one of the largest in the world and has an annual
rated production capacity of 1.7 billion pounds, following a recent
debottlenecking, which represents approximately 12% of total North American
capacity. The Company sold approximately 25% of its styrene sales volumes
pursuant to long-term conversion contracts during fiscal 1995. Approximately
46% of the Company's styrene sales volumes were exported in fiscal 1995,
principally to the Far East, either directly or pursuant to arrangements with
large international trading companies. In fiscal 1995, the styrene unit
operated at an average utilization rate of 96% and generated revenues of $467
million, which represented 45% of the Company's total revenues.
Acrylonitrile. The Company manufactures acrylonitrile from propylene and
ammonia. Acrylonitrile is used primarily in the manufacture of intermediate
products such as acrylic fiber and ABS/SAN resins. The principal end uses for
acrylonitrile include apparel, furnishings, upholstery, household appliances,
carpets and plastics for automotive parts.
The Company is the second largest global producer of acrylonitrile. The
Company's acrylonitrile unit has an annual rated production capacity of 740
million pounds, which represents approximately 21% of total North American
capacity. The Company sold approximately 40% of its acrylonitrile sales
volumes pursuant to long-
53
<PAGE>
term conversion agreements during fiscal 1995. Approximately 80% of the
Company's acrylonitrile production in fiscal 1995 was exported, principally to
the Far East, either directly or pursuant to arrangements with large
international trading companies. In fiscal 1995, the acrylonitrile unit
operated at an average utilization rate of 96% and generated revenues of $251
million, which represented 24% of the Company's total revenues.
Hydrogen cyanide is a by-product of acrylonitrile manufacturing and is used
by the Company as a raw material for the production of TBA and sodium cyanide.
Acetic Acid. The Company produces acetic acid from carbon monoxide and
methanol. Acetic acid is primarily used in the manufacture of intermediate
products such as vinyl acetate monomer. These intermediate products are used
to produce various consumer products, including pharmaceuticals, adhesives,
glue, cigarette filters and surface coatings.
The Company is the third largest North American producer of acetic acid.
Following a 200 million pound capacity expansion completed in June 1996, the
Company's acetic acid unit has an annual rated production capacity of
approximately 800 million pounds, which represents approximately 17% of total
North American capacity. All of the Company's production is sold to BP
pursuant to a long-term contract through 2016. In fiscal 1995, the acetic acid
unit operated at an average utilization rate of 107% and generated revenues of
$94 million, which represented 9% of the Company's total revenues.
Methanol. The Company is constructing a world-scale, 150 million gallon per
year methanol plant at the Texas City Plant. The plant is expected to be
operational by September 1996. Capital investment in the plant and production
capacity will be shared equally by the Company and BP. The Company will be
entitled to 60% of methanol production and BP will be entitled to the
remaining 40% of production. Approximately one-half of the total methanol
production will be used as a raw material in the Company's acetic acid plant,
replacing methanol that is currently being purchased. The plant will be
constructed at significantly less than normal replacement cost because
available equipment already at the Texas City Plant is being refurbished and
used in the project. The plant will use highly efficient state-of-the-art
catalyst technology. The lower capital investment coupled with modern
operating technology should result in a methanol plant with significant
competitive advantages.
In a project related to the new methanol plant, Praxair has constructed a
new partial oxidation unit at the Company's Texas City Plant that will supply
carbon monoxide and hydrogen to the Company for use in the production of
acetic acid and plasticizers. The partial oxidation unit began production in
late June 1996. The Company's synthesis gas reformer, which currently is being
used to produce carbon monoxide and hydrogen at the Texas City Plant, will be
available for use in the methanol plant.
Plasticizers. The Company manufactures plasticizers employing a series of
processes using alpha-olefins and orthoxylene as the primary raw materials.
Major end-uses for plasticizers include flexible plastics used in shower
curtains and liners, floor coverings, cable insulation, upholstery and plastic
molding. The Company has an agreement with BASF pursuant to which the Company
sells all of its plasticizer production to BASF through the end of the decade.
The Company's plasticizer capacity is 280 million pounds per year.
TBA. TBA is produced by the addition of hydrogen cyanide to isobutylene in
an acid catalyst reaction. The Company uses a portion of its by-product
hydrogen cyanide from acrylonitrile production in this process. Major end uses
for TBA include pesticides, solvents and synthetic rubber. The Company sells
all of its TBA production to Flexsys pursuant to a long-term conversion
agreement. The Company's capacity for TBA is currently 21 million pounds per
year.
Sodium Cyanide. The Company operates a sodium cyanide plant at the Texas
City Plant which is owned by DuPont. The Company and DuPont have an agreement
whereby the Company receives a fee for operating the
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facility through 2004. The facility uses hydrogen cyanide by-product produced
by the Company as a raw material. The capacity of this plant is 100 million
pounds per year.
PULP CHEMICALS
Sodium Chlorate. Sodium chlorate is used in the production of chlorine
dioxide and is sold primarily to pulp manufacturers for use as a bleaching
chemical primarily in the pulp manufacturing process. Bleached pulp is used to
make uncoated paper for commercial printing and for office copiers and
printers, and coated paper for magazines, catalogues, promotional printed
products, packing, tissue and other products and as a raw material to produce
sodium chlorite.
Sodium chlorate is manufactured by passing an electric current through an
undivided cell containing a solution of sodium chloride (salt). Electric power
costs typically represent approximately 70% of the variable cost of production
of sodium chlorate. Electric power is purchased by each of the Company's
facilities pursuant to contracts with local electric utilities. Consequently,
the rates charged by local electric utilities are an important competitive
factor among sodium chlorate producers. The Company's electrical power costs
are believed to be competitive with other producers in the areas in which it
operates.
Upon completion of the Valdosta, Georgia plant, the Company will be the
second largest producer of sodium chlorate. The Company's four sodium chlorate
plants have an aggregate annual rated production capacity of 350,000 tons. The
Valdosta plant, scheduled to begin production in late 1996, will increase the
Company's total annual capacity by 30% to nearly 460,000 tons. Following
completion of the plant, the Company will account for approximately 22% of
North American sodium chlorate capacity. Valdosta, Georgia was selected
because of its proximity to existing customers, currently being supplied from
the Company's Canadian plants, and to reliable, competitively priced
electricity. The new facility is intended to meet the growing market demand
from the pulp and paper industry in the southeastern U.S. In fiscal 1995, the
Company's sodium chlorate plants operated at a weighted average utilization
rate of 97% and its pulp chemicals business generated revenues of $144
million, which represented 14% of the Company's total revenues.
Chlorine Dioxide Generators. Through its ERCO Systems Group ("ERCO"), the
Company is the largest worldwide supplier of patented technology for the
generators which certain pulp mills use to convert sodium chlorate into
chlorine dioxide. Each mill that uses chlorine dioxide requires at least one
generator. The Company receives revenue when a generator is sold to a mill and
also receives royalties from the mill after start-up, generally over the next
ten-year period, based on the amount of chlorine dioxide produced by the
generator. Historically, the Company has supplied approximately two-thirds of
all pulp mill generators worldwide.
The research and development group of Sterling Pulp works to develop new and
more efficient generators. When pulp mills move to higher levels of
substitution of chlorine dioxide for elemental chlorine, they are usually
required to upgrade generator capacity or purchase new generator technology.
Mills may also convert to a newer generator to take advantage of efficiency
advances and technological improvements. Each upgrade or conversion results in
a licensing agreement which generally provides for payment of an additional
ten-year royalty.
The Company has a representative office in Beijing, China. This office
focuses on the development of opportunities for future sales of sodium
chlorate and chlorine dioxide generators as well as for the licensing and
construction of sodium chlorate plants in that region. The first generator in
China to convert sodium chlorate to chlorine dioxide was sold by ERCO and
commenced operation in fiscal 1994, and since then several more generators
have been sold by ERCO for use in China.
Sodium Chlorite. The Company manufactures sodium chlorite at its Buckingham,
Quebec facility. Sodium chlorite is a specialty product used primarily to
produce chlorine dioxide for water treatment and as a disinfectant for fresh
produce. The Company has a rated annual capacity of approximately 3,500 tons,
which represents approximately 40% of total North American capacity.
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SALES AND MARKETING
The Company sells its products primarily pursuant to multi-year contracts
and spot transactions in both the domestic and export markets through its
commercial organization and sales force. This long-term, high volume focus
allows the Company to maintain relatively low selling, general and
administrative expenses related to the marketing of its products. The Company
competes primarily on the basis of product price, quality and deliverability.
Prices for the Company's commodity chemicals are determined by market factors
that are largely beyond the Company's control, and, except with respect to a
number of its multi-year contracts, the Company generally sells its products
at prevailing market prices. The Company emphasizes the importance of
delivering products to its customers on time and within specifications. In its
effort to insure that its products are of consistently high quality, the
Company uses a statistical quality control program.
Some of the Company's multi-year contracts for its petrochemical products
are structured as conversion agreements, pursuant to which the customer
furnishes raw materials which the Company processes. In exchange, the Company
receives a fee typically designed to cover its fixed and variable costs of
production and to generally provide an element of profit dependent on the
existing market conditions for the product. These conversion agreements allow
the Company to maintain lower levels of working capital and, in some cases, to
gain access to certain improvements in manufacturing process technology. The
Company believes its conversion agreements help insulate the Company to some
extent from the effects of declining markets and changes in raw material
prices while allowing it to share in the benefits of favorable market
conditions for most of the products sold under these arrangements. The balance
of the Company's products are sold by its direct sales force, which
concentrates on the styrene, acrylonitrile and pulp chemical markets. Revenues
from BP and Mitsubishi accounted for approximately 16% and 13%, respectively,
of the Company's fiscal 1995 revenues.
The Company sells sodium chlorate primarily in Canada and the U.S. generally
under one to five year supply contracts, most of which provide for minimum and
maximum volumes or a percentage of requirements at market prices. In addition,
most sales contracts contain certain "meet or release" pricing clauses and
some contain restrictions on the amount of future price increases. Certain
contracts are evergreen and require advance notice before termination. There
were no individual customers of the Company's pulp chemical business which
accounted for more than 10% of the Company's revenues in fiscal 1995.
CONTRACTS
The Company's key multi-year contracts and conversion agreements, which
collectively accounted for 28% of the Company's 1995 revenues, are detailed
below:
Styrene-Bayer
The Company and Bayer Corporation ("Bayer"), a subsidiary of Bayer AG, are
currently operating under a conversion agreement effective through December
31, 2000. Under this agreement, the Company provides Bayer, subject to a
specified minimum and maximum, a major portion of Bayer's styrene requirements
for its manufacture of styrene-containing polymers. The agreement permits
Bayer to terminate its obligations upon twelve months' notice to the Company
should Bayer sell its business that uses styrene or to assign the agreement,
subject to the Company's consent, to a third party that may purchase the
business. During fiscal 1995, the Company delivered approximately 13% of its
styrene production pursuant to the predecessor agreement.
Styrene-BP Chemicals
Effective April 1, 1994 the Company and BP entered into a styrene sales and
purchase agreement. The term of the agreement initially expires in December
1996. The Company and BP are currently negotiating an extension of this
agreement. Although the likelihood and terms of any extension are impossible
to predict, at this time management has no reason to believe that the
agreement will not be extended. During fiscal 1995, the Company delivered
approximately 13% of its styrene production to BP pursuant to this agreement.
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Acrylonitrile-Monsanto
The Company and Monsanto entered into a multi-year conversion agreement
effective January 1, 1994 which superceded a prior agreement that had been in
place since 1986. The initial term of this agreement will expire at the end of
1998, at which time the agreement will convert to an "evergreen" contract with
successive two year terms if not terminated. During fiscal 1995, the Company
delivered approximately 25% of its acrylonitrile production to Monsanto
pursuant to this agreement.
Acrylonitrile-BP Chemicals
In 1988, the Company entered into a long-term conversion agreement with BP,
under which BP contributed the majority of the capital expenditures required
for starting the third acrylonitrile reactor train at the Texas City Plant and
has the option to take up to approximately one-sixth of the Company's total
acrylonitrile capacity. BP furnishes the necessary raw materials and pays the
Company a conversion fee for the amount of acrylonitrile it takes. During
fiscal 1995, the Company delivered approximately 21% of its acrylonitrile
production to BP pursuant to this agreement. This agreement has an initial
term of ten years, with BP having the option to extend the agreement for two
additional five-year terms. One of the Company's three acrylonitrile reactors
incorporates certain BP technological improvements under a separate license
agreement from BP, and the Company has the right to incorporate these and any
future improvements into its other existing acrylonitrile facilities. BP has a
first security interest in and lien on the third reactor and related equipment
and in the first acrylonitrile produced in the three reactor units and the
proceeds generated from the sales thereof to the extent of the acrylonitrile
which BP is entitled to purchase under the production agreement. These rights
are only to be exercised upon an event of default by the Company.
Acetic Acid-BP Chemicals
The Company has had an agreement in effect since August 1986 with BP which,
as now amended, gives BP the exclusive right to purchase all of the Company's
acetic acid production until August 2016. In exchange for that exclusive
right, BP is obligated to make certain unconditional monthly payments to the
Company until August 2006. BP provides methanol and reimburses the Company on
the basis designed to provide the Company with full cost recovery. In
addition, the Company is entitled to receive annually a portion of the profits
earned by BP from the sale of acetic acid produced by the Company. The acetic
acid unit is subject to certain security arrangements (taking the form of a
sale-leaseback transaction) which provide that, until August 1996, under
certain limited circumstances generally under the Company's control, BP can
take physical possession of and operate the acetic acid unit. In August 1996,
title to the acetic acid unit will revert to the Company.
Plasticizers-BASF
The Company has a product sales agreement with BASF that initially extends
through the end of the decade, pursuant to which the Company sells all of its
plasticizer production to BASF. BASF provides certain raw materials to the
Company and markets the plasticizers produced by the Company. BASF pays fees
to the Company on a formula basis designed to reimburse the Company's direct
and allocated costs. In addition, the Company is entitled to a share of
profits earned by BASF attributable to the plasticizers supplied by the
Company. BASF retains title to and has a security interest in the raw
materials furnished by it and in the finished inventory of plasticizers
produced by the Company for delivery to BASF.
TBA-Flexsys
The Company sells all of its TBA production to Flexsys pursuant to a long-
term conversion agreement which expires on December 31, 1996, but continues
thereafter unless terminated by either party with 24 months prior written
notification, as of December 31 of any calendar year. The Company has not
received any such notice.
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Sodium Cyanide-DuPont
The Company operates a sodium cyanide facility owned by DuPont which was
constructed in 1989 on land owned by the Company at the Texas City Plant. The
Company and DuPont have an agreement whereby the Company receives a fee for
operating the facility for up to 30 years. The facility utilizes as a raw
material hydrogen cyanide, a by-product of the Company's acrylonitrile
production process. The Company is compensated by DuPont for the raw material
value of the hydrogen cyanide as well as for the Company's allocated and
incremental out-of-pocket costs for operating the facility. Either party may
terminate this agreement by giving 36 months written notice. Termination by
the Company prior to the 15th anniversary of the agreement (2004) would
require various remedies to be made by the Company to DuPont, including
penalties and cost of removal of the facility from the Company's plant site.
Termination by DuPont prior to 2004 would require DuPont to pay for the cost
of removal of the facility and reimbursement of the Company's fixed costs for
12 months. Assignability of the agreement is limited, and if the Company
assigns the agreement under certain circumstances, it must deliver to DuPont a
lease for the land on which the facility is situated and permit DuPont to
operate the facility. DuPont also may operate the sodium cyanide facility in
the event of certain defaults.
COMPETITION
The industry in which the Company operates is highly competitive. Many of
the Company's competitors, particularly in the petrochemical industry, are
larger and have substantially greater financial resources than the Company.
Among the Company's competitors are some of the world's largest chemical
companies that have their own raw material resources. In addition, a
significant portion of the Company's business is based upon widely available
technology. The entrance of new competitors into the industry and the addition
by existing competitors of new capacity may reduce the Company's ability to
maintain profit margins or its ability to preserve its market share, or both.
Such developments could have a negative impact on the Company's ability to
obtain higher profit margins, even during periods of increased demand for the
Company's products.
The Company's primary domestic competitors by product are set forth below:
Styrene The Dow Chemical Company, ARCO Chemical Company, Amoco
Chemical Company (a subsidiary of Amoco Corporation),
Chevron Chemical Company (a subsidiary of Chevron
Corporation), Cos-Mar (a joint venture of General Electric
Company and FINA Inc.) and Huntsman Chemical Corporation
Acrylonitrile The British Petroleum Company P.L.C., Cytec Industries
Inc., E.I. du Pont de Nemours and Company and Monsanto
Company
Acetic Acid Hoechst Celanese Corporation, Eastman Chemical Company and
Hanson PLC
Plasticizers Exxon Corporation, Aristech Chemicals and Eastman Chemical
Company
TBA BASF AG and Nitto Chemical Industry Co., Ltd.
Sodium Chlorate Akzo Nobel NV, CXY Chemicals Ltd. and Kerr-McGee
Corporation
Sodium Chlorite Vulcan Chemicals (a subsidiary of Vulcan Materials Co.)
Historically, petrochemical industry profitability has been affected by
vigorous price competition, which may intensify due to, among other things,
new domestic and foreign industry capacity. The Company's businesses are
subject to changes in the world economy, including changes in currency
exchange rates. In general, weak economic conditions either in the United
States or in the world tend to reduce demand and put pressure on margins.
Operations outside the United States are subject to the economic and political
risks inherent in the countries in which they operate. Additionally, the
export and domestic markets can be affected significantly by import laws and
regulations. During 1995, the Company's export sales were approximately 52% of
total revenues. It is not possible to predict accurately how changes in raw
material costs, market conditions or other factors will affect petrochemical
industry margins in the future.
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RAW MATERIALS AND ENERGY RESOURCES
For each of the Company's products, the combined cost of raw materials and
utilities is far greater than all other production costs combined. Thus, an
adequate supply of these materials at reasonable prices is critical to the
success of the Company's business. The Company does not currently produce any
of its major raw materials (benzene, ethylene, propylene, ammonia and
methanol) at the Texas City Plant, or electricity at its pulp chemical
facilities, although the Company's methanol plant is expected to commence
production by September 1996. The Company believes that its primary raw
materials will, for the foreseeable future, remain in adequate supply to meet
demand. The Company obtains certain of its raw materials pursuant to
conversion agreements as described below.
Styrene
The Company manufactures styrene from ethylene and benzene. The Company's
styrene conversion agreements require that other parties furnish to the
Company the ethylene and/or benzene necessary to fulfill its conversion
obligations. Approximately 30% and 20% of the Company's fiscal 1995 benzene
and ethylene requirements, respectively, were furnished by customers pursuant
to conversion arrangements. The Company purchases benzene and ethylene for use
in the remainder of its production of styrene for sale to others. Benzene and
ethylene are both commodity petrochemicals and the price for each can
fluctuate widely due to significant changes in the availability of these
products, such as major capacity additions or significant plant operating
problems, and due to variations in the economy and commodity chemical markets
in general. The Company has multi-year arrangements with several ethylene
suppliers that provide for its estimated requirements for purchased ethylene
at generally prevailing and competitive market prices.
Acrylonitrile
The Company produces acrylonitrile by reacting propylene and ammonia over a
solid-fluidized catalyst at low pressure. The Company's conversion agreements
require that other parties furnish to the Company the propylene and/or ammonia
necessary to fulfill its conversion obligations. Approximately 40% of the
Company's fiscal 1995 propylene and ammonia requirements were furnished by
customers pursuant to conversion arrangements. The Company purchases propylene
and ammonia for use in the remainder of its production of acrylonitrile for
sale to others. Propylene and ammonia are both commodity petrochemicals and
the price for each can fluctuate widely due to significant changes in the
availability of these products, such as major capacity additions or
significant plant operating problems, and due to variations in the economy and
commodity chemical markets in general.
TECHNOLOGY AND LICENSING
Petrochemicals
In 1986, Monsanto granted the Company a nonexclusive, irrevocable and
perpetual right and license to use Monsanto's technology at the Texas City
Plant and other technology Monsanto acquired through third party licenses in
effect at the time of the acquisition of the plant from Monsanto for the
purpose of continuing the production of the chemicals which were then produced
at the Texas City Plant. During fiscal 1991, BP purchased the acetic acid
technology from Monsanto (subject to the above licenses). The Company believes
that these licenses are material to the operation of the Texas City Plant.
BP has granted to the Company a non-exclusive, perpetual, royalty free
license (except in the case of a breach of the related production agreement)
to use BP's acrylonitrile technology at the Texas City Plant as part of the
acrylonitrile expansion project. The Company and BP have agreed to cross-
license any technology or improvements relating to the manufacture of
acrylonitrile in the Company's facility.
Management believes that the manufacturing processes that the Company
utilizes at the Texas City Plant are cost effective and competitive. Although
the Company does not engage in alternative process research with respect to
its U.S. operations, it does monitor new technology developments, and when the
Company believes it is appropriate the Company will seek to obtain licenses
for process improvements.
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Pulp Chemicals
The Company produces sodium chlorate using state-of-the-art metal cell
technology.
The principal business of ERCO is the design, sale and technical service of
custom-built patented chlorine dioxide generators. Sterling Pulp's engineering
group is involved in the technical support of the Company's sales and
marketing group through joint calling efforts and defines the scope of a
project and produces technical schedules and cost estimates. The Company
performs detailed design of chlorine dioxide generators which are then
constructed by customers. Plant and instrumentation testing and generator
start-up are handled by a joint engineering/technical service team of the
Company. The Company was involved in a number of patent disputes with Akzo
Nobel regarding chlorine dioxide technology. The parties reached a settlement
of such disputes that allows licensees of both the Company and Akzo Nobel to
operate their chlorine dioxide generators within the broadest range of
operating conditions, subject to payment of royalties in certain
circumstances.
The Company's pulp chemical research and development activities are carried
out at its Toronto, Ontario laboratories. Activities include the development
of new or improved chlorine dioxide generation processes and research in new
technologies focusing on electrochemical and membrane technology related to
chorine dioxide, including improvement of quality and reduction of quantity of
pulp mill effluents and treatment of municipal water supplies.
ENVIRONMENTAL AND SAFETY MATTERS
The Company's operations involve the handling, production, transportation
and disposal of materials classified as hazardous or toxic and are extensively
regulated under environmental and health and safety laws. Operating permits
required for the Company's operations are subject to periodic renewal and may
be revoked or modified for cause or when new or revised environmental laws or
requirements are implemented.
New laws or permit requirements and conditions may affect the Company's
operations, products or waste disposal. Past or future operations may result
in claims, regulatory action or liabilities. Expenditures could be required to
upgrade wastewater collection, pretreatment, disposal systems or other
matters. Some risk of environmental costs and liabilities is inherent in
particular operations and products of the Company, as it is with other
companies engaged in similar businesses.
The Company conducts environmental management programs to maintain
compliance with applicable environmental laws. As part of these programs, the
Company conducts or commissions reviews of its environmental performance and
addresses issues identified. The Company routinely conducts inspection and
surveillance programs to detect and respond to any leaks or spills of
regulated hazardous substances and to correct any identified regulatory
deficiency. To reduce the risk of offsite consequences from any unanticipated
event, the Company acquired a greenbelt buffer zone adjacent to the Texas City
Plant in 1991. The Company also participates in a regional air monitoring
network to monitor ambient air quality in the Texas City community. This
program is part of the Company's commitment to Responsible Care initiatives of
the Chemical Manufacturers Association and Canadian Chemical Producers
Association.
The Company has recently been recognized as a 33/50 Environmental Champion
by the EPA for surpassing the emission reduction goals of the 33/50 program at
the Texas City Plant faster than the EPA's timetable. The voluntary 33/50
program targeted 17 high priority chemicals included in the EPA's Toxic
Release Inventory. Six of the 17 chemicals are present at the Company's Texas
City Plant. The goal of the program was a 33% reduction in air emissions of
these compounds by 1992, compared to 1987 levels, and a 50% reduction by 1995.
For the 1994 reporting year, the Company achieved a 74% reduction in the
targeted chemicals including a 99% reduction in chromium and nickel compounds,
a 96% reduction in hydrogen cyanide emissions by converting this byproduct
into sodium cyanide and an 87% reduction in benzene emissions primarily by
constructing a major new waste water treatment facility. In addition to these
improvements, the Company has voluntarily initiated a complete review of the
overall environmental condition at its Texas City Plant and will initiate
appropriate
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actions or preventative projects necessary to insure that the facility
continues to operate in a safe and environmentally responsible manner,
including appropriate responses to previously identified elevated
concentrations of certain chemicals in the soil and groundwater. The Company
is presently unable to determine what remediation or other action, if any, may
need to be taken regarding these conditions. No assurances can be given that
the Company will not incur material environmental expenditures associated with
its facilities, operations or products.
Changing and increasingly strict environmental laws and regulations might
affect the manufacture, handling, processing, distribution or use of chemical
products and the release, treatment, storage or disposal of wastes by the
Company. For example, at both the state and federal level, the trend towards
regulation of discharges on a sectoral, geographic or multimedia basis may
directly or indirectly affect producers of specific chemicals. Such actions
may be expected to exert pressure on companies in the commodity chemical
industry to enhance their wastewater recycling and on-site treatment systems
to reflect the government's evolving views. Accordingly, the Company could be
required from time to time to make expenditures to upgrade its wastewater
collection, pretreatment or disposal systems at the Texas City Plant.
Production of chemical products involves the use, storage, transportation
and disposal of materials that may be classified as hazardous or toxic under
applicable laws. Management believes that the Company's procedures for the
use, storage, transportation and disposal of these materials are consistent
with industry standards and applicable laws and that it takes precautions to
protect its employees and others from harmful exposure to such materials.
However, there can be no assurance that past or future operations will not
result in exposure or injury or to claims of injury by employees or the public
due to the use, storage, transportation or disposal of these materials.
Under the Assets Purchase Agreement for the Company's acquisition of the
Texas City Plant from Monsanto, Monsanto agreed to be liable and to indemnify
the Company for certain environmental liabilities. The contractual indemnity
expires upon certain changes of control of the Company. Monsanto has taken the
position that the Transaction will be such a change of control. Accordingly,
any future claims the Company may have against Monsanto may necessarily be
based upon statutory laws or common law principles, although there can be no
assurance that the Company would prevail against Monsanto with respect to any
such claim. Based on information currently available, the Company believes the
loss of the indemnity will not have a material adverse effect on its financial
condition.
In connection with the Company's purchase of the pulp chemical business in
1992, the seller, Tenneco Canada, Inc., contractually retained liability for
costs, damages, fines, penalties and other losses under claims by third
parties (including employees and authorities) arising from the ownership or
operation of the facilities and businesses prior to the acquisition. The
Company is also indemnified against the breach of environmental remediation
covenants. These covenants oblige the indemnifying party to do specific
remedial work (including decommissioning the old section of the Vancouver
facility, which is underway) at the facilities within set time periods, and to
do any investigation, monitoring or remedial work required by present or
future legislation governing environmental conditions predating the
acquisition. The indemnity also protects the Company against losses arising
from the remediation of pre-acquisition environmental conditions or from pre-
acquisition violations of environmental laws. With the exception of any third
party claims, the losses against which the Company is indemnified do not
include consequential damages or lost profits. The Company has agreed to an
assignment of the Tenneco Canada, Inc. obligations to Albright & Wilson UK
Limited.
Groundwater data obtained in the course of the acquisition of the pulp
chemical business indicated elevated concentrations of certain chemicals in
the soil and groundwater at the four Canadian sites. The Company conducted a
focused baseline sampling of groundwater conditions beneath its Canadian
facilities in connection with Tenneco Canada's indemnification of the Company
for preclosing conditions which confirmed the previous data. The Company from
time to time has encountered elevated concentrations of chemicals in soils or
groundwater at its Canadian plants which it has addressed or is addressing.
During the course of the acquisition of the pulp chemical facilities by the
Company, air emissions sources were reviewed, and any available dustfall and
vegetation stress studies were considered. This review indicated
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emission excursion episodes at specific locations in the scrubber systems at
the Thunder Bay, Buckingham and Vancouver facilities. The conditions at
Thunder Bay and Vancouver have been addressed and satisfactorily resolved and
the conditions at Buckingham are being addressed. The Company believes that it
is otherwise in compliance in all material respects with permit requirements
under applicable provincial law for operating emissions sources.
The Company's pulp chemical business is sensitive to potential environmental
regulation. The Environmental Protection Agency has published draft
regulations which, if enacted, would support substitution of chlorine dioxide,
which is produced from sodium chlorate, for elemental chlorine in the pulp
bleaching process. Certain environmental groups are encouraging passage of
regulations which restrict the amount of AOX or chlorine derivatives in bleach
plant effluent. Increased substitution of chlorine dioxide for elemental
chlorine in the pulp bleaching process significantly reduces the amount of AOX
and chlorine derivatives in bleach plant effluent. As long as there is not an
outright ban on chlorine containing compounds, regulation restricting AOX or
chlorine derivatives in bleach plant effluent should favor the use of chlorine
dioxide, thus sodium chlorate. Any significant ban on all chlorine containing
compounds could have a material adverse effect on the Company's financial
condition and results of operations.
There are currently efforts in some jurisdictions to ban all chlorine and
chlorine-containing products, including chlorine dioxide, from the pulp
bleaching process. British Columbia has a regulation in place that would
effectively eliminate the use of chlorine dioxide in the bleaching process by
the year 2002. The pulp and paper industry is working to change this
regulation and believes that a ban of chlorine dioxide in the bleaching
process will yield no measurable environmental or public health benefit. In
the event such regulations were implemented, the Company would seek to sell
its products to customers in other markets. The Company is not aware of any
other laws or regulations currently in place which would restrict the use of
the product.
Emissions into the air from the Texas City Plant are subject to certain
permit requirements and self-implementing emission limitations and standards
under state and federal law. The Texas City Plant is located in an area that
is classified by the EPA as not having attained the ambient air quality
standards for ozone, which is controlled by direct regulation of volatile
organic compounds ("VOCs") and nitrogen oxide ("NOx"). Additional requirements
were issued in fiscal 1992 and modified in fiscal 1994 by the Texas Natural
Resource Conservation Commission in order to achieve ambient air quality
standards for ozone. These measures may substantially increase the Company's
VOCs and NOx control costs in the future, although the cost and full impact,
if any, cannot be determined at this time.
Additionally, the Clean Air Act Amendments of 1990 contain new federal
permit requirements and provisions governing toxic air emissions. The Company
has incurred and will incur additional costs to comply with this law and with
requirements issued by the State of Texas to control VOCs and NOx, as will all
other similarly situated organic chemical manufacturing facilities.
Management believes that the Company is in compliance in all material
respects with applicable environmental law. However, there can be no assurance
that past practices or future operations will not result in material claims or
regulatory action.
EMPLOYEES
As of June 30, 1996, the Company had approximately 1,189 employees,
including approximately 303 at its facilities in Canada. Approximately 60% of
the employees at the Company's manufacturing facilities are covered by union
agreements. The primary union agreement is with the Texas City, Texas Metal
Trades Council, AFL-CIO, of Galveston County, Texas and covers all hourly
employees at the Texas City Plant. The Company signed
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a new labor agreement in early May 1996 which is subject to renegotiation in
April 1999. The new agreement increases the flexibility of work rules which
the Company believes will increase the overall efficiency of the Texas City
Plant. Employees at the Vancouver plant are represented by the Pulp, Paper and
Woodworkers Union. The Vancouver agreement was renegotiated in November 1994
and is subject to further renegotiation in November 1997. Employees at the
Buckingham plant are represented by either the Energy and Chemicals Workers
Union or an office and professional workers union. Both agreements were
negotiated in November 1994 and are subject to renegotiation in November 1997.
The Company believes its relationship with its employees is good.
INSURANCE
The Company currently maintains $500 million of coverage for property damage
to its Texas City Plant and resulting business interruption. Although the
Company carries such insurance, it has only one styrene manufacturing facility
and one acrylonitrile manufacturing facility; thus, a significant interruption
in the operation of either facility could have a material adverse affect on
the Company's financial condition, results of operations or cash flows. The
Company maintains $338 million of combined coverage for property damage and
resulting business interruption for its pulp chemical operations. The Company
also maintains other insurance coverages for various risks associated with its
business. There is no assurance that the Company will not incur losses beyond
the limits of, or outside the coverage of, its insurance. From time to time
various types of insurance for companies in the chemical industry have been
very expensive or, in some cases, unavailable. There is no assurance that in
the future the Company will be able to maintain its existing coverage or that
the premiums will not increase substantially.
PROPERTIES
The principal executive offices of the Company are located in Houston, Texas
and are subleased through Citicorp, N.A.
The Texas City Plant is located approximately 45 miles south of Houston in
Texas City, Texas, on a 290-acre site on Galveston Bay near many other
chemical manufacturing complexes and refineries. The Company has facilities to
load its products in drums, containers, trucks, railcars, barges and ocean-
going tankers for shipment to customers. The site offers room for future
expansion and includes a greenbelt around the northern edge of the plant site.
The Texas City Plant comprises seven basic operating units which can be
divided into three groups based on the chemistry involved. One group of
operating units involves synthesis gas chemistry (carbon monoxide and
hydrogen), and its facilities include the synthesis gas complex, the acetic
acid unit and three plasticizer units (oxo-alcohol, phthalic anhydride and
linear phthalate esters). Carbon monoxide and hydrogen are utilized as
feedstocks in the oxo-alcohol manufacturing process, and carbon monoxide is a
feedstock to produce acetic acid. A new partial oxidation unit is being
constructed by Praxair at the Texas City Plant to supply carbon monoxide and
hydrogen to the Company. See "--Raw Materials and Energy Resources--
Petrochemicals--Acetic Acid." The synthesis gas reformer will then be
available for use in the new methanol unit also under construction at the
Texas City Plant. A second group of operating units involves acrylonitrile and
hydrogen cyanide chemistry, and its facilities include the acrylonitrile unit,
the TBA unit and the sodium cyanide unit. Ammonia and propylene are used as
feedstocks in the acrylonitrile process, and hydrogen cyanide, a by-product of
that process, is used as a feedstock for the other units in this second group
and is also burned as fuel. The third operating group is based on ethylene and
benzene chemistry, and its facilities comprise the ethylbenzene and styrene
units. Although the styrene unit is independent of the rest of the facility
from a feedstock and by-product standpoint, it is the cornerstone of the
Company's energy balance, as it uses large quantities of by-product steam
generated by the acrylonitrile and phthalic anhydride units, thus reducing the
demands on the Company's steam generating facility. In this way, the Company's
utilities system links the three operating groups together in an effort to
minimize utility costs. This integration results in cost efficiencies without
significantly compromising the operating flexibility of the individual product
units.
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<PAGE>
The Company owns all of the facilities and equipment located at the Texas
City Plant other than the sodium cyanide unit owned by DuPont, a cogeneration
facility owned by a joint venture between the Company and Praxair Energy
Resources, Inc., the new partial oxidation unit currently under construction
at the site by Praxair and the acetic acid unit and related facilities which
are operated under a ten-year sale leaseback arrangement with BP ending in
August 1996. Upon expiration of such ten-year period, title to the acetic acid
unit will revert to the Company. The Company also owns storage facilities,
approximately 200 rail cars and an acetic acid barge. In addition, the Company
subleases approximately 20,000 square feet of office space in Houston, Texas
for its corporate headquarters, owns a 50,000 square foot office building in
Toronto and leases several storage facilities in the U.S. and Asia.
Information regarding the Company's plants is presented below:
<TABLE>
<CAPTION>
PLANT LOCATION ACREAGE OWNED/LEASED
-------------- ------- ------------
<S> <C> <C>
PETROCHEMICALS:
Texas City, Texas.................................. 290 acres Owned/Leased
PULP CHEMICALS:
Buckingham, Quebec................................. 20 acres Owned
Vancouver, British Columbia........................ 20 acres Owned
Thunder Bay, Ontario............................... 20 acres Leased
Grande Prairie, Alberta............................ 15 acres Leased
Valdosta, Georgia.................................. 18 acres Leased
</TABLE>
LEGAL PROCEEDINGS
SHAREHOLDER LAWSUITS
In April and May, 1996, six putative class action complaints relating to the
proposed Merger and the events leading up to the recommendation of the
approval thereof by the Board of Directors of the Company were filed in the
Court of Chancery for New Castle County, Delaware. By order dated May 22,
1996, the Court consolidated the six actions. The complaints name the Company
and each of its directors as defendants. One of the complaints names TSG,
Unicorn, and STX Acquisition as defendants as well. The complaints generally
allege that the course of conduct taken by the directors in considering the
Company's strategic alternatives and in recommending the Merger has been in
violation of their fiduciary duties to the Company's stockholders and seek
injunctive relief and unspecified damages. These lawsuits are styled: (i) Kurt
Kopf et al. v. Sterling Chemicals, Inc., Gordon A. Cain, et al; Civil Action
No. 14960; (ii) Ernest Hack v. Sterling Chemicals, Inc., Gordon A. Cain et al;
Civil Action No. 14962; (iii) Salim Shiry, et al. v. Sterling Chemicals, Inc.,
Gordon A. Cain et al; Civil Action No. 14963; (iv) Olga Fried, et al. v.
Sterling Chemicals, Inc., Gordon A. Cain; et al; Civil Action No. 14969; (v)
Maria Lerman, et al. v. Sterling Chemicals, Inc., Gordon A. Cain, et al, Civil
Action No. 14972; and (vi) Alm R. Kahn v. Sterling Chemicals, Inc., The
Sterling Group, Inc., The Unicorn Group, Inc., STX Acquisition Corp., Gordon
A. Cain, et al, Civil Action No. 14981. In addition, a seventh putative class
action complaint relating to the same matters was filed in the District Court
of Harris County, Texas in May 1996, styled Sigmund Balaban v. Gordon A. Cain,
et. al, Case No. 96-26271. The Company believes that these actions are without
merit and has instructed legal counsel to vigorously defend each action. While
lawsuits are in the early stages, at this time they are not anticipated to
have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
PETROCHEMICALS
On January 30, 1995, the Company filed a lawsuit against Huntsman Chemical
Corporation and certain affiliates seeking a declaratory judgment in
connection with an alleged agreement arising from discussions, previously
suspended by the Company relating to possible future capacity rights for a
significant portion of the Company's styrene unit at its Texas City Plant. In
the lawsuit, the Company is requesting a judicial
64
<PAGE>
determination that, among other things, there was no enforceable agreement
between the Company and any of the defendants. In response, the defendants
filed a counterclaim demanding a jury trial and asserting that a contractual
agreement existed, that the Company breached the alleged agreement, and that
as a result the defendants incurred an unspecified amount of "massive
damages." Subsequently, the Company filed a motion for summary judgment. On
November 30, 1995, the court granted the Company's motion for summary judgment
in Sterling Chemicals, Inc. v Huntsman Chemical Corporation; Huntsman Styrene
Corporation and Huntsman Corporation; Cause No. 95-005256; In the 61st
Judicial District Court of Harris County, Texas. The summary judgment confirms
that, as a matter of law, no enforceable contract or agreement ever existed
between the Company and the defendants. The court's order, which includes
recovery of legal fees, also moots the defendants' counterclaim against the
Company for damages resulting from breach of the alleged contract. The
defendants have appealed this decision. The Company believes a loss with
respect to this matter is not probable and is unable to quantify a reasonably
possible loss estimate at this time.
On June 19, 1995, a lawsuit styled George Allemand and Willie Allemand vs.
Sterling Chemical, Inc., et al.; Cause No. A-152,286; In the 58th Judicial
District Court of Jefferson County, Texas, was filed against the Company and
several other corporate defendants asserting personal injury and mental
anguish resulting from an incident occurring on June 16, 1995 in which a hose
being used to unload a barge of sulfuric acid at the Company's Texas City
Plant ruptured, spraying sulfuric acid on an employee of Marine Fueling
Service, Inc. The plaintiffs seek an unspecified amount of damages. The
incident is under investigation and discovery is ongoing.
On May 8, 1994, an ammonia release occurred at the Company's Texas City
Plant while a reactor in the acrylonitrile unit was being restarted after a
shutdown for routine maintenance. The Company estimated that approximately
three thousand pounds of ammonia were emitted into the atmosphere.
Approximately nine thousand individuals have filed claims directly with the
Company alleging personal injury and/or property damage as a result of
exposure to the ammonia. The Company and its insurance carriers are in the
process of evaluating these claims. Approximately two thousand of these claims
have been settled and three thousand have been denied by the Company.
Settlements, costs and expenses to date have totaled approximately $3.0
million. All amounts above the Company's $1.0 million deductible (which has
been charged against earnings) have been paid by its insurance carriers. A
number of suits and interventions in existing suits were filed by various
plaintiffs in April and early May 1996 relating to the ammonia release. These
suits and interventions were presumably filed in anticipation of the
expiration of the applicable two year statute of limitations. There are now a
total of approximately 45 suits and interventions involving over 5,000
plaintiffs pending against the Company. The Company recently participated in a
binding, non-appealable arbitration proceeding with respect to approximately
1,500 of such plaintiffs. The outcome of this proceeding is expected to be
received in the fall of 1996. The Company does not believe that the suits
relating to the ammonia release will have a material adverse impact on the
financial position, results of operations, or cash flows of the Company, and
the Company intends to vigorously defend all such suits.
On April 27, 1994, approximately one thousand two hundred plaintiffs filed a
lawsuit styled Angela Smith, et al. vs. Amoco Chemical Company, et al.; Cause
No. 95CV0509; In the 212th Judicial District Court of Galveston County, Texas,
suing the Company and eighteen other corporate defendants in the Texas City,
Texas area. The plaintiffs seek an unspecified amount of damages for personal
injury and property damages arising from alleged chemical releases. Discovery
is proceeding and the Company is vigorously defending this lawsuit.
On May 9, 1991, a lawsuit styled Moranda Allen, et al. vs. Sterling
Chemical, Inc., et al.; Cause No. 91-019786; In the 127th Judicial District
Court of Harris County, Texas, was filed against the Company and several other
petrochemical companies operating in the Texas City, Texas area. The
plaintiffs in the lawsuit assert personal injury and property damage claims
arising from alleged chemical releases. The plaintiffs seek an unspecified
amount of damages. Although the court dismissed a number of the plaintiffs for
failure to comply with discovery, over three hundred plaintiffs remain. The
Company is vigorously defending this lawsuit.
65
<PAGE>
PULP CHEMICALS
The Company's primary competitor in the supply of patented technology for
generators which convert sodium chlorate into chlorine dioxide is Akzo Nobel
(formerly Eka Nobel) and its affiliates. The Company was previously engaged
with Akzo Nobel in numerous patent disputes throughout the world in which the
Company and Akzo Nobel were challenging certain patents of the other and
attempting to restrict the other's operating range. The Company and Akzo Nobel
have reached an out-of-court settlement resolving all such disputes. The
settlement allows licensees of both the Company and Akzo Nobel to operate
their chlorine dioxide generators within the broadest range of operating
conditions, subject to payment of royalties in certain circumstances. The
settlement did not have a material adverse effect on the Company's financial
position or results of operations.
On January 8, 1996, Repap New Brunswick, Inc. (formerly Miramichi Pulp and
Paper, Inc.) filed a lawsuit styled Repap New Brunswick, Inc. v. Sterling Pulp
Chemicals, Ltd; In the Court of Queen's Bench of New Brunswick, Trial
Division, Judicial District of Miramichi. The plaintiff asserts property
damage, business interruption and lost profits claims resulting from the
December 17, 1992 explosion of plaintiff's chlorine dioxide generator. The
plaintiff seeks an unspecified total amount of damages. The Company is
vigorously defending this lawsuit. Based on management's review of the
available information and advice of outside legal counsel, the Company
believes that final resolution of this matter will not have a material adverse
effect on its financial position, results of operations or cash flow.
The Company is subject to various other claims and legal actions that arise
in the ordinary course of business.
66
<PAGE>
MANAGEMENT
PRESENT DIRECTORS AND EXECUTIVE OFFICERS
Frank J. Hevrdejs is currently the President and sole director and Hunter
Nelson and John D. Hawkins are currently Vice Presidents of STX Acquisition
and Chemicals.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of both Holdings and Chemicals following the
consummation of the Transaction.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Frank P. Diassi......... 63 Chairman of the Board of Directors
Robert W. Roten......... 62 President, Chief Executive Officer and Director
Jim P. Wise............. 52 Vice President--Finance and Chief Financial Officer
Richard K. Crump........ 50 Vice President--Commercial
Robert N. Bannon........ 51 Vice President--Operations, President Sterling Pulp Chemicals,
Ltd.
F. Maxwell Evans........ 51 Vice President, General Counsel and Secretary
Robert O. McAlister..... 56 Vice President--Human Resources and Administration
Stewart H. Yonts........ 50 Treasurer
J. Virgil Waggoner...... 68 Director (Vice Chairman)
Allan R. Dragone........ 70 Director
John L. Garcia.......... 40 Director
Frank J. Hevrdejs....... 50 Director
Hunter Nelson........... 43 Director
</TABLE>
Frank P. Diassi. Mr. Diassi is currently Managing General Partner of
Unicorn, a private financial organization. He organized Unicorn in 1984 and
has originated investments in over 40 entrepreneurial companies. Prior to
forming Unicorn, Mr. Diassi organized and operated several businesses ranging
from chemical distribution to the manufacturing of organic chemicals and
detergent products. In addition, he had a number of years of executive
experience with the petrochemical department of Continental Oil Company. He
has been Chairman of the Board of Hawkeye Chemical Company and was a founding
director of Arcadian Corporation, the largest nitrogen fertilizer company in
the Western hemisphere. Mr. Diassi currently serves as Chairman of the Board
of Software Plus, Inc. In addition, he serves on the Board of Mail-Well, Inc.
and several private companies. In 1991, Unicorn Ventures, Ltd. and Unicorn
Ventures II, L.P. (the "Ventures"), small business investment companies acting
under license of the Small Business Administration (the "SBA"), and of which
Unicorn was the managing general partner, filed for reorganization under
Chapter 11 of the Federal Bankruptcy Code. The Ventures were successfully
reorganized in 1995 pursuant to a plan which included full payment of general
creditors and a restructuring of the secured debt held by the SBA.
Robert W. Roten. Mr. Roten spent the first 25 years of his career with
Monsanto Company and served as Vice President for sales and marketing for El
Paso Products Company from 1981 to 1983. Mr. Roten was President of Materials
Exchange, Inc., a Houston-based petrochemical and plastics marketing firm,
from 1983 until 1986. He served as Vice President--Commercial of the Company
from August 1986 until September 1991, when he became Vice President--
Corporate Development. Mr. Roten became Executive Vice President and Chief
Operating Officer of the Company in April 1993.
Jim P. Wise. Mr. Wise was employed by Transco Energy Company as Executive
Vice President, Chief Financial Officer and a member of the Board of Directors
from November 1982 until September 1991. From September 1991 to July 1994, he
was Chairman and Chief Executive Officer of Neostar Group, Inc., a private
investment banking and financial advisory firm. From July 1994 to September
1994, he was Senior Vice President and Chief Financial Officer of U.S.
Delivery Systems, Inc. Mr. Wise joined the Company on September 26, 1994 as
Vice President--Finance and Chief Financial Officer.
67
<PAGE>
Richard K. Crump. Mr. Crump was Vice President of Materials Management for El
Paso Products Company from 1976 through 1983 and Vice President of Sales for
Rammhorn Marketing from 1984 to August 1986. He served as Director--Commercial
of the Company from August 1986 until October 1991, when he became Vice
President--Commercial.
Robert N. Bannon. Mr. Bannon was employed by Monsanto Company for 15 years,
most recently as Manager, Strategic Operations--Sales. He became a Director in
the Company's Commercial Department in August 1986. He became the Director of
Manufacturing for the Company in October 1989, and served in that capacity
until he became Vice President--Operations in October 1991. Mr. Bannon has been
the President of Sterling Pulp Chemicals, Ltd. since August 1992 and is a
Director of Mainland Bank in Texas City, Texas.
F. Maxwell Evans. Mr. Evans joined the law firm of Bracewell & Patterson of
Houston, Texas in 1973 and was a partner in the firm from 1979 through December
1991. He received an L.L.M. in Environmental Law in August 1992. He became
General Counsel and Secretary of the Company on September 1, 1992 and was
promoted to Vice President, General Counsel and Secretary on July 26, 1995.
Robert O. McAlister. Mr. McAlister was employed by Champlin Petroleum
Company, a subsidiary of Union Pacific Corporation from 1974 to 1987 where he
held a variety of positions in Human Resources, Marketing and Strategic
Planning. In 1987, he joined Champlin Refining and Chemicals, Inc., a joint
venture between Champlin Petroleum and PDVSA, the national oil company of
Venezuela, as Vice President of Human Resources. He joined the Company in 1991
as Director of Human Resources and was promoted to Vice President--Human
Resources and Administration on July 26, 1995.
Stewart H. Yonts. Mr. Yonts was employed by Tenneco, Inc. from 1976 to 1980,
last serving as Tax Counsel. Mr. Yonts was Tax Manager of Home Petroleum
Corporation from 1980 to 1982 and Director of Taxes of MCO Resources, Inc., a
natural resources company, from 1982 to 1986. He joined the Company as Tax
Manager in August 1986 and served as Manager of Taxes and Benefits Accounting
from November 1989 until he became the Treasurer on October 1, 1994.
J. Virgil Waggoner. Mr. Waggoner has served as President of the Company since
1986. From 1950 to 1980 Mr. Waggoner was employed by Monsanto Company, last
serving as Group Vice President and Managing Director of Monsanto's Plastics
and Resins Company. Mr. Waggoner was President of El Paso Products Company (now
a subsidiary of Rexene Corporation), a commodity chemicals and plastics
company, from 1980 to 1983 and was a self-employed industry consultant from
1983 to 1986. Mr. Waggoner has been on the Boards of Directors of Kirby
Corporation and Mail-Well, Inc. since July 1993 and February 1994,
respectively.
Allan R. Dragone. Mr. Dragone has been a director of Arcadian Corporation
since 1989, and served as Chairman of the Board from 1989 to 1990. He was
President and Chief Executive Officer of Azko America, Inc., a chemicals
producer, from 1986 to 1989, and was Chairman of the Board of Fiber Industries,
Inc., a polyester fibers producer, from 1987 to 1989. He also is a director of
United Water Resources, Inc., a water services company; a director of Wellman,
Inc., a polyester fibers producer and plastic reclamation company; and a
director of PM Holdings Corporation and its subsidiary, Purina Mills, Inc., an
animal feed producer. He was Chairman of the Board of the New York Racing
Commission from 1990 to 1995, and currently serves as a trustee.
John L. Garcia. Mr. Garcia has been a Managing Director and Head of the
Global Chemical Investment Banking Group with CS First Boston Corporation since
1994 and prior thereto was a Managing Director with Wertheim Schroder & Co.
Inc. Mr. Garcia also serves as a director of Acetex Corporation.
Frank J. Hevrdejs. Mr. Hevrdejs is a principal and President of TSG, which he
co-founded in 1982. Mr. Hevrdejs has actively participated in acquisitions of
over 40 businesses in the past 15 years. He is Chairman of First Sterling
Ventures Corp., an investment company, Enduro Holdings, Inc., a structural and
electrical manufacturing company, and Fibreglass Holdings, Inc., a truck
accessory manufacturer. He is also a board
68
<PAGE>
member of Mail-Well, Inc., an envelope manufacturer and commercial printer,
Purina Mills, Inc., an animal feed producer, and Eagle U.S.A., an air-freight
company.
Hunter Nelson. Mr. Nelson is currently a principal with TSG. Prior to
joining TSG in 1989, he served as vice president of administration and general
counsel of Fiber Industries, Inc., a producer of polyester fibers. Mr. Nelson
was previously a partner in the law firm of Andrews & Kurth L.L.P.
specializing in general corporate and securities law. Mr. Nelson serves on the
board of Sterling Diagnostic Imaging, Inc. and several other private
companies.
In addition to the above named directors, the following individuals are
expected to become directors as a result of significant purchases of STX
Acquisition Common Stock in the Equity Private Placement by entities with
which they are affiliated.
George B. Gregory. Age 33. Mr. Gregory is a Managing Director of Koch
Equities Inc., a subsidiary of Koch Industries, Inc., where he is responsible
for leading the chemical investment and acquisitions effort. Prior to joining
Koch Equities Inc., Mr. Gregory worked as a consultant for Monitor Company and
as a chemist for E.I. duPont de Nemours & Company.
Robert B. Calhoun. Age 53. Mr. Calhoun has been President of Clipper Asset
Management Corporation, the sole general partner of The Clipper Group, L.P., a
private investment firm, since 1991, and of Clipper Capital Corporation, the
sole general partner of Clipper Capital Partners, L.P., an affiliated private
investment firm, since 1993. From 1975 to 1991, Mr. Calhoun was a Managing
Director of CS First Boston Corporation. Mr. Calhoun is also a director of
HighwayMaster Communications, Inc., Avondale Incorporated and Interstate
Bakeries Corporation.
COMPENSATION OF DIRECTORS
Upon consummation of the Transaction, fees payable to non-employee directors
of Holdings have initially been set at $20,000 per year and an attendance fee
of $1,000 for each meeting of the Board or a committee thereof. Members of the
Board of Directors who are employees of Holdings or Chemicals will not receive
a fee for their services as directors. All directors will be reimbursed for
travel expenses for their services as directors.
69
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
HISTORICAL INFORMATION
Set forth below is information regarding compensation arrangements and
benefits paid or made available to the five most highly compensated executive
officers of the Company (the "named executive officers") for the three fiscal
years ended September 30, 1995. Compensation during such fiscal years included
participation in certain stock option, stock appreciation and other benefit
plans sponsored by the Company or its subsidiaries, in which the named
executive officers will no longer be eligible to participate after the
Transaction. For information regarding cash compensation arrangements and
benefit plans to be implemented by the Company, see the information set forth
below under the caption "--After the Transaction."
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------
ANNUAL
COMPENSATION(3) AWARDS PAYOUTS
----------------- ----------------------- ------------
RESTRICTED SECURITIES ALL OTHER
NAME AND PRINCIPAL SALARY BONUS STOCK UNDERLYING COMPENSATION
POSITION YEAR ($)(1) ($)(2) AWARD(S) OPTIONS/SARS ($)(4)
- ------------------ ---- -------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
J. Virgil Waggoner...... 1995 $325,000 $506,851 $ -0- -0- $ 9,675
President and Chief 1994 279,166 134,987 -0- -0- 1,916
Executive Officer 1993 275,000 -0- -0- -0- 11,452
Robert W. Roten......... 1995 205,000 266,394 -0- 20,000/-0- 9,364
Executive Vice
President and 1994 177,500 71,579 -0- -0- 8,817
Chief Operating Officer 1993 175,000 -0- -0- -0- 9,450
Robert N. Bannon........ 1995 180,000 233,906 -0- 15,000/-0- 9,045
President-Sterling Pulp 1994 152,500 61,353 -0- -0- 7,561
Chemicals, Ltd. 1993 150,000 -0- -0- -0-/262,500 8,100
Richard K. Crump........ 1995 180,000 233,906 -0- 15,000/-0- 9,045
Vice President-- 1994 152,500 61,353 -0- -0- 7,561
Commercial 1993 150,000 -0- -0- -0- 8,100
Jim P. Wise............. 1995 180,000 413,906(5) 186,975 12,500/-0- 1,620
Vice President--Finance
and 1994 3,409 -0- -0- -0- 31
Chief Financial Officer 1993 -0- -0- -0- -0- -0-
</TABLE>
- --------
(1) Includes amounts deferred under the Company's 401(K) Savings and
Investment Plan.
(2) Paid pursuant to the Company's Profit Sharing Plan.
(3) No named executive officer received any perquisites and other personal
benefits the aggregate amount of which exceeded the lesser of either
$50,000 or 10% of the total annual salary and bonus reported for 1995 in
the Summary Compensation Table.
(4) For fiscal year 1995, All Other Compensation includes matching
contributions paid by the Company pursuant to the Company's 401(k) Savings
and Investment Plan, as follows: Mr. Waggoner, $6,750, Mr. Roten, $7,519,
Mr. Bannon, $7,425, Mr. Crump, $7,425 and Mr. Wise, $0; and premiums for
group term life insurance paid by the Company as follows: Mr. Waggoner,
$2,925, Mr. Roten, $1,845, Mr. Bannon, $1,620, Mr. Crump, $1,620 and Mr.
Wise, $1,620.
(5) In addition to payments pursuant to the Company's profit sharing plan,
this amount includes an additional $90,000 in cash and the value of 12,000
shares of Common Stock awarded to Mr. Wise. On the date of the award, the
fair market value of the Common Stock was $7.50 per share.
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<PAGE>
Option Grants in Last Fiscal Year. The following sets forth certain options
granted in fiscal 1995 to purchase Company Common Stock.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
PERCENT OF RATES OF STOCK
NUMBER OF TOTAL PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE(1) EXPIRATION -----------------
NAME GRANTED (#) FISCAL YEAR (PER SHARE) DATE(3) 5% 10%
- ---- ----------- ------------ ----------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
J. Virgil Waggoner...... -0- -0- -- -- $ -0- $ -0-
Robert W. Roten......... 20,000 24% $13.375 October 1, 2004 169,802 430,310
Robert N. Bannon........ 15,000 18% 13.375 October 1, 2004 127,351 322,733
Richard K. Crump........ 15,000 18% 13.375 October 1, 2004 127,351 322,733
Jim P. Wise............. 12,500 15% 13.375 October 1, 2004 106,126 268,944
</TABLE>
- --------
(1) Options were granted at 100% of fair market value on the date of grant.
(2) The dollar amounts set forth under these columns are the result of
calculations of assumed annual rates of stock price appreciation from
October 1, 1994 (the date of grant of the options awarded) to October 1,
2004 (the date of expiration of such options) of 0%, 5% and 10%. Based on
these assumed annual rates of stock price appreciation of 0%, 5% and 10%,
respectively, the Company's stock price at October 1, 2004 is projected to
be $13.50, $21.99 and $35.02, respectively. These assumptions are not
intended to forecast future appreciation of the Company's stock price. The
Company's stock price may increase or decrease in value over the time
period set forth above. Optionees will not realize value under their
option grants without stock price appreciation which will benefit all
stockholders. The potential realizable value computation does not take
into account federal or state income tax consequences of option exercises
or sales of appreciated stock.
(3) The options granted on October 1, 1994 are exercisable from the third
through the tenth anniversaries of the date of grant. However, upon
consummation of the Merger, each outstanding option to acquire Company
Common Stock will be canceled. See "The Transaction."
Aggregate SAR Exercises in Fiscal 1995 and Year-end Option/SAR Values. The
following table provides information on SAR exercises in fiscal 1995 by the
named executive officers and the value of such officers' unexercised options
and SARs at September 30, 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT AT SEPTEMBER 30, 1995
SEPTEMBER 30, 1995 (#)(1) ($)(3)
SHARES ACQUIRED VALUE -------------------------- -------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Virgil Waggoner...... -0- $ -0- -0- -0-/-0- $-0- $ -0-/-0-
Robert W. Roten......... -0- -0- -0- 20,000/-0- -0- -0-/-0-
Robert N. Bannon........ -0- 1,004,883 -0- 15,000/131,250(2) -0- -0-/557,813
Richard K. Crump........ -0- -0- -0- 15,000/-0- -0- -0-/-0-
Jim P. Wise............. -0- -0- -0- 12,500/-0- -0- -0-/-0-
</TABLE>
- --------
(1) Upon consummation of the Merger, each outstanding option to acquire
Company Common Stock will be canceled. See "The Transaction."
(2) In September 1992, the Company initiated a Stock Appreciation Rights
Program (the "Program") pursuant to the Omnibus Stock and Incentive Plan,
to provide additional compensation to certain Executive Officers and other
employees of the Company. Under the Program, the Company offered each
participant the right to purchase a specified number of shares of the
Company's Common Stock and granted 20 SARs for each share purchased. In
fiscal 1993, Mr. Bannon purchased 13,125 shares and was granted 262,500
SARs. During fiscal 1995, the participants unanimously agreed, at the
Company's request, to amend the Program to, among other things, limit the
potential value of the SARs by placing a ceiling on the amounts that the
Company may be required to pay upon exercise of the SARs. Under the
amended Program, Mr. Bannon exercised 25% of his SARs on October 10, 1994
and an additional 25% of his SARs on September 1, 1995 for the fixed
amount payable to him of $9.00 and $6.31 per SAR, respectively, and is
permitted to exercise up to 50% and 100% of his remaining SARs on
September 1, 1996, and September 1, 1997, respectively, limited by the
maximum amount payable on such dates of $10.00 per SAR and $11.00 per SAR,
respectively, provided
71
<PAGE>
he is still employed by the Company on such date. However, upon
consummation of the Merger, each such SAR will be converted into the right
to receive a cash payment equal to the excess, if any, of $12.00 over the
base price provided for in such SAR. See "The Transaction." The amounts
indicated in the column entitled "Value Realized ($)" represent the amount
paid to the holder of the SARs upon exercise thereof.
(3) An "In-the-Money" option or SAR is an option or SAR for which the market
price on the date the option or SAR was granted is less than the market
price of Company Common Stock at September 30, 1995. All of the value
shown reflects stock price appreciation since the granting of the option
or SAR, as the case may be.
The Company has maintained the Sterling Chemicals, Inc. Amended and Restated
Stock Appreciation Rights Plan for Non-Employee Directors (the "SAR Plan") for
the benefit of certain non-employee members of the Board of Directors.
Pursuant to the SAR Plan, other than Gordon A. Cain and J. Virgil Waggoner,
each member of the Board of Directors at the time of the adoption of the SAR
Plan (a "Participant") was awarded 40,000 SARs on January 27, 1993 at a grant
price of $4.00 per SAR. The aggregate number of SARs that were awarded to all
Participants under the SAR Plan is 200,000. The SAR Plan was amended in
October 1994 to limit the potential value of the SARs by placing a ceiling on
the amounts that the Company may be required to pay upon the exercise of the
SARs. Participants were given greater flexibility with respect to the dates on
which they may exercise their SARs. Under the amended SAR Plan, each
Participant exercised 25% of his SARs on October 10, 1994 and an additional
25% of his SARs on September 1, 1995 for the fixed amount payable to him of
$9.00 and $6.31 per SAR, respectively, and is permitted to exercise up to 50%,
and 100% of his remaining SARS on September 1, 1996, and September 1, 1997,
respectively, limited by the maximum amount payable on such dates of $10.00
per SAR and $11.00 per SAR, respectively, provided the Participant is a member
of the Board of Directors on each such date. All unexercised SARs terminate at
12:01 a.m. on September 2, 1997.
Upon consummation of the Merger, each SAR relating to the Company will be
converted into the right to receive a cash payment equal to the excess, if
any, of $12.00 over the grant price provided for in such SAR, and the SAR Plan
will terminate. See "The Transaction."
Pension Plans. The Company has maintained a defined benefit Salaried
Employees' Pension Plan (the "Pension Plan") covering substantially all
salaried employees, including the named executive officers. Pension costs are
borne solely by the Company and determined annually on an actuarial basis with
contributions made accordingly. The pension benefits payable under the Pension
Plan for individuals hired by Monsanto (from which the Company acquired its
Texas City Plant) prior to April 1, 1986 are based on such individual's vested
percentage times years of service multiplied by 1.4% of Average Earnings (as
defined). Individuals hired by Monsanto on or after April 1, 1986 and other
individuals hired by the Company receive a pension payable under the Pension
Plan based on such individual's vested percentage times years of service
multiplied by 1.2% of Average Earnings. Average Earnings excludes, among other
things, amounts received under the Company's Profit Sharing Plan and is
generally defined as the greater of (i) average compensation received during
the highest three of the final five calendar years of employment or (ii)
average compensation received during the final 36 months of employment.
For those Company employees who were (i) employed by the Company prior to
October 1, 1986, (ii) previously employed by Monsanto and (iii) accruing a
Monsanto pension plan benefit, the Company recognizes Monsanto pension plan
years of service offset by any vested benefit under the Monsanto pension plan.
For those Company employees as of August 21, 1992 who were (i) previously
employed by Albright & Wilson based in the United States and (ii) participants
in the Tenneco Canada, Inc. Retirement Plan, the Company recognizes Tenneco
Canada, Inc. Retirement Plan years of service offset by any vested benefit
under that plan. A participant will become vested only after five years of
service, except that Canadian participants will become vested after two years
of service.
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<PAGE>
The following table illustrates the aggregate of the annual normal
retirement benefits payable under the Pension Plan, Equalization Plan and
Supplemental Plan (as defined) based on 1.4% of Average Earnings, without
reduction for any offset amounts.
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------
AVERAGE EARNINGS 10 20 30 40
- ---------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
$ 50,000........................................ $ 7,000 $14,000 $21,000 $28,000
100,000........................................ 14,000 28,000 42,000 56,000
150,000........................................ 21,000 42,000 63,000 84,000
200,000........................................ 21,000 42,000 63,000 84,000
250,000........................................ 21,000 42,000 63,000 84,000
300,000........................................ 21,000 42,000 63,000 84,000
350,000........................................ 21,000 42,000 63,000 84,000
400,000........................................ 21,000 42,000 63,000 84,000
</TABLE>
The following table illustrates the annual normal retirement benefits
payable under the Pension Plan based on 1.2% of Average Earnings, without
reduction for any offset amounts. Such benefit levels assume retirement at age
65, the years of service shown, continued existence of the Pension Plan,
Equalization Plan and Supplemental Plan without substantial change and payment
in the form of a single life annuity.
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------
AVERAGE EARNINGS 10 20 30 40
- ---------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
$ 50,000........................................ $ 6,000 $12,000 $18,000 $24,000
100,000........................................ 12,000 24,000 36,000 48,000
150,000........................................ 18,000 36,000 54,000 72,000
200,000........................................ 18,000 36,000 54,000 72,000
250,000........................................ 18,000 36,000 54,000 72,000
300,000........................................ 18,000 36,000 54,000 72,000
350,000........................................ 18,000 36,000 54,000 72,000
400,000........................................ 18,000 36,000 54,000 72,000
</TABLE>
The benefits under the Pension Plan are computed by multiplying Average
Earnings by credited years of service times the respective percentages
referred to above. The benefits payable under the Pension Plan are not reduced
by any benefits payable under Social Security or other offset amounts. The
benefits payable to Table A participants are reduced by the amount of pension
benefits which participants may be entitled to under Monsanto's pension plan.
The number of credited years of service of each of the named executive
officers are as follows: J. Virgil Waggoner--39 years; Robert W. Roten--34
years; Richard K. Crump--9 years; Robert N. Bannon--24 years; and Jim P.
Wise--1 year.
Pension Benefit Equalization Plan. The Company has maintained the Sterling
Chemicals, Inc. Pension Benefit Equalization Plan (the "Equalization Plan").
The Equalization Plan provides additional benefits to employees whose
retirement benefits under the Pension Plan are reduced, curtailed or otherwise
limited as a result of certain limitations under the Internal Revenue Code of
1986, as amended (the "Code"). The additional benefits provided by the
Equalization Plan are in an amount equal to the benefits under the Pension
Plan which are reduced, curtailed or limited by reason of the application of
such limitations. All employees who participate in the Pension Plan are
eligible to participate in the Equalization Plan. Benefits have been paid to
participants under the Equalization Plan and such benefits are generally
payable at the time, and in the manner, benefits are payable under the Pension
Plan.
Supplemental Employee Retirement Plan. The Company has maintained the
Sterling Chemicals, Inc. Supplemental Employee Retirement Plan (the
"Supplemental Plan"). The Supplemental Plan also provides additional benefits
to certain employees whose retirement benefits under the Pension Plan are
reduced, curtailed or otherwise limited because such employee's annual
compensation is in excess of $150,000 or because certain
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<PAGE>
Social Security integration benefits were removed from the Pension Plan. The
additional benefits provided by the Supplemental Plan are in an amount equal
to the benefits under the Pension Plan which are reduced, curtailed or limited
by reason of the applications of such limitations. Only those employees who
are a part of management or are "highly compensated" and are subject to
limitations on Pension Plan benefits imposed by the Code may participate in
the Supplemental Plan. No benefits have been paid to participants under the
Supplemental Plan and such benefits are generally payable at the time, and in
the manner, benefits are payable under the Pension Plan.
Assuming retirement at age 65, or their current age, if older, and the
continuation of their current levels of base salary until such retirement, as
of September 30, 1995, total retirement benefits under the Equalization Plan
and/or the Supplemental Plan payable to Messrs. Waggoner, Roten, Crump,
Bannon, and Wise will be $122,003, $86,098, $53,616, $85,389, and $30,847 per
year, respectively, reduced by the value of the benefits payable under the
Pension Plan, which are $71,761, $62,148, $44,680, $69,105, and $25,706 per
year, respectively.
Termination Pay Plan. On April 24, 1996, the Company adopted a Consolidated
Termination Pay Plan for All Salaried Employees of the Company and its
Subsidiaries, which supercedes and replaces all prior termination pay plans
(collectively, the "Prior Plans") The Consolidated Termination Pay Plan was
amended and restated on May 20, 1996 (as amended, the "Consolidated Plan").
The Consolidated Plan provides that if, within the 24-month period following
a "change of control," the employment of any full time salaried employee of
Sterling Chemicals, Inc. (or any wholly owned direct or indirect subsidiary
thereof, or any successor thereto) is terminated for any reason (other than
the employee's death or disability, resignation or retirement or termination
for cause), or such employee is requested to accept a new job which is less
than equivalent to his or her job immediately prior to the change of control
in terms of compensation, job level, job responsibilities or credits, such
employee shall be entitled to receive termination pay. Such an event giving
rise to termination pay under the plan is defined as a "Triggering Event."
The termination pay payable to any eligible employee following a Triggering
Event is equal to 36 months' pay (for certain members of senior management),
or 24 months' pay (for all other salaried employees) (the relevant period
being referred to as such employee's "Termination Pay Period") at the
employee's base pay rate in effect at the time of the change of control, and
is payable as and when such base salary would otherwise have been payable to
such employee if such employee had not been terminated. An affected employee
is to receive continued health benefits for the Termination Pay Period, and an
amount equal to the projected amount of profit sharing that would have been
received by the affected employee under the Company's Amended and Restated
Salaried Employees' Profit Sharing Plan during the Termination Pay Period.
Other amounts payable upon a Triggering Event include benefits accrued under
the Company's ESOP, the Company's Amended and Restated Savings and Investment
Plan (the "Savings Plan"), the Pension Plan, the Supplemental Plan or the
Equalization Plan, or any similar plan in effect for Canadian employees, which
would be forfeited by the employee due to the Triggering Event.
The Consolidated Plan also provides for outplacement services and gross-up
payments for any excise tax imposed by Section 4999 of the Code or any
interest or penalty thereon.
For purposes of the Consolidated Plan, a "change of control" means (i) the
acquisition of or the ownership of 50% or more of the total voting stock of
the Company then issued and outstanding, by any person or group of affiliated
persons, or entities not affiliated with the Company as of April 24, 1996,
either with or without the consent of the Company, or (ii) individuals who
were members of the Board of the Company immediately prior to a meeting of the
stockholders of the Company involving a contest for the election of directors
do not constitute a majority of the Board immediately following such election
unless the election of such new directors was recommended to the stockholders
by management of the Company, or (iii) in addition to (i) and (ii) above, with
respect to employees of Sterling Pulp Chemicals, Ltd. and Sterling Pulp
Chemicals US, Inc., only, the acquisition of or the ownership of 50% or more
of the total voting stock of Sterling Pulp Chemicals, Ltd. or Sterling Canada,
Inc. The Transaction will constitute a "change of control" under the
Consolidated Plan. However, as there are
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<PAGE>
currently no plans to terminate any employees covered under the Consolidated
Plan, no payments are expected to be made under such plan in connection with
the Transaction.
After the Transaction
Pension Plans. The Pension Plan, the Equalization Plan and the Supplemental
Plan will remain in place following the Transaction.
Employee Stock Ownership Plan. In connection with the Transaction, the New
ESOP will be established which will cover substantially all eligible
employees. The New ESOP, which will invest primarily in shares of Holdings
Common Stock, will borrow $6.5 million from Chemicals pursuant to the
Chemicals ESOP Loan to purchase shares of STX Acquisition Common Stock at the
closing of the Transaction ("Closing") which will be converted into 541,662
shares of Holdings Common Stock. The Chemicals ESOP Loan bears interest at
interest rates based on the Base Rate (as defined in the Credit Agreement)
plus a margin or the Eurodollar Rate (as defined) plus a margin. The
outstanding principal of the Chemicals ESOP Loan is payable in 16 equal
quarterly installments during the period beginning December 31, 1996 and
ending September 30, 2000. The shares of STX Acquisition Common Stock to be
purchased by the New ESOP will be pledged as security for the Chemicals ESOP
Loan (the "ESOP Pledge"), and such shares will be released and allocated to
New ESOP participants' accounts as the Chemicals ESOP Loan is discharged. It
is anticipated that employer contributions to the New ESOP will be in amounts
sufficient to enable the New ESOP to discharge its indebtedness under the
Chemicals ESOP Loan. Shares released under the ESOP Pledge will be allocated
to each participant based on his or her compensation relative to all
compensation for all New ESOP participants. Until the Chemicals ESOP Loan is
paid in full, contributions will be used to pay the outstanding principal and
interest on the Chemicals ESOP Loan. Distributions from the New ESOP are made
in cash or Holdings Common Stock upon a participant's retirement, death,
disability or termination of employment. If Holdings Common Stock is
distributed to a participant, the participant may, within two 60-day periods,
require Chemicals to purchase all or a portion of such Holdings Common Stock
at its fair market value as determined by an independent appraiser as of an
annual valuation date (the "Put Options"). The first 60-day period commences
on the date the participant receives a distribution of Holdings Common Stock
and the second 60-day period commences a year from such date. Pursuant to an
Employee Stockholders Agreement to be entered into by each participant, if a
participant fails to exercise either of the two Put Options, the participant
may transfer the shares of Holdings Common Stock only upon receipt of a bona
fide third party offer and only after first offering the shares to the New
ESOP, then to Holdings and then to other employee stockholders party to such
agreement. Employees of Chemicals will own approximately 5% of the outstanding
Holdings Common Stock through the New ESOP after the Transaction.
Savings Plan. The Savings Plan covers substantially all employees, including
executive officers, and will be amended and continued after the Transaction.
The Savings Plan is designed to qualify under Section 401(k) of the Code. Each
participant has the option to defer taxation of a portion of his or her
earnings by directing the Company to contribute a percentage of such earnings
to the Savings Plan. A participant may direct up to a maximum of 15% of
eligible earnings to the Savings Plan, subject to certain limitations set
forth in the Code for certain "highly compensated" participants, as defined in
Section 414(q) of the Code. A participant's contributions become distributable
upon the termination of his or her employment for any reason.
Stock Option Plan. Holdings expects to adopt a stock option plan (the
"Option Plan") after the Transaction. The Option Plan will be administered by
the Compensation Committee of the Board of Directors (the "Committee"). Option
grants under the Option Plan may be made to directors and key employees
selected by the Committee. The Committee may provide that the options will
vest immediately or in increments over a period of time.
Profit Sharing Plan. Chemicals expects to establish a Profit Sharing Plan
covering all full time employees, including executive officers. The Profit
Sharing Plan will be administered by the Committee. Amounts paid under the
Profit Sharing Plan will constitute taxable income in the year received and
will be based on Chemicals'
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<PAGE>
financial performance over a period of time to be determined. The Committee
will determine a percentage of the amount by which the Company's earnings
before depreciation, amortization, interest and taxes (and before profit
sharing) exceed a minimum level. If earnings exceed this minimum level,
Chemicals may make distributions to employees. The Committee may change the
amount set aside for profit sharing and the proportion of such amount
allocated to an individual employee or group of employees. The Profit Sharing
Plan will not be qualified under Section 401(a) of the Code.
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<PAGE>
PRINCIPAL STOCKHOLDERS
HISTORICAL
The following table sets forth certain information regarding the beneficial
ownership of Company Common Stock as of July 15, 1996, by (i) each person
known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director and nominee for
director of the Company, (iii) each named executive officer of the Company,
and (iv) all of the directors and executive officers as a group. In addition,
employees of the Company, including the Company's executive officers, own
5,988,448 shares of Company Common Stock through the Sterling Chemicals, Inc.
Employee Stock Ownership Plan (the "Current ESOP"), which represents 10.8% of
the outstanding shares of Company Common Stock. These shares are held of
record by Merrill Lynch & Co. Incorporated ("Merrill Lynch"), as trustee of
the Current ESOP, who disclaims beneficial ownership of the shares. The
Current ESOP shares are allocated to the account of each employee who has sole
voting power of their respective Current ESOP shares. Unless otherwise
indicated, each of the stockholders has sole voting and investment power with
respect to the shares beneficially owned. The information is based upon
information furnished to the Company by each individual or entity named below.
<TABLE>
<CAPTION>
COMPANY COMMON
STOCK
---------------------------
NUMBER OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES PERCENT
- --------------------------------------- ---------- -------
<S> <C> <C>
Gordon A. Cain..................................... 6,632,850(2) 11.9%
J. Virgil Waggoner................................. 4,113,194(3) 7.4
William A. McMinn.................................. 84,579 *
James J. Kerley.................................... 144,579 *
Gilbert M. A. Portal............................... ---- *
Frank J. Pizzitola................................. 10,000 *
Raymond R. Knowland................................ 2,500 *
Robert W. Roten.................................... 997,364(4) 1.8
Robert N. Bannon................................... 163,201(5) *
Richard K. Crump................................... 476,649(6) *
Jim P. Wise........................................ 26,269(7) *
All executive officers and directors of the Company
as a group (14 persons)............................ 12,808,428(2)(3)(8) 23.0
</TABLE>
- --------
* Less than 1%
(1) The mailing address of each such beneficial owner is 1200 Smith Street,
Suite 1900, Houston, Texas 77002-4312.
(2) Includes 375,000 shares held in Mr. Cain's Keogh Plan, over which Mr. Cain
has sole voting power and includes 2,257,850 shares with respect to which
Mr. Cain disclaims beneficial ownership, held by a private family
foundation for which Mr. Cain serves as the Chairman of the Board of
Trustees and has shared voting and disposition powers.
(3) Includes 50,602 shares held by Mr. Waggoner's wife, with respect to which
Mr. Waggoner disclaims beneficial ownership. Includes 77,472 shares over
which Mr. Waggoner has sole voting power held by Merrill Lynch, as Trustee
of the Current ESOP as of July 15, 1996 and allocated to Mr. Waggoner's
account.
(4) Includes 49,216 shares over which Mr. Roten has sole voting power held by
Merrill Lynch, as Trustee of the Current ESOP as of July 15, 1996 and
allocated to Mr. Roten's account.
(5) Includes 29,053 shares over which Mr. Bannon has sole voting power held by
Merrill Lynch, as Trustee of the Current ESOP as of July 15, 1996 and
allocated to Mr. Bannon's account.
(6) Includes 37,507 shares over which Mr. Crump has sole voting power held by
Merrill Lynch, as Trustee of the Current ESOP as of July 15, 1996 and
allocated to Mr. Crump's account.
(7) Includes 419 shares over which Mr. Wise has sole voting power held by
Merrill Lynch, as Trustee of the Current ESOP as of July 15, 1996 and
allocated to Mr. Wise's account.
(8) Includes 221,023 shares held by Merrill Lynch, as Trustee of the Current
ESOP and allocated through July 15, 1996 to the accounts of such officers.
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<PAGE>
AFTER THE TRANSACTION
As described in "The Transaction," the Equity Private Placement will be
consummated simultaneously with the Merger and shares of STX Acquisition
Common Stock purchased in the Equity Private Placement will be converted into
a certain number of shares of Holdings Common Stock. In connection with the
Equity Private Placement, the purchasers therein and certain other
stockholders of the Company have agreed to enter into a Stockholders Agreement
which restricts transfer of shares of Holdings Common Stock held by such
stockholders (with certain exceptions) unless such shares are first offered to
the New ESOP, Holdings and finally to the other stockholders party to the
agreement. In addition, the agreement restricts the ability of any stockholder
who is a party to the agreement to initiate a disposition of a control
position in Holdings without first complying with the right of first refusal
provisions. See "Description of Capital Stock--Transfer Restrictions." In
addition, employees of CS First Boston Corporation or its affiliates who
purchase shares in the Equity Private Placement have entered into a Nominee
and Stockholders' Agreement with Clipper Capital Associates, L.P. with respect
to the voting and transfer of such shares. It is anticipated that upon
consummation of the Transaction, investors in the Equity Private Placement
including affiliates of TSG and Unicorn and certain principal stockholders of
the Company will own at least approximately 75% of Holdings Common Stock
assuming the maximum number of Rollover Shares.
As of the date hereof, it is expected that upon consummation of the
Transaction each of (i) affiliates of Clipper Capital Partners, L.P.
(collectively, "The Clipper Group"), (ii) Koch Equities Inc., (iii) Fayez
Sarofim & Co., (iv) Olympus Growth Fund II, L.P., (v) Frank J. Hevrdejs and
(vi) Frank P. Diassi will beneficially own 5% or greater of the outstanding
capital stock of Holdings. In addition, William C. Oehming, Hunter Nelson and
Susan O. Rheney, principals of TSG, will invest in the Equity Private
Placement and be stockholders of Holdings. A Voting Agreement among certain
significant holders of Holdings Common Stock (including TSG, Koch Equities
Inc. and The Clipper Group) who are expected to own in the aggregate over 40%
of the Holdings Common Stock will provide for each of such parties to vote
their shares of Holdings Common Stock in favor of a nominee to the Board of
Directors of Holdings to be selected by each of Koch Equities and The Clipper
Group. See "Underwriting." The rights of Koch Equities and The Clipper Group
to select a nominee under such Voting Agreement are terminated in the event
their ownership of Holdings Common Stock represents less than 5% of the total
outstanding shares of Holdings Common Stock. In addition, persons who will
acquire 10% or more of the Holdings Common Stock pursuant to the Equity
Private Placement and certain other stockholders will be parties to a
Registration Rights Agreement providing certain piggyback and demand
registration rights to such stockholders.
CERTAIN TRANSACTIONS
TSG and Unicorn have entered into an agreement with STX Acquisition pursuant
to which such firms have provided to STX Acquisition and its subsidiaries
consulting and advisory services with respect to the organization of STX
Acquisition and its subsidiaries, structuring and financing of the
Transaction, arrangements for outside consulting services, advice with respect
to employee benefit and compensation arrangements and other matters. The
agreement also provides that STX Acquisition will utilize the consulting
services of TSG in any future acquisitions or securities offerings within the
succeeding 24 months on terms to be negotiated and that STX Acquisition will
indemnify TSG and Unicorn against liabilities relating to their services. Upon
consummation of the Merger, Holdings will pay TSG and Unicorn one-time
transaction fees of approximately $8 million and $4 million, respectively, for
these services and reimburse TSG and Unicorn for their expenses. These
transaction fees are consistent with fees paid to TSG in other transactions,
but were not negotiated on an arm's length basis. Since its formation in 1982,
TSG has completed 32 acquisitions for a total consideration of approximately
$5.5 billion. TSG has provided similar consulting and advisory services in
other transactions in which TSG has been involved. STX Acquisition believes
these fees are reasonable and customary in transactions of this type.
In addition, STX Acquisition has agreed that if Holdings or any of its
subsidiaries determines within 24 months to dispose of or acquire any assets
or businesses or to offer its securities for sale or to raise any debt or
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<PAGE>
equity financing, Holdings or its subsidiary will retain TSG as a consultant
with respect to the transaction, provided that TSG's fees are competitive and
Holdings and TSG mutually agree on the terms of the engagement.
STX Acquisition and Chemicals were formed by an investor group led by TSG
and Unicorn for the purpose of effecting the Transaction. After the
Transaction, Mr. Diassi, Managing General Partner of Unicorn, will be Chairman
of the Board of Holdings and Chemical and Mr. Hevrdejs, a principal and
director of TSG and Mr. Nelson is a principal of TSG, will be directors of
Holdings and Chemicals. See "Management." Messrs. Hevrdejs, Diassi and Nelson,
together with other officers, employees and affiliates of TSG and Unicorn and
officers, directors and employees of the Company, are expected to purchase STX
Acquisition Common Stock in the Equity Private Placement.
As a matter of policy, all future transactions between Holdings or Chemicals
and their respective directors, officers and affiliates are expected to be on
terms no less favorable to Holdings or Chemicals than those available from
unaffiliated third parties. Under the Indentures, all future transactions that
involve consideration to TSG or Unicorn in excess of $2.5 million will be
approved by a majority of the disinterested members of the Board of Directors
of Holdings or Chemicals, as the case may be. The Notes Indenture will
restrict transactions between Chemicals and its affiliates and the Discount
Notes Indenture will restrict transactions between Holdings and its
affiliates. See "Description of the Units--Description of the Discount Notes--
Certain Covenants--Limitation on Transactions with Affiliates" and
"Description of the Notes--Certain Covenants--Limitation on Transactions with
Affiliates."
As described in "Principal Stockholders--After the Transaction," it is
currently anticipated that upon consummation of the Transaction, Koch Equities
Inc., a subsidiary of Koch Industries, Inc., ("Koch Industries") will own at
least 5% of the outstanding capital stock of Holdings. The Company and
affiliates of Koch Industries have ongoing commercial relationships,
including, from time to time, supply of raw materials or sales of
petrochemicals. For the fiscal year ended September 30, 1995, sales to and
purchases from Koch Industries and its affiliates represented less than 1% and
3%, respectively, of the Company's revenues.
In addition to the employee benefits that will continue after the Merger as
described under "Management--Compensation of Executive Officers--After the
Transaction," prospective investors should also consider the matters described
below.
Relationships with TSG. TSG was founded in 1982 by Messrs. Gordon A. Cain
and Frank J. Hevrdejs. In 1992, Mr. Cain made a decision to reduce his level
of business activity. By December 1993, Mr. Cain had sold all of his stock in
TSG and resigned as an officer and director. Since that time, Mr. Cain has had
no equity or other financial interest in TSG, although at TSG's invitation he
has invested in three transactions organized by TSG. For marketing purposes,
Mr. Cain was described as Chairman Emeritus of TSG until November 1995, but
since December 1992 has had no role in TSG's ongoing operations. TSG is
currently controlled by Messrs. Hevrdejs and William C. Oehmig, the husband of
Mr. Cain's stepdaughter. Messrs. Cain and William A. McMinn assist TSG as
senior advisors on selected transactions. Although Mr. McMinn has received
certain advisory fees for such services, Mr. Cain has not. Neither Mr. Cain
nor Mr. McMinn participated in any such capacity in connection with the
Merger. TSG and Mr. McMinn recently assisted Mr. Cain with the acquisition of
a company in a transaction unrelated to the Merger and similar assistance may
be provided with respect to future transactions. Messrs. Cain, Waggoner and
McMinn, along with principals of TSG, invested in such transaction, and
Messrs. Cain and McMinn are members of the Board of Directors of the surviving
corporation in such transaction. Messrs. Cain and McMinn also sublease office
space from TSG, either directly or through companies with which they are
affiliated. Messrs. Cain and McMinn, along with Mr. J. Virgil Waggoner, Robert
W. Roten, the Company's Executive Vice-President, and Richard K. Crump, a
Vice-President in the Company, have previously co-invested with principals of
TSG in several transactions. Approximately 10 years ago, the Company's Texas
City petrochemical facility was purchased by the Company from Monsanto Company
in a leveraged buyout led by Mr. Cain (at which time he was a director and
principal stockholder of TSG) and Mr. Waggoner. Principals of TSG currently
own 897,000 shares of Common Stock of the Company, representing approximately
1.6% of the outstanding shares. As of the date of the Merger Agreement
principals of TSG owned 100% of the common stock of STX Acquisition.
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<PAGE>
Continuing Equity Interest of Certain Persons. Certain directors and
executive officers of the Company and others will have continuing equity
interests in Holdings following the Merger. Messrs. Frank J. Hevrdejs and
William C. Oehmig (stockholders of the Company and principals of TSG) and
Messrs. Gordon A. Cain, J. Virgil Waggoner, and Robert W. Roten, each executed
an Inducement Agreement. Pursuant to the Inducement Agreement, Messrs. Cain,
Waggoner and Roten each agreed to make Rollover Elections as to a portion of
their shares of Company Common Stock (an aggregate of 1,404,254 Rollover
Shares), subject to pro rata reduction with Rollover Elections made by other
stockholders of the Company if Rollover Elections exceed the maximum number of
Rollover Shares. Messrs. Hevrdejs and Oehmig agreed to make Rollover Elections
as to 100% of their Company Common Stock (an aggregate of 897,000 Rollover
Shares) provided that their Rollover Shares will not be subject to pro rata
reduction. Unless Rollover Elections exceed the maximum number of Rollover
Shares, following the Merger, Messrs. Cain, Waggoner and Roten would
collectively own approximately 12.9% of the outstanding shares of Holdings
Common Stock and Messrs. Hevredjs and Oehmig would collectively own a minimum
of approximately 8.2% of such outstanding shares.
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DESCRIPTION OF THE NOTES
The Notes are to be issued pursuant to the Indenture (the "Notes Indenture")
between Chemicals and Fleet National Bank, as trustee (the "Trustee").
Following is a summary of material provisions of the Notes Indenture. This
summary does not purport to be complete and is subject to and is qualified in
its entirety by reference to all provisions of the Notes and the Notes
Indenture (including provisions made part of the Notes Indenture by reference
to the Trust Indenture Act of 1939, as amended), including the definitions
therein of terms not defined herein. Certain terms used herein are defined
below under "Certain Definitions". A copy of the Notes Indenture is filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
GENERAL
The Notes will be senior subordinated unsecured obligations of Chemicals,
will be limited to $275,000,000 aggregate principal amount and will mature on
August 15, 2006. The Notes will bear interest at the rate per annum shown on
the front cover of this Prospectus from August 21, 1996 or from the most
recent date to which interest has been paid as provided for, payable semi-
annually on February 15 and August 15 of each year, commencing February 15,
1997 to each Person in whose name a Note is registered at the close of
business on the preceding February 1 or August 1, as the case may be.
Principal of and premium, if any, and interest on the Notes will be payable,
and the transfer of Notes will be registrable, at the office or the agency
maintained by Chemicals in the City of New York. In addition, payment of
interest may, at the option of Chemicals, be made by check mailed to the
address of the person entitled thereto as it appears in the Note Register.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any multiple thereof. No service charge will be
made for any registration of transfer or exchange of Notes, but Chemicals may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes will not be
redeemable at the option of Chemicals prior to August 15, 2001. Thereafter,
the Notes will be redeemable, at Chemicals' option, in whole or in part from
time to time, upon not less than 30 or nor more than 60 days' notice mailed to
each Holder of Notes to be redeemed at the Holder's address appearing in the
Note Register, at the following redemption prices (expressed as percentages of
principal amount), plus accrued interest to the redemption date (subject to
the right of Holders of record on the relevant record date to receive interest
due on the relevant interest payment date), if redeemed during the 12-month
period beginning August 15 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2001............................................................ 105.875%
2002............................................................ 103.917%
2003............................................................ 101.958%
2004............................................................ 100.000%
</TABLE>
In addition, at any time and from time to time prior to August 15, 1999,
Chemicals may redeem in the aggregate up to 35% of the original principal
amount of the Notes with the proceeds of one or more Public Equity Offerings
following which there is a Public Market, at a redemption price (expressed as
a percentage of principal amount) of 111.75% plus accrued interest to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
provided, however, that at least $178,750,000 aggregate principal amount of
the Notes must remain outstanding after each such redemption.
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In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee on a pro rata basis unless otherwise required by
law or regulation, although no Note of $1,000 in original principal amount or
less shall be redeemed in part. If any Note is to be redeemed in part only,
the notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note.
RANKING
The indebtedness evidenced by the Notes will constitute senior subordinated
unsecured obligations of Chemicals. The payment of the principal of and
premium, if any, and interest on the Notes will be subordinate in right of
payment, as set forth in the Notes Indenture, to the prior payment in full in
cash or cash equivalents of all existing and future Senior Debt of Chemicals,
including Chemicals' obligations under the Credit Agreement, and will rank
pari passu in right of payment with all existing and future senior
subordinated indebtedness of Chemicals. The Notes will be senior in all
respects to any subordinated indebtedness of Chemicals. At June 30, 1996,
after giving effect to the Transaction, the aggregate principal amount of
outstanding Senior Debt of Chemicals would have been approximately $361.9
million and Chemicals would have had no subordinated indebtedness. Although
the Notes Indenture contains limitations on the amount of additional Debt that
Chemicals may incur, under certain circumstances the amount of such Debt could
be substantial and, in any case, such Debt may be Senior Debt. Chemicals has
agreed in the Notes Indenture that it will not incur, directly or indirectly,
any Debt that is subordinate or junior in ranking in right of payment to its
Senior Debt unless such Debt is Senior Subordinated Debt or is expressly
subordinated in right of payment to Senior Subordinated Debt. See "--Certain
Covenants--Limitation on Debt".
A portion of the operations of Chemicals is conducted through its
subsidiaries. Claims of creditors of such subsidiaries, including trade
creditors, secured creditors and creditors holding debt and guarantees issued
by such subsidiaries, and claims of preferred stockholders (if any) of such
subsidiaries generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of Chemicals,
including holders of the Notes, even though such obligations will not
constitute Senior Debt. The Notes, therefore, will be effectively subordinated
to creditors (including trade creditors) and preferred stockholders (if any)
of subsidiaries of Chemicals. At June 30, 1996, after giving effect to the
Transaction, the aggregate liabilities (consisting of Debt and trade payables)
of Chemicals' subsidiaries would have been approximately $697.5 million.
Although the Notes Indenture limits the incurrence of Debt and preferred stock
of certain of Chemicals' subsidiaries, such limitation is subject to a number
of significant qualifications. Moreover, the Notes Indenture does not impose
any limitation on the incurrence by such subsidiaries of liabilities that are
not considered Debt under the Notes Indenture. See "--Certain Covenants--
Limitation on Debt" and "--Limitation on Restrictions on Distributions from
Subsidiaries; Limitation on Preferred Stock of Subsidiaries."
Chemicals may not pay principal of, premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not repurchase, redeem or otherwise retire any
Notes (collectively, "pay the Notes") if (i) any Designated Senior Debt is not
paid or prepaid when due or (ii) any other default on Designated Senior Debt
occurs and the maturity of such Designated Senior Debt is accelerated in
accordance with its terms unless, in either case, the default has been cured
or waived and any such acceleration has been rescinded or such Designated
Senior Debt has been paid in full. However, Chemicals may pay the Notes
without regard to the foregoing if Chemicals and the Trustee receive written
notice approving such payment from the Representative of the Designated Senior
Debt with respect to which either of the events set forth in clause (i) or
(ii) of the immediately preceding sentence has occurred and is continuing.
During the continuance of any default (other than a default described in
clause (i) or (ii) of the second preceding sentence) with respect to any
Designated Senior Debt pursuant to which the maturity thereof may be
accelerated immediately without further notice (except such notice as may be
required to effect such acceleration) or the expiration of any applicable
grace periods, Chemicals may not pay the Notes for a period (a "Payment
Blockage Period") commencing upon the receipt by the Trustee (with a copy to
Chemicals) of written notice (a "Blockage Notice") of such default from the
Representative of the holders of such Designated Senior Debt specifying an
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election to effect a Payment Blockage Period and ending 179 days thereafter
(or earlier if such Payment Blockage Period is terminated (i) by written
notice to the Trustee and Chemicals from the Person or Persons who gave such
Blockage Notice, (ii) because the default giving rise to such Blockage Notice
is no longer continuing or (ii) because such Designated Senior Debt has been
repaid in full). Notwithstanding the provisions described in the immediately
preceding sentence, unless the holders of such Designated Senior Debt or the
Representative of such holders have accelerated the maturity of such
Designated Senior Debt, Chemicals may resume payments on the Notes after the
end of such Payment Blockage Period. The Notes shall not be subject to more
than one Payment Blockage Period in any consecutive 360-day period,
irrespective of the number of defaults with respect to Designated Senior Debt
during such period.
Upon any payment or distribution of the assets of Chemicals upon a total or
partial liquidation or dissolution or reorganization of or similar proceeding
relating to Chemicals or its property, the holders of Senior Debt will be
entitled to receive payment in full of such Senior Debt before the Holders are
entitled to receive any payment, and until the Senior Debt is paid in full,
any payment or distribution to which Holders would be entitled but for the
subordination provisions of the Notes Indenture will be made to holders of
such Senior Debt as their interests may appear. If a distribution is made to
Holders that, due to the subordination provisions, should not have been made
to them, such Holders are required to hold it in trust for the holders of
Senior Debt and pay it over to them as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default,
Chemicals or the Trustee shall promptly notify the holders of Designated
Senior Debt or the Representative of such holders of the acceleration.
By reason of the subordination provisions contained in the Notes Indenture,
in the event of insolvency, creditors of Chemicals who are holders of Senior
Debt may recover more, ratably, than the Holders, and creditors of Chemicals
who are not holders of Senior Debt may recover less, ratably, than holders of
Senior Debt and may recover more, ratably, than the Holders.
Except as limited above, the terms of the subordination provisions described
above will not apply to payments from money or the proceeds of U.S. Government
Obligations held in trust by the Trustee for the payment of principal of and
interest on the Notes pursuant to the provisions described under "--
Defeasance".
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder shall have the right
to require Chemicals to repurchase such Holder's Notes at a purchase price in
cash equal to 101% of the principal amount thereof plus accrued and unpaid
interest (if any) to the date of repurchase (subject to the right of holders
of record on the relevant record date to receive interest due on the relevant
interest payment date).
The occurrence of any of the following events will constitute a "Change of
Control" under the Notes Indenture:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more of the Permitted Holders, is or
becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act except that a Person shall be deemed to have "beneficial
ownership" of all shares that any such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 35% of the total voting power
of the Voting Stock of Holdings; provided that the Permitted Holders
"beneficially own," as defined above, directly or indirectly, in the
aggregate a lesser percentage of the total voting power of the Voting Stock
of Holdings than such other Person and do not have the right or ability by
voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors of Holdings (for the purposes of this
clause (i), (A) such other Person shall be deemed to beneficially own any
Voting Stock of a corporation (the "specified corporation") held by any
other corporation (the "parent corporation"), if such other Person
"beneficially owns" (as defined above), directly or indirectly, more than
35% of the voting power of the Voting Stock of such parent corporation and
the Permitted Holders "beneficially own" (as defined above),
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directly or indirectly, in the aggregate a lesser percentage of the voting
power of the Voting Stock of such parent corporation and do not have the
right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the Board of Directors of such parent
corporation and (B) the Permitted Holders shall be deemed to beneficially
own any Voting Stock of a specified corporation held by any parent
corporation so long as the Permitted Holders beneficially own (as so
defined), directly or indirectly, in the aggregate a majority of the voting
power of the Voting Stock of the parent corporation);
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of Holdings or
Chemicals (together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of Holdings
or Chemicals, as the case may be, was approved by a majority of the
directors of Holdings or Chemicals, as the case may be, then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of Holdings
or Chemicals, as the case may be, then in office;
(iii) the merger or consolidation of Holdings or Chemicals with or into
another Person or the merger of another Person (other than a Permitted
Holder) with or into Holdings or Chemicals, or the sale or transfer in one
or a series of transactions of all or substantially all the assets of
Holdings or Chemicals to another Person (other than a Permitted Holder)
and, in the case only of any such merger or consolidation, the securities
of Holdings or Chemicals that are outstanding immediately prior to such
transaction and which represent 100% of the aggregate voting power of the
Voting Stock of Holdings or Chemicals are changed into or exchanged for
cash, securities or property, unless pursuant to such transaction such
securities are changed into or exchanged for, in addition to any other
consideration, securities of the surviving corporation that represent
immediately after such transaction, at least a majority of the aggregate
voting power of the Voting Stock of the surviving corporation; or
(iv) for so long as a holding company ownership structure is maintained
over Chemicals, Holdings shall hold less than a majority of the Capital
Stock of Chemicals (other than Preferred Stock of Chemicals issued in
accordance with the terms of the Notes Indenture) or less than a majority
of the Voting Stock of Chemicals.
Within 30 days following any Change of Control, Chemicals will mail a notice
to each Holder with a copy to the Trustee stating (i) that a Change of Control
has occurred and that such Holder has the right to require Chemicals to
purchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest (if any) to the date
of purchase (subject to the right of Holders of record on the relevant record
date to receive interest due on the relevant interest payment date); (ii) the
material circumstances and facts regarding such Change of Control (including,
but not limited to, information with respect to pro forma historical income,
cash flow and capitalization after giving effect to such Change of Control);
(iii) the repurchase date (which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed); and (iv) the instructions,
determined by Chemicals consistent with the Notes Indenture, that a Holder
must follow in order to have its Notes repurchased.
Chemicals shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant described
hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
Chemicals shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof. Neither the Board of Directors nor the
Trustee may waive compliance by the Company with its obligation to repurchase
Notes upon a Change of Control.
The Change of Control purchase feature is a result of negotiations between
Chemicals and the Underwriters. Management has no present intention to engage
in a transaction involving a Change of Control, although it is possible that
Chemicals or Holdings would decide to do so in the future. The provisions of
the Notes Indenture relating to a Change of Control may not afford Holders
protection in the event of a highly leveraged transaction,
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reorganization, restructuring, merger or similar transaction (including, in
certain circumstances, a transaction involving Chemicals' management or its
affiliates) that may adversely affect Holders, if such transaction does not
constitute a Change of Control, as defined above. Any such transaction will
result in a Change of Control only if it is the type of transaction specified
by such definition. For example, a merger or consolidation with, or sale of
assets to, a Permitted Holder (defined to include, among others, the
purchasers in the Equity Private Placement and the employees and stockholders
of TSG and Unicorn) would not meet the definition of Change of Control and,
therefore, Holders of Notes would not be entitled to require Chemicals to
purchase their Notes.
The Credit Agreement generally will prohibit Chemicals from purchasing any
Notes, and will also provide that the occurrence of certain change of control
events with respect to Chemicals would constitute a default thereunder. In the
event a Change of Control occurs at a time when Chemicals is prohibited from
purchasing Notes, Chemicals could seek the consent of its lenders to the
purchase of Notes or could attempt to refinancing the borrowings that contain
such prohibition. If Chemicals does not obtain such a consent or repay such
borrowings, Chemicals will remain prohibited from purchasing Notes. In such
case, Chemicals' failure to purchase tendered Notes would constitute an Event
of Default under the Notes Indenture which would, in turn, constitute a
default under the Credit Agreement. In such circumstances, the subordination
provisions in the Notes Indenture would likely restrict payment to the Holders
of Notes.
Upon consummation of the Transaction, Chemicals will not have any Debt that
is pari passu with the Notes that contain any change of control provisions.
Future indebtedness of Chemicals may contain prohibitions on the occurrence of
certain events that would constitute a Change of Control or require such
indebtedness to be repurchased upon a Change of Control. Moreover, the
exercise by the holders of their rights to require Chemicals to repurchase the
Notes could cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on
Chemicals. Finally, Chemicals' ability to pay cash to the holders of Notes
following the occurrence of a Change of Control may be limited by Chemicals'
then existing financial resources. There can be no assurance that sufficient
funds will be available when necessary to make any required repurchases. The
provisions under the Notes Indenture relating to the Company's obligation to
make an offer to repurchase the Notes as a result of a Change of Control may
be waived or modified with the prior written consent of the Holders of a
majority in principal amount of the Notes.
The Change of Control purchase feature of the Notes may in certain
circumstances make more difficult or discourage a takeover of Chemicals, and,
thus, removal of incumbent management.
CERTAIN COVENANTS
The Notes Indenture will contain certain covenants, including among others
the ones summarized below:
Limitation on Debt. (a) Chemicals shall not Incur, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur any Debt unless the
Consolidated EBITDA Coverage Ratio at the date of such Incurrence exceeds 1.75
to 1.0 if such Debt is Incurred on or prior to August 15, 1998 or 2.0 to 1.0
if such Debt is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), Chemicals and its
Restricted Subsidiaries may Incur the following Debt: (1) Debt Incurred
pursuant to the Revolving Credit Provisions of the Credit Agreement or any
other revolving credit facility which, when taken together with all letters of
credit and the principal amount of all other Debt Incurred under this clause
(1), does not exceed the greater of $100 million and the sum of (i) 65% of the
gross book value of the inventory of Chemicals and its Restricted
Subsidiaries, and (ii) 85% of the gross book value of the accounts receivable
of Chemicals and its Restricted Subsidiaries; (2) Debt Incurred pursuant to
the Term Loan Provisions of the Credit Agreement or any indenture or term loan
provisions of any other credit or loan agreement which, when taken together
with the principal amount of all other Debt Incurred pursuant to this clause
(2), does not exceed $350 million outstanding at any one time less the
aggregate amount of all principal repayments of any such Debt actually made
after the Issue Date (other than any such principal repayments made as a
result of the Refinancing of any such Debt); (3) Debt Incurred pursuant to the
ESOP Loan
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Provisions of the Credit Agreement in an aggregate principal amount not to
exceed $6.5 million outstanding at any one time less the aggregate amount of
all principal repayments of any such Debt actually made after the Issue Date
(other than any such principal repayments made as a result of the Refinancing
of any such Debt); (4) Debt of Chemicals owed to and held by a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or transfer of any
Capital Stock that results in such Wholly Owned Subsidiary ceasing to be a
Wholly Owned Subsidiary or any transfer of such Debt (other than to a Wholly
Owned Subsidiary) shall be deemed, in each case, to constitute the issuance of
such Debt by Chemicals; (5) Debt of a Restricted Subsidiary incurred and
outstanding on or prior to the date on which such Restricted Subsidiary became
a Restricted Subsidiary or was acquired by Chemicals (other than Debt issued
in connection with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by Chemicals); (6) the Notes; (7) Debt outstanding
on the Issue Date (other than Debt described in clause (1), (2), (3), (4), (5)
or (6); (8) Refinancing Debt in respect of Debt Incurred pursuant to paragraph
(a) or pursuant to clause (6) or (7) or this clause (8); (9) Hedging
Obligations; provided that with respect to Interest Rate Agreements and
Currency Agreements (if such Currency Agreements relate to Debt), only to the
extent directly related to Debt permitted to be incurred by Chemicals pursuant
to the Notes Indenture; and (10) Debt in an aggregate principal amount which,
together with all other Debt of Chemicals and the Restricted Subsidiaries then
outstanding (other than Debt permitted by clauses (1) through (9) of this
paragraph (b) or paragraph (a) above) does not exceed $25 million.
(c) Notwithstanding paragraphs (a) and (b) above, Chemicals shall not Incur
any Debt if the proceeds thereof are used, directly or indirectly, to repay,
prepay, redeem, defease, retire, refund or refinance any Subordinated
Obligations unless such Debt shall be subordinated to the Notes to at least
the same extent as such Subordinated Obligations.
(d) Notwithstanding paragraphs (a) and (b) above, (i) Chemicals shall not
Incur any Debt if such Debt is subordinated or junior in ranking to any Senior
Debt, unless such Debt is Senior Subordinated Debt or is expressly
subordinated in right of payment to Senior Subordinated Debt and (ii)
Chemicals shall not issue any Secured Debt which is not Senior Debt unless
contemporaneously therewith effective provision is made to secure the Notes
equally and ratably with such Secured Debt for so long as such Secured Debt is
secured by a Lien.
(e) For purposes of determining compliance with paragraph (b) of this
covenant, (i) in the event that an item of Debt meets the criteria of more
than one of the types of Debt described in paragraph (b), Chemicals, in its
sole discretion, will classify such item of Debt and only be required to
include the amount and type of such Debt in one of the clauses of paragraph
(b) and (ii) an item of Debt may be divided and classified in more than one of
the types of Debt in paragraph (b).
Limitation on Restricted Payments. (a) Chemicals shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to (i) declare or
pay any dividend or make any distribution on or in respect of its Capital
Stock (including any payment in connection with any merger or consolidation
involving Chemicals) or similar payment to the direct or indirect holders of
its Capital Stock (except dividends or distributions payable solely in its
Non-Convertible Capital Stock or in options, warrants or other rights to
purchase its Non-Convertible Capital Stock and except dividends or
distributions payable to Chemicals or a Restricted Subsidiary), and other than
pro rata dividends or other distributions made by a Restricted Subsidiary of
Chemicals that is not a Wholly Owned Subsidiary to minority shareholders (or
owners of an equivalent interest in the case of a Restricted Subsidiary that
is an entity other than a corporation), (ii) purchase, redeem or otherwise
acquire or retire for value any Capital Stock of Chemicals, any direct or
indirect parent of Chemicals or a Restricted Subsidiary (other than such
Capital Stock owned by Chemicals or any Wholly Owned Subsidiary), (iii)
purchase, repurchase, redeem, defease or otherwise acquire or retire for
value, prior to scheduled maturity, scheduled repayment or scheduled sinking
fund payment, any Subordinated Obligations (other than purchase, repurchase or
other acquisition of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition), or (iv) make any
Investment in any Person (other than a Permitted Investment) (any such
dividend, distribution, purchase, redemption,
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repurchase, defeasance, other acquisition, retirement, or Investment being
herein referred to as a "Restricted Payment"), if at the time Chemicals or
such Restricted Subsidiary makes such Restricted Payment: (1) a Default shall
have occurred and be continuing (or would result therefrom); (2) Chemicals,
after giving pro forma effect to such Restricted Payment, would not be
permitted to Incur an additional $1.00 of Debt pursuant to clause (a) under
"Limitation on Debt"; or (3) the aggregate amount of such Restricted Payment
and all other Restricted Payments since the Issue Date would exceed the sum
of: (A) 50% of the Consolidated Net Income accrued during the period (treated
as one accounting period) from the beginning of the fiscal quarter during
which the Notes were originally issued to the end of the most recent fiscal
quarter ending at least 45 days prior to the date of such Restricted Payment
(or, in case such Consolidated Net Income shall be a deficit, minus 100% of
such deficit); provided, however, that if the Notes achieve an Investment
Grade Rating during any fiscal quarter, the percentage for such fiscal quarter
(and for any other fiscal quarter where, on the first day of such fiscal
quarter, the Notes shall have an Investment Grade Rating) will be 100% of
Consolidated Net Income during such fiscal quarter; provided, further,
however, that if such Restricted Payment is to be made in reliance upon an
additional amount permitted pursuant to the immediately preceding proviso, the
Notes must have an Investment Grade Rating at the time such Restricted Payment
is declared or, if not declared, made; (B) the aggregate Net Cash Proceeds
received by Chemicals from the issue or sale of its Capital Stock (other than
Redeemable Stock or Exchangeable Stock) subsequent to the Issue Date (other
than an issuance or sale to a Subsidiary or an employee stock ownership plan
or similar trust); (C) the aggregate Net Cash Proceeds received by Chemicals
from the issue or sale of its Capital Stock (other than Redeemable Stock or
Exchangeable Stock) to an employee stock ownership plan subsequent to the
Issue Date; provided, however, that if such employee stock ownership plan
issues any Debt, such aggregate amount shall be limited to an amount equal to
any increase in the Consolidated Net Worth of Chemicals resulting from
principal repayments made by such employee stock ownership plan with respect
to Debt issued by it to finance the purchase of such Capital Stock; (D) the
amount by which Debt of Chemicals is reduced on Chemicals' balance sheet upon
the conversion or exchange (other than by a Subsidiary) subsequent to the
Issue Date, of any Debt of Chemicals convertible or exchangeable for Capital
Stock (other than Redeemable Stock or Exchangeable Stock) of Chemicals (less
the amount of any cash, or other property, distributed by Chemicals upon such
conversion or exchange); (E) an amount equal to the sum of (i) the net
reduction in Investments in Unrestricted Subsidiaries resulting from
dividends, repayments of loans or advances or other transfers of assets, in
each case to Chemicals or any Restricted Subsidiary from Unrestricted
Subsidiaries, and (ii) the portion (proportionate to Chemicals' equity
interest in such Subsidiary) of the fair market value of the net assets of an
Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated
a Restricted Subsidiary; provided, however, that the foregoing sum shall not
exceed, in the case of any Unrestricted Subsidiary, the amount of Investments
previously made (and treated as a Restricted Payment) by Chemicals or any
Restricted Subsidiary in such Unrestricted Subsidiary; (F) to the extent not
covered in clauses (A) through (E) above, the aggregate net cash proceeds
received after the date of the Notes Indenture by Chemicals as capital
contributions (other than from any of its Restricted Subsidiaries; and (G) $5
million; provided, however, that, to the extent used, such $5 million shall
reduce the amount available for Investments pursuant to clause (xii) of the
definition of "Permitted Investments" set forth under "--Certain Definitions;"
and provided, further, however, that the amounts available under this clause
(G) and under clause (xii) of the definition of "Permitted Investments" shall
in no event exceed $10 million in the aggregate.
(b) The provisions of the foregoing paragraph (a) shall not prohibit: (i)
any purchase or redemption of Capital Stock or Subordinated Obligations of
Chemicals made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of Chemicals (other than Redeemable Stock or
Exchangeable Stock of Chemicals and other than Capital Stock of Chemicals
issued or sold to a Subsidiary or an employee stock ownership plan); provided,
however, that (A) such purchase or redemption shall be excluded in the
calculation of the amount of Restricted Payments and (B) the Net Cash Proceeds
from such sale shall be excluded from clauses (3)(B) and (3)(C) of paragraph
(a); (ii) any purchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Obligations of Chemicals made by exchange
for, or out of the proceeds of the substantially concurrent sale of, Debt of
Chemicals which is permitted to be Incurred pursuant to the covenant described
under "Limitation on Debt" above; provided, however, that such purchase,
redemption,
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defeasance or other acquisition or retirement for value shall be excluded in
the calculation of the amount of Restricted Payments; (iii) any purchase or
redemption of Subordinated Obligations from Net Available Cash to the extent
permitted under "Limitation on Sales of Assets and Subsidiary Stock" below;
provided, however, that such purchase or redemption shall be excluded in the
calculation of the amount of Restricted Payments; (iv) dividends paid within
60 days after the date of declaration thereof if at such date of declaration
such dividend would have complied with this provision; provided, however, that
at the time of declaration of such dividend, no other Default shall have
occurred and be continuing (or would result therefrom); and provided, further,
however, that such dividend shall be included in the calculation of the amount
of Restricted Payments; (v) the declaration or payment of any dividend on
shares of Chemicals' Common Stock so long as (x) Chemicals would be permitted
immediately after giving pro forma effect to such declaration or payment to
Incur an additional $1.00 of Debt pursuant to clause (a) under "Limitation on
Debt", (y) such declaration or payment is made immediately prior to a date on
which cash interest is required to be paid on the Discount Notes and (z) the
full amount of such payment is applied by Holdings on such date as payment of
such cash interest on the Discount Notes; provided that such dividend shall be
included in the calculation of the amount of Restricted Payments; (vi)
payments to the ESOP on behalf of the employees of Holdings or its
Subsidiaries; provided that all such payments by Chemicals and its
Subsidiaries may not exceed, during any fiscal year, 10% of the aggregate
compensation expense during such fiscal year attributable to employees of
Holdings and its Subsidiaries who are eligible to participate in the ESOP;
(vii) a payment to Holdings to pay its operating and administrative expenses
including, without limitation, directors fees, legal and audit expenses, SEC
compliance expenses, and corporate franchise and other taxes, in an amount not
to exceed the greater of $2.0 million per fiscal year and 0.2% of revenues of
Chemicals for the preceding fiscal year; provided, however, that such amount
shall be excluded in the calculation of the amount of Restricted Payments;
(viii) a payment by Chemicals to Holdings or to the ESOP or directly by
Chemicals to be used to repurchase common stock of Holdings distributed to
participants and beneficiaries of the ESOP as required by and in accordance
with the ESOP as in effect on the Issue Date and Section 409(h)(1)(B) of the
Code and the regulations thereunder; provided, however, that such amount shall
be excluded in the calculation of the amount of Restricted Payments; (ix) a
payment by Chemicals to Holdings or the ESOP, or directly by Chemicals, to be
used to repurchase, redeem, acquire or retire for value any Capital Stock of
Holdings pursuant to any stockholder's agreement, management equity
subscription plan or agreement, stock option plan or agreement, or employee
benefit plan in effect as of the Issue Date or such employee plan or agreement
or employee benefit plan as may be adopted by Chemicals or Holdings from time
to time; provided, however, that the aggregate price paid for all Capital
Stock repurchased, redeemed, acquired or retired by Chemicals or on behalf of
Holdings or Chemicals shall not exceed $5 million in any fiscal year;
provided, further, however, that such amount, to the extent related to the
ESOP, shall be excluded in the calculation of Restricted Payments; (x) a
payment to Holdings pursuant to the tax sharing agreement as the same may be
amended from time to time in a manner not materially adverse to Chemicals;
provided, however, that such amount shall be excluded in the calculation of
the amount of Restricted Payments; (xi) any payment to Holdings to permit
Holdings to make payments for advisory services owed pursuant to the
engagement letter dated as of April 23, 1996 by and between STX Acquisition
and TSG; provided, however, that such amount shall be excluded in the
calculation of the amount of Restricted Payments; (xii) a payment to Holdings
to permit Holdings to comply with the terms of the Discount Notes Indenture
relating to the application of proceeds from an Asset Disposition (relating to
the sale or disposition of property by Chemicals) as defined in such Discount
Notes Indenture; provided, however, that such amount shall be excluded in the
calculation of the amount of Restricted Payments; and (xiii) the Permitted
Dividend; provided that such Permitted Dividend shall be excluded in the
calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
Chemicals shall not, and shall not permit any Restricted Subsidiary to, create
or permit to exist or become effective any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary to (i) pay dividends
or make any other distributions on its Capital Stock or pay any Debt or other
obligation owed to Chemicals, (ii) make any loans or advances to Chemicals or
(iii) transfer any of its property or assets to Chemicals, except: (a) any
encumbrance or restriction pursuant to an agreement in effect on the Issue
Date or pursuant to the issuance of the Notes; (b) any encumbrance or
restriction with respect to a Restricted Subsidiary pursuant to an agreement
relating to any Debt
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Incurred by such Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by Chemicals (other than Debt Incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by Chemicals) and outstanding on such date; (c) any
encumbrance or restriction pursuant to an agreement effecting a Refinancing of
Debt Incurred pursuant to an agreement referred to in clause (a) or (b) or
contained in any amendment to an agreement referred to in clause (a) or (b);
provided, however, that the encumbrances and restrictions contained in any of
such refinancing agreement or amendment are no less favorable to the Holders
than encumbrances and restrictions with respect to such Restricted Subsidiary
contained in such agreements; (d) any such encumbrance or restriction
consisting of customary nonassignment provisions in leases governing leasehold
interests to the extent such provisions restrict the transfer of the lease or
other customary non-assignment provisions in contracts (other than contracts
that constitute Debt) entered into the ordinary course of business to the
extent such provisions restrict the transfer of the assets subject to such
contracts; and (e) in the case of clause (iii) above, restrictions contained
in security agreements or mortgages securing Debt of a Restricted Subsidiary
to the extent such restrictions restrict the transfer of the property subject
to such security agreements or mortgages; (f) encumbrances or restrictions
imposed by operation of applicable law; and (g) any restriction with respect
to a Restricted Subsidiary imposed pursuant to an agreement entered into for
the sale or disposition of all or substantially all the Capital Stock or
assets of such Restricted Subsidiary pending the closing of such sale or
disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) Chemicals shall not,
and shall not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless (i) Chemicals or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at
least equal to the fair market value, as determined in good faith by the Board
of Directors (including as to the value of all non-cash consideration), of the
shares and assets subject to such Asset Disposition and at least 85% of the
consideration thereof received by Chemicals or such Restricted Subsidiary is
in the form of cash or cash equivalents, and (ii) an amount equal to 100% of
the Net Available Cash from such Asset Disposition is applied by Chemicals (or
such Restricted Subsidiary, as the case may be) (A) first, to the extent
Chemicals elects (or is required by the terms of any Senior Debt), to prepay,
repay or purchase Senior Debt or Debt (other than any Redeemable Stock) of a
Wholly Owned Subsidiary (in each case other than Debt owed to Chemicals or an
Affiliate of Chemicals or Holdings) within 180 days from the later of the date
of such Asset Disposition or the receipt of such Net Available Cash; (B)
second, to the extent of the balance of such Net Available Cash after
application in accordance with clause (A), at Chemicals' election to the
investment by Chemicals, any Wholly Owned Subsidiary or the Restricted
Subsidiary making such Asset Disposition in assets to replace the assets that
were the subject of such Asset Disposition or an asset that (as determined by
the Board of Directors) will be used in the business of Chemicals, the Wholly
Owned Subsidiaries or the Restricted Subsidiary making such Asset Disposition
existing on the date of original issuance of the Notes or in businesses
reasonably related thereto, in each case within the later of one year from the
date of such Asset Disposition or the receipt of such Net Available Cash; (C)
third, to the extent of the balance of such Net Available Cash after
application and in accordance with clauses (A) and (B), to make an offer to
purchase Notes (and any other Senior Subordinated Debt of Chemicals designated
by Chemicals) pursuant to and subject to the conditions contained in the Notes
Indenture; and (D) fourth, to the extent of the balance of such Net Available
Cash after application in accordance with clauses (A), (B) and (C), to (x) the
acquisition by Chemicals, any Wholly Owned Subsidiary or the Restricted
Subsidiary making such Asset Disposition of Tangible Property or (y) the
prepayment, repayment or purchase of Debt (other than any Redeemable Stock) of
Chemicals or Debt of any Restricted Subsidiary (in either case other than Debt
owed to Chemicals or an Affiliate of Chemicals), in each case within one year
from the later of the receipt of such Net Available Cash and the date the
offer described in clause (b) below is consummated; provided, however, that in
connection with any prepayment, repayment or purchase of Debt pursuant to
clause (A), (C) or (D) above, Chemicals shall cause the related loan
commitment (if any) to be permanently reduced in an amount equal to the
principal amount so prepaid, repaid or purchased. Notwithstanding the
foregoing provisions of this paragraph, Chemicals and its Restricted
Subsidiaries shall not be required to apply any Net Available Cash in
accordance with this paragraph except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which are not applied in accordance
with this paragraph exceeds $20 million. Pending application of Net Available
Cash pursuant to this paragraph, such Net Available Cash shall be invested in
Temporary Cash Investments.
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For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the express assumption of Debt of Chemicals or any
Restricted Subsidiary and the release of Chemicals or such Restricted
Subsidiary from all liability on such Debt in connection with such Asset
Disposition and (y) securities received by Chemicals or any Restricted
Subsidiary from the transferee that are converted by Chemicals or such
Restricted Subsidiary into cash within 90 days of the receipt of such
securities. The 85% limitation referred to in the previous paragraph shall not
apply to any Asset Disposition in which the cash portion of the consideration
received therefor, determined in accordance with the previous sentence, is
equal to or greater than what the after-tax proceeds would have been had such
Asset Disposition complied with such 85% limitation.
(b) In the event of an Asset Disposition that requires the purchase of the
Notes (and other Senior Subordinated Debt) pursuant to clause (a)(ii)(C)
above, Chemicals will be required to purchase Notes tendered pursuant to an
offer by Chemicals for the Notes (and other Senior Subordinated Debt) at a
purchase price of 100% of their principal amount (without premium) plus
accrued but unpaid interest (or, in respect of such other Senior Subordinated
Debt, such lesser price, if any, as may be provided for by the terms of such
Senior Subordinated Debt) in accordance with the procedures (including
prorating in the event of oversubscription) set forth in the Notes Indenture.
If the aggregate purchase price of Notes (and any other Senior Subordinated
Debt) tendered pursuant to such offer is less than the Net Available Cash
allotted to the purchase thereof, Chemicals will be required to apply the
remaining Net Available Cash in accordance with clause (a)(ii)(D) above.
Chemicals shall not be required to make such an offer to purchase Notes (and
other Senior Subordinated Debt) pursuant to this covenant if the Net Available
Cash available therefor is less than $10 million (which lesser amount shall be
carried forward for purposes of determining whether such an offer is required
with respect to any subsequent Asset Disposition).
To the extent that any or all of the Net Available Cash of any Foreign Asset
Sale is prohibited or delayed by applicable local law from being repatriated
to the United States, the portion of such Net Available Cash so affected shall
not be required to be applied at the time provided above, but may be retained
by the applicable Restricted Subsidiary (and invested in accordance with the
last sentence of the first paragraph of section (a) of this covenant) so long,
but only so long, as the applicable local law will not permit repatriation to
the United States. Chemicals shall agree to cause the applicable Restricted
Subsidiary to promptly take all actions required by the applicable local law
to permit such repatriation. Once such repatriation of any of such affected
Net Available Cash is permitted under the applicable local law, such
repatriation shall be immediately effected and such repatriated Net Available
Cash will be applied in the manner as described in this covenant.
(c) Chemicals shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, Chemicals shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
Limitation on Transactions with Affiliates. Chemicals shall not, and shall
not permit any Restricted Subsidiary to, conduct any business or enter into
any transaction or series of related transactions (including the purchase,
sale, lease or exchange of any property or the rendering of any service) with
any Affiliate of Holdings or Chemicals (an "Affiliate Transaction") unless (i)
the terms of such Affiliate Transaction are (A) set forth in writing and (B)
as favorable to Chemicals or such Restricted Subsidiary as terms that would be
obtainable at the time for a comparable transaction or series of related
transactions in arm's length dealings with an unrelated third Person, (ii) if
such Affiliate Transaction involves an amount in excess of $2.5 million, the
disinterested members of the Board of Directors have, by resolution,
determined in good faith that such Affiliate Transaction meets the criteria
set forth in (i)(B) above, and (iii) if such Affiliate Transaction involves an
amount in excess of $7.5 million, such Affiliate Transaction is determined by
an Independent Financial Advisor to be fair from a financial standpoint to
Chemicals or its Restricted Subsidiary, as the case may be. The foregoing
requirements shall not be applicable to (x) contracts with Koch Equities Inc.
or its affiliates in the ordinary course of business on terms as favorable to
Chemicals or the relevant Restricted Subsidiary as would be obtainable at the
time for a comparable transaction in arm's length dealings with an unrelated
third Person or (y) any purchase or supply contracts in the ordinary course of
business on terms as favorable to Chemicals or the relevant Restricted
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Subsidiary as would be obtainable at the time for a comparable transaction in
arm's length dealings with an unrelated third Person; provided that the Board
of Directors shall, not later than the 60th day after the end of each six-
month period following the Issue Date, have reviewed such contracts and
determined that such contracts meet the criteria set forth in this clause (y).
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
Restricted Payment or Permitted Investment permitted to be paid pursuant to
the covenant described under "Limitation on Restricted Payments," (ii) any
issuance of securities, or other payments, awards or grants in cash,
securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the Board of
Directors of Chemicals or the board of directors of the relevant Restricted
Subsidiary, (iii) loans or advances to employees in the ordinary course of
business, but in any event not to exceed $2 million in the aggregate
outstanding at any one time, (iv) the payment of reasonable and customary fees
to directors of Chemicals and its Restricted Subsidiaries who are not
employees of Chemicals or its Restricted Subsidiaries, (v) any transaction
between Chemicals and a Wholly Owned Subsidiary or between Wholly Owned
Subsidiaries, (vi) one-time fees payable to TSG and Unicorn in connection with
the Transaction in an aggregate amount not to exceed $8.1 million and $4.4
million, respectively and (vii) indemnification payments to directors and
officers of Chemicals in accordance with applicable state laws.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. Chemicals shall not sell or otherwise dispose of any shares of
Capital Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of
any shares of its Capital Stock except (i) to Chemicals or a Wholly Owned
Subsidiary, (ii) if, immediately after giving effect to such issuance, sale or
other disposition, such Restricted Subsidiary remains a Restricted Subsidiary
or (iii) if all shares of Capital Stock of such Restricted Subsidiary are sold
or otherwise disposed of; provided, however, that in connection with any sale
pursuant to this clause (iii), Chemicals may retain no more that 10% of the
outstanding Capital Stock of the Restricted Subsidiary being sold as a portion
of the purchase price in connection with such sale. In connection with any
such sale or disposition of Capital Stock, Chemicals or any such Restricted
Subsidiary shall comply with the covenant described under "--Limitation on
Sales of Assets and Subsidiary Stock."
SEC Reports. Notwithstanding that Chemicals may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, Chemicals shall file with the SEC and provide the Trustee and Holders
with such annual reports and such information, documents and other reports as
are specified in Sections 13 and 15(d) of the Exchange Act, including, without
limitation Forms 8-K, 10-Q and 10-K, such information, documents and other
reports to be so filed and provided at the times specified for the filing of
such information, documents and reports under such Sections.
MERGER AND CONSOLIDATION
Chemicals shall not consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, all or
substantially all its assets to, any Person unless: (i) the resulting,
surviving or transferee Person (the "Successor Company") is a Person organized
and existing under the laws of the United States or any State thereof or the
District of Columbia and the Successor Company (if not Chemicals) expressly
assumes by a supplemental indenture, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of Chemicals under the
Notes Indenture and the Notes; (ii) immediately after giving effect to such
transaction (and treating any Debt which becomes an obligation of the
Successor Company or any Subsidiary of the Successor Company as a result of
such transaction as having been Incurred by such Person at the time of such
transaction), no Default shall have occurred and be continuing; (iii)
immediately after giving effect to such transaction the Successor Company
would be able to Incur an additional $1.00 of Debt pursuant to paragraph (a)
under "--Limitation on Debt"; (iv) immediately after giving effect to such
transaction, the Successor Company has Consolidated Net Worth in an amount
which is not less than the Consolidated Net Worth of Chemicals immediately
prior to such transaction minus any costs incurred in connection with the
transaction; (v) Chemicals delivers to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger or
transfer and such supplemental indenture (if any) comply with the Notes
Indenture.
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The Successor Company shall be the successor to Chemicals and shall succeed
to, and be substituted for, and may exercise every right and power of,
Chemicals under the Notes Indenture, but the predecessor Company in the case
of a conveyance, transfer or lease shall not be released from the obligation
to pay the principal of and interest on the Notes.
DEFAULTS
An "Event of Default" is defined in the Notes Indenture as (a) a default in
any payment of interest on any Note when the same becomes due and payable, and
such default continues for a period of 30 days; (b) a default in the payment
of the principal of any Note when the same becomes due and payable at its
Stated Maturity, upon redemption, upon declaration, upon required repurchase
or otherwise; (c) the failure by Chemicals to comply with its obligations
under "--Merger and Consolidation"; (d) the failure by Chemicals to comply for
30 days after notice with any of its obligations in the covenants described
above under "--Change of Control" (other than a failure to purchase Notes), or
under "--Certain Covenants" under "--Limitation on Debt", "-- Limitation on
Restricted Payments", "--Limitation on Restrictions on Distributions from
Restricted Subsidiaries", "--Limitation on Sales of Assets and Subsidiary
Stock" (other than a failure to purchase Notes), "--Limitation on Transactions
with Affiliates", or "--SEC Reports"; (e) the failure by Chemicals to comply
with any of its agreements in the Notes or the Notes Indenture (other than
those referred to in (a), (b), (c) or (d) above) and such failure continues
for 60 days after the notice specified below; (f) a default under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Debt for money borrowed by Chemicals or
any of its Subsidiaries (or the payment of which is Guaranteed by Chemicals or
any of its Subsidiaries) whether such Debt or Guarantee now exists, or is
created after the date of the Notes Indenture, which default (i) is caused by
failure to pay principal of or premium, if any, or interest on such Debt prior
to the expiration of the grace period provided in such Debt on the date of
such default ("Payment Default") or (ii) results in the acceleration of such
Debt prior to its express maturity and, in each case, the principal amount of
any such Debt, together with the principal amount of any other such Debt under
which there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $10 million or more; (g) certain events of bankruptcy
or insolvency of Chemicals or any Significant Subsidiary; or (h) any final
non-appealable judgment or decree not covered by insurance or as to which the
insurance carrier has denied responsibility for the payment of money in excess
of $10 million is rendered against Chemicals or a Significant Subsidiary and
is not discharged and there is a period of 60 days following such judgment
during which such judgment or decree is not discharged, waived or the
execution thereof stayed. A Default under clause (d) or (e) is not an Event of
Default until the Trustee or the Holders of at least 25% in principal amount
of the Notes notify Chemicals of the Default and Chemicals does not cure such
Default within the time specified after receipt of such notice.
If an Event of Default (other than certain events of bankruptcy, insolvency
or reorganization of Chemicals) occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount of the outstanding Notes may
declare the principal of and accrued but unpaid interest on all the Notes to
be due and payable. Upon such a declaration, such principal and interest shall
be due and payable immediately. If an Event of Default relating to certain
events of bankruptcy, insolvency or reorganization of Chemicals or a
Significant Subsidiary occurs and is continuing, the principal of and interest
on all the Notes will ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any holders
of the Notes. Under certain circumstances, the holders of a majority in
principal amount of the outstanding Notes may rescind any such acceleration
with respect to the Notes and its consequences.
Subject to the provisions of the Notes Indenture relating to the duties of
the Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Notes Indenture at the request or direction of any of the holders of the Notes
unless such holders have offered to the Trustee reasonable indemnity or
security against any loss, liability or expense. Except to enforce the right
to receive payment of principal, premium (if any) or interest when due, no
holder of a Note may pursue any remedy with respect to the Notes Indenture or
the Notes unless (i) such holder has previously given the Trustee notice that
an Event of Default is continuing; (ii) holders of at least 25% in principal
amount of the outstanding Notes have requested the Trustee to pursue the
remedy; (iii) such holders have offered the Trustee
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reasonable security or indemnity against any loss, liability or expense; (iv)
the Trustee has not complied with such request within 60 days after the
receipt thereof and the offer of security or indemnity and (v) the holders of
a majority in principal amount of the outstanding Notes have not given the
Trustee a direction inconsistent with such request within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount
of the outstanding Notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
of exercising any trust or power conferred on the Trustee.
The Notes Indenture provides that if a Default occurs and is continuing and
is known to the Trustee, the Trustee must mail to each Holder notice of the
Default within 90 days (or such shorter period as may be required by
applicable law) after it occurs. Except in the case of a Default in the
payment of principal of, premium (if any) or interest on any Note, the Trustee
may withhold notice if and so long as a committee of its trust officers
determines that withholding notice is in the interest of the holders of the
Notes. In addition, Chemicals is required to deliver to the Trustee, within
120 days after the end of each fiscal year, a certificate indicating whether
the signers thereof know of any Default that occurred during the previous
year. Chemicals also is required to deliver to the Trustee, within 30 days
after the occurrence thereof, written notice of any event which would
constitute certain Defaults, their status and what action Chemicals is taking
or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Notes Indenture may be amended or
supplemented with the consent of the holders of a majority in principal amount
of the Notes then outstanding and any past default or compliance with any
provisions may be waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding. However, without the consent
of each holder of an outstanding Note, no amendment may, among other things,
(i) reduce the amount of Notes whose holders must consent to an amendment;
(ii) reduce the rate of or extend the time for payment of interest on any
Note; (iii) reduce the principal of or extend the Stated Maturity of any Note;
(iv) reduce the premium payable upon the redemption of any Note or change the
time at which any Note may or shall be redeemed; (v) make any Note payable in
money other than that stated in the Note; (vi) impair the right of any holder
of the Notes to receive payment of principal of and interest on such holder's
Notes on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such holder's Notes; (vii)
make any change in the amendment provisions which requires each holder's
consent or in the waiver provisions; or (viii) make any change to the
subordination provisions of the Notes Indenture that would adversely affect
the Holders.
Without the consent of any holder of the Notes, Chemicals and the Trustee
may amend or supplement the Notes Indenture to cure any ambiguity, omission,
defect or inconsistency, to provide for the assumption by a successor
corporation of the obligations of Chemicals under the Notes Indenture, to
provide for uncertificated Notes in addition to or in place of certificated
Notes (provided that the uncertificated Notes are issued in registered form
for purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to
add Guarantees with respect to the Notes, to add to the covenants of Chemicals
and its Subsidiaries for the benefit of the Holders or to surrender any right
or power conferred upon Chemicals, to make any change that does not adversely
affect the rights of any Holder or to comply with any requirement of the SEC
in connection with the qualification of the Notes Indenture under the Trust
Indenture Act of 1939.
The consent of the Holders is not necessary under the Notes Indenture to
approve the particular form of any proposed amendment. It is sufficient if
such consent approves the substance of the proposed amendment.
After an amendment under the Notes Indenture becomes effective, Chemicals is
required to mail to Holders a notice briefly describing such amendment.
However, the failure to give such notice to all Holders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER
The Notes will be issued in registered form and will be transferred only
upon the surrender of the Notes being transferred for registration of
transfer. Chemicals may require payment of a sum sufficient to cover any tax,
assessment or other governmental charge payable in connection with certain
transfers and exchanges.
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DEFEASANCE
Chemicals at any time may terminate all its obligations under the Notes and
the Notes Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligation to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. Chemicals at any time may terminate its obligations under the covenants
described under "--Certain Covenants" and "--Change of Control," the operation
of the cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under
"--Defaults" above and the limitations contained in clauses (iii) and (iv) of
the first paragraph under "--Merger and Consolidation" above ("covenant
defeasance").
Chemicals may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If Chemicals exercises its legal
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default with respect thereto. If Chemicals exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clauses (d), (f), (g) (with respect only to
Significant Subsidiaries) or (h) under "--Events of Default" above or the
failure of Chemicals to comply with "--Change of Control" above.
In order to exercise either defeasance option, Chemicals must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivering to the Trustee an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such
deposit and defeasance and will be subject to Federal income tax on the same
amount and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred (and, in the case of
legal defeasance only, such Opinion of Counsel must be based on a ruling of
the Internal Revenue Service or a change in applicable Federal income tax
law).
CONCERNING THE TRUSTEE
Fleet National Bank is to be the Trustee under the Notes Indenture and has
been appointed by Chemicals as Registrar and Paying Agent with regard to the
Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Notes Indenture provides that if an Event of Default
occurs (and is not cured), the Trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Notes Indenture
at the request of any Holder of Notes, unless such Holder shall have offered
to the Trustee security and indemnity satisfactory to it against any loss,
liability or expense and then only to the extent required by the terms of the
Notes Indenture.
GOVERNING LAW
The Notes Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the
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provisions described under "--Certain Covenants--Limitation on Affiliate
Transactions" and "--Certain Covenants--Limitations on Sales of Assets and
Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act) of Capital Stock
representing 10% or more of the total voting power of the Voting Stock (on a
fully diluted basis) of Chemicals or of rights or warrants to purchase such
Capital Stock (whether or not currently exercisable) and any Person who would
be an Affiliate of any such beneficial owner pursuant to the first sentence
hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) of shares of
Capital Stock of a Restricted Subsidiary (other than directors' qualifying
shares), property or other assets (each referred to for the purposes of this
definition as a "disposition") by Chemicals or any of its Restricted
Subsidiaries, including any disposition by means of a merger, consolidation or
similar transaction, for gross proceeds in excess of $2.0 million, other than
(i) a disposition by a Restricted Subsidiary to Chemicals or by Chemicals or a
Restricted Subsidiary to a Wholly Owned Subsidiary, (ii) a disposition of
property or assets (other than shares of Capital Stock of a Restricted
Subsidiary and which do not constitute all or substantially all of the assets
of any division or line of business of Chemicals or any Restricted Subsidiary)
at fair market value in the ordinary course of business, (iii) for purposes of
the covenant described under "--Certain Covenants--Limitation on Sales of
Assets and Subsidiary Stock" only, a disposition that constitutes a Restricted
Payment or a Permitted Investment permitted by the covenant described under
"--Certain Covenants--Limitation on Restricted Payments", (iv) the disposition
of all or substantially all of the assets of Chemicals permitted by the
covenant described under "Merger and Consolidation" and (v) the disposition of
assets in exchange for other assets that satisfy the requirement for
replacement assets set forth in Section (a)(ii)(B) of the covenant described
under "--Certain Covenants--Limitation on Sales of Assets and Subsidiary
Stock."
"Attributable Debt", in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale/Leaseback Transaction (including any period for which such lease has
been extended).
"Average Life" means, as of the date of determination, with respect to any
Debt or Preferred Stock, the quotient obtained by dividing (i) the sum of the
products of numbers of years from the date of determination to the dates of
each successive scheduled principal payment of such Debt or redemption or
similar payment with respect to such Preferred Stock multiplied by the amount
of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of Chemicals or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Canadian Facility" means a revolving loan and letter of credit facility for
loans and letters of credit in Canadian or U.S. dollars to or for the account
of Sterling Pulp Chemicals, Ltd., a Wholly Owned Subsidiary of Chemicals.
"Capital Lease Obligations" of a Person means any obligation which is
required to be classified and accounted for as a capital lease on the face of
a balance sheet of such Person prepared in accordance with GAAP; the amount of
such obligation shall be the capitalized amount thereof, determined in
accordance with generally accepted accounting principles; and the Stated
Maturity thereof shall be the date of the last payment of rent or any other
amount due under such lease prior to the first date upon which such lease may
be terminated by the lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or
interests in such Person (however designated), including any Preferred Stock,
but excluding any debt securities convertible into or exchangeable for such
equity.
"Code" means the Internal Revenue Code of 1986, as amended.
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"Commodity Agreement" means any commodity future contract, commodity option
or other similar agreement or arrangement (limited in amount to underlying
exposure, and not for speculative purposes) entered into by Chemicals or any
Restricted Subsidiary that is designed to protect Chemicals or any Restricted
Subsidiary against fluctuations in the price of commodities used by Chemicals
or a Restricted Subsidiary as raw materials in the ordinary course of
business.
"Consolidated EBITDA Coverage Ratio" as of any date of determination means
the ratio of (i) the aggregate amount of EBITDA for the period of the most
recent four consecutive fiscal quarters ending at least 45 days prior to the
date of such determination to (ii) Consolidated Interest Expense for such four
fiscal quarters; provided, however, that (1) if Chemicals or any Restricted
Subsidiary has Incurred any Debt since the beginning of such period that
remains outstanding or if the transaction giving rise to the need to calculate
the Consolidated EBITDA Coverage Ratio is an Incurrence of Debt, or both,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving effect on a pro forma basis to such Debt as if such Debt had been
Incurred on the first day of such period and the discharge of any other Debt
repaid, repurchased, defeased or otherwise discharged with the proceeds of
such new Debt as if such discharge had occurred on the first day of such
period, (2) if since the beginning of such period Chemicals or any Restricted
Subsidiary shall have made any Asset Disposition, the EBITDA for such period
shall be reduced by an amount equal to the EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset Disposition for
such period, or increased by an amount equal to the EBITDA (if negative),
directly attributable thereto for such period, and Consolidated Interest
Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Debt of Chemicals
or any Restricted Subsidiary repaid, repurchased, defeased or otherwise
discharged with respect to Chemicals and its continuing Restricted
Subsidiaries in connection with such Asset Dispositions for such period (or,
if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated
Interest Expense for such period directly attributable to the Debt of such
Restricted Subsidiary to the extent Chemicals and its continuing Restricted
Subsidiaries are no longer liable for such Debt after such sale), (3) if since
the beginning of such period Chemicals or any Restricted Subsidiary (by merger
or otherwise) shall have made an Investment in any Restricted Subsidiary (or
any Person which becomes a Restricted Subsidiary) or an acquisition of assets,
including any acquisition of assets occurring in connection with a transaction
causing a calculation to be made hereunder, which constitutes all or
substantially all of an operating unit of a business, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto (including the Incurrence of any Debt) as if such Investment or
acquisition occurred on the first day of such period, and (4) if since the
beginning of such period any Person (that subsequently became a Restricted
Subsidiary or was merged with or into Chemicals or any Restricted Subsidiary
since the beginning of such period) shall have made any Asset Disposition or
any Investment that would have required an adjustment pursuant to clause (2)
or (3) above if made by Chemicals or a Restricted Subsidiary during such
period, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset Disposition
or Investment occurred on the first day of such period. For purposes of this
definition, whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings relating thereto, and the amount of
Consolidated Interest Expense associated with any Debt Incurred in connection
therewith, the pro forma calculations shall be determined in good faith by a
responsible financial or accounting Officer of Chemicals. If any Debt bears a
floating rate of interest and is being given pro forma effect, the interest of
such Debt shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Debt if such Interest
Rate Agreement has a remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of Chemicals and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such interest expense, (i) interest expense
attributable to Capital Lease Obligations, (ii) amortization of debt discount
and debt issuance cost, (iii) capitalized interest, (iv) non-cash interest
payments, (v) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing, (vi) net costs
under Interest Rate Agreements (including amortization of fees), (vii)
Preferred Stock dividends in respect of all Redeemable Stock of Chemicals and
all Preferred Stock held by Persons other than Chemicals or a Wholly Owned
Subsidiary, (viii) interest incurred in connection with Investments in
discontinued operations; (ix) interest actually paid by
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Chemicals or any of its Restricted Subsidiaries under any Guarantee of Debt or
other obligation of any other Person and (x) the cash contributions to any
employee stock ownership plan or similar trust to the extent such
contributions are used by such plan or trust to pay interest or fees to any
Person (other than Chemicals or any Restricted Subsidiary) in connection with
Debt Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of Chemicals
and its consolidated Subsidiaries; provided, however, that there shall not be
included in such Consolidated Net Income (i) any net income of any Person if
such Person is not a Restricted Subsidiary, except that (A) subject to the
exclusion contained in clause (iv) below, Chemicals' equity in the net income
of any such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such Person
during such period to Chemicals or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other distribution
to a Restricted Subsidiary, to the limitations contained in clause
(iii) below) and (B) Chemicals' equity in a net loss of any such Person for
such period shall be included in determining such Consolidated Net Income to
the extent of any cash actually contributed by Chemicals or a Restricted
Subsidiary to such Person during such period; (ii) any net income (or loss) of
any Person acquired by Chemicals or a Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition; (iii) any
net income of any Restricted Subsidiary to the extent such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the payment
of dividends or the making of distributions by such Restricted Subsidiary,
directly or indirectly, to Chemicals, except that (A) subject to the exclusion
contained in clause (iv) below, Chemicals' equity in the net income of any
such Restricted Subsidiary for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Restricted Subsidiary during such period to Chemicals or
another Restricted Subsidiary as a dividend or other distribution (subject, in
the case of a dividend or other distribution to another Restricted Subsidiary,
to the limitation contained in this clause) and (B) Chemicals' equity in a net
loss of any such Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income; (iv) any gain or loss realized upon
the sale or other disposition of any assets of Chemicals or its consolidated
Subsidiaries (including pursuant to any sale-and-leaseback arrangement) which
is not sold or otherwise disposed of in the ordinary course of business and
any gain or loss realized upon the sale or other disposition of any Capital
Stock of any Person; (v) extraordinary gains or losses; and (vi) the
cumulative effect of a change in accounting principles. Notwithstanding the
foregoing, for the purposes of the covenant described under "Certain
Covenants--Limitation on Restricted Payments" only, there shall be excluded
from Consolidated Net Income any dividends, repayments of loans or advances or
other transfers of assets from Unrestricted Subsidiaries to Chemicals or a
Restricted Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such covenant
pursuant to clause (a)(3)(E) thereof.
"Consolidated Net Worth" of any Person means the total of the amounts shown
on the balance sheet of such Person and its consolidated subsidiaries,
determined on a consolidated basis in accordance with GAAP, as of the end of
the most recent fiscal quarter of such Person ending at least 45 days prior to
the taking of any action for the purpose of which the determination is being
made, as (i) the par or stated value of all outstanding Capital Stock of such
Person plus (ii) paid-in capital or capital surplus relating to such Capital
Stock plus (iii) any retained earnings or earned surplus less (A) any
accumulated deficit, (B) any amounts attributable to Redeemable Stock and (C)
any amounts attributable to Exchangeable Stock.
"Credit Agreement" means the agreement dated June 21, 1996 among Chemicals,
Texas Commerce Bank National Association, as administrative agent, and the
other lenders party thereto, and their respective successors and assigns, as
the same may be amended, supplemented, waived and otherwise modified from time
to time in accordance with the terms thereof.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to (limited in
amount to underlying exposure, and not for speculative purposes) which such
Person is a party or a beneficiary.
"Debt" of any Person means, without duplication, (i) the principal of and
premium (if any) in respect of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other
similar instruments for the payment of which such Person is responsible or
liable; (ii) all Capital
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Lease Obligations of such Person and all Attributable Debt in respect of
Sale/Leaseback Transactions entered into by such Person; (iii) all obligations
of such Person issued or assumed as the deferred purchase price of property,
all conditional sale obligations of such Person and all obligations of such
Person under any title retention agreement (but excluding trade accounts
payable arising in the ordinary course of business); (iv) all obligations of
such Person for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction (other than obligations with
respect to letters of credit securing obligations (other than obligations
described in (i) through (iii) above) entered into in the ordinary course of
business of such Person to the extent such letters of credit are not drawn
upon or, if and to the extent drawn upon, such drawing is reimbursed no later
than the third Business Day following receipt by such Person of a demand for
reimbursement following payment on the letter of credit); (v) all Redeemable
Stock of such Person and, with respect to any Subsidiary of such Person, all
Preferred Stock other than pay-in-kind dividends in the form of Preferred
Stock (the amount of Debt represented thereby shall equal the greater of its
liquidation preference and the redemption, repayment or other repurchase
obligations with respect thereto, but excluding any accrued dividends); (vi)
all Hedging Obligations of such Person; (vii) all obligations of the type
referred to in clauses (i) through (v) of other Persons and all dividends of
other Persons for the payment of which, in either case, such Person is
responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise, including by means of any Guarantee; and (viii) all obligations of
the type referred to in clauses (i) through (vi) of other Persons secured by
any Lien on any property or asset of such Person (whether or not such
obligation is assumed by such Person), the amount of such obligation being
deemed to be the lesser of the value of such property or assets or the amount
of the obligation so secured. The amount of Debt of any Person at any date
shall be the outstanding balance of such date of all unconditional obligations
as described above and the maximum liability upon the occurrence of the
contingency giving rise to the obligation, of any contingent obligations at
such date; provided, however, that the amount outstanding at any time of any
Debt Incurred with original issue discount is the face amount of such Debt
less the remaining unamortized portion of the original issue discount of such
Debt at such time as determined in conformity with GAAP.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Debt" means the Debt under the Credit Agreement and any
bank credit facility refinancing such Debt.
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense of
Chemicals, (b) depreciation expense, (c) amortization expense, (d) an amount
equal to any extraordinary gain or loss realized in connection with an Asset
Disposition, (e) the impact of accruals for periods prior to the Issue Date
for the Company's Stock Appreciation Rights Plan and (f) all other non-cash
items reducing such Consolidated Net Income (excluding any non-cash item to
the extent it represents an accrual of, or reserve for, cash disbursements for
any subsequent period) less all non-cash items increasing such Consolidated
Net Income (such amount calculated pursuant to this clause (f) not to be less
than zero), in each case for such period. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation
and amortization of, a Subsidiary of Chemicals shall be added to Consolidated
Net Income to compute EBITDA only to the extent (and in the same proportion)
that the net income of such Subsidiary was included in calculating
Consolidated Net Income and only if a corresponding amount would be permitted
at the date of determination to be dividended or otherwise paid to Chemicals
by such Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments,
judgments, decrees, orders, statutes, rules and governmental regulations
applicable to such Subsidiary or its stockholders.
"ESOP Loan Provisions" means the provisions of the Credit Agreement pursuant
to which lenders thereunder have committed to make ESOP loans available to
Chemicals.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchangeable Stock" means any Capital Stock which is exchangeable or
convertible into another security (other than Capital Stock of Chemicals which
is neither Exchangeable Stock nor Redeemable Stock).
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"Foreign Asset Sale" means an Asset Disposition in respect of Capital Stock
or assets of a Foreign Subsidiary or a Restricted Subsidiary of the type
described in Section 936 of the Code to the extent that the proceeds of such
Asset Disposition are received by a Person subject in respect of such proceeds
to the tax laws of a jurisdiction other than the United States or any state
thereof or the District of Columbia.
"Foreign Subsidiary" means a Restricted Subsidiary that is incorporated in a
jurisdiction other than the United States or a State thereof or the District
of Columbia and with respect to which more than 66 2/3% of any of its sales,
earnings or assets (determined on a consolidated basis in accordance with
GAAP) are located in, generated from or derived from operations located in
territories or jurisdictions outside the United States.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth (i) in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) in such
other statements by such other entity as approved by a significant segment of
the accounting profession, and (iv) the rules and regulations of the SEC
governing the inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Debt or other obligation of any Person
and any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt or other obligation of such Person (whether arising by
virtue of partnership arrangements, or by agreement to keep-well, to purchase
assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Debt or other obligation
of the payment thereof or to protect such obligee against loss in respect
thereof (in whole or in part); provided, however, that the term "Guarantee"
shall not include endorsements for collection or deposit in the ordinary
course of business or guarantees of obligations of a Subsidiary in the
ordinary course of business if such obligations do not constitute Debt of such
Subsidiary. The term "Guarantee" used as a verb has a corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement, Currency Agreement or Commodity
Agreement (limited in amount to underlying exposure, and not for speculative
purposes).
"Holder" means the Person in whose name a Note is registered on the
Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Debt or Capital Stock of a Person existing at
the time such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary. The term "Incurrence" when used as a noun
shall have a correlative meaning. The accretion of principal of a non-interest
bearing or other discount security shall be deemed the Incurrence of Debt.
"Independent Financial Advisor" means a reputable accounting, appraisal or
investment banking firm that, in the reasonable good faith judgment of the
Board of Directors of Chemicals, is qualified to perform the task for which
such firm has been engaged and is independent with respect to Chemicals and
its Affiliates.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement (limited in
amount to underlying exposure, and not for speculative purposes) designed to
protect Chemicals of any Restricted Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any loan or advance to, any acquisition of
Capital Stock, equity interest, obligation or other security of, or capital
contribution or other investment in, or any other credit extension to
(including by way of Guarantee of any Debt of), such Person. For purposes of
the definition of "Unrestricted Subsidiary", the definition of "Restricted
Payment" and the covenant described under "--Certain Covenants--
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Limitation on Restricted Payments," (i) "Investment" shall include the portion
(proportionate to Chemicals' equity interest in such Subsidiary) of the fair
market value of the net assets of any Subsidiary of Chemicals at the time that
such Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that if such designation is made in connection with the acquisition of such
Subsidiary or the assets owned by such Subsidiary, the "Investment" in such
Subsidiary shall be deemed to be the consideration paid in connection with
such acquisition; provided, further, however, that upon a redesignation of
such Subsidiary as a Restricted Subsidiary, Chemicals shall be deemed to
continue to have a permanent "Investment" in an Unrestricted Subsidiary equal
to an amount (if positive) equal to (x) Chemicals' "Investment" in such
Subsidiary at the time of such redesignation less (y) the portion
(proportionate to Chemicals' equity interest in such Subsidiary) of the fair
market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors.
"Investment Grade Rating" means a rating of BBB- or higher by S&P and Baa3
or higher by Moody's or the equivalent of such rating by S&P and Moody's or by
any other Rating Agencies selected as provided in the definition of Rating
Agency.
"Issue Date" means the date on which the Notes are originally issued, after
giving effect to the Transaction.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and
when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Debt or other obligations relating to
such properties or assets that are the subject of such Asset Disposition or
received in any other noncash form) therefrom, in each case net of (i) all
legal, title and recording expenses, commissions and other fees and expenses
incurred, and all Federal, state, provincial, foreign and local taxes required
to be accrued as a liability under GAAP, as a consequence of such Asset
Disposition, (ii) all payments made on any Debt which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any Lien
upon or other security agreement of any kind with respect to such assets, or
which must by its terms, or in order to obtain a necessary consent to such
Asset Disposition, or by applicable law be repaid out of the proceeds from
such Asset Disposition, (iii) all distributions and other payments required to
be made to minority interest holders in Subsidiaries or joint ventures as a
result of such Asset Disposition and (iv) the deduction of appropriate amounts
provided by the sellers as a reserve, in accordance with GAAP, against any
liabilities associated with the property or other assets disposed in such
Asset Disposition and retained by Chemicals or any Restricted Subsidiary after
such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Non-Convertible Capital Stock" means, with respect to any corporation, any
non-convertible Capital Stock of such corporation and any Capital Stock of
such corporation convertible solely into non-convertible common stock of such
corporation; provided, however, that Non-Convertible Capital Stock shall not
include any Redeemable Stock or Exchangeable Stock.
"Permitted Dividend" means the distribution, on or prior to October 15,
1996, from Chemicals to Holdings, in the form of a dividend, of the receivable
relating to the Permitted Loan, which distribution results in the discharge in
full of the Permitted Loan.
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"Permitted Holders" means (i) the purchasers in the Equity Private
Placement, (ii) any Person who on the date of issuance of the Notes is an
officer, director, stockholder, employee or consultant of TSG or Unicorn,
(iii) each of Frank J. Hevrdejs, William C. Oehmig, J. Virgil Waggoner, Robert
W. Roten and Gordon Cain, (iv) any Permitted Transferee with respect to any
Person covered by the preceding clauses (i) through (iii), (v) the New ESOP or
(vi) any savings or investment plan sponsored by Chemicals or Holdings.
"Permitted Investment" means an Investment by Chemicals or any Restricted
Subsidiary in (i) a Wholly Owned Subsidiary or a Person that will, upon the
making of such Investment, become a Wholly Owned Subsidiary; (ii) Temporary
Cash Investments; (iii) receivables owing to Chemicals or any Restricted
Subsidiary if created or acquired in the ordinary course of business and
payable or dischargeable in accordance with customary trade terms; (iv) stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to Chemicals or any Restricted
Subsidiary or in satisfaction of judgments; (v) any Person to the extent such
Investment represents the non-cash portion of the consideration received for
an Asset Disposition as permitted pursuant to the covenant described under "--
Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock"; (vi)
Investments by Chemicals or a Restricted Subsidiary in a Person to the extent
the consideration for such Investment consists of shares of Capital Stock of
Chemicals or Holdings (other than Redeemable Stock of Chemicals); (vii)
payroll, travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for accounting
purposes and that are made in the ordinary course of business; (viii) loans or
advances to employees or to a trust for the benefit of such employees that are
made in the ordinary course of business of Chemicals or such Restricted
Subsidiary; (ix) the ESOP Loan; (x) the Permitted Loan; (xi) another Person if
as a result of such Investment such Person is merged or consolidated with or
into, or transfers or conveys all or substantially all of its assets to,
Chemicals or a Restricted Subsidiary; provided that such Person's primary
business is reasonably related to the business of Chemicals and its Restricted
Subsidiaries; and (xii) Investments in Unrestricted Subsidiaries or joint
ventures (whether in corporate or partnership form or otherwise), in either
case in entities engaged in businesses reasonably related to the business of
Chemicals and its Restricted Subsidiaries, in an aggregate amount not to
exceed $10 million; provided, however, that the amount available for
Investments pursuant to this clause (xii) shall be reduced in accordance with
clause (a)(3)(G) under "--Certain Covenants--Limitation on Restricted
Payments."
"Permitted Loan" means the subordinated loan to Holdings by Chemicals, to be
made on the Issue Date, of up to $485 million, representing the proceeds of
the Notes Offering and amounts initially borrowed under the Term Loan
Provisions of the Credit Agreement net of repayment of existing Debt, purchase
of certain equity interests and payment of Transaction expenses; provided,
however, that such loan is subordinated in right of payment to the Notes; and
provided, further, however, that such loan is discharged in full on or prior
to October 15, 1996 through the Permitted Dividend.
"Permitted Transferee" means with respect to any Person, (i) in the case of
an entity, any Affiliate of such Person, and (ii) in the case of an
individual, any person related by lineal or collateral consanguinity to such
individual or to the spouse of such individual (adopted persons shall be
considered the natural born child of their adoptive parents; lineal
consanguinity is that relationship that exists between persons of whom one is
descended (or ascended) in a direct line from the other, as between son,
father, grandfather, great-grandfather; and collateral consanguinity is that
relationship that exists between persons who have the same ancestors, but who
do not descend (or ascend) from the other, as between uncle and nephew, or
cousin and cousin), in each case to whom such Person has transferred Common
Stock of Holdings.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
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"Public Equity Offering" means an underwritten primary public offering of
common stock of Holdings pursuant to an effective registration statement under
the Securities Act.
"Public Market" means any time after (x) a Public Equity Offering has been
consummated and (y) at least 15% of the total issued and outstanding common
stock of the Holdings has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Rating Agency" means S&P and Moody's, or if S&P or Moody's or both shall
not make a rating on the Notes publicly available, a nationally recognized
statistical rating agency or agencies, as the case may be, selected by
Chemicals (as certified by a resolution of the Board of Directors) which shall
be substituted for S&P or Moody's or both, as the case may be.
"Redeemable Stock" means any Capital Stock that by its terms or otherwise is
required to be redeemed on or prior to the Stated Maturity of the Notes or is
redeemable at the option of the holder thereof at any time on or prior to the
Stated Maturity of the Notes.
"Refinance" means, in respect of any Debt, to refinance, extend, renew,
refund, repay, prepay, redeem, defease or retire, or to issue other Debt in
exchange or replacement for, such indebtedness. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Debt" means Debt that Refinances any Debt of Chemicals or any
Restricted Subsidiary existing on the Issue Date or Incurred in compliance
with the Notes Indenture including Debt that Refinances Refinancing Debt;
provided, however, that (i) such Refinancing Debt has a Stated Maturity no
earlier than the Stated Maturity of the Debt being Refinanced, (ii) such
Refinancing Debt has an Average Life at the time such Refinancing Debt is
Incurred that is equal to or greater than the Average Life of the Debt being
Refinanced, (iii) such Refinancing Debt has an aggregate principal amount (or
if Incurred with original issue discount, an aggregate issue price) that is
equal to or less than the aggregate principal amount (or if Incurred with
original issue discount, the aggregate accreted value) then outstanding or
committed (plus fees and expenses, including any premium and defeasance costs)
under the Debt being Refinanced and (iv) with respect to any Refinancing Debt
of Debt other than Senior Debt, such Refinancing Debt shall rank no more
senior, and shall be at least as subordinated, in right of payment to the
Notes as the Debt being so extended, renewed, refunded or refinanced;
provided, further, however, that Refinancing Debt shall not include (x) Debt
of a Subsidiary that Refinances Debt of Chemicals or (y) Debt of Chemicals or
a Restricted Subsidiary that Refinances Debt of an Unrestricted Subsidiary.
"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Debt of Chemicals.
"Restricted Subsidiary" means any Subsidiary of Chemicals that is not an
Unrestricted Subsidiary.
"Revolving Credit Provisions" means the provisions of the Credit Agreement
pursuant to which lenders thereunder have committed to make available to
Chemicals a revolving credit facility, including the Canadian Facility.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby Chemicals or a Restricted Subsidiary
transfers such property to a Person and Chemicals or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Debt" means any Debt of Chemicals secured by a Lien.
"Senior Debt" means (i) Debt of Chemicals, whether outstanding on the Issue
Date or thereafter Incurred and (ii) accrued and unpaid interest (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to Chemicals whether or not such interest is an
allowable claim in any such proceeding) in respect of (A) indebtedness of
Chemicals for money borrowed and (B) indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of which
Chemicals is responsible or
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liable unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are
subordinate in right of payment to the Notes; provided, however, that Senior
Debt shall not include (1) any obligation of Chemicals to Holdings or any
subsidiary of Holdings, (2) any liability for Federal, state, local or other
taxes owed or owing by Chemicals, (3) any accounts payable or other liability
to trade creditors arising in the ordinary course of business (including
guarantees thereof or instruments evidencing such liabilities), (4) any Debt
of Chemicals (and any accrued and unpaid interest in respect thereof) which is
subordinate or junior in any respect to any other Debt or other obligation of
Chemicals, (5) that portion of any Debt which at the time of Incurrence is
Incurred in violation of the Notes Indenture, (6) Debt owed, due, or
guaranteed on behalf of, any director, officer or employee of Chemicals or any
Subsidiary (including without limitation amounts owed for compensation), and
(7) Debt which when Incurred and without respect to any election under Section
1111(b) of Title 11 United States Code, is without recourse to Chemicals.
"Senior Subordinated Debt" means the Notes and any other Debt of Chemicals
that specifically provides that such Debt is to rank pari passu with the Notes
in right of payment and is not subordinated by its terms in right of payment
to any Debt or other obligation of Chemicals which is not Senior Debt.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" of Chemicals as defined in Rule 1-02 of Regulation S-
X, promulgated by the SEC.
"S&P" means Standard & Poor's Ratings Group.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the principal of such security is due
and payable, including pursuant to any mandatory redemption provision (but
excluding any provision providing for the repurchase of such security at the
option of the holder thereof upon the happening of any contingency unless such
contingency has occurred).
"Subordinated Obligation" means any Debt of Chemicals (whether outstanding
on Issue Date or hereafter Incurred) which is subordinate or junior in right
of payment to the Notes.
"Subsidiary" means any corporation, association, partnership or other
business entity of which more than 50% of the total voting power of shares of
Capital Stock or other interests (including partnership interests) entitled
(without regard to the occurrence of any contingency) to vote in the election
of directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by (i) Chemicals, (ii) Chemicals and one or more
Subsidiaries or (iii) one or more Subsidiaries.
"Tangible Property" means all land, buildings, machinery and equipment and
leasehold interests and improvements which would be reflected on a balance
sheet of Chemicals prepared in accordance with generally accepted accounting
principles, excluding (i) all rights, contracts and other intangible assets of
any nature whatsoever and (ii) all inventories and other current assets.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 270 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized
by the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50,000,000 (or the foreign
currency equivalent thereof) and has outstanding debt which is rated "A" (or
such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker
dealer or mutual fund distributor, (iii) repurchase obligations with a term of
not more than 30 days for underlying securities of the types described in
clause (i) above entered into with a bank meeting the qualifications described
in clause (ii) above, (iv) investments in commercial paper, maturing not more
than 180 days after the date of acquisition, issued by a corporation (other
than an Affiliate of Chemicals or Holdings) organized and in existence under
the laws of the United States of America or any foreign country recognized by
the United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to
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Moody's or "A-1" (or higher) according to S&P, (v) investments in securities
with maturities of six months or less from the date of acquisition issued or
fully guaranteed by any state, commonwealth or territory of the United States
of America, or by any political subdivision or taxing authority thereof, and
rated at least "A" by S&P or "A" by Moody's, (vi) participations (for a tenor
of not more than 90 days) in loans to Persons having short-term credit ratings
of at least "A-1" and "P-1" by S&P and Moody's, respectively, (vii) with
respect to any Foreign Subsidiary organized in Canada, commercial paper of
Canadian companies rated R-1 High or the equivalent thereof by Dominion Bond
Rating Services with maturities of less than one year and (viii) with respect
to Foreign Subsidiaries not organized in Canada, government obligations of
another country whose debt securities are rated by S&P and/or Moody's "A-1" or
"P-1", or the equivalent thereof (if a short-term debt rating is provided by
either) or at least "AA" or "AA2", or the equivalent thereof (if a long-term
unsecured debt rating is provided by either), in each case, with maturities of
less than 12 months.
"Term Loan Provisions" means the provisions of the Credit Agreement pursuant
to which lenders thereunder have committed to make term loans available to
Chemicals.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa-77bbbb)
as in effect on the date of this Notes Indenture.
"Trustee" means the party named as such in the Notes Indenture until a
successor replaces it and, thereafter, means the successor.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the payment
of which the full faith and credit of the United States of America is pledged
and which are not callable at the issuer's option.
"Unrestricted Subsidiary" means (i) any Subsidiary of Chemicals that at the
time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
of Chemicals (including any newly acquired or newly formed Subsidiary) to be
an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries
owns any Capital Stock or Debt of, or holds any Lien on any property of,
Chemicals or any other Subsidiary of Chemicals that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if
such Subsidiary has assets of greater than $1,000, such designation would be
permitted under the covenant described under "--Certain Covenants--Limitation
on Restricted Payments;" and provided, further, however, that (1) no
Subsidiary of Chemicals that is a Restricted Subsidiary on the Issue Date
(other than a Restricted Subsidiary with total assets of $1,000 or less on the
Issue Date) may be designated an Unrestricted Subsidiary and (2) no Subsidiary
holding, directly or indirectly, any assets (other than assets totaling $1,000
or less which constituted the only assets of a Restricted Subsidiary on the
Issue Date) held by Chemicals or a Restricted Subsidiary on the Issue Date may
be designated an Unrestricted Subsidiary. The Board of Directors may designate
any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however,
that immediately after giving effect to such designation (x) if such
Unrestricted Subsidiary at such time has Debt, Chemicals could Incur $1.00 of
additional Debt under paragraph (a) of the covenant described under "--Certain
Covenants--Limitation on Debt" and (y) no Default shall have occurred and be
continuing. Any such designation by the Board of Directors shall be by
Chemicals to the Trustee by promptly filing with the Trustee a copy of the
board resolution giving effect to such designation and an officers'
certificate certifying that such designation complied with the foregoing
provisions.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by Chemicals
or another Wholly Owned Subsidiary; provided, however, that a Foreign
Subsidiary shall be a Wholly Owned Subsidiary if more than 90% of the Capital
Stock and Voting Stock thereof is owned by Chemicals or another Wholly Owned
Subsidiary.
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DESCRIPTION OF THE UNITS
Each Unit consists of $1,000 principal amount at maturity of Discount Notes
and one Warrant to purchase three shares of Holdings Common Stock. The
Discount Notes and the Warrants will not be separately transferable until the
earlier of (i) 30 days from the Closing Date and (ii) such date as the
Underwriters may, in their discretion, deem appropriate (the "Separation
Date").
DESCRIPTION OF THE DISCOUNT NOTES
The Discount Notes are to be issued pursuant to the Indenture (the "Discount
Notes Indenture"), between Holdings and Fleet National Bank, as Trustee (the
"Trustee"). The following is a summary of material provisions of the Discount
Notes Indenture. This summary does not purport to be complete and is subject
to and is qualified in its entirety by reference to all the provisions of the
Discount Notes and the Discount Notes Indenture (including provisions made
part of the Discount Notes Indenture by reference to the Trust Indenture Act
of 1939, as amended), including the definitions therein of terms not defined
herein. Certain terms used herein are defined below under "--Certain
Definitions". A copy of the form of the Discount Notes Indenture is filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
GENERAL
The Discount Notes will be senior secured obligations of Holdings, will be
limited to $191,751,000 aggregate principal amount at maturity ($100,000,064
aggregate initial Accreted Value) and will mature on August 15, 2008. The
Discount Notes will accrete at the rate per annum shown on the front cover of
this Prospectus, compounded semi-annually, to an aggregate principal amount of
$191,751,000 by August 15, 2001. The Discount Notes are being offered at a
substantial discount from their principal amount at maturity. Although for
federal income tax purposes a significant amount of original issue discount,
taxable as ordinary income, will be recognized by a Holder as such discount
accrues from the Issue Date, no interest will be payable on the Discount Notes
prior to February 15, 2002. From and after August 15, 2001, the Discount Notes
will bear interest at the rate per annum shown on the front cover of this
Prospectus from August 15, 2001 or from the most recent date to which interest
has been paid or provided for, payable semi-annually on February 15 and August
15 of each year, commencing February 15, 2002 to each Person in whose name a
Discount Note is registered at the close of business on the preceding February
1 or August 1, as the case may be. Principal of and premium, if any, and
interest on the Discount Notes will be payable, and the transfer of Discount
Notes will be registrable, at the office or agency maintained by Holdings in
the City of New York. In addition, payment of interest may, at the option of
Holdings, be made by check mailed to the address of the person entitled
thereto as it appears in the Discount Note Register. Interest will be computed
on the basis of a 360-day year of twelve 30-day months.
The Discount Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 principal amount at maturity and any
multiple thereof. No service charge will be made for any registration of
transfer or exchange of Discount Notes, but Holdings may require payment of a
sum sufficient to cover any transfer tax or other governmental charge payable
in connection therewith.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Discount Notes will not
be redeemable at the option of Holdings prior to August 15, 2001. Thereafter,
the Discount Notes will be redeemable, at Holdings' option, in whole or in
part from time to time, upon not less than 30 nor more than 60 days' prior
notice mailed to each Holder of Discount Notes to be redeemed at the Holder's
address appearing in the Discount Note Register, at the following redemption
prices (expressed in percentages of principal amount at maturity), plus
accrued interest to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due
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on the relevant interest payment date), if redeemed during the 12-month period
beginning August 15 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2001............................................................ 106.75%
2002............................................................ 105.40%
2003............................................................ 104.05%
2004............................................................ 102.70%
2005............................................................ 101.35%
2006 and thereafter............................................. 100.00%
</TABLE>
In addition, at any time and from time to time prior to August 15, 1999,
Holdings may redeem in the aggregate up to 35% of the Accreted Value of the
Discount Notes with the net proceeds of one or more Public Equity Offerings
following which there is a Public Market, at a redemption price (expressed as
a percentage of Accreted Value on the redemption date) of 113.5% plus accrued
interest to the redemption date (subject to the right of Holders of record on
the relevant record date to receive interest due on the relevant interest
payment date); provided, however, that at least $124,638,150 aggregate
principal amount at maturity of the Discount Notes must remain outstanding
after each such redemption.
In the case of any partial redemption, selection of the Discount Notes for
redemption will be made by the Trustee on a pro rata basis unless otherwise
required by law or regulation, although no Discount Note of $1,000 in
principal amount at maturity or less shall be redeemed in part. If any
Discount Note is to be redeemed in part only, the notice of redemption
relating to such Discount Note shall state the portion of the principal amount
at maturity thereof to be redeemed. A new Discount Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original Discount Note.
RANKING
The indebtedness evidenced by the Discount Notes will constitute senior
obligations of Holdings, will rank pari passu in right of payment with all
existing and future senior indebtedness of Holdings and will be senior in
right of payments to all future subordinated indebtedness of Holdings. At June
30, 1996, on a pro forma basis after giving effect to the Transaction,
Holdings would have had no debt other than the Discount Notes. See
"Capitalization."
Substantially all of the operations of Holdings are conducted through its
subsidiaries. Claims of creditors of such subsidiaries, including trade
creditors, secured creditors and creditors holding indebtedness and guarantees
issued by such subsidiaries, and claims of preferred stockholders (if any) of
such subsidiaries generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of Holdings,
including holders of the Discount Notes. The Discount Notes, therefore, will
be effectively subordinated to creditors (including trade creditors) and
preferred stockholders (if any) of subsidiaries of Holdings. At June 30, 1996,
after giving effect to the Transaction, the aggregate liabilities (consisting
of Debt and trade payables) of Holdings' subsidiaries would have been
approximately $697.5 million, including the Notes. Although the Discount Notes
Indenture limits the incurrence of Debt and preferred stock of Holdings'
subsidiaries, such limitation is subject to a number of significant
qualifications. Moreover, the Discount Notes Indenture does not impose any
limitation on the incurrence by such subsidiaries of liabilities that are not
considered Debt under the Discount Notes Indenture. See "--Certain Covenants--
Limitation on Debt" and "--Limitation on Restrictions on Distributions from
Subsidiaries; Limitation on Preferred Stock of Subsidiaries".
SECURITY
The Discount Notes will be secured by a second priority lien on all the
Capital Stock of Chemicals (the "Collateral"), subject to a first priority
lien in favor of the lenders under the Credit Agreement. The Trustee and the
holders of the Discount Notes shall not have any right to enforce their lien
on the Collateral. Only the lenders under the Credit Agreement will have the
right to direct and control any sale or other disposition of the Collateral in
foreclosure or other judicial proceedings or private sale, none of which
require the consent of the holders of the Discount Notes. Upon any such sale
of the Collateral, the lien securing the Discount Notes will be automatically
extinguished with the rights of the holders of the Discount Notes in the event
of such sale being limited to the right to receive excess proceeds after
payment in full of all indebtedness owed to the lenders under
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the Credit Agreement. In the event of a default or similar occurrence there
can be no assurance that such second priority interest will be available or
sufficient to satisfy claims by Holders of the Discount Notes.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder shall have the right
to require Holdings to repurchase such Holder's Discount Notes at a purchase
price in cash equal to 101% of the Accreted Value thereof plus accrued and
unpaid interest (if any) to the date of repurchase (subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date).
The occurrence of any of the following events will constitute a "Change of
Control" under the Discount Notes Indenture:
(i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more Permitted Holders, is or becomes the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that a Person shall be deemed to have "beneficial ownership" of
all shares that any such Person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 35% of the total voting power of the
Voting Stock of Holdings; provided that the Permitted Holders "beneficially
own" (as defined above), directly or indirectly, in the aggregate a lesser
percentage of the total voting power of the Voting Stock of Holdings than
such other Person and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of the
Board of Directors of Holdings (for the purposes of this clause (i), (A)
such other Person shall be deemed to beneficially own any Voting Stock of a
corporation (the "specified corporation") held by any other corporation
(the "parent corporation"), if such other Person beneficially owns (as
defined above), directly or indirectly, of more than 35% of the voting
power of the Voting Stock of such parent corporation and the Permitted
Holders beneficially own (as defined above), directly or indirectly, in the
aggregate a lesser percentage of the voting power of the Voting Stock of
such parent corporation and do not have the right or ability by voting
power, contract or otherwise to elect or designate for election a majority
of the board of directors of such parent corporation and (B) the Permitted
Holders shall be deemed to beneficially own any Voting Stock of a specified
corporation held by any parent corporation so long as the Permitted Holders
beneficially own (as so defined), directly or indirectly, in the aggregate
a majority of the voting power of the Voting Stock of the parent
corporation);
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of Holdings or
Chemicals (together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of Holdings
or Chemicals, as the case may be, was approved by a majority of the
directors of Holdings or Chemicals, as the case may be, then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of Holdings
or Chemicals, as the case may be, then in office;
(iii) the merger or consolidation of Holdings or Chemicals with or into
another Person or the merger of another Person (other than a Permitted
Holder) with or into Holdings or Chemicals, or the sale or transfer in one
or a series of transactions of all or substantially all the assets of
Holdings or Chemicals to another Person (other than a Permitted Holder),
and, in the case only of any such merger or consolidation, the securities
of Holdings or Chemicals that are outstanding immediately prior to such
transaction and which represent 100% of the aggregate voting power of the
Voting Stock of Holdings or Chemicals are changed into or exchanged for
cash, securities or property, unless pursuant to such transaction such
securities are changed into or exchanged for, in addition to any other
consideration, securities of the surviving corporation that represent
immediately after such transaction, at least a majority of the aggregate
voting power of the Voting Stock of the surviving corporation; or
(iv) Holdings shall hold less than 100% of the Capital Stock of Chemicals
(other than Preferred Stock of Chemicals issued in accordance with the
terms of the Discount Notes Indenture) or less than 100% of the Voting
Stock of Chemicals.
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Within 30 days following any Change of Control, Holdings shall mail a notice
to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require Holdings to
purchase such Holder's Discount Notes at a purchase price in cash equal to
101% of the Accreted Value thereof plus accrued and unpaid interest, if any,
to the date of purchase (subject to the right of holders of record on the
relevant record date to receive interest on the relevant interest payment
date); (2) the material circumstances and facts regarding such Change of
Control (including information with respect to pro forma historical income,
cash flow and capitalization, each after giving effect to such Change of
Control); (3) the repurchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed in the event of a
Change of Control); and (4) the instructions determined by Holdings,
consistent with the covenant described hereunder, that a Holder must follow in
order to have its Discount Notes purchased.
Holdings shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Discount Notes pursuant to this covenant.
To the extent that the provisions of any securities laws or regulations
conflict with the provisions of the covenant described above, Holdings shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under such covenant by virtue thereof.
Neither the Board of Directors nor the Trustee may waive compliance by
Holdings with its obligation to repurchase Discount Notes upon a Change of
Control.
The Change of Control purchase feature is a result of negotiations between
Holdings and the Underwriters. Management has no present intention to engage
in a transaction involving a Change of Control, although it is possible that
Holdings or Chemicals would decide to do so in the future. The provisions of
the Discount Notes Indenture relating to a Change of Control may not afford
Holders protection in the event of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction (including, in
certain circumstances, a transaction involving Holdings' management or its
affiliates) that may adversely affect Holders, if such transaction does not
constitute a Change of Control, as defined above. Any such transaction will
result in a Change of Control only if it is the type of transaction specified
by such definition. For example, a merger or consolidation with, or sale of
assets to, a Permitted Holder (defined to include, among others, the
purchasers in the Equity Private Placement and the employees and stockholders
of TSG and Unicorn) would not meet the definition of Change of Control and,
therefore, Holders of Discount Notes would not be entitled to require
Chemicals to purchase their Discount Notes.
The Credit Agreement generally will prohibit Holdings from purchasing any
Discount Notes, and will also provide that the occurrence of certain change of
control events with respect to Holdings would constitute a default thereunder.
In the event a Change of Control occurs at a time when Holdings is prohibited
from purchasing Discount Notes, Holdings could seek the consent of its lenders
to the purchase of Discount Notes or could attempt to refinance the borrowings
that contain such prohibition. If Holdings does not obtain such a consent or
repay such borrowings, Holdings will remain prohibited from purchasing
Discount Notes. In such case, Holdings' failure to purchase tendered Discount
Notes would constitute an Event of Default under the Discount Notes Indenture
which would, in turn, constitute a default under the Credit Agreement.
Upon consummation of the Transaction, Holdings will not have any Debt that
is pari passu with the Discount Notes that contains any Change of Control
provisions. Future indebtedness of Holdings may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repurchased upon a Change of Control.
Moreover, the exercise by the holders of their right to require Holdings to
repurchase the Discount Notes could cause a default under such indebtedness,
even if the Change of Control itself does not, due to the financial effect of
such repurchase on Holdings. Finally, Holdings' ability to pay cash to the
holders of Discount Notes following the occurrence of a Change of Control may
be limited by Holdings' then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any
required repurchases. The provisions under the Discount Notes Indenture
relating to the Company's obligation to make an offer to repurchase the
Discount Notes as a result of a Change of Control may be waived or modified
with the prior written consent of the Holders of a majority in principal
amount of the Discount Notes.
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The Change of Control purchase feature of the Discount Notes may in certain
circumstances make more difficult or discourage a takeover of Holdings, and,
thus, removal of incumbent management.
CERTAIN COVENANTS
The Discount Notes Indenture will contain certain covenants, including among
others the ones summarized below:
Limitation on Debt. (a) Holdings shall not Incur, and shall not permit any
Restricted Subsidiary to Incur, directly or indirectly, any Debt unless the
Consolidated EBITDA Coverage Ratio at the date of such Incurrence exceeds 1.75
to 1.0 if such Debt is Incurred on or prior to August 15, 1998 or 2.0 to 1.0
if such Debt is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), Holdings and its Restricted
Subsidiaries may Incur the following Debt: (1) Debt Incurred by Chemicals and
its Restricted Subsidiaries pursuant to the Revolving Credit Provisions of the
Credit Agreement or any other revolving credit facility which, when taken
together with all letters of credit and the principal amount of all other Debt
Incurred pursuant to this clause (1), does not exceed the greater of $100
million and the sum of (i) 65% of the gross book value of the inventory of
Chemicals and its Restricted Subsidiaries and (ii) 85% of the gross book value
of the accounts receivable of Chemicals and its Restricted Subsidiaries; (2)
Debt Incurred by Chemicals and its Restricted Subsidiaries pursuant to the
Term Loan Provisions of the Credit Agreement or any indenture or term loan
provisions of any other credit or loan agreement which, when taken together
with the principal amount of all other Debt Incurred pursuant to this clause
(2), does not exceed $350 million outstanding at any one time less the
aggregate amount of all principal repayments of any such Debt actually made
after the Issue Date (other than any such principal repayments made as a
result of the Refinancing of any such Debt); (3) Debt Incurred by Chemicals
and its Restricted Subsidiaries pursuant to the ESOP Loan Provisions of the
Credit Agreement in an aggregate principal amount not to exceed $6.5 million
outstanding at any one time less the aggregate amount of all principal
repayments of any such Debt actually made after the Issue Date (other than any
such principal repayments made as a result of the Refinancing of any such
Debt); (4) Debt of Holdings owed to and held by a Wholly Owned Subsidiary;
provided, however, that any subsequent issuance or transfer of any Capital
Stock which results in such Wholly Owned Subsidiary ceasing to be a Wholly
Owned Subsidiary or any transfer of such Debt (other than to a Wholly Owned
Subsidiary) shall be deemed, in each case, to constitute the Incurrence of
such Debt by Holdings; (5) Debt of a Restricted Subsidiary Incurred and
outstanding on or prior to the date on which such Restricted Subsidiary became
a Restricted Subsidiary or was acquired by Holdings (other than Debt Incurred
in connection with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by Holdings); (6) the Discount Notes and the Notes;
(7) Debt outstanding on the Issue Date (other than Debt described in clause
(1), (2), (3), (4), (5) or (6)); (8) Refinancing Debt in respect of Debt
Incurred pursuant to paragraph (a) or pursuant to clause (6) or (7) or this
clause (8); (9) Hedging Obligations; provided that with respect to Interest
Rate Agreements and Currency Agreements (if such Currency Agreements relate to
Debt), only to the extent directly related to Debt permitted to be Incurred by
Holdings pursuant to the Discount Notes Indenture; (10) the Permitted Loan;
and (11) Debt in an aggregate principal amount which, together with all other
Debt of Holdings and the Restricted Subsidiaries then outstanding (other than
Debt permitted by clauses (1) through (10) above or paragraph (a)) does not
exceed $25 million.
(c) Notwithstanding the foregoing, Holdings shall not Incur any Debt
pursuant to the foregoing paragraph (b) if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinated Obligations unless such
Debt shall be subordinated to the Discount Notes to at least the same extent
as such Subordinated Obligations.
(d) For purposes of determining compliance with paragraph (b) of this
covenant, (i) in the event that an item of Debt meets the criteria of more
than one of the types of Debt described in paragraph (b), Holdings, in its
sole discretion, will classify such item of Debt and only be required to
include the amount and type of such Debt in one of the clauses of paragraph
(b) and (ii) an item of Debt may be divided and classified in more than one of
the types of debt in paragraph (b).
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Limitation on Restricted Payments. (a) Holdings shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to (i) declare or
pay any dividend or make any distribution on or in respect of its Capital
Stock (including any payment in connection with any merger or consolidation
involving Holdings) or similar payment to the direct or indirect holders of
its Capital Stock (except dividends or distributions payable solely in its
Non-Convertible Capital Stock or in options, warrants or other rights to
purchase its Non-Convertible Capital Stock and except dividends or
distributions payable to Holdings or a Restricted Subsidiary), and other than
pro rata dividends or other distributions made by a Restricted Subsidiary of
Holdings that is not a Wholly Owned Subsidiary to minority shareholders (or
owners of an equivalent interest in the case of a Restricted Subsidiary that
is an entity other than a corporation), (ii) purchase, redeem or otherwise
acquire or retire for value any Capital Stock of Holdings, any direct or
indirect parent of Holdings, or a Restricted Subsidiary (other than such
Capital Stock owned by Holdings or any Wholly Owned Subsidiary), (iii)
purchase, repurchase, redeem, defease or otherwise acquire or retire for
value, prior to scheduled maturity, scheduled repayment or scheduled sinking
fund payment, any Subordinated Obligations (other than the purchase,
repurchase or other acquisition of Subordinated Obligations purchased in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of acquisition)
or (iv) make any Investment in any Person (other than a Permitted Investment)
(any such dividend, distribution, purchase, redemption, repurchase,
defeasance, other acquisition, retirement, Investment being herein referred to
as a "Restricted Payment"), if at the time Holdings or such Restricted
Subsidiary makes such Restricted Payment: (1) a Default shall have occurred
and be continuing (or would result therefrom); or (2) Holdings, after giving
pro forma effect to such Restricted Payment, would not be permitted to Incur
an additional $1.00 of Debt pursuant to clause (a) under "--Limitation on
Debt"; or (3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of: (A) 50% of
the Consolidated Net Income accrued during the period (treated as one
accounting period) from the beginning of the fiscal quarter during which the
Discount Notes were originally issued to the end of the most recent fiscal
quarter ending at least 45 days prior to the date of such Restricted Payment
(or, in case such Consolidated Net Income shall be a deficit, minus 100% of
such deficit); provided, however, that if the Discount Notes achieve an
Investment Grade Rating during any fiscal quarter, the percentage for such
fiscal quarter (and of any other fiscal quarter where, on the first day of
such fiscal quarter, the Discount Notes shall have an Investment Grade Rating)
will be 100% of Consolidated Net Income during such fiscal quarter; provided,
further, however, that if such Restricted Payment is to be made in reliance
upon an additional amount permitted pursuant to the immediately preceding
proviso, the Discount Notes must have an Investment Grade Rating at the time
such Restricted Payment is declared or, if not declared, made; (B) the
aggregate Net Cash Proceeds received by Holdings from the issue or sale of its
Capital Stock (other than Redeemable Stock or Exchangeable Stock) subsequent
to the Issue Date (other than an issuance or sale to a Subsidiary or an
employee stock ownership plan or similar trust); (C) the aggregate Net Cash
Proceeds received by Holdings from the issue or sale of its Capital Stock
(other than Redeemable Stock or Exchangeable Stock) to an employee stock
ownership plan subsequent to the Issue Date; provided, however, that if such
employee stock ownership plan issues any Debt, such aggregate amount shall be
limited to an amount equal to any increase in the Consolidated Net Worth of
Holdings resulting from principal repayments made by such employee stock
ownership plan with respect to Debt issued by it to finance the purchase of
such Capital Stock; (D) the amount by which Debt of Holdings is reduced on
Holdings's balance sheet upon the conversion or exchange (other than by a
Subsidiary) subsequent to the Issue Date, of any Debt of Holdings convertible
or exchangeable for Capital Stock (other than Redeemable Stock or Exchangeable
Stock) of Holdings (less the amount of any cash, or other property,
distributed by Holdings upon such conversion or exchange); (E) an amount equal
to the sum of (i) the net reduction in Investments in Unrestricted
Subsidiaries resulting from dividends, repayments of loans or advances or
other transfers of assets, in each case to Holdings or any Restricted
Subsidiary from Unrestricted Subsidiaries, and (ii) the portion (proportionate
to Holdings' equity interest in such Subsidiary) of the fair market value of
the net assets of an Unrestricted Subsidiary at the time such Unrestricted
Subsidiary is designated a Restricted Subsidiary; provided, however, that the
foregoing sum shall not exceed, in the case of an Unrestricted Subsidiary, the
amount of Investments previously made (and treated as a Restricted Payment) by
Holdings or any Restricted Subsidiary in such Unrestricted Subsidiary; (F) to
the extent not covered in clauses (A) through (E) above, the aggregate net
cash proceeds received after the date of the Discount Notes Indenture by
Holdings as capital contributions (other than from any Restricted
Subsidiaries); and (G) $5 million; provided,
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however, that, to the extent used, such $5 million shall reduce the amount
available for Investments pursuant to clause (xii) of the definition of
"Permitted Investments" set forth under "--Certain Definitions;" and provided,
further, however, that the amounts available under this clause (G) and under
clause (xii) of the definition of "Permitted Investments" shall in no event
exceed $10 million in the aggregate.
(b) The provisions of the foregoing paragraph (a) shall not prohibit: (i)
any purchase or redemption of Capital Stock or Subordinated Obligations of
Holdings made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of Holdings (other than Redeemable Stock or
Exchangeable Stock of Holdings and other than Capital Stock issued or sold to
a Subsidiary or an employee stock ownership plan); provided, however, that (A)
such purchase or redemption shall be excluded in the calculation of the amount
of Restricted Payments and (B) the Net Cash Proceeds from such sale shall be
excluded from clauses (3)(B) and (3)(C) of paragraph (a); (ii) any purchase,
redemption, defeasance or other acquisition or retirement for value of
Subordinated Obligations of Holdings made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Debt of Holdings which is
permitted to be Incurred pursuant to the covenant described under "--
Limitation on Debt" above; provided, however, that such purchase, redemption,
defeasance or other acquisition or retirement for value shall be excluded in
the calculation of the amount of Restricted Payments; (iii) any purchase or
redemption of Subordinated Obligations of Holdings from Net Available Cash to
the extent permitted under "--Limitation on Sales of Assets and Subsidiary
Stock" below; provided, however, that such purchase or redemption shall be
excluded in the calculation of the amount of Restricted Payments; (iv)
dividends paid within 60 days after the date of declaration thereof if at such
date of declaration such dividend would have complied with this provision;
provided, however, that at the time of declaration of such dividend, no other
Default shall have occurred and be continuing (or would result therefrom); and
provided, further, however, that such dividend shall be included in the
calculation of the amount of Restricted Payments; (v) repurchases of common
stock of Holdings distributed to participants and beneficiaries of the ESOP as
required by and in accordance with the ESOP and Section 409(h)(1)(B) of the
Code and the regulations thereunder; provided, however, that such amount shall
be excluded in the calculation of the amount of Restricted Payments; (vi)
payments to the ESOP on behalf of employees of Holdings or its Subsidiaries;
provided that all such payments by Holdings and its Subsidiaries may not
exceed, during any fiscal year, 10% of the aggregate compensation expense
during such fiscal year attributable to employees of Holdings and its
Subsidiaries who are eligible to participate in the ESOP; and (vii) the
repurchase, redemption, acquisition or retirement for value of any Capital
Stock of Holdings pursuant to any stockholder's agreement, management equity
subscription plan or agreement, stock option plan or agreement or employee
benefit plan in effect as of the Issue Date or such employee plan or agreement
or employee benefit plan as may be adopted by Holdings or Chemicals from time
to time; provided, however, that the aggregate price paid for all Capital
Stock repurchased, redeemed, acquired or retired by or on behalf of Holdings
or Chemicals shall not exceed $5 million in any fiscal year; provided,
further, however, that such amount, to the extent related to the ESOP, shall
be excluded in the calculation of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
Holdings shall not, and shall not permit any Restricted Subsidiary to, create
or permit to exist or become effective any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary to (i) pay dividends
or make any other distributions on its Capital Stock or pay any Debt or other
obligation owed to Holdings, (ii) make any loans or advances to Holdings or
(iii) transfer any of its property or assets to Holdings, except: (a) any
encumbrance or restriction pursuant to an agreement in effect on the Issue
Date or pursuant to the issuance of the Discount Notes or the Notes; (b) any
encumbrance or restriction with respect to a Restricted Subsidiary pursuant to
an agreement relating to any Debt Incurred by such Restricted Subsidiary on or
prior to the date on which such Restricted Subsidiary was acquired by Holdings
(other than Debt Incurred as consideration in, or to provide all or any
portion of the funds or credit support utilized to consummate, the transaction
or series of related transactions pursuant to which such Restricted Subsidiary
became a Restricted Subsidiary or was acquired by Holdings) and outstanding on
such date; (c) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Debt Incurred pursuant to an agreement referred to
in clause (a) or (b) or contained in any amendment to an agreement referred to
in clause (a) or (b); provided, however, that the encumbrances and
restrictions contained in any of such refinancing agreement or amendment are
no less favorable to the Holders than encumbrances and restrictions with
respect to such Restricted Subsidiary contained in such agreements; (d) any
such encumbrance or restriction consisting of customary nonassignment
provisions in leases governing leasehold interests to the
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extent such provisions restrict the transfer of the lease or other customary
non-assignment provisions in contracts (other than contracts that constitute
Debt) entered into in the ordinary course of business to the extent such
provisions restrict the transfer of the assets subject to such contracts; (e)
in the case of clause (iii) above, restrictions contained in security
agreements or mortgages securing Debt of a Restricted Subsidiary to the extent
such restrictions restrict the transfer of the property subject to such
security agreements or mortgages; (f) encumbrances or restrictions imposed by
operation of applicable law; and (g) any restriction with respect to a
Restricted Subsidiary imposed pursuant to an agreement entered into for the
sale or disposition of all or substantially all the Capital Stock or assets of
such Restricted Subsidiary pending the closing of such sale or disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) Holdings shall not,
and shall not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless (i) Holdings or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at
least equal to the fair market value, as determined in good faith by the Board
of Directors (including as to the value of all non-cash consideration), of the
shares and assets subject to such Asset Disposition and at least 85% of the
consideration thereof received by Holdings or such Restricted Subsidiary is in
the form of cash or cash equivalents, and (ii) an amount equal to 100% of the
Net Available Cash from such Asset Disposition is applied by Holdings (or such
Restricted Subsidiary, as the case may be) (A) first, to the extent Holdings
elects (or is required by the terms of any Senior Debt), to prepay, repay or
purchase Senior Debt or Debt (other than any Redeemable Stock) of a Wholly
Owned Subsidiary (in each case other than Debt owed to Holdings or an
Affiliate of Holdings) within 180 days from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash (or such longer
period as is permitted pursuant to the terms of the Notes Indenture in
connection with the application of Net Available Cash from an Asset
Disposition by Chemicals or a Restricted Subsidiary of Chemicals); (B) second,
to the extent of the balance of such Net Available Cash after application in
accordance with clause (A), at Holdings's election to the investment by
Holdings, any Wholly Owned Subsidiary or the Restricted Subsidiary making such
Asset Disposition in assets to replace the assets that were the subject of
such Asset Disposition or an asset that (as determined by the Board of
Directors) will be used in the business of Holdings, the Wholly Owned
Subsidiaries or the Restricted Subsidiary making such Asset Disposition
existing on the Issue Date or in businesses reasonably related thereto, in
each case within the later of one year from the date of such Asset Disposition
or the receipt of such Net Available Cash; (C) third, to the extent of the
balance of such Net Available Cash after application and in accordance with
clauses (A) and (B), to make an offer to purchase Discount Notes (and any
other Senior Debt designated by Holdings) pursuant to and subject to the
conditions contained in the Discount Notes Indenture; and (D) fourth, to the
extent of the balance of such Net Available Cash after application in
accordance with clauses (A), (B) and (C), to (x) the acquisition by Holdings,
any Wholly Owned Subsidiary or the Restricted Subsidiary making such Asset
Disposition of Tangible Property or (y) the prepayment, repayment or purchase
of Debt (other than any Redeemable Stock) of Holdings or Debt of any
Restricted Subsidiary (in either case other than Debt owed to Holdings or an
Affiliate of Holdings), in each case within one year from the later of the
receipt of such Net Available Cash and the date the offer described in
paragraph (b) below is consummated; provided, however, that in connection with
any prepayment, repayment or purchase of Debt pursuant to clause (A), (C) or
(D) above, Holdings shall cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased. Notwithstanding the foregoing provisions of this
paragraph, Holdings and its Restricted Subsidiaries shall not be required to
apply any Net Available Cash in accordance with this paragraph except to the
extent that the aggregate Net Available Cash from all Asset Dispositions which
are not applied in accordance with this paragraph exceeds $20 million. Pending
application of Net Available Cash pursuant to this paragraph, such Net
Available Cash shall be invested in Temporary Cash Investments.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the express assumption of Debt of Holdings or any
Restricted Subsidiary and the release of Holdings or such Restricted
Subsidiary from all liability on such Debt in connection with such Asset
Disposition and (y) securities received by Holdings or any Restricted
Subsidiary from the transferee that are converted by Holdings or such
Restricted Subsidiary into cash within 90 days of the receipt of such
securities. The 85% limitation referred to in the
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previous paragraph shall not apply to any Asset Disposition in which the cash
portion of the consideration received therefor, determined in accordance with
the previous sentence, is equal to or greater than what the after-tax proceeds
would have been had such Asset Disposition complied with such 85% limitation.
(b) In the event of an Asset Disposition that requires the purchase of the
Discount Notes (and other Senior Debt) pursuant to clause (a)(ii)(C) above,
Holdings will be required to purchase Discount Notes tendered pursuant to an
offer by Holdings for the Discount Notes (and other Senior Debt) at a purchase
price of 100% of the Accreted Value of each Discount Note on the date of such
offer (without premium) plus accrued but unpaid interest (or, in respect of
such other Senior Debt, such lesser price, if any, as may be provided for by
the terms of such Senior Debt) in accordance with the procedures (including
prorating in the event of oversubscription) set forth in the Discount Notes
Indenture. If the aggregate purchase price of Discount Notes (and any other
Senior Debt) tendered pursuant to such offer is less than the Net Available
Cash allotted to the purchase thereof, Holdings will be required to apply the
remaining Net Available Cash in accordance with clause (a)(ii)(D) above.
Holdings shall not be required to make such an offer to purchase Discount
Notes (and other Senior Debt) pursuant to this covenant if the Net Available
Cash available therefor is less than $10 million (which lesser amount shall be
carried forward for purposes of determining whether such an offer is required
with respect to any subsequent Asset Disposition).
To the extent that any or all of the Net Available Cash of any Foreign Asset
Sale is prohibited or delayed by applicable local law from being repatriated
to the United States, the portion of such Net Available Cash so affected shall
not be required to be applied at the time provided above, but may be retained
by the applicable Restricted Subsidiary (and invested in accordance with the
last sentence of the first paragraph of section (a) of this covenant) so long,
but only so long, as the applicable local law will not permit repatriation to
the United States. Holdings shall agree to cause the applicable Restricted
Subsidiary to promptly take all actions required by the applicable local law
to permit such repatriation. Once such repatriation of any of such affected
Net Available Cash is permitted under the applicable local law, such
repatriation shall be immediately effected and such repatriated Net Available
Cash will be applied in the manner as described in this covenant.
(c) Holdings shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Discount Notes pursuant to
this covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, Holdings shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
Limitation on Transactions with Affiliates. (a) Holdings shall not, and
shall not permit any Restricted Subsidiary to, conduct any business or enter
into any transaction or series of related transactions (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of Holdings (an "Affiliate Transaction") unless
(i) the terms of such Affiliate Transaction are (A) set forth in writing and
(B) as favorable to Holdings or such Restricted Subsidiary as terms that would
be obtainable at the time for a comparable transaction or series of related
transactions in arm's length dealings with an unrelated third Person, (ii) if
such Affiliate Transaction involves an amount in excess of $2.5 million, the
disinterested members of the Board of Directors have, by resolution,
determined in good faith that such Affiliate Transaction meets the criteria
set forth in (i)(B) above and (iii) if such Affiliate Transaction involves an
amount in excess of $7.5 million, such Affiliate Transaction is determined by
an Independent Financial Advisor to be fair from a financial standpoint to
Holdings or its Restricted Subsidiary, as the case may be. The foregoing
requirements shall not be applicable to (x) contracts with Koch Equities Inc.
or its affiliates in the ordinary course of business on terms as favorable to
Holdings or the relevant Restricted Subsidiary as would be obtainable at the
time for a comparable transaction in arm's length dealings with an unrelated
third Person or (y) any purchase or supply contracts in the ordinary course of
business on terms as favorable to Holdings or the relevant Restricted
Subsidiary as would be obtainable at the time for a comparable transaction in
arm's length dealings with an unrelated third Person, provided that the Board
of Directors shall, not later than the 60th day after the end of each six-
month period following the Issue Date, have reviewed such contracts and
determined that such contracts meet the criteria set forth in this clause (y).
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(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
Restricted Payment or Permitted Investment permitted to be paid pursuant to
the covenant described under "--Limitation on Restricted Payments", (ii) any
issuance of securities, or other payments, awards or grants in cash,
securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the Board of
Directors of Chemicals or the board of directors of the relevant Restricted
Subsidiary, (iii) loans or advances to employees in the ordinary course of
business, but in any event not to exceed $2 million in the aggregate
outstanding at any one time, (iv) the payment of reasonable and customary fees
to directors of Holdings and its Restricted Subsidiaries who are not employees
of Holdings or its Restricted Subsidiaries, (v) any transaction between
Holdings and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries,
(vi) one-time fees payable to TSG and Unicorn in connection with the
Transaction in an aggregate amount not to exceed $8.1 million and $4.4
million, respectively and (vii) indemnification payments to directors and
officers of Holdings in accordance with applicable state laws.
Limitation on Liens. Holdings shall not, and shall not permit any Restricted
Subsidiary to, directly or indirectly, Incur or permit to exist any Lien of
any nature whatsoever on any of its properties (including Capital Stock of a
Restricted Subsidiary) securing Debt of Holdings, whether owned at the Issue
Date or thereafter acquired, other than Permitted Liens, without effectively
providing that the Discount Notes shall be secured equally and ratably with
(or prior to) the obligations so secured for so long as such obligations are
so secured; provided, however, that Holdings may Incur other Liens to secure
Debt as long as the amount of outstanding Debt secured by Liens Incurred
pursuant to this proviso does not exceed 5% of Consolidated Net Tangible
Assets, as determined based on the consolidated balance sheet of Holdings as
of the end of the most recent fiscal quarter ending at least 45 days prior
thereto.
Limitation on Sale/Leaseback Transactions. Holdings shall not, and shall not
permit any Restricted Subsidiary to, enter into any Sale/Leaseback Transaction
with respect to any property unless (i) Holdings or such Restricted Subsidiary
would be entitled to (A) Incur Debt in an amount equal to the Attributable
Debt with respect to such Sale/Leaseback Transaction pursuant to the covenant
described under "--Limitation on Debt" and (B) create a Lien on such property
securing such Attributable Debt without equally and ratably securing the
Discount Notes pursuant to the covenant described under "--Limitation on
Liens", (ii) the net proceeds received by Holdings or any Restricted
Subsidiary in connection with such Sale/Leaseback Transaction are at least
equal to the fair value (as determined by the Board of Directors) of such
property and (iii) Holdings applies the proceeds of such transaction in
compliance with the covenant described under "--Limitation on Sale of Assets
and Subsidiary Stock".
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. Holdings shall not sell or otherwise dispose of any shares of
Capital Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of
any shares of its Capital Stock except (i) to Holdings or a Wholly Owned
Subsidiary, (ii) if, immediately after giving effect to such issuance, sale or
other disposition, such Restricted Subsidiary remains a Restricted Subsidiary;
or (iii) if all shares of Capital Stock of such Restricted Subsidiary are sold
or otherwise disposed of; provided, however, that in connection with any sale
pursuant to this clause (iii), Holdings may retain no more than 10% of the
outstanding Capital Stock of the Restricted Subsidiary being sold as a portion
of the purchase price in connection with such sale. In connection with any
such sale or disposition of Capital Stock, Holdings or any such Restricted
Subsidiary shall comply with the covenant described under "--Limitation on
Sales of Assets and Subsidiary Stock."
Impairment of Security Interest. Holdings shall not, and Holdings shall not
permit any of its Subsidiaries to, take or knowingly or negligently omit to
take, any action which action or omission might or would have the result of
impairing or adversely affecting the security interest with respect to the
Collateral for the benefit of the Trustee and the holders of the Discount
Notes, and Holdings shall not, and shall not permit any of its Subsidiaries
to, grant to any Person other than the Collateral Agent, for the benefit of
the Trustee and the holders of the Discount Notes and other beneficiaries
described in the Pledge Agreement, any interest whatsoever in any of the
Collateral.
Amendments to Pledge Agreement. Holdings shall not, and Holdings shall not
permit any of its Subsidiaries to, amend, modify or supplement, or permit or
consent to any amendment, modification or supplement of, the Pledge Agreement
in any way that would be adverse to the holders of the Discount Notes.
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SEC Reports. Notwithstanding that Holdings may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, Holdings shall file with the SEC and provide the Trustee and Holders with
such annual reports and such information, documents and other reports
specified in Sections 13 and 15(d) of the Exchange Act, including, without
limitation Forms 8-K, 10-Q and 10-K, such information, documents and other
reports to be so filed and provided at the times specified for the filing of
such information, documents and reports under such Sections.
MERGER AND CONSOLIDATION
Holdings shall not consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, all or
substantially all its assets to, any Person, unless: (i) the resulting,
surviving or transferee Person (the "Successor Company") shall be a Person
organized and existing under the laws of the United States of America, any
State thereof or the District of Columbia and the Successor Company (if not
Holdings) expressly assumes, by an indenture supplemental thereto, executed
and delivered to the Trustee, in form acceptable to the Trustee, all the
obligations of Holdings under the Discount Notes, the Discount Notes Indenture
and the Pledge Agreement; (ii) immediately after giving effect to such
transaction (and treating any Debt which becomes an obligation of the
Successor Company or any Subsidiary as a result of such transaction as having
been Incurred by such Successor Company or such Subsidiary at the time of such
transaction), no Default shall have occurred and be continuing; (iii)
immediately after giving effect to such transaction, the Successor Company
would be able to Incur an additional $1.00 of Debt pursuant to paragraph (a)
of the covenant described under "--Limitation on Debt"; (iv) immediately after
giving effect to such transaction, the Successor Company shall have
Consolidated Net Worth in an amount which is not less than the Consolidated
Net Worth of Holdings prior to such transaction minus any costs incurred in
connection with such transaction; and (v) Holdings shall have delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger or transfer and such supplemental indenture (if
any) comply with the Discount Notes Indenture.
The Successor Company shall be the successor to Holdings and shall succeed
to, and be substituted for, and may exercise every right and power of,
Holdings under the Discount Notes Indenture, but the predecessor Person in the
case of a conveyance, transfer or lease shall not be released from the
obligation to pay the principal of and interest on the Discount Notes.
DEFAULTS
An "Event of Default" is defined in the Discount Notes Indenture as (a) a
default in any payment of interest on any Discount Note when the same becomes
due and payable, and such default continues for a period of 30 days; (b) a
default in the payment of the principal of any Discount Note when the same
becomes due and payable at its Stated Maturity, upon redemption, upon
declaration, upon required repurchase or otherwise; (c) the failure by
Holdings to comply with its obligations under "--Merger and Consolidation";
(d) the failure by Holdings to comply for 30 days after notice with any of its
obligations in the covenants described above under "--Change of Control"
(other than a failure to purchase Discount Notes) or under "--Certain
Covenants" under "--Limitation on Debt", "--Limitation on Restricted
Payments", "--Limitation on Restrictions on Distributions from Restricted
Subsidiaries", "--Limitation on Sales of Assets and Subsidiary Stock" (other
than a failure to purchase Discount Notes), "--Limitation on Transactions with
Affiliates", "--Limitation on Liens", "--Limitation on Sale/Leaseback
Transactions", "--Limitation on the Sale or Issuance of Capital Stock of
Restricted Subsidiaries", "--Impairment of Security Interest", "--Amendments
to Pledge Agreement" or "--SEC Reports"; (e) the failure by Holdings to comply
with any of its agreements in the Discount Notes or the Discount Notes
Indenture (other than those referred to in (a), (b), (c) or (d) above) and
such failure continues for 60 days after the notice specified below; (f) a
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Debt for money
borrowed by Holdings or any of its Subsidiaries (or the payment of which is
Guaranteed by Holdings or any of its Subsidiaries) whether such Debt or
Guarantee now exists, or is created after the date of the Discount Notes
Indenture, which default (i) is caused by failure to pay principal of or
premium, if any, or interest on such Debt prior to the expiration of the grace
period provided in such Debt on the date of such default ("Payment Default")
or (ii) results in the
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acceleration of such Debt prior to its express maturity and, in each case, the
principal amount of any such Debt, together with the principal amount of any
other such Debt under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $10 million or more; (g) certain
events of bankruptcy or insolvency of Holdings or any Significant Subsidiary;
(h) any final non-appealable judgment or decree not covered by insurance or as
to which the insurance carrier has denied responsibility for the payment of
money in excess of $10 million is rendered against Holdings or a Significant
Subsidiary and is not discharged and there is a period of 60 days following
such judgment during which such judgment or decree is not discharged, waived
or the execution thereof stayed; or (i) the security interest under the Pledge
Agreement shall, at any time, cease to be in full force and effect for any
reason other than the satisfaction in full of all obligations under the
Discount Notes Indenture and discharge of the Discount Notes Indenture or any
security interest created thereunder shall be declared invalid or
unenforceable or Holdings shall assert, in any pleading in any court of
competent jurisdiction, that such security interest is invalid or
unenforceable. A Default under clause (d) or (e) is not an Event of Default
until the Trustee or the Holders of at least 25% in principal amount of the
Discount Notes notify Holdings of the Default and Holdings does not cure such
Default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Discount Notes may
declare the Accreted Value of and accrued but unpaid interest on all the
Discount Notes to be due and payable (collectively, the "Default Amount").
Upon such a declaration, the Default Amount shall be due and payable
immediately. If an Event of Default relating to certain events of bankruptcy,
insolvency or reorganization of Holdings or a Significant Subsidiary occurs
and is continuing, the Default Amount on all the Discount Notes will ipso
facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any holders of the Discount Notes.
Under certain circumstances, the holders of a majority in principal amount of
the outstanding Discount Notes may rescind any such acceleration with respect
to the Discount Notes and its consequences.
Subject to the provisions of the Discount Notes Indenture relating to the
duties of the Trustee, in case an Event of Default occurs and is continuing,
the Trustee will be under no obligation to exercise any of the rights or
powers under the Discount Notes Indenture at the request or direction of any
of the holders of the Discount Notes unless such holders have offered to the
Trustee reasonable indemnity or security against any loss, liability or
expense. Except to enforce the right to receive payment of principal, premium
(if any) or interest when due, no holder of a Discount Note may pursue any
remedy with respect to the Discount Notes Indenture or the Discount Notes
unless (i) such holder has previously given the Trustee notice that an Event
of Default is continuing; (ii) holders of at least 25% in principal amount of
the outstanding Discount Notes have requested the Trustee to pursue the
remedy; (iii) such holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense; (iv) the Trustee has not
complied with such request within 60 days after the receipt thereof and the
offer of security or indemnity and (v) the holders of a majority in principal
amount of the outstanding Discount Notes have not given the Trustee a
direction inconsistent with such request within such 60-day period. Subject to
certain restrictions, the Holders of a majority in principal amount of the
outstanding Discount Notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
of exercising any trust or power conferred on the Trustee.
The Discount Notes Indenture provides that if a Default occurs and is
continuing and is known to the Trustee, the Trustee must mail to each Holder
notice of the Default within 90 days (or such shorter period as may be
required by applicable law) after it occurs. Except in the case of a Default
in the payment of principal of, premium (if any) or interest on any Discount
Note, the Trustee may withhold notice if and so long as a committee of its
trust officers determines that withholding notice is in the interest of the
holders of the Discount Notes. In addition, Holdings is required to deliver to
the Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred
during the previous year. Holdings also is required to deliver to the Trustee,
within 30 days after the occurrence thereof, written notice of any event which
would constitute certain Defaults, their status and what action Holdings is
taking or proposes to take in respect thereof.
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AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Discount Notes Indenture and the Security
Documents may be amended or supplemented with the consent of the holders of a
majority in principal amount of the Discount Notes then outstanding and any
past default or compliance with any provisions may be waived with the consent
of the holders of a majority in principal amount of the Discount Notes then
outstanding. However, without the consent of each holder of an outstanding
Discount Note, no amendment may, among other things, (i) reduce the amount of
Discount Notes whose holders must consent to an amendment; (ii) reduce the
rate of or extend the time for payment of interest on any Discount Note; (iii)
reduce the principal amount at maturity or Accreted Value of any Discount Note
or extend the Stated Maturity of any Discount Note; (iv) reduce the premium
payable upon the redemption of any Discount Note or change the time at which
any Discount Note may or shall be redeemed; (v) make any Discount Note payable
in money other than that stated in the Discount Note; (vi) impair the right of
any holder of the Discount Notes to receive payment of principal of, or
premium if any, and interest on such holder's Discount Notes on or after the
due dates therefor or to institute suit for the enforcement of any payment on
or with respect to such holder's Discount Notes; (vii) make any change in the
amendment provisions which requires each holder's consent or in the waiver
provisions; (viii) make any change in the Security Documents that would
adversely affect the Holders.
Without the consent of any holder of the Discount Notes, Holdings and the
Trustee may amend or supplement the Discount Notes Indenture or any Security
Document to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of Holdings
under the Discount Notes Indenture, to provide for uncertificated Discount
Notes in addition to or in place of certificated Discount Notes (provided that
the uncertificated Discount Notes are issued in registered form for purposes
of Section 163(f) of the Code, or in a manner such that the uncertificated
Discount Notes are described in Section 163(f)(2)(B) of the Code), to add
Guarantees with respect to the Discount Notes, to add to the covenants of
Holdings and its Subsidiaries for the benefit of the Holders or to surrender
any right or power conferred upon Holdings, to make any change that does not
adversely affect the rights of any Holder or to comply with any requirement of
the SEC in connection with the qualification of the Discount Notes Indenture
under the Trust Indenture Act of 1939.
The consent of the Holders is not necessary under the Discount Notes
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
Holdings has agreed not to amend or waive any covenant in the Discount Notes
Indenture that would make the terms of the Discount Notes materially more
onerous on the lenders under the Credit Agreement without the prior written
consent of such lenders.
After an amendment under the Discount Notes Indenture becomes effective,
Holdings is required to mail to Holders a notice briefly describing such
amendment. However, the failure to give such notice to all Holders, or any
defect therein, will not impair or affect the validity of the amendment.
TRANSFER
The Discount Notes will be issued in registered form and will be transferred
only upon the surrender of the Discount Notes being transferred for
registration of transfer. Holdings may require payment of a sum sufficient to
cover any tax, assessment or other governmental charge payable in connection
with certain transfers and exchanges.
DEFEASANCE
Holdings at any time may terminate all its obligations under the Discount
Notes and the Discount Notes Indenture ("legal defeasance"), except for
certain obligations, including those respecting the defeasance trust and
obligation to register the transfer or exchange of the Discount Notes, to
replace mutilated, destroyed, lost or stolen Discount Notes and to maintain a
registrar and paying agent in respect of the Discount Notes. Holdings at
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any time may terminate its obligations under the covenants described under "--
Certain Covenants" and "--Change of Control", the operation of the cross
acceleration provision, the bankruptcy provisions with respect to Significant
Subsidiaries and the judgment default provision described under "--Defaults"
above and the limitations contained in clauses (iii) and (iv) of the first
paragraph under "Merger and Consolidation" above ("covenant defeasance").
Holdings may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If Holdings exercises its legal
defeasance option, payment of the Discount Notes may not be accelerated
because of an Event of Default with respect thereto. If Holdings exercises its
covenant defeasance option, payment of the Discount Notes may not be
accelerated because of an Event of Default specified in clause (d), (f), (g)
(with respect only to Significant Subsidiaries) or (h) under "--Events of
Default" above or the failure of Holdings to comply with "--Change of Control"
above.
In order to exercise either defeasance option, Holdings must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Discount Notes to redemption or maturity, as the case may be,
and must comply with certain other conditions, including delivering to the
Trustee an Opinion of Counsel to the effect that holders of the Discount Notes
will not recognize income, gain or loss for Federal income tax purposes as a
result of such deposit and defeasance and will be subject to Federal income
tax on the same amount and in the same manner and at the same times as would
have been the case if such deposit and defeasance had not occurred (and, in
the case of legal defeasance only, such Opinion of Counsel must be based on a
ruling of the Internal Revenue Service or a change in applicable Federal
income tax law).
CONCERNING THE TRUSTEE
Fleet National Bank is to be the Trustee under the Discount Notes Indenture
and has been appointed by Holdings as Registrar and Paying Agent with regard
to the Discount Notes.
The Holders of a majority in principal amount of the outstanding Discount
Notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Discount Notes Indenture provides that if an Event of
Default occurs (and is not cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Discount
Notes Indenture at the request of any Holder of Discount Notes, unless such
Holder shall have offered to the Trustee security and indemnity satisfactory
to it against any loss, liability or expense and then only to the extent
required by the terms of the Discount Notes Indenture.
GOVERNING LAW
The Discount Notes Indenture provides that it and the Discount Notes will be
governed by, and construed in accordance with, the laws of the State of New
York without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be
required thereby.
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CERTAIN DEFINITIONS
"Accreted Value" means, (A) as of any date prior to August 15, 2001, an
amount per $1,000 principal amount at maturity of Discount Notes that is equal
to the sum of (a) the initial offering price ($521.51 per $1,000 principal
amount of Discount Notes) of such Discount Notes and (b) the portion of the
excess of the principal amount of such Discount Note over such initial
offering price which shall have been amortized through such date, such amount
to be so amortized on a daily basis and compounded semi-annually on each
February 15 and August 15 at the rate of 13.5% per annum from the Issue Date
through the date of determination computed on the basis of a 360-day year of
twelve 30-day months (the following table indicating the Accreted Value at the
semiannual compounding dates with respect to each $1,000 principal amount at
maturity of Discount Notes set forth below):
<TABLE>
<CAPTION>
ACCRETED
DATE VALUE
---- --------
<S> <C>
August 21, 1996................................................... $ 521.51
February 15, 1997................................................. 555.51
August 15, 1997................................................... 593.00
February 15, 1998................................................. 633.03
August 15, 1998................................................... 675.76
February 15, 1999................................................. 721.37
August 15, 1999................................................... 770.07
February 15, 2000................................................. 822.05
August 15, 2000................................................... 877.54
February 15, 2001................................................. 936.77
August 15, 2001................................................... 1,000.00
</TABLE>
and (B) as of any date after August 15, 2001, the principal amount of each
Discount Note.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the provisions described under "--Certain
Covenants--Limitation on Affiliate Transactions" and "--Certain Covenants--
Limitations on Sales of Assets and Subsidiary Stock" only, "Affiliate" shall
also mean any beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act) of Capital Stock representing 10% or more of the total voting
power of the Voting Stock (on a fully diluted basis) of Holdings or of rights
or warrants to purchase such Capital Stock (whether or not currently
exercisable) and any Person who would be an Affiliate of any such beneficial
owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) of shares of
Capital Stock of a Restricted Subsidiary (other than directors' qualifying
shares), property or other assets (each referred to for the purposes of this
definition as a "disposition") by Holdings or any of its Restricted
Subsidiaries, including any disposition by means of a merger, consolidation or
similar transaction, for gross proceeds in excess of $2.0 million, other than
(i) a disposition by a Restricted Subsidiary to Holdings or by Holdings or a
Restricted Subsidiary to a Wholly Owned Subsidiary, (ii) a disposition of
property or assets (other than shares of Capital Stock of a Restricted
Subsidiary and which do not constitute all or substantially all of the assets
of any division or line of business of Holdings or any Restricted Subsidiary)
at fair market value in the ordinary course of business, (iii) for purposes of
the covenant described under "--Certain Covenants--Limitation on Sale of
Assets and Subsidiary Stock" only, a disposition that constitutes a Restricted
Payment or a Permitted Investment permitted by the covenant described under
"--Certain Covenants--Limitation on Restricted Payments", (iv) the disposition
of all or substantially all of the assets of Holdings permitted by the
covenant described under "Merger and Consolidation" and (v) the disposition of
assets in exchange for other assets that satisfy the requirement for
replacement assets set forth in
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Section (a)(ii)(B) of the covenant described under "--Certain Covenants--
Limitation on Sales of Assets and Subsidiary Stock".
"Attributable Debt", in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Discount Notes, compounded annually) of the total obligations of
the lessee for rental payments during the remaining term of the lease included
in such Sale/Leaseback Transaction (including any period for which such lease
has been extended).
"Average Life" means, as of the date of determination, with respect to any
Debt or Preferred Stock, the quotient obtained by dividing (i) the sum of the
products of numbers of years from the date of determination to the dates of
each successive scheduled principal payment of such Debt or redemption or
similar payment with respect to such Preferred Stock multiplied by the amount
of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of Holdings or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Canadian Facility" means a revolving loan and letter of credit facility for
loans and letters of credit in Canadian or U.S. dollars to or for the account
of Sterling Pulp Chemicals, Ltd., a Wholly Owned Subsidiary of Holdings.
"Capital Lease Obligations" of a Person means any obligation which is
required to be classified and accounted for as a capital lease on the face of
a balance sheet of such Person prepared in accordance with GAAP; the amount of
such obligation shall be the capitalized amount thereof, determined in
accordance with generally accepted accounting principles; and the Stated
Maturity thereof shall be the date of the last payment of rent or any other
amount due under such lease prior to the first date upon which such lease may
be terminated by the lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or
interests in such Person (however designated), including any Preferred Stock,
but excluding any debt securities convertible into or exchangeable for such
equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commodity Agreement" means any commodity future contract, commodity option
or other similar agreement or arrangement (limited in amount to underlying
exposure, and not for speculative purposes) entered into by Holdings or any
Restricted Subsidiary that is designed to protect Holdings or any Restricted
Subsidiary against fluctuations in the price of commodities used by Holdings
or a Restricted Subsidiary as raw materials in the ordinary course of
business.
"Consolidated Current Liabilities" as of the date of determination means the
aggregate amount of liabilities of Holdings and its consolidated Subsidiaries
which may properly be classified as current liabilities (including taxes
accrued as estimated), on a consolidated basis, after eliminating (i) all
intercompany items between Holdings and any Subsidiary and (ii) all current
maturities of long-term Debt, all as determined in accordance with GAAP
consistently applied.
"Consolidated EBITDA Coverage Ratio" as of any date of determination means
the ratio of (i) the aggregate amount of EBITDA for the period of the most
recent four consecutive fiscal quarters ending at least 45 days prior to the
date of such determination to (ii) Consolidated Interest Expense for such four
fiscal quarters; provided, however, that (1) if Holdings or any Restricted
Subsidiary has Incurred any Debt since the beginning of such period that
remains outstanding or if the transaction giving rise to the need to calculate
the Consolidated EBITDA Coverage Ratio is an Incurrence of Debt, or both,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving effect on a pro forma basis to such Debt as if such Debt had been
Incurred on the first day of such period and the discharge of any other Debt
repaid, repurchased, defeased or otherwise
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discharged with the proceeds of such new Debt as if such discharge had
occurred on the first day of such period, (2) if since the beginning of such
period Holdings or any Restricted Subsidiary shall have made any Asset
Disposition, the EBITDA for such period shall be reduced by an amount equal to
the EBITDA (if positive) directly attributable to the assets which are the
subject of such Asset Disposition for such period, or increased by an amount
equal to the EBITDA (if negative), directly attributable thereto for such
period, and Consolidated Interest Expense for such period shall be reduced by
an amount equal to the Consolidated Interest Expense directly attributable to
any Debt of Holdings or any Restricted Subsidiary repaid, repurchased,
defeased or otherwise discharged with respect to Holdings and its continuing
Restricted Subsidiaries in connection with such Asset Dispositions for such
period (or, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Debt of such Restricted Subsidiary to the extent Holdings and its continuing
Restricted Subsidiaries are no longer liable for such Debt after such sale),
(3) if since the beginning of such period Holdings or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or
an acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder,
which constitutes all or substantially all of an operating unit of a business,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto (including the Incurrence of any Debt)
as if such Investment or acquisition occurred on the first day of such period,
and (4) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into Holdings or any
Restricted Subsidiary since the beginning of such period) shall have made any
Asset Disposition or any Investment that would have required an adjustment
pursuant to clause (2) or (3) above if made by Holdings or a Restricted
Subsidiary during such period, EBITDA and Consolidated Interest Expense for
such period shall be calculated after giving pro forma effect thereto as if
such Asset Disposition or Investment occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to
an acquisition of assets, the amount of income or earnings relating thereto,
and the amount of Consolidated Interest Expense associated with any Debt
Incurred in connection therewith, the pro forma calculations shall be
determined in good faith by a responsible financial or accounting Officer of
Holdings. If any Debt bears a floating rate of interest and is being given pro
forma effect, the interest of such Debt shall be calculated as if the rate in
effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Debt if such Interest Rate Agreement has a remaining term in excess of 12
months). For the purpose of calculating the Consolidated EBITDA Coverage Ratio
at any time until two years after the Issue Date in connection with the
Incurrence of Debt by any Restricted Subsidiary to finance the acquisition of
a business reasonably related to the business of Holdings and the Restricted
Subsidiaries, any non-cash interest expense on the Discount Notes shall be
excluded.
"Consolidated Interest Expense" means, for any period, the total interest
expense of Holdings and its consolidated Restricted Subsidiaries, plus, to the
extent not included in such interest expense, (i) interest expense
attributable to Capital Lease Obligations, (ii) amortization of debt discount
and debt issuance cost, (iii) capitalized interest, (iv) non-cash interest
payments, (v) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing, (vi) net costs
under Interest Rate Agreements (including amortization of fees), (vii)
Preferred Stock dividends in respect of all Redeemable Stock of Holdings and
all Preferred Stock held by Persons other than Holdings or a Wholly Owned
Subsidiary, (viii) interest incurred in connection with Investments in
discontinued operations; (ix) interest actually paid by Holdings or any of its
Restricted Subsidiaries under any Guarantee of Debt or other obligation of any
other Person and (x) the cash contributions to any employee stock ownership
plan or similar trust to the extent such contributions are used by such plan
or trust to pay interest or fees to any Person (other than Holdings or any
Restricted Subsidiary) in connection with Debt Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of Holdings
and its consolidated Subsidiaries; provided, however, that there shall not be
included in such Consolidated Net Income (i) any net income of any Person if
such Person is not a Restricted Subsidiary, except that (A) subject to the
exclusion contained in clause (iv) below, Holdings' equity in the net income
of any such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such Person
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during such period to Holdings or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other distribution
to a Restricted Subsidiary, to the limitations contained in clause (iii)
below) and (B) Holdings' equity in a net loss of any such Person for such
period shall be included in determining such Consolidated Net Income to the
extent of any cash actually contributed by Holdings or a Restricted Subsidiary
to such Person during such period; (ii) any net income (or loss) of any Person
acquired by Holdings or a Subsidiary in a pooling of interests transaction for
any period prior to the date of such acquisition; (iii) any net income of any
Restricted Subsidiary to the extent such Restricted Subsidiary is subject to
restrictions, directly or indirectly, on the payment of dividends or the
making of distributions by such Restricted Subsidiary, directly or indirectly,
to Holdings, except that (A) subject to the exclusion contained in clause (iv)
below), Holdings's equity in the net income of any such Restricted Subsidiary
for such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Restricted Subsidiary
during such period to Holdings or another Restricted Subsidiary as a dividend
or other distribution (subject, in the case of a dividend or other
distribution to another Restricted Subsidiary, to the limitation contained in
this clause) and (B) Holdings's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such Consolidated
Net Income; (iv) any gain or loss realized upon the sale or other disposition
of any assets of Holdings or its consolidated subsidiaries (including pursuant
to any sale-and-leaseback arrangement) which is not sold or otherwise disposed
of in the ordinary course of business and any gain or loss realized upon the
sale or other disposition of any Capital Stock of any Person; (v)
extraordinary gains or losses; and (vi) the cumulative effect of a change in
accounting principles. Notwithstanding the foregoing, for the purposes of the
covenant described under "Certain Covenants--Limitation on Restricted
Payments" only, there shall be excluded from Consolidated Net Income any
dividends, repayments of loans or advances or other transfers of assets from
Unrestricted Subsidiaries to Holdings or a Restricted Subsidiary to the extent
such dividends, repayments or transfers increase the amount of Restricted
Payments permitted under such covenant pursuant to clause (a)(3)(E) thereof.
"Consolidated Net Worth" of any Person means the total of the amounts shown
on the balance sheet of such Person and its consolidated subsidiaries,
determined on a consolidated basis in accordance with GAAP, as of the end of
the most recent fiscal quarter of such Person ending at least 45 days prior to
the taking of any action for the purpose of which the determination is being
made, as (i) the par or stated value of all outstanding Capital Stock of such
Person plus (ii) paid-in capital or capital surplus relating to such Capital
Stock plus (iii) any retained earnings or earned surplus less (A) any
accumulated deficit, (B) any amounts attributable to Redeemable Stock and (C)
any amounts attributable to Exchangeable Stock.
"Consolidated Net Tangible Assets" as of any date of determination, means
the total amount of assets (less accumulated depreciation and amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items) which would appear on a consolidated balance sheet
of Holdings and its consolidated Subsidiaries, determined on a consolidated
basis in accordance with GAAP, and after deducting therefrom Consolidated
Current Liabilities and, to the extent otherwise included, the amounts of: (i)
minority interests in consolidated Subsidiaries held by Persons other than
Holdings or a Subsidiary; (ii) excess of cost over fair value of assets of
businesses acquired, as determined in good faith by the Board of Directors;
(iii) any revaluation or other write-up in book value of assets subsequent to
the Issue Date as a result of a change in the method of valuation in
accordance with GAAP consistently applied; (iv) unamortized debt discount and
expenses and other unamortized deferred charges, goodwill, patents,
trademarks, service marks, trade names, copyrights, licenses, organization or
developmental expenses and other intangible items; (v) treasury stock; and
(vi) cash set apart and held in a sinking or other analogous fund established
for the purpose of redemption or other retirement of Capital Stock to the
extent such obligation is not reflected in Consolidated Current Liabilities.
"Credit Agreement" means the agreement dated June 21, 1996 among Chemicals,
Texas Commerce Bank National Association, as administrative agent, and the
other lenders party thereto, and their respective successors and assigns, as
the same may be amended, supplemented, waived and otherwise modified from time
to time in accordance with the terms thereof.
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"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement (limited in
amount to underlying exposure, and not for speculative purposes) to which such
Person is a party or a beneficiary.
"Debt" of any Person means, without duplication, (i) the principal of and
premium (if any) in respect of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other
similar instruments for the payment of which such Person is responsible or
liable; (ii) all Capital Lease Obligations of such Person and all Attributable
Debt in respect of Sale/Leaseback Transactions entered into by such Person;
(iii) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such Person
and all obligations of such Person under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of any obligor on
any letter of credit, banker's acceptance or similar credit transaction (other
than obligations with respect to letters of credit securing obligations (other
than obligations described in (i) through (iii) above) entered into in the
ordinary course of business of such Person to the extent such letters of
credit are not drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the third Business Day following receipt by such
Person of a demand for reimbursement following payment on the letter of
credit); (v) all Redeemable Stock of such Person and, with respect to any
Subsidiary of such Person, all Preferred Stock other than pay-in-kind
dividends in the form of Preferred Stock (the amount of Debt represented
thereby shall equal the greater of its liquidation preference and the
redemption, repayment or other repurchase obligations with respect thereto,
but excluding any accrued dividends); (vi) all Hedging Obligations of such
Person; (vii) all obligations of the type referred to in clauses (i) through
(v) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee; and (viii) all obligations of the type referred to in clauses (i)
through (vi) of other Persons secured by any Lien on any property or asset of
such Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured. The amount of
Debt of any Person at any date shall be the outstanding balance of such date
of all unconditional obligations as described above and the maximum liability
upon the occurrence of the contingency giving rise to the obligation, of any
contingent obligations at such date; provided, however, that the amount
outstanding at any time of any Debt Incurred with original issue discount is
the face amount of such Debt less the remaining unamortized portion of the
original issue discount of such Debt at such time as determined in conformity
with GAAP.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense of
Holdings, (b) depreciation expense, (c) amortization expense, (d) an amount
equal to any extraordinary gain or loss realized in connection with an Asset
Disposition, (e) the impact of accruals for periods prior to the Issue Date
for the Company's Stock Appreciation Rights Plan and (f) all other non-cash
items reducing such Consolidated Net Income (excluding any non-cash items to
the extent it represents an accrual of, or reserve for, cash disbursements for
any subsequent period) less all non-cash items increasing such Consolidated
Net Income (such amount calculated pursuant to this clause (f) not to be less
than zero), in each case for such period. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation
and amortization of, a Subsidiary of Holdings shall be added to Consolidated
Net Income to compute EBITDA only to the extent (and in the same proportion)
that the net income of such Subsidiary was included in calculating
Consolidated Net Income and only if a corresponding amount would be permitted
at the date of determination to be dividended or otherwise paid to Holdings by
such Subsidiary without prior approval (that has not been obtained), pursuant
to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to
such Subsidiary or its stockholders.
"ESOP Loan Provisions" means the provisions of the Credit Agreement pursuant
to which lenders thereunder have committed to make ESOP loans available to
Chemicals.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchangeable Stock" means any Capital Stock which is exchangeable or
convertible into another security (other than Capital Stock of Holdings which
is neither Exchangeable Stock nor Redeemable Stock).
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy.
"Foreign Asset Sale" means an Asset Disposition in respect of Capital Stock
or assets of a Foreign Subsidiary or a Restricted Subsidiary of the type
described in Section 936 of the Code to the extent that the proceeds of such
Asset Disposition are received by a Person subject in respect of such proceeds
to the tax laws of a jurisdiction other than the United States or any state
thereof or the District of Columbia.
"Foreign Subsidiary" means a Restricted Subsidiary that is incorporated in a
jurisdiction other than the United States or a State thereof or the District
of Columbia and with respect to which more than 66 2/3% of any of its sales,
earnings or assets (determined on a consolidated basis in accordance with
GAAP) are located in, generated from or derived from operations located in
territories or jurisdictions outside the United States.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth (i) in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) in such
other statements by such other entity as approved by a significant segment of
the accounting profession, and (iv) the rules and regulations of the SEC
governing the inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Debt or other obligation of any Person
and any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt or other obligation of such Person (whether arising by
virtue of partnership arrangements, or by agreement to keep-well, to purchase
assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Debt or other obligation
of the payment thereof or to protect such obligee against loss in respect
thereof (in whole or in part); provided, however, that the term "Guarantee"
shall not include endorsements for collection or deposit in the ordinary
course of business or guarantees of obligations of a Subsidiary in the
ordinary course of business if such obligations do not constitute Debt of such
Subsidiary. The term "Guarantee" used as a verb has a corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement, Currency Agreement or Commodity
Agreement (limited in amount to underlying exposure, and not for speculative
purposes).
"Holder" means the Person in whose name a Discount Note is registered on the
Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Debt or Capital Stock of a Person existing at
the time such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary. The term "Incurrence" when used as a noun
shall have a correlative meaning. The accretion of principal of a non-interest
bearing or other discount security shall be deemed the Incurrence of Debt.
"Independent Financial Advisor" means a reputable accounting, appraisal or
investment banking firm that, in the reasonable good faith judgment of the
Board of Directors of Holdings, is qualified to perform the task for which
such firm has been engaged and is independent with respect to Holdings and its
Affiliates.
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"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement (limited in
amount to underlying exposure, and not for speculative purposes) designed to
protect Holdings or any Restricted Subsidiary against fluctuations in interest
rates.
"Investment" in any Person means any loan or advance to, any acquisition of
Capital Stock, equity interest, obligation or other security of, or capital
contribution or other investment in, or any other credit extension to
(including by way of Guarantee of any Debt of) such Person. For purposes of
the definition of "Unrestricted Subsidiary," the definition of "Restricted
Payment" and the covenant described under "--Certain Covenants--Limitation on
Restricted Payments", (i) "Investment" shall include the portion
(proportionate to Holdings' equity interest in such Subsidiary) of the fair
market value of the net assets of any Subsidiary of Holdings at the time that
such Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that if such designation is made in connection with the acquisition of such
Subsidiary or the assets owned by such Subsidiary, the "Investment" in such
Subsidiary shall be deemed to be the consideration paid in connection with
such acquisition; provided, further, however, that upon a redesignation of
such Subsidiary as a Restricted Subsidiary, Holdings shall be deemed to
continue to have a permanent "Investment" in an Unrestricted Subsidiary equal
to an amount (if positive) equal to (x) Holdings' "Investment" in such
Subsidiary at the time of such redesignation less (y) the portion
(proportionate to Holdings' equity interest in such Subsidiary) of the fair
market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors.
"Investment Grade Rating" means a rating of BBB- or higher by S&P and Baa3
or higher by Moody's or the equivalent of such rating by S&P and Moody's or by
any other Rating Agencies selected as provided in the definition of Rating
Agency.
"Issue Date" means the date on which the Discount Notes are originally
issued, after giving effect to the Transaction.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investor Service, Inc.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and
when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Debt or other obligations relating to
such properties or assets that are the subject of such Asset Disposition or
received in any other noncash form) therefrom, in each case net of (i) all
legal, title and recording expenses, commissions and other fees and expenses
incurred, and all Federal, state, provincial, foreign and local taxes required
to be accrued as a liability under GAAP, as a consequence of such Asset
Disposition, (ii) all payments made on any Debt which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any Lien
upon or other security agreement of any kind with respect to such assets, or
which must by its terms, or in order to obtain a necessary consent to such
Asset Disposition, or by applicable law be repaid out of the proceeds from
such Asset Disposition, and (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition and (iv) the deduction of
appropriate amounts provided by the sellers as a reserve, in accordance with
GAAP, against any liabilities associated with the property or other assets
disposed in such Asset Disposition and retained by Holdings or any Restricted
Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
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"Non-Convertible Capital Stock" means, with respect to any corporation, any
non-convertible Capital Stock of such corporation and any Capital Stock of
such corporation convertible solely into non-convertible common stock of such
corporation; provided, however, that Non-Convertible Capital Stock shall not
include any Redeemable Stock or Exchangeable Stock.
"Permitted Holders" means (i) the purchasers in the Equity Private
Placement, (ii) any Person who on the date of issuance of the Discount Notes
is an officer, director, stockholder, employee or consultant of TSG or
Unicorn, (iii) each of Frank J. Hevrdejs, William C. Oehmig, J. Virgil
Waggoner, Robert W. Roten and Gordon Cain, (iv) any Permitted Transferee with
respect to any Person covered by the preceding clauses (i) through (iii), (v)
the New ESOP or (vi) any savings or investment plan sponsored by Chemicals or
Holdings.
"Permitted Investment" means an Investment by Holdings or any Restricted
Subsidiary in (i) a Wholly Owned Subsidiary or a Person that will, upon the
making of such Investment, become a Wholly Owned Subsidiary; (ii) Temporary
Cash Investments; (iii) receivables owing to Holdings or any Restricted
Subsidiary if created or acquired in the ordinary course of business and
payable or dischargeable in accordance with customary trade terms; (iv) stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to Holdings or any Restricted Subsidiary
or in satisfaction of judgments; (v) any Person to the extent such Investment
represents the non-cash portion of the consideration received for an Asset
Disposition as permitted pursuant to the covenant described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock"; (vi)
Investments by Holdings or a Restricted Subsidiary in a Person to the extent
the consideration for such Investment consists of shares of Capital Stock of
Holdings (other than Redeemable Stock); (vii) payroll, travel and similar
advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses for accounting purposes and that are made
in the ordinary course of business; (viii) loans or advances to employees or
to a trust for the benefit of such employees that are made in the ordinary
course of business of Holdings or such Restricted Subsidiary; (ix) the ESOP
Loan; (x) the Permitted Loan; (xi) another Person if as a result of such
Investment such Person is merged or consolidated with or into, or transfers or
conveys all or substantially all of its assets to, Holdings or a Restricted
Subsidiary; provided that such Person's primary business is reasonably related
to the business of Holdings and its Restricted Subsidiaries; and (xii)
Investments in Unrestricted Subsidiaries or joint ventures (whether in
corporate or partnership form or otherwise), in either case in entities
engaged in businesses reasonably related to the business of Holdings and its
Restricted Subsidiaries, in an aggregate amount not to exceed $10 million;
provided, however, that the amount available for Investments pursuant to this
clause (xii) shall be reduced in accordance with clause (a)(3)(G) under "--
Certain Covenants--Limitation on Restricted Payments".
"Permitted Liens" means, with respect to any Person, (a) pledges or deposits
by such Person under worker's compensation laws, unemployment insurance laws
or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Debt) or leases to which
such Person is a party, or deposits to secure public or statutory obligations
of such Person or deposits of cash or United States government bonds to secure
surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, in
each case Incurred in the ordinary course of business; (b) Liens imposed by
law, such as carriers', warehousemen's and mechanics' Liens, in each case for
sums not yet due or being contested in good faith by appropriate proceedings
or other Liens arising out of judgments or awards against such Person with
respect to which such Person shall then be proceeding with an appeal or other
proceedings for review; (c) Liens for property taxes not yet subject to
penalties for non-payment or which are being contested in good faith by
appropriate proceedings; (d) Liens in favor of issuers of surety bonds or
letters of credit issued pursuant to the request of and for the account of
such Person in the ordinary course of its business; provided, however, that
such letters of credit do not constitute Debt; (e) minor survey exceptions,
minor encumbrances, easements or reservations of, or rights of others for,
licenses, rights of way, sewers, electric lines, telegraph and telephone lines
and other similar purposes, or zoning or other restrictions as to the use of
real property or Liens incidental to the conduct of the business of such
Person or to the ownership of its properties which were not Incurred in
connection with Debt and which do not in the aggregate materially adversely
affect the value of said properties or materially impair their use in the
operation of the business of
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such Person; (f) Liens securing Debt Incurred to finance the construction,
purchase or lease of, or repairs, improvements or additions to, property of
such Person; provided, however, that the Lien may not extend to any other
property owned by such Person or any of its Subsidiaries at the time the Lien
is Incurred, the Debt secured by the Lien may not be Incurred more than 180
days after the later of the acquisition, completion of construction, repair,
improvement, addition or commencement of full operation of the property
subject to the Lien, the Debt secured by such Lien shall have otherwise been
permitted to be issued under the Discount Notes Indenture, and the aggregate
principal amount of Debt secured by such Liens shall not exceed the lesser of
cost or Fair Market Value of the assets or property so acquired or
constructed; (g) Liens to secure Debt permitted under the provisions described
in clause (b)(1) and (2) under "--Certain Covenants--Limitation on Debt"; (h)
Liens existing on the Issue Date; (i) Liens on property or shares of Capital
Stock of another Person at the time such other Person becomes a Subsidiary of
such Person; provided, however, that such Liens are not created, incurred or
assumed in connection with, or in contemplation of, such other Person becoming
such a Subsidiary; provided further, however, that such Lien may not extend to
any other property owned by such Person or any of its Subsidiaries; (j) Liens
on property at the time such Person or any of its Subsidiaries acquires the
property, including any acquisition by means of a merger or consolidation with
or into such Person or a Subsidiary of such Person; provided, however, that
such Liens are not created, incurred or assumed in connection with, or in
contemplation of, such acquisition; provided further, however, that the Liens
may not extend to any other property owned by such Person or any of its
Subsidiaries; (k) Liens securing Debt or other obligations of a Subsidiary of
such Person owing to such Person or a Wholly Owned Subsidiary of such Person;
(l) Liens securing Interest Rate Agreements and Currency Agreements so long as
such Interest Rate Agreements and Currency Agreements relate to Debt that is,
and is permitted to be under the Discount Notes Indenture, secured by a Lien
on the same property securing such Interest Rate Agreements and Currency
Agreements; (m) Liens created pursuant to the terms of the Pledge Agreement
and (n) Liens to secure any Refinancing (or successive Refinancings) as a
whole, or in part, of any Debt secured by any Lien referred to in the
foregoing clauses (f), (h), (i) and (j); provided, however, that (x) such new
Lien shall be limited to all or part of the same property that secured the
original Lien (plus improvements to or on such property) and (y) the Debt
secured by such Lien at such time is not increased to any amount greater than
the sum of (A) the outstanding principal amount or, if greater, committed
amount of the Debt described under clauses (f), (h), (i) or (j) at the time
the original Lien became a Permitted Lien and (B) an amount necessary to pay
any fees and expenses, including premiums, related to such refinancing,
refunding, extension, renewal or replacement. Notwithstanding the foregoing,
"Permitted Liens" will not include any Lien described in clauses (f), (i) or
(j) above to the extent such Lien applies to any assets acquired directly or
indirectly from Net Available Cash pursuant to clause (a)(ii)(B) or (D) of the
covenant described under "--Certain Covenants--Limitation on Sale of Assets
and Subsidiary Stock".
"Permitted Loan" means the loan to Holdings by Chemicals, to be made on the
Issue Date, of up to $485 million, representing the proceeds of the Notes
Offering and amounts initially borrowed under the Term Loan Provisions of the
Credit Agreement net of repayment of existing Debt, purchase of certain equity
interests and payment of Transaction expenses; provided, however, that such
loan is subordinated in right of payment to the Discount Notes; and provided,
further, however, that such loan is discharged in full on or prior to October
15, 1996 through the distribution from Chemicals to Holdings, in the form of a
dividend, of the receivable relating thereto.
"Permitted Transferee" means with respect to any Person, (i) in the case of
an entity, any Affiliate of such Person, and (ii) in the case of an
individual, any person related by lineal or collateral consanguinity to such
individual or to the spouse of such individual (adopted persons shall be
considered the natural born child of their adoptive parents; lineal
consanguinity is that relationship that exists between persons of whom one is
descended (or ascended) in a direct line from the other, as between son,
father, grandfather, great-grandfather; and collateral consanguinity is that
relationship that exists between persons who have the same ancestors, but do
not descend (or ascend) from the other, as between uncle and nephew, or cousin
and cousin), in each case to whom such Person has transferred Common Stock of
Holdings.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
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"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Public Equity Offering" means an underwritten primary public offering of
common stock of Holdings pursuant to an effective registration statement under
the Securities Act.
"Public Market" means any time after (x) a Public Equity Offering has been
consummated and (y) at least 15% of the total issued and outstanding common
stock of Holdings has been distributed by means of an effective registration
statement under the Securities Act or sales pursuant to Rule 144 under the
Securities Act.
"Rating Agency" means S&P and Moody's, or if S&P or Moody's or both shall
not make a rating on the Discount Notes publicly available, a nationally
recognized statistical rating agency or agencies, as the case may be, selected
by Holdings (as certified by a resolution of the Board of Directors) which
shall be substituted for S&P or Moody's or both, as the case may be.
"Redeemable Stock" means any Capital Stock that by its terms or otherwise is
required to be redeemed on or prior to the Stated Maturity of the Discount
Notes or is redeemable at the option of the holder thereof at any time on or
prior to the Stated Maturity of the Discount Notes.
"Refinance" means, in respect of any Debt, to refinance, extend, renew,
refund, repay, prepay, redeem, defease or retire, or to issue other Debt in
exchange or replacement for, such indebtedness. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Debt" means Debt that Refinances any Debt of Holdings or any
Restricted Subsidiary existing on the Issue Date or Incurred in compliance
with the Discount Notes Indenture including Debt that Refinances Refinancing
Debt; provided, however, that (i) such Refinancing Debt has a Stated Maturity
no earlier than the Stated Maturity of the Debt being Refinanced, (ii) such
Refinancing Debt has an Average Life at the time such Refinancing Debt is
Incurred that is equal to or greater than the Average Life of the Debt being
Refinanced, (iii) such Refinancing Debt has an aggregate principal amount (or
if Incurred with original issue discount, an aggregate issue price) that is
equal to or less than the aggregate principal amount (or if Incurred with
original issue discount, the aggregate accreted value) then outstanding or
committed (plus fees and expenses, including any premium and defeasance costs)
under the Debt being Refinanced and (iv) with respect to any Refinancing Debt
of Debt other than Senior Debt, such Refinancing Debt shall rank no more
senior, and shall be at least as subordinated, in right of payment to the
Discount Notes as the Debt being so extended, renewed, refunded or refinanced;
provided further, however, that Refinancing Debt shall not include (x) Debt of
a Subsidiary that Refinances Debt of Holdings or (y) Debt of Holdings or a
Restricted Subsidiary that Refinances Debt of an Unrestricted Subsidiary.
"Restricted Subsidiary" means any Subsidiary of Holdings that is not an
Unrestricted Subsidiary.
"Revolving Credit Provisions" means the provisions of the Credit Agreement
pursuant to which lenders thereunder have committed to make available to
Chemicals a revolving credit facility, including the Canadian Facility.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby Holdings or a Restricted Subsidiary
transfers such property to a Person and Holdings or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Senior Debt" means (i) Debt of Holdings, whether outstanding on the Issue
Date or thereafter Incurred and (ii) accrued and unpaid interest (including
interest accruing on or after the filing of any petition in bankruptcy
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or for reorganization relating to Holdings whether or not such interest is an
allowable claim in any such proceeding) in respect of (A) indebtedness of
Holdings for money borrowed and (B) indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of which
Holdings is responsible or liable unless, in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is
provided that such obligations are subordinate in right of payment to the
Discount Notes; provided, however, that Senior Debt shall not include (1) any
obligation of Holdings to any Subsidiary, (2) any liability for Federal,
state, local or other taxes owed or owing by Holdings, (3) any accounts
payable or other liability to trade creditors arising in the ordinary course
of business (including guarantees thereof or instruments evidencing such
liabilities), (4) any Debt of Holdings (and any accrued and unpaid interest in
respect thereof) which is subordinate or junior in any respect to any other
Debt or other obligation of Holdings, (5) that portion of any Debt which at
the time of Incurrence is Incurred in violation of the Discount Notes
Indenture, (6) Debt owed, due, or guaranteed on behalf of, any director,
officer or employee of Holdings or any Subsidiary (including, without
limitation, amounts owed for compensation), and (7) Debt which when Incurred
and without respect to any election under Section 1111(b) of Title 11 United
States Code, is without recourse to Holdings.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" of Holdings as defined in Rule 1-02 of Regulation S-
X, promulgated by the SEC.
"S&P" means Standard & Poor's Ratings Group.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the principal of such security is due
and payable, including pursuant to any mandatory redemption provision (but
excluding any provision providing for the repurchase of such security at the
option of the holder thereof upon the happening of any contingency unless such
contingency has occurred).
"Subordinated Obligation" means any Debt of Holdings (whether outstanding on
Issue Date or hereafter Incurred) which is subordinate or junior in right of
payment to the Discount Notes.
"Subsidiary" means any corporation, association, partnership or other
business entity of which more than 50% of the total voting power of shares of
Capital Stock or other interests (including partnership interests) entitled
(without regard to the occurrence of any contingency) to vote in the election
of directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by (i) Holdings, (ii) Holdings and one or more
Subsidiaries or (iii) one or more Subsidiaries.
"Tangible Property" means all land, buildings, machinery and equipment and
leasehold interests and improvements which would be reflected on a balance
sheet of Holdings prepared in accordance with generally accepted accounting
principles, excluding (i) all rights, contracts and other intangible assets of
any nature whatsoever and (ii) all inventories and other current assets.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 270 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized
by the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50,000,000 (or the foreign
currency equivalent thereof) and has outstanding debt which is rated "A" (or
such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker
dealer or mutual fund distributor, (iii) repurchase obligations with a term of
not more than 30 days for underlying securities of the types described in
clause (i) above entered into with a bank meeting the qualifications described
in clause (ii) above, (iv) investments in commercial paper, maturing not more
than 180 days after the date of acquisition, issued by a corporation (other
than an Affiliate of Holdings) organized and in existence under the laws of
the United States of America or any foreign country recognized by the United
States of America with a
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rating at the time as of which any investment therein is made of "P-1" (or
higher) according to Moody's or "A-1" (or higher) according to S&P, (v)
investments in securities with maturities of six months or less from the date
of acquisition issued or fully guaranteed by any state, commonwealth or
territory of the United States of America, or by any political subdivision or
taxing authority thereof, and rated at least "A" by S&P or "A" by Moody's,
(vi) participations (for a tenor of not more than 90 days) in loans to Persons
having short-term credit ratings of at least "A-1" and "P-1" by S&P and
Moody's, respectively, (vii) with respect to any Foreign Subsidiary organized
in Canada, commercial paper of Canadian companies rated R-1 High or the
equivalent thereof by Dominion Bond Rating Services with maturities of less
than one year and (viii) with respect to Foreign Subsidiaries not organized in
Canada, government obligations of another country whose debt securities are
rated by S&P and/or Moody's "A-1" or "P-1", or the equivalent thereof (if a
short-term debt rating is provided by either) or at least "AA" or "AA2", or
the equivalent thereof (if a long-term unsecured debt rating is provided by
either), in each case, with the maturities of less than 12 months.
"Term Loan Provisions" means the provisions of the Credit Agreement pursuant
to which lenders thereunder have committed to make term loans available to
Chemicals.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S)77aaa-77bbbb)
as in effect on the date of this Discount Notes Indenture.
"Trustee" means the party named as such in the Discount Notes Indenture
until a successor replaces it and, thereafter, means the successor.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the payment
of which the full faith and credit of the United States of America is pledged
and which are not callable at the issuer's option.
"Unrestricted Subsidiary" means (i) any Subsidiary of Holdings that at the
time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
of Holdings (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries own
any Capital Stock or Debt of, or holds any Lien on any property of, Holdings
or any other Subsidiary of Holdings that is not a Subsidiary of the Subsidiary
to be so designated; provided, however, that either (A) the Subsidiary to be
so designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets of greater than $1,000, such designation would be permitted under the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments"; and provided, further, however, that no (1) Subsidiary of Holdings
that is a Restricted Subsidiary on the Issue Date (other than a Restricted
Subsidiary with total assets of $1,000 or less on the Issue Date) may be
designated an Unrestricted Subsidiary and (2) no Subsidiary holding, directly
or indirectly, any assets (other than assets totaling $1,000 or less which
constituted the only assets of a Restricted Subsidiary on the Issue Date) held
by Holdings or a Restricted Subsidiary on the Issue Date may be designated an
Unrestricted Subsidiary. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) if such Unrestricted Subsidiary at
such time has Debt, Holdings could Incur $1.00 of additional Debt under
paragraph (a) of the covenant described under "--Certain Covenants--Limitation
on Debt" and (y) no Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be by Holdings to the Trustee by
promptly filing with the Trustee a copy of the board resolution giving effect
to such designation and an Officer's Certificate certifying that such
designation complied with the foregoing provisions.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
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"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by Holdings
or another Wholly Owned Subsidiary; provided, however, that a Foreign
Subsidiary shall be a Wholly Owned Subsidiary if more than 90% of the Capital
Stock and Voting Stock thereof is owned by Holdings or another Wholly Owned
Subsidiary.
DESCRIPTION OF THE WARRANTS
A total of 191,751 Warrants will be issued under a warrant agreement (the
"Warrant Agreement") between Holdings and KeyCorp Shareholder Services, Inc.
as Warrant Agent (the "Warrant Agent"). The Warrants are subject to the terms
contained in the Warrant Agreement. The following summary, which describes
certain material provisions of the Warrant Agreement and the Warrants, does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, the Warrant Agreement and the Warrants, including the
definitions therein of the capitalized terms not defined herein. A copy of the
form of the Warrant Agreement is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
GENERAL
The Warrants will be exercisable at any time beginning twelve months
following the Closing Date and on or prior to the Expiration Date. Each
Warrant, when exercised, will entitle the holder thereof to receive three
shares of Holdings Common Stock, subject to adjustment, at an exercise price
of $.01 per share (the "Exercise Price"). Upon consummation of the
Transaction, the Warrants will initially entitle the holders thereof to
acquire, in the aggregate, approximately 5.0% of the outstanding Holdings
Common Stock on a fully diluted basis. The Discount Notes and the Warrants
will not trade separately until the Separation Date. All outstanding Warrants
will expire on August 15, 2008 (the "Expiration Date"). Holdings will give
notice not less than 90 nor more than 120 days prior to the Expiration Date to
the registered holders of the then outstanding Warrants. If Holdings fails to
give this notice, the Warrants will nevertheless terminate and become void on
the Expiration Date.
METHOD OF EXERCISE
The Warrants may be exercised at any time beginning twelve months following
the Closing Date by surrendering to the Warrant Agent a Warrant certificate
signed by the registered holder indicating such holder's election to exercise
or sell all or a portion of the Warrants evidenced by such certificate,
together with payment in full of the applicable Exercise Price (payable in
cash or through the surrender of unexercised Warrants, as provided in the
Warrant Agreement). Upon surrender of the Warrant certificate for exercise or
sale and payment of the Exercise Price, the Warrant Agent will deliver or
cause to be delivered, to or upon the written order of any holder, appropriate
evidence of ownership of any shares of Holdings Common Stock or other
securities or property (including any money) to which such holder is entitled,
together with Warrant certificates evidencing any Warrants not exercised or
sold.
Certificates for Warrants will be issued in fully registered form only. No
service charge shall be made for registration of transfer or exchange upon
surrender of any Warrant certificate at the office of the Warrant Agent
maintained for that purpose. Holdings may require payment of a sum sufficient
to cover any tax or other government charge that may be imposed in connection
with any registration or transfer or exchange of Warrant certificates.
Fractional shares of Holdings Common Stock are not required to be issued
upon exercise of Warrants, but in lieu thereof Holdings will pay a cash
adjustment.
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ADJUSTMENT
The number of shares of Holdings Common Stock issuable upon the exercise of
each Warrant and the Exercise Price are subject to adjustment in certain
events, including (i) a dividend or distribution on Holdings Common Stock in
shares of Holdings' capital stock or a stock split, combination, subdivision
or reclassification of Holdings Common Stock, (ii) the issuance of rights,
options, warrants or convertible or exchangeable securities (collectively,
"Rights") to all holders of Holdings Common Stock entitling such holders to
purchase shares of Holdings Common Stock for a consideration per share less
than the then current market value per share of Holdings Common Stock, (iii)
the sale of shares of Common Stock or Rights at a price below the then current
market value per share of Holdings Common Stock, and (iv) the distribution to
all holders of Holdings Common Stock of any of Holdings' assets, debt
securities, or any rights or warrants to purchase securities (excluding those
rights referred to in clause (ii) above and excluding cash dividends or other
cash distributions from current or retained earnings).
In the event of a distribution to holders of Holdings Common Stock which
results in an adjustment to the number of shares of Holdings Common Stock or
other consideration for which a Warrant may be exercised, the holders of the
Warrants may, in certain circumstances, be deemed to have received a
distribution subject to United States federal income tax as a dividend. See
"Certain United States Federal Income Tax Consequences."
MERGERS, CONSOLIDATIONS, ETC.
In the event that Holdings consolidates or mergers with or into, or sells
all or substantially all of its property and assets to, another person, each
Warrant thereafter shall entitle the holder to receive upon the exercise
thereof the number of shares of capital stock or other securities or property
which the holder of a share of Holdings Common Stock is entitled to receive
upon completion of such consolidation, merger or sale of assets. If Holdings
merges, consolidates or sells all or substantially all of its property and
assets to another person and, in connection therewith, consideration to the
holders of Common Stock in exchange for their shares is payable solely in
cash, or in the event of the dissolution, liquidation or winding-up of
Holdings, then the holders of the Warrants will be entitled to receive
distributions on an equal basis with the holders of Holdings Common Stock (or
other securities) issuable upon exercise of the Warrants, as if the Warrants
had been exercised immediately prior to such event (or the record date
therefor), less the Exercise Price. Upon receipt by the holders of such
payment, if any, the Warrants will expire and the rights of holders thereof
with respect to the Warrants will cease. In the case of any such merger,
consolidation or sale of assets, the surviving or acquiring person and, in the
event of any dissolution, liquidation or winding-up of Holdings, Holdings,
must deposit with the Warrant Agent the funds, if any, necessary to pay the
holders of the Warrants. After such funds and the surrendered Warrants are
received, the Warrant Agent must make payment by delivering a check in such
amount as is appropriate (or, in the case of consideration other than cash,
such consideration as is appropriate) to such person or persons as it may be
directed in writing by the holders surrendering such Warrants.
REGISTRATION REQUIREMENT
Holdings is required, under the terms of the Warrant Agreement, to use its
best efforts to cause to be declared effective no later than twelve months
after the Closing Date, a shelf registration statement with respect to the
issuance of the shares of Holdings Common Stock upon the exercise of the
Warrants. Holdings is required to use its best efforts to maintain the
effectiveness of such shelf registration statement until the earlier of (i)
such time as all Warrants have been exercised and (ii) the Expiration Date.
During any consecutive 365-day period, Holdings will have the ability to
suspend availability of such shelf registration statement for up to two 15
consecutive day periods (except for the 30 consecutive day period immediately
prior to the Expiration Date) if Holdings' Board of Directors determines in
good faith that there is a valid purpose for the suspension and provides
notice of such determination to the holders at their addresses appearing in
the register of Warrants maintained by the Warrant Agent.
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NO RIGHTS AS STOCKHOLDERS
Holders of Warrants are not entitled, by virtue of being such holders, to
receive dividends or subscription rights, vote, consent, exercise any
preemptive right or receive notice as stockholders of Holdings in respect of
any meeting of stockholders for the election of directors of Holdings or any
other matter, or exercise any other rights whatsoever as stockholders of
Holdings.
RESERVATION OF SHARES
Prior to the consummation of the Offering, the Company will authorize and
reserve for issuance such number of shares of Holdings Common Stock as shall
be issuable upon exercise of all outstanding Warrants. Such shares of Holdings
Common Stock, when issued, will be duly and validly issued, fully paid and
non-assessable, free of preemptive rights and free from all taxes, liens,
charges and security interests with respect to the issue thereof.
REPORTS
Whether or not required by the rules and regulations of the SEC, so long as
any of the Warrants remain outstanding, Holdings shall cause copies of the
reports described under "Description of the Discount Notes--Certain
Covenants--SEC Reports" to be filed with the Warrant Agent and mailed to the
holders at their addresses appearing in the register of Warrants maintained by
the Warrant Agent.
AMENDMENT
From time to time, Holdings and the Warrant Agent, without the consent of
the holders of the Warrants, may amend or supplement the Warrant Agreement for
certain purposes, including the curing of defects or inconsistencies or making
changes that do not adversely affect the rights of any holder. Any amendment
or supplement to the Warrant Agreement that has an adverse effect on the
interests of the holders of the Warrants shall require the written consent of
the holders of a majority of the then outstanding Warrants. The consent of
each holder of the Warrants affected shall be required for any amendment
pursuant to which the number of shares of Holdings Common Stock receivable
upon the exercise of Warrants would be decreased (other than pursuant to
adjustments provided for in the Warrant Agreement).
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Upon consummation of the Transaction, the authorized capital stock of
Holdings will be 22,000,000 shares, consisting of 20,000,000 shares of
Holdings Common Stock and 2,000,000 shares of Preferred Stock of Holdings, par
value $0.01 per share ("Preferred Stock"). The following summary is qualified
in its entirety by reference to the Form of Holdings' Certificate of
Incorporation (the "Charter") and the Amended Bylaws of the Company (the
"Bylaws"), which will be the Certificate of Incorporation and Bylaws of
Holdings upon consummation of the Merger. Copies of the Charter and Bylaws are
included as exhibits to the Registration Statement of which this Prospectus is
a part.
Holdings Common Stock. The holders of Holdings Common Stock are entitled to
dividends in such amounts and at such times as may be declared by the Board of
Directors out of funds legally available therefor. Holders of Holdings Common
Stock are entitled to one vote per share for the election of directors and
other corporate matters. In the event of liquidation, dissolution or winding
up of Holdings, holders of Holdings Common Stock would be entitled to share
ratably in all assets of Holdings available for distribution to the holders of
Holdings Common Stock. Holdings Common Stock carries no preemptive rights. All
outstanding shares of Holdings Common Stock are expected to be duly
authorized, validly issued, fully paid and nonassessable.
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Preferred Stock. The Board of Directors is authorized to issue from time to
time, without stockholder authorization, in one or more designated series,
shares of preferred stock with such dividend, redemption, conversion and
exchange provisions as are provided in the particular series. Upon
consummation of the Transaction, none of such shares will have been issued.
Except as by law expressly provided, or except as may be provided by
resolution of the Board of Directors, the Preferred Stock shall have no right
or power to vote on any question or in any proceeding or to be represented at,
or to receive notice of, any meeting of stockholders of Holdings. The issuance
of the Preferred Stock could have the effect of delaying or preventing a
change in control of Holdings. The Board of Directors has no present plans to
issue any of the Preferred Stock.
PROVISIONS HAVING POSSIBLE ANTI-TAKEOVER EFFECT
Statutory Provisions. Section 203 ("Section 203") of the General Corporation
Law of the State of Delaware (the "Delaware Act") restricts certain
transactions between a corporation organized under Delaware law (or its
majority-owned subsidiaries) and any person holding 15% or more of the
corporation's outstanding voting stock, together with the affiliates or
associates of such person (an "Interested Stockholder"). Section 203 generally
prohibits a publicly held Delaware corporation from engaging in the following
transactions with an Interested Stockholder, for a period of three years from
the date the stockholder becomes an Interested Stockholder (unless certain
conditions, described below, are met): (a) all mergers or consolidations, (b)
sales, leases, exchanges or other transfers of 10% or more of the aggregate
assets of the corporation, (c) issuances or transfers by the corporation of
any stock of the corporation which would have the effect of increasing the
Interested Stockholder's proportionate share of the stock of any class or
series of the corporation, (d) any other transaction which has the effect of
increasing the proportionate share of the stock of any class or series of the
corporation which is owned by the Interested Stockholder, and (e) receipt by
the Interested Stockholder of the benefit (except proportionately as a
stockholder) of loans, advances, guarantees, pledges or other financial
benefits provided by the corporation.
The three-year ban does not apply if either the proposed transaction or the
transaction by which the Interested Stockholder became an Interested
Stockholder is approved by the board of directors of the corporation prior to
the date such stockholder becomes an Interested Stockholder. Additionally, an
Interested Stockholder may avoid the statutory restriction if, upon the
consummation of the transaction whereby such stockholder becomes an Interested
Stockholder, the stockholder owns at least 85% of the outstanding voting stock
of the corporation without regard to those shares owned by the corporation's
officers and directors or certain employee stock plans. Business combinations
are also permitted within the three-year period if approved by the board of
directors and authorized at an annual or special meeting of stockholders, by
the holders of at least 66 2/3% of the outstanding voting stock not owned by
the Interested Stockholder. In addition, any transaction is exempt from the
statutory ban if it is proposed at a time when the corporation has proposed,
and a majority of certain continuing directors of the corporation have
approved, a transaction with a party which is not an Interested Stockholder of
the corporation (or who becomes such with board approval) if the proposed
transaction involves (a) certain mergers or consolidations involving the
corporation, (b) a sale or other transfer of over 50% of the aggregate assets
of the corporation, or (c) a tender or exchange offer for 50% or more of the
outstanding voting stock of the corporation.
Section 203 is not applicable to corporations that do not have a class of
voting stock that is (i) listed on a national securities exchange, (ii)
authorized for quotation on the NASDAQ Stock Market, or (iii) held of record
by more than 2,000 stockholders, unless the foregoing results from action
taken, directly or indirectly, by an Interested Stockholder or from a
transaction in which a person becomes an Interested Stockholder. Upon
consummation of the Transaction, it is expected that Section 203 will not be
applicable to Holdings, though it may be applicable in the future. A
corporation may, at its option, exclude itself from the coverage of Section
203 if its original Certificate of Incorporation contains a provision
expressly electing not to be governed by Section 203. The Charter will not
contain such a provision.
Charter and Bylaw Provisions. The Charter will provide that the number of
directors will be fixed by the Board of Directors in accordance with the
Bylaws, but will consist of not less than three nor more than 15
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members. The Bylaws currently provide that the Board of Directors will consist
of seven members. A director of Holdings may be removed only upon the
affirmative vote of the holders of not less than a majority of the outstanding
capital stock entitled to vote at an election of directors.
The Charter will provide that Holdings may, by action of its Board of
Directors, issue warrants, rights and options with such terms as determined by
the Board of Directors. This provision will allow the Board of Directors to
adopt a rights plan. Holdings does not currently have a rights plan in effect.
The Charter will provide that Holdings may, by action of its Board of
Directors, provide for a sinking fund for the purchase or redemption of shares
of any series and specify the terms and conditions governing the operations of
any such fund. Upon consummation of the Transaction, Holdings will not have
any such fund.
The Charter will provide that nominations of persons for election to the
Board of Directors may be made by or at the direction of the Board of
Directors, and that the Bylaws may set forth procedures for nominations of
persons for election to the Board of Directors. The Bylaws do not currently
contain any such procedures. The Charter and the Bylaws will provide that any
newly created directorship resulting from an increase in the number of
directors or a vacancy on the Board of Directors shall be filled by vote of a
majority of the remaining directors then in office, even though less than a
quorum. The Charter will also provide that special meetings of the
stockholders may only be called by the Board of Directors and that the
stockholders may not act by written consent. The Charter will provide that
these provisions of the Charter, and the Bylaws as a whole, may not be amended
by the stockholders without the approval of at least 66 2/3% of the voting
power of all shares of Holdings entitled to vote generally in the election of
directors, voting together as a single class.
The foregoing provisions of the Charter and the Bylaws, and of Section 203
if applicable, together with the ability of the Board of Directors to issue
Preferred Stock without further stockholder action, could delay or frustrate
the removal of incumbent directors or the assumption of control by the holder
of a large block of Holdings Common Stock even if such removal or assumption
would be beneficial, in the short term, to stockholders of Holdings. The
provisions could also discourage or make more difficult a merger, tender offer
or proxy contest even if such event would be favorable to the interests of
stockholders.
LIMITATION ON DIRECTORS AND OFFICERS LIABILITY
The Delaware Act authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by such
legislation, directors are accountable to corporations and their stockholders
for monetary damages for conduct constituting gross negligence in the exercise
of their duty of care. Although the Delaware Act does not change directors'
duty of care, it enables corporations to limit available relief to equitable
remedies such as injunction or rescission. The Charter limits the liability of
Holdings' directors to Holdings or its stockholders (in their capacity as
directors but not in their capacity as officers) to the fullest extent
permitted by the Delaware Act. Specifically, directors of Holdings will not be
personally liable for monetary damages for breach of a director's fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to Holdings or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware Act or (iv) for any
transaction from which the director derived an improper personal benefit.
The inclusion of this provision in the Charter may have the effect of
reducing the likelihood of derivative litigation against directors and may
discourage or deter stockholders or management from bringing a lawsuit against
directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefited Holdings and its stockholders.
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TRANSFER RESTRICTIONS
Purchasers of shares in the Equity Private Placement will become parties to
a Stockholder Agreement (the "Stockholder Agreement"), which restricts
transfers of shares of Holdings Common Stock owned by a stockholder other than
(i) Rollover Shares (except with respect to such shares held by parties to the
Inducement Agreement), and (ii) shares distributed to such stockholder by the
New ESOP or the Company's existing Employee Stock Ownership Plan. Except for
certain permitted transfers, and subject to the Control Provision (as defined)
and the Material Agreement Provision (as defined), the Stockholders Agreement
permits the stockholders who are parties thereto (the "Holders") to transfer
their shares of Common Stock or any interest therein only upon receipt of a
bona fide third party offer and after first offering such shares to the New
ESOP, then to Holdings and finally to the other Holders (the "Eligible
Offerees"). Subject to the Control Provision and the Material Agreement
Provision, the Stockholders Agreement permits the Holders to transfer their
shares of Common Stock or an interest therein, without first receiving a bona
fide third party offer and first offering the shares to the Eligible Offerees,
only if the transfer is: (1) between Holders; (2) by any Holder to the New
ESOP or Holdings; (3) by any Holder to a wholly-owned subsidiary corporation
or parent corporation of such Holder and vice versa; (4) by any individual
Holder during such Holder's lifetime to a guardian of his estate, to his
spouse during marriage and not incident to a divorce, or to certain relatives
of such Holder or spouse, and to trusts for the benefit of such Holder, his
spouse, or certain relatives of such Holder or spouse, and vice versa; (5) to
the estate, heirs, beneficiaries or legatees of any individual Holder upon his
death; (6) by certain investors that are Holders to their Associates (as
defined), or the officers, directors, shareholders or employees and certain
consultants of such Holders, and certain of their relatives and their
Associates; (7) by any Holder at a price per share of $12.00 until there has
been a New ESOP valuation of the Common Stock at which time the price shall be
the New ESOP valuation of such Common Stock, to any person who has become a
director, officer or employee of the Company after the date of the Merger; (8)
by a Holder to a bank or other financial institution for the purpose of
securing a loan to a Holder to purchase shares of Common Stock; (9) by the New
ESOP to New ESOP participants, alternate payees and beneficiaries to the
extent required by law or the provisions of the New ESOP; (10) to certain
charitable organizations; (11) with the consent of the Company, by any Holder
to a qualified retirement plan sponsored by the Holder or any corporation
controlling, controlled by or under common control with such Holder; (12) by
any such qualified retirement plan to participants, alternate payees and
beneficiaries to the extent required by law; (13) made, within one year after
the Closing Date, by TSG, William C. Oehmig or Frank J. Hevrdejs in
transactions exempt from registration under the Securities Act; (14) by any
Holder which is a partnership, corporation or limited liability company to the
equity holders of such Holder as a distribution pursuant to law, its
organization documents or its dissolution; (15) by a Holder pursuant to such
Holder's rights under any registration rights agreement to which the Company
is a party or by which it is bound; or (16) by a Holder that is an investment
fund or account which is managed by an investment advisor to the investment
advisor or another fund or account managed by such advisor, and vice versa.
The purchase price of shares of Common Stock under the Stockholders
Agreement is (1) the price contained in the bona fide third party offer in the
event of such an offer or (2) the fair market value of the shares being
purchased, as last determined under the New ESOP (or if no such determination
has yet been made, $12.00 per share), in the event of any other purchase
thereunder.
The Stockholders Agreement contains a provision (the "Material Agreement
Provision") prohibiting the stockholders who are parties thereto from
transferring shares of Common Stock if, in the reasonable judgment of
Holdings, the transfer would cause a material breach, default, event of
default or acceleration of payments under any agreement to which Holdings or
any of its subsidiaries is a party and under which the indebtedness or
liability of Holdings exceeds $1.0 million.
The Stockholders Agreement contains provisions (the "Control Provision")
respecting Control Dispositions, as defined below. The Control Provision
prohibits any stockholder who is a party to the Stockholders Agreement from
initiating the acceptance of a Control Disposition offer without first
complying with the right of first refusal provisions in the Stockholders
Agreement. After compliance with applicable right of first refusal provisions
in the Stockholders Agreement, a stockholder who desires to, and is permitted
to,
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initiate the acceptance of a Control Disposition offer (the "Initiating
Stockholder") must give to each other holder of Common Stock who is a party to
the Stockholders Agreement the option to participate in the proposed Control
Disposition on a pro rata basis.
A Control Disposition is defined as any disposition or series of related
dispositions which would have the effect of transferring to any transferee or
group more than (i) 40% of the then outstanding shares of Common Stock, or (ii)
15% of the shares of Common Stock then outstanding if thereafter the proposed
transferee would directly or indirectly have beneficial ownership of 50% or
more of all of the then outstanding Common Stock.
By becoming a party to the Stockholders Agreement, Holders also become bound
by a Tag-Along Agreement as required pursuant to the Merger Agreement. The Tag-
Along Agreement provides that if any of such Holders propose to transfer, sell
or otherwise dispose of (a "Transfer") in the aggregate 51% or more of the
Holdings Common Stock then issued and outstanding, the other holders of
Holdings Common Stock will have the right to participate in such Transfer on a
pro rata basis.
The Stockholders Agreement requires that, at any time that Holdings is
engaged in an underwritten public offering of its securities, each stockholder
who is a party thereto refrain from making any disposition of Common Stock on a
securities exchange or in the over-the-counter or any other public trading
market for the period of time requested by Holdings.
The Stockholders Agreement will terminate upon any of the following events:
(i) the dissolution of Holdings; (ii) any event that reduces the number of
Holders to one in accordance with the terms thereof; (iii) a registered public
offering of Common Stock (excluding certain offerings) resulting in net
proceeds to the Company of not less than $75 million; (iv) the written
agreement of at least the Required Voting Percentage (as defined); or (v) 10
years after the Closing Date; except that the provisions of the Stockholders
Agreement applicable to Control Dispositions that also constitute a Transfer
that is subject to the Tag-Along Agreement shall remain in force and effect for
so long as the Tag-Along Agreement remains in force and effect.
REGISTRATION RIGHTS
Certain of the purchasers in the Equity Private Placement will have
registration rights with respect to Holdings Common Stock held by such persons.
TRANSFER AGENT
The Transfer Agent for the Holdings Common Stock will be KeyCorp Shareholder
Services, Inc.
DESCRIPTION OF THE CREDIT FACILITY
As part of the Transaction, Chemicals has entered into a Credit Agreement
(the "Credit Agreement") with Texas Commerce Bank National Association, as
administrative agent (the "Agent"), for a syndicate of lenders, and Credit
Suisse and Chase Securities Inc. as co-arrangers. Funding of the Credit
Facility is subject to (i) there being no Material Adverse Effect (as defined
in the Credit Agreement), (ii) the closing of the Offerings and the Equity
Private Placement and (iii) the consummation of the Merger. The following
description summarizes material provisions of the Credit Agreement; the
description does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the Credit Agreement, including
the definitions therein of certain terms, a copy of which has been filed as an
exhibit to the Registration Statement of which this prospectus is a part.
The Credit Agreement provides for facilities consisting of (i) a six and one
half year revolving credit facility providing for up to $100.0 million in
revolving loans (the "Revolving Credit Facility"), (ii) a term loan facility
providing for up to $350.0 million in term loans ("Term Loans") consisting of
(x) a six and one half year $200.0 million term loan and (y) an eight year
$150.0 million term loan and (iii) a four year $6.5 million ESOP Term Loan.
At the Closing, it is anticipated that Chemicals will borrow all of the Term
Loans. The proceeds from such borrowings will be used to (i) finance the Merger
(ii) refinance certain existing indebtedness of the Company
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and (iii) to finance the payment of certain fees and expenses related to the
Merger and the related financings. Additionally, at the Closing, Chemicals
will borrow the entire amount of the ESOP Term Loan and lend those funds to
the New ESOP, which will use such funds to purchase STX Acquisition Common
Stock.
The Credit Agreement requires the principal amount of the Term Loans to be
amortized in quarterly installments beginning with the fiscal quarter ending
December 31, 1996, plus additional mandatory prepayments based upon
consolidated excess cash flow. The ESOP Term Loan will be amortized in 16
equal quarterly installment amounts of $406,250 during its four-year term. The
Revolving Credit Facility is a six and one half year revolving line of credit
to Chemicals. Advances under the Revolving Credit Facility will be subject to
a Borrowing Base (as defined) consisting of 85% of eligible accounts
receivable and 65% of eligible inventory with an inventory cap of 50% of the
Borrowing Base.
Under the Credit Agreement, Chemicals is permitted to make optional
prepayments without premium or penalty. Prepayments of borrowings must be
accompanied by payments of all breakage costs and lenders' expenses or losses,
if any, incurred as a result of such prepayment.
Chemicals' obligations under the Revolving Credit Facility, the Term Loans
and the ESOP Term Loan (collectively, the "Credit Facility") will be secured
by a first priority lien on the capital stock of Chemicals' domestic
subsidiaries, 65% of the capital stock of its foreign subsidiaries and
substantially all of the domestic assets of Chemicals, including without
limitation, accounts receivable, inventory, intangibles and fixed assets and
assignments of certain material leases, licenses and contracts. In addition,
the Credit Facility is secured by a pledge by Holdings of all of the capital
stock of Chemicals. A second lien on the capital stock of Chemicals will be
permitted to secure the obligations under the Discount Notes.
The domestic subsidiaries of Chemicals will guarantee the obligations under
the Credit Facility. The six and one half year term loan, the ESOP Term Loan
and the Revolving Credit Facility initially bear interest at a rate per annum
of, at Chemicals' option, either the Eurodollar Rate (as defined) plus 2.5% or
the Base Rate (as defined) plus 1.5%. The applicable margin will be reduced
based on Chemicals' ratio of total outstanding debt at the end of each fiscal
quarter to EBITDA for the four quarter period ending on such quarter. The
eight year term loan will bear interest at the Eurodollar Rate plus 3.0% or
the Base Rate plus 2.0%.
The Credit Agreement contains numerous financial and operating covenants,
including, but not limited to, restrictions on Chemicals' ability to incur
indebtedness, pay dividends, create liens, sell assets, engage in mergers and
acquisitions and refinance existing indebtedness. The Credit Agreement also
requires Chemicals to satisfy certain financial covenants and tests. In
addition, the Credit Agreement includes various circumstances that will
constitute, subject in certain cases to notice and grace periods, an event of
default thereunder.
The Credit Agreement requires Chemicals to pay the following fees in
connection with the maintenance of the Credit Agreement: (i) commitment fees
to be paid to the lenders in amounts equal to 1/2 of 1% per annum (decreasing
to .375 of 1% depending on the debt to EBITDA ratio) on the unused commitment
under the Revolving Credit Facility payable quarterly in arrears until such
time as the Revolving Credit Facility matures, and (ii) an annual
administration fee to the Agent. In addition, at closing Chemicals will pay
various fees and closing costs in connection with the origination and
syndication of the Credit Facility.
Chemicals will also be required to reimburse the Agent for all reasonable
out-of-pocket costs and expenses incurred in the preparation, documentation,
syndication and administration of the Credit Agreement and to reimburse the
lenders for all out-of-pocket costs and expenses incurred in connection with
the enforcement of their rights after a default under the Credit Agreement.
Chemicals agreed to indemnify the Agent and the lenders, certain of their
affiliates, and their respective officers, directors, employees, agents and
attorneys against certain liabilities arising out of or relating to the Credit
Agreement and the transactions contemplated thereby.
As provided for in the Credit Agreement, Sterling Pulp Chemicals, Ltd.
("Sterling Pulp") will enter into a revolving credit facility (the "Canadian
Revolver") with a Canadian financial institution to be determined. The
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Canadian Revolver is expected to provide for revolving credit and bank
overdraft loans up to an aggregate of approximately $15 million, subject to a
borrowing base limitation. The Canadian Revolver will be secured by a first
lien on the inventory and accounts receivable of Sterling Pulp. The amount
available under the Canadian Revolver will represent a sub-limit under the
$100 million Revolving Credit Facility.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material U.S. federal income tax
consequences expected to apply to United States Holders (as defined below) and
the material U.S. federal income and estate tax consequences expected to apply
to Non-United States Holders (as defined below) from the purchase, ownership
and disposition of the Notes, the Discount Notes (collectively, the Notes and
the Discount Notes are sometimes referred to as "Debt Securities"), the
Warrants and shares of Common Stock received upon exercise of the Warrants
("Warrant Shares"). The summary is based upon currently applicable law,
including current provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), existing and proposed Treasury regulations (the "regulations"),
judicial decisions, and administrative rulings and practice. There can be no
assurance that the Internal Revenue Service (the "IRS") will not take a
contrary view, and no ruling from the IRS has been or will be sought.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conclusions set
forth herein. Any such changes or interpretations may be retroactive and could
affect the tax consequences applicable to holders of the Debt Securities and
Warrants.
The following summary is for general information only, does not address all
aspects of U.S. federal taxation that may be relevant to particular investors,
deals only with holders that will hold the Securities (and any Holdings Common
Stock acquired upon exercising a Warrant) as capital assets, and does not
discuss any aspect of state, local, or foreign tax laws. The tax treatment of
a holder of the Securities may vary depending upon such holder's particular
situation. Certain holders (including insurance companies, tax-exempt
organizations, financial institutions or broker-dealers, taxpayers subject to
the alternative minimum tax, and foreign corporations and persons who are not
citizens or residents of the United States) may be subject to special rules
not discussed below. EACH POTENTIAL INVESTOR SHOULD CONSULT HIS OR HER TAX
ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF PURCHASING, HOLDING AND
DISPOSING OF THE SECURITIES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE,
LOCAL AND FOREIGN TAX LAWS.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
This section discusses certain rules applicable to a holder of Debt
Securities, Warrants or Warrant Shares that is a United States Holder. For
purposes of this discussion, a "United States Holder" means a holder of Debt
Securities, Warrants or Warrant Shares who or which is (i) an individual who
is a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in the United States or under the laws of the
United States or any political subdivision thereof or (iii) a person otherwise
subject to U.S. federal income taxation on its worldwide income.
THE DEBT SECURITIES
Stated Interest and Original Issue Discount
Holders of Notes will be required to include stated interest in gross income
in accordance with their method of accounting for tax purposes unless the
Notes are issued with more than a de minimis amount of original issue
discount. At present, Chemicals and the Underwriters expect that the Notes
will be issued with no or a de minimis amount of original issue discount.
Holders of Discount Notes will be required to include stated interest and
original issue discount on the Discount Notes in gross income in accordance
with the original issue discount rules discussed below. As a result, holders
of Discount Notes will be required to include amounts in income with respect
to the Discount Notes prior to the receipt of cash payments attributable to
such income (regardless
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of whether the holder is a cash or accrual method taxpayer). Furthermore, even
after interest payments commence on the Discount Notes, the amount of interest
that a holder is required to include in income for any taxable year may exceed
the cash payments actually made to the holder for that taxable year.
Taxation of Original Issue Discount--General Rules
The amount of original issue discount, if any, on a debt instrument is the
excess of its "stated redemption price at maturity" over its "issue price,"
subject to a statutorily defined de minimis exception. The "issue price" of a
debt instrument offered for cash as part of an investment unit, such as a
Discount Note issued together with a Warrant, is as described below under "--
Discount Notes." The "stated redemption price at maturity" of a debt
instrument is the sum of its principal amount plus all other payments required
thereunder, other than payments of "qualified stated interest" (defined
generally as stated interest that is unconditionally payable in cash or in
property (other than debt instruments of the issuer) at least annually at a
single fixed rate that appropriately takes into account the length of
intervals between payments).
In general, the holder of a debt instrument issued with original issue
discount must include in gross income for federal income tax purposes the sum
of the daily portions of original issue discount with respect to that debt
instrument for each day during the taxable year on which the holder owns the
debt instrument. The daily portions of original issue discount with respect to
a debt instrument are determined by allocating to each day during a taxable
year a ratable portion of the original issue discount attributable to the
accrual period (generally, the accrual periods with respect to any debt
instrument consist of periods of one year or less from the date of original
issuance) in which such day is included. The amount of original issue discount
attributable to each accrual period equals the amount determined by (i)
multiplying the "adjusted issue price" of the debt instrument at the beginning
of the accrual period by the yield to maturity of the debt instrument (i.e.,
the discount rate that, when applied to all payments under the debt
instrument, results in a present value equal to the issue price) and (ii)
subtracting therefrom the amount of the qualified stated interest, if any,
allocable to that accrual period. The "adjusted issue price" at the beginning
of any accrual period is the issue price of the debt instrument, plus the
amount of original issue discount taken into account for all prior accrual
periods, minus the amount of all cash payments previously made on the debt
instrument (other than payments of qualified stated interest). This constant
yield method of determining the amount of original issue discount includable
in income for any period will ordinarily require a holder of a debt instrument
to include increasing amounts of original issue discount in income in
successive accrual periods.
The tax basis of a debt instrument in the hands of the holder is increased
by the amount of original issue discount, if any, on the debt instrument that
is included in the holder's gross income and is decreased by the amount of any
cash payments (other than payments of qualified stated interest) received with
respect to the debt instrument, whether such payments are denominated as
principal or interest.
Notes
It is presently expected that the Notes will be issued for an amount equal
to the stated principal amount payable at maturity on those Notes, and that
all of the interest payable on the Notes will be qualified stated interest.
The issue price of the Notes will be determined without regard to pre-issuance
accrued interest. (Such interest will be returned to the holder of the
obligation as part of the first interest payment on the obligation and treated
as a tax-free return of capital.) As a result, it is presently expected that
the Notes will be issued with no original issue discount. Holders of Notes
will be required to include the qualified stated interest payable on the Notes
in their gross income in accordance with their method of accounting for tax
purposes. In the event that the Notes are issued with a de minimis amount of
original issue discount, the original issue discount rules would not apply to
the Notes and Holders of the Notes would be required to include any de minimis
original issue discount in income as principal payments were made on the
Notes. However, if the Notes are issued with more than a de minimis amount of
original issue discount, the Notes would be subject to the original issue
discount rules, and Holders of the Notes would be required to include that
original issue discount in income in accordance with those rules.
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Discount Notes
The Discount Notes will be issued with original issue discount for federal
income tax purposes. As a result, holders of Discount Notes will be required
to include amounts in income over the term of the Discount Notes in accordance
with the rules described above.
Because the original purchasers of the Discount Notes will also be
purchasing Warrants, the Discount Notes and the Warrants will be treated as
"investment units". The issue price of a debt instrument issued as part of an
investment unit is determined by allocating the issue price of the investment
unit among each element of such unit in accordance with their relative fair
market values on the date of issuance. The issue price of an investment unit
is equal to the first price at which a substantial amount of units is sold,
excluding sales to bond houses, brokers and similar persons or organizations
acting in the capacity of underwriters, wholesalers or placement agents.
Holdings will make an allocation of the issue price between the Discount Notes
and the Warrants based on their relative values at the time of issuance.
Holdings' allocation is binding on a holder of Discount Notes unless such
holder explicitly discloses a contrary position on his or her tax return for
the year in which the Discount Notes and Warrants are acquired. This
allocation is, however, not binding on the IRS, and therefore, there can be no
assurance that the IRS will respect such allocation. Because none of the
payments of stated interest on the Discount Notes will constitute payments of
qualified stated interest, the stated redemption price at maturity of the
Discount Notes will be equal to the sum of the principal amount plus all
payments of stated interest.
Optional Redemption
Holdings may redeem the Discount Notes at the times and the redemption
prices set forth under the heading "Description of the Discount Notes--
Optional Redemption" and Chemicals may redeem the Notes at the times and the
redemption prices set forth under the heading "Description of the Notes--
Optional Redemption." In addition, in the event of a Change of Control (as
defined under the headings "Description of the Discount Notes--Certain
Definitions" and "Description of the Notes--Certain Definitions"), Holdings
will be required to offer to redeem all of the Discount Notes and Chemicals
will be required to offer to redeem all of the Notes. Under the original issue
discount regulations, if an issuer of a debt instrument with original issue
discount has an unconditional option to redeem such debt instrument, the
issuer will be treated as having exercised such option if, by treating the
date of deemed exercise of the option as the maturity date and the redemption
price (and all payments of stated interest (other than qualified stated
interest payments) made to the date of deemed exercise) as the stated
redemption price at maturity, the yield to maturity on such debt instrument
would be lower than such yield would have been had the option not been deemed
exercised. Because a redemption of the Discount Notes or the Notes under the
terms applicable in the case of an optional redemption will not lower the
yield to maturity on such notes, neither the Discount Notes nor the Notes will
be deemed to be called prior to their maturity. In addition, under the
original issue discount regulations, Holdings' obligation to offer to redeem
the Discount Notes and Chemicals' obligation to offer to redeem the Notes on a
Change of Control will not affect the yield or maturity date of the Discount
Notes or the Notes unless, based on all of the facts and circumstances as of
the issue date, it is more likely than not that a redemption will occur as a
result of a Change of Control. Holdings and Chemicals have no present
intention to treat the redemption provisions applicable on a Change of Control
or any option to redeem the Discount Notes or the Notes prior to their stated
maturity as being triggered or exercised or as otherwise affecting the
computation of the yield to maturity of, or the original issue discount on,
the Discount Notes or the Notes.
Applicable High Yield Discount Obligation Rules
The original issue discount on any obligation that constitutes an
"applicable high yield discount obligation" is not deductible until paid. An
"applicable high yield discount obligation" is any debt instrument that (i)
has a maturity date which is more than five years from the date of issue, (ii)
has a yield to maturity which equals or exceeds five percentage points over
the applicable federal rate for the calendar month in which the obligation is
issued and (iii) has "significant original issue discount." A debt instrument
generally has "significant original issue discount" if, as of the close of any
accrual period ending more than five years after the date of issue, the
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excess of the interest that has accrued on the obligation over the interest
that is required to be paid thereunder exceeds the product of the issue price
of the instrument and its yield to maturity. Moreover, if the debt
instrument's yield to maturity exceeds the applicable federal rate plus six
percentage points, a ratable portion of the issuing corporation's deduction
for original issue discount (the "Disqualified OID") will be denied. For
purposes of the dividends-received deduction under Section 243 of the Code,
the Disqualified OID will be treated as a dividend to the extent it would have
been so treated if it had been distributed by the issuing corporation with
respect to its stock.
Holdings expects that, based on the terms of the instrument and its
projected yield to maturity, the Discount Notes will constitute applicable
high yield discount obligations, and a portion of the original issue discount
on those obligations will be treated as Disqualified OID. As a result,
Holdings will not be allowed a deduction for the accrual of original issue
discount on the Discount Notes until such interest is actually paid, and
Holdings will not be allowed a deduction for the accrual or payment of the
portion of the original issue discount that constitutes Disqualified OID.
Corporate holders of the Discount Notes should be allowed a dividends received
deduction (generally at a 70 percent rate) with respect to the accrual of the
Disqualified OID so long as Holdings has current or accumulated earnings and
profits in excess of such amount. The Notes will not constitute applicable
high yield discount obligations.
Market Discount
Purchasers of Debt Securities should be aware that an acquisition of Debt
Securities may be affected by the market discount provisions of the Code.
These rules generally provide that, subject to a statutorily defined de
minimis exception, if a holder of a debt instrument purchases it at a "market
discount" (as defined below) and thereafter recognizes gain on a disposition
of the debt instrument (including a gift), the lesser of such gain (or
appreciation, in the case of a gift) and the portion of the market discount
that accrued while the debt instrument was held by such holder will be treated
as ordinary interest income at the time of the disposition. For this purpose,
a purchase at a "market discount" is defined to include a purchase at or after
the original issue at a price below the stated redemption price at maturity,
or, in the case of a debt instrument issued with original issue discount, such
as a Discount Note, at a price below its "adjusted issue price" (i.e., its
issue price, plus the aggregate original issue discount includible in income
by all holders of the debt instrument, minus all payments made on the note,
other than payments of qualified stated interest). The market discount rules
also provide that a holder who acquires a debt instrument at a market discount
(and who does not elect to include such market discount in income on a current
basis) may be required to defer a portion of any interest expense that may
otherwise be deductible on any indebtedness incurred or maintained to purchase
or carry such debt instrument until the holder disposes of the debt instrument
in a taxable transaction. Holders who purchase the Debt Securities at original
issuance at the issue price will not be subject to the market discount
provisions with respect to such obligations.
The Debt Securities provide that they may be redeemed, in whole or in part,
before maturity. If some or all of the Debt Securities are redeemed in part,
each holder of a Note or Discount Note so redeemed that was acquired at a
market discount would be required to treat the principal payment as ordinary
interest income to the extent of any accrued market discount on such Note or
Discount Note.
Any market discount on a Note or Discount Note will be considered to accrue
ratably from the date of its acquisition to its maturity date, unless the
holder makes an irrevocable election to accrue market discount on a constant
interest rate basis. In addition, a holder of a debt instrument acquired at a
market discount may elect to include the market discount in income as the
discount thereon accrues, either on a straight-line basis or, if elected, on a
constant interest rate basis. The current inclusion election, once made,
applies to all market discount obligations acquired by such holder on or after
the first day of the first taxable year to which the election applies, and the
election may not be revoked without the consent of the IRS. If a holder of a
Note or Discount Note elects to include market discount in income, the
foregoing rules with respect to the recognition of ordinary income on a sale
or other disposition of such Note or Discount Note and the deferral of
interest deductions on
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indebtedness related to such Note or Discount Note would not apply. Any
accrued market discount which is included in a holder's gross income would
increase the adjusted tax basis of the Note or Discount Note in the hands of
the holder.
Acquisition Premium
A holder who pays an "acquisition premium" for a Discount Note may be
entitled to a reduction in the amount of original issue discount includable in
such holder's income for any taxable year to the extent of the portion of the
acquisition premium properly allocable to such year. "Acquisition premium" is
any amount paid by a holder for a Discount Note in excess of its "adjusted
issue price" (i.e., its issue price increased by the original issue discount
previously accrued on the Discount Note and decreased by cash payments (other
than qualified stated interest) made with respect to such Discount Note) at
the time of the acquisition.
Amortizable Bond Premium
Generally, if the tax basis of a debt instrument held as a capital asset
exceeds the sum of all amounts payable on the obligation other than qualified
stated interest, such excess may constitute amortizable bond premium that the
holder may elect to amortize under the constant interest rate method and
deduct over the period from his or her acquisition date to the obligation's
maturity date. A holder who elects to amortize bond premium must reduce his or
her tax basis in the related obligation by the amount of the aggregate
deductions allowable for amortizable bond premium.
In the case of a debt instrument, such as a Note, that may be called at a
premium prior to maturity, the earlier call date of the debt instrument is
treated as the maturity date of the debt instrument and the amount of bond
premium is determined by treating the amount payable on such call date as the
amount payable at maturity if such a calculation produces a smaller
amortizable bond premium than the method described in the preceding paragraph.
If a holder of a debt instrument is required to amortize and deduct bond
premium by reference to a certain call date, the debt instrument will be
treated as maturing on such date for the amount payable, and, if not redeemed
on such date, the debt instrument will be treated as reissued on such date for
the amount so payable. If a debt instrument purchased at a premium is redeemed
prior to its maturity, a purchaser who has elected to deduct bond premium may
deduct any remaining unamortized bond premium as an ordinary loss in the
taxable year of redemption.
The amortizable bond premium deduction is treated as an offset to interest
income on the related security for federal income tax purposes. Each
prospective purchaser is urged to consult his or her tax advisor as to the
consequences of the treatment of such premium as an offset to interest income
for federal income tax purposes.
The IRS recently issued proposed regulations on the treatment of amortizable
bond premium. Each prospective purchaser should consult his or her tax advisor
regarding the potential application of the proposed regulations.
Constant Yield Election
A holder of a Note or Discount Note, subject to certain limitations, may
elect to include all interest and discount on the Note or Discount Note in
gross income under the constant yield method. For this purpose, interest
includes stated and unstated interest, acquisition discount, de minimis
original issue discount, original issue discount, de minimis market discount
and market discount, as adjusted by any acquisition premium and amortizable
bond premium. This election, if made in respect of a market discount bond,
will constitute an election to include market discount in income currently on
all market discount bonds acquired by such holder on or after the first day of
the first taxable year to which the election applies. See "--Market Discount."
Sale, Exchange, Retirement or other Disposition
In general, a holder of a Note or Discount Note will recognize gain or loss
upon the sale, exchange, retirement or other taxable disposition of the Note
or Discount Note measured by the difference between (i) the amount of cash and
the fair market value of property received (except to the extent such cash or
property is
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attributable to accrued but unpaid qualified stated interest, which will be
taxable as ordinary income) and (ii) the holder's tax basis in the Note or
Discount Note (as increased by any original issue discount and market discount
previously included in income by the holder and decreased by any cash payments
received (other than payments constituting qualified stated interest) and any
amortizable bond premium deducted over the term of the Note or Discount Note).
Subject to the market discount and amortizable bond premium rules discussed
above, any such gain or loss will generally be long-term capital gain or loss
if the holder has owned the obligation for more than one year.
WARRANTS
The federal income tax consequences of the purchase and the exercise or sale
of Warrants will depend, to some extent, on whether they are viewed, for
federal income tax purposes, as equivalent to common stock. There is no
authority directly dealing with that issue. Because nominal consideration is
required to exercise the Warrants and the exercise of the Warrants is
economically compelling, Holdings believes that, if presented with the issue,
it is likely that the IRS would recharacterize the Warrants as issued and
outstanding shares of non-voting common stock of Holdings for federal income
tax purposes.
Neither Holdings nor the holder will recognize gain or loss as a result of
Holding's issuance of the Warrants as part of the Units. The holder's adjusted
tax basis in a Warrant will be an amount equal to the issue price of the
Warrant.
Neither Holdings nor the holder will recognize gain or loss as a result of a
holder's receipt of Warrant Shares upon exercising Warrants. A holder's
adjusted tax basis in the Warrant Shares will be an amount equal to the
holder's adjusted tax basis in the Warrants plus the amount paid to Holdings
as the exercise price for the Warrants. If the Warrants lapse without
exercise, the holder should recognize a capital loss in an amount equal to the
holder's adjusted tax basis in the Warrants. Any such capital loss will be
long-term capital loss if the holding period for the Warrants exceeds one
year. In the event that a Warrant is sold or otherwise disposed of in a
taxable exchange, the holder will realize and recognize capital gain or loss
in an amount equal to the difference between the amount realized on the
exchange and the holder's adjusted tax basis in the Warrant. If the Warrant
has been held for more than one year, any capital gain or loss recognized by
the holder will be long-term capital gain or loss.
If the Warrants are exercised and Warrant Shares are thereafter disposed of
in a taxable transaction, holders of Warrant Shares will realize and recognize
capital gain or loss in an amount equal to the difference between the amount
realized on the exchange and the holder's adjusted tax basis in the Warrant
Shares. The gain or loss recognized will be long-term capital gain or loss if
the holding period with respect to the Warrant Shares is more than one year.
The holding period of Warrant Shares will depend on whether the Warrants are
treated as warrants or as common stock. If the Warrants are treated as stock,
the holding period of the Warrant Shares will include the holding period of
the Warrants. On the other hand, if the Warrants are treated as warrants the
holding period for the Warrant Shares will commence on the date the Warrants
are exercised.
The conversion ratio of the Warrants is subject to adjustment under certain
circumstances. If an adjustment increases the proportionate interest of a
holder of a Warrant in the fully diluted Common Stock (e.g., an adjustment to
reflect a taxable dividend paid to holders of Common Stock), Section 305 of
the Code may treat holders of the Warrants as having received a constructive
dividend distribution.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Backup withholding may apply to certain noncorporate holders with respect to
payments made by Holdings or Chemicals for interest on the Debt Securities,
dividends on the Warrant Shares, or the redemption of the Debt Securities.
Such holders will be subject to backup withholding at a rate of 31 percent
unless the beneficial owner of such security supplies the payor or its agent
with a taxpayer identification number, certified under penalties of perjury,
and certain other information, or otherwise establishes, in the manner
prescribed by law, an exemption from backup withholding. In addition, if a
Warrant, a Warrant Share or a Debt Security is sold to (or through) a "broker"
(disregarding redemptions by Holdings or the Company), the broker may be
required to withhold 31
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<PAGE>
percent of the entire sale price, unless either (i) the broker determines that
the seller is a corporation or other exempt recipient or (ii) the seller
provides, in the required manner, certain identifying information. Such a sale
must also be reported by the broker to the IRS, unless the broker determines
that the seller is an exempt recipient. The term "broker" as defined by
Treasury regulations, includes all persons who, in the ordinary course of
business, stand ready to effect sales made by others.
Any amount withheld under backup withholding rules from a payment to a
holder is allowable as a credit or refund against the holder's federal income
tax, provided that the holder furnishes the required information to the IRS.
In addition, certain penalties may be imposed by the IRS on a holder who is
required to supply information but does not do so in the proper manner.
UNITED STATES FEDERAL TAXATION OF NON-UNITED STATES HOLDERS
This section discusses certain special rules applicable to a holder of Debt
Securities, Warrants or Warrant Shares that is a Non-United States Holder. For
purposes of this discussion, a "Non-United States Holder" means a holder of
Debt Securities, Warrants or Warrant Shares that is not a United States
Holder.
THE DEBT SECURITIES
Interest and Original Issue Discount Attributable to the Discount Notes and
Interest Attributable to the Notes
Except to the extent qualifying as "portfolio interest", as defined below,
payments of stated interest on the Notes and payments of principal and
interest on the Discount Notes (to the extent of accrued original issue
discount) received by a Non-United States Holder will generally be subject to
withholding of United States federal income tax at the rate of 30 percent (or
such lower treaty rate as may be applicable) unless the payments are
effectively connected with the conduct of a trade or business within the
United States by the Non-United States Holder. If the payments are effectively
connected with the conduct of a trade or business in the United States by the
Non-United States Holder, such payments will be subject to United States
federal income tax on a net basis at the rates applicable to United States
persons generally (and, with respect to corporate holders, may also be subject
to a 30 percent branch profits tax). If payments are subject to United States
federal income tax on a net basis in accordance with the rules described in
the preceding sentence, such payments will not be subject to United States
withholding tax so long as the holder provides Chemicals or Holdings, as the
case may be, or their paying agent, with a properly executed Form 4224. Non-
United States Holders should consult any applicable income tax treaties, which
may provide for a lower rate of withholding tax, exemption from or reduction
of branch profits tax, or other rules different from those described above.
Portfolio interest is exempt from the 30 percent withholding tax discussed
above. Except as set out below, interest (including original issue discount)
paid to a Non-United States Holder attributable to the Notes or the Discount
Notes will constitute "portfolio interest" within the meaning of Sections
871(h) and 881(c) of the Code, provided Chemicals or Holdings, as the case may
be, or their paying agent, receives (i) from the beneficial owner, a properly
completed Form W-8 (or substitute Form W-8) under penalties of perjury which
provides the beneficial owner's name and address and certifies that the
beneficial owner of the Note or the Discount Note is a Non-United States
Holder, or (ii) from a security clearing organization, bank or other financial
institution that holds the Notes or the Discount Notes in the ordinary course
of its trade or business (a "financial institution") on behalf of the
beneficial owner, certification under penalties of perjury that such a Form W-
8 (or substitute Form W-8) has been received by it or by a qualifying
intermediary from the beneficial owner, and a copy of the Form W-8 is
furnished to the payor. The portfolio interest exemption will not apply to
interest or original issue discount attributable to the Notes or the Discount
Notes received by (i) a 10 percent shareholder (including any shares held
indirectly by attribution) of Holdings, (ii) a Non-United States Holder that
holds the Notes or the Discount Notes in connection with the conduct of a
trade or business within the United States, (iii) certain banks or (iv) a
controlled foreign corporation for United States federal income tax purposes
that is directly or indirectly related to Chemicals or Holdings.
Gain on Disposition of the Notes and the Discount Notes
A Non-United States Holder will generally not be subject to United States
federal income tax with respect to gain recognized on disposition of the Notes
or the Discount Notes unless (i) the gain is effectively connected
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with a trade or business of the Non-United States Holder in the United States
or (ii) in the case of a Non-United States Holder that is an individual, such
holder is present in the United States for 183 or more days in the taxable
year of the disposition and certain other requirements are met. In addition,
if stated interest on the Notes or original issue discount on the Discount
Notes, as applicable, does not qualify for the portfolio interest exemption,
gain recognized by a Non-United States Holder on the disposition of the Notes
or Discount Notes to the extent of accrued but unpaid stated interest or
original issue discount, as applicable, may be subject to United States
federal income tax.
WARRANTS
Dividends on Warrant Shares
Any dividends paid on the Warrant Shares that are received by a Non-United
States Holder will generally be subject to withholding of United States
federal income tax at the rate of 30 percent (or such lower treaty rate as may
be applicable) unless the payments are effectively connected with the conduct
of a trade or business within the United States by the Non-United States
Holder. If the payments are effectively connected with the conduct of a trade
or business in the United States by the Non-United States Holder, such
payments will be subject to United States federal income tax on a net basis at
the rates applicable to United States persons generally (and, with respect to
corporate holders, may also be subject to a 30 percent branch profits tax). If
payments are subject to United States federal income tax on a net basis in
accordance with the rules described in the preceding sentence, such payments
will not be subject to United States withholding tax so long as the holder
provides Holdings or its paying agent with a properly executed Form 4224. Non-
United States Holders should consult any applicable income tax treaties, which
may provide for a lower rate of withholding tax, exemption from or reduction
of branch profits tax, or other rules different from those described above.
Under current Treasury regulations, dividends paid to an address in a
foreign country are presumed to be paid to a resident of that country for
purposes of determining the applicability of a tax treaty providing for a
lower rate of withholding. However, Treasury regulations proposed in April of
1996 would, if finalized in their current form, require Non-United States
Holders to file a "withholding certificate" with Holdings' withholding agent
(or, under certain circumstances, a "qualified intermediary") to obtain the
benefit of an applicable tax treaty providing for a lower rate of withholding
tax on dividends. The required withholding certificate would have to contain
the name and address of the holder and the basis for any reduced rate claimed.
See the discussion below under "--Proposed Regulations relating to Withholding
and Information Reporting."
Gain on Disposition of the Warrants or Warrants Shares
A Non-United States Holder will generally not be subject to United States
federal income tax with respect to gain recognized on disposition of the
Warrants or Warrant Shares unless (i) the gain is effectively connected with a
trade or business of the Non-United States Holder in the United States; (ii)
in the case of a Non-United States Holder that is an individual, such holder
is present in the United States for 183 or more days in the taxable year of
the disposition and certain other requirements are met; or (iii) Holdings is
at the time of the disposition, or was at any time during the testing period,
a United States real property holding corporation ("USRPHC") as defined under
Section 897(c)(2) of the Code and, in the event the Warrants (if the Warrants
are appropriately treated as an issue of non-voting common stock of Holdings)
or the Warrant Shares are regularly traded on an established securities
market, the Non-United States Holder actually or constructively owned, at any
time during the testing period, more than five percent of such Warrants or
Warrant Shares, respectively. For purposes of this paragraph, the "testing
period" means the shorter of (i) the five-year period ending on the date of
the disposition of such property and (ii) the period during which the Non-
United States Holder held the property. Holdings can give no assurance that it
is not a USRPHC.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Under Treasury Regulations, Chemicals and Holdings must report annually to
the IRS the amount of interest (including original issue discount) and
dividends paid to each Non-United States Holder, and the United States
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federal income tax, if any, withheld with respect to such interest and
dividends. Such information may be made available by the IRS to the tax
authorities in a foreign country under the provisions of an applicable tax
treaty or information exchange agreement.
Backup withholding (which generally is a withholding tax imposed at the rate
of 31 percent on payments to persons that fail to furnish certain required
information) generally will not apply to payments to Non-United States Holders
of principal, interest, and premium (if any) on the Debt Securities if (i) the
holder certifies to the issuer or its agent under penalties of perjury that it
is a Non-United States Holder and provides its name and address or (ii) a
securities clearing organization, bank, or other financial institution that
holds customers' securities in the ordinary course of its trade or business
and that holds the Debt Security on behalf of its owner certifies to the
issuer or its agent, under penalties of perjury, that it has received such
statement from the owner or from a financial institution between it and the
owner and furnishes the issuer or its agent with a copy of such statement.
Under temporary regulations, dividends payable on the Warrant Shares at an
address outside the United States are not subject to backup withholding absent
knowledge that the payee is a United States Holder. However, Treasury
regulations proposed in April of 1996 would, if finalized in their current
form, require a Non-United States Holder of Warrant Shares to file a
withholding certificate with Holdings' withholding agent (or, under certain
circumstances, a qualified intermediary) representing that such Non-United
States Holder is a foreign person in order to avoid backup withholding on
dividends paid on those Shares. See the discussion below under "--Proposed
Regulations relating to Withholding and Information Reporting."
Under present law, payment of the proceeds from a sale of a Debt Security,
Warrant or Warrant Share to or through a foreign office of a broker is not
subject to information reporting or backup withholding, except that if the
broker is a U.S. person, or a foreign person with certain types of
relationships to the United States, information reporting may apply to such
payment unless the broker has documentary evidence in its records that the
holder is a Non-United States Holder and certain other conditions are met or
an exemption from information reporting is otherwise established. Payment of
the proceeds from a sale of a Debt Security, Warrant or Warrant Share to or
through the U.S. office of a broker is subject to information reporting and
backup withholding unless the beneficial owner under penalties of perjury
certifies, among other things, that it is a Non-United States Holder or
otherwise establishes an exemption from information reporting and backup
withholding.
PROPOSED REGULATIONS RELATING TO WITHHOLDING AND INFORMATION REPORTING
On April 22, 1996 the IRS issued proposed regulations relating to (i)
withholding income tax on U.S.-source income paid to Non-United States
Holders; (ii) claiming Non-United States Holder status to avoid backup
withholding; and (iii) reporting to the IRS of payments to Non-United States
Holders. The proposed regulations would substantially revise some aspects of
the current system for withholding on and reporting amounts paid to Non-United
States Holders. The regulations unify current certification procedures and
forms and reliance standards are clarified. Most forms are proposed to be
combined into a single form: Form W-8. In general, the regulations are
proposed to be effective for payments made after December 31, 1997.
Certificates issued, however, on or before the date that is 60 days after the
proposed regulations are made final will continue to be valid until they
expire. All proposed regulations are subject to change before adoption in
their final form. No reliable prediction can be made as to when, if ever, the
proposed regulations will be made final and, if so, as to their final form.
UNITED STATES FEDERAL ESTATE TAXES
The Warrants or Warrant Shares owned or treated as owned by an individual
who is not a citizen or domiciliary of the United States at the date of death
will be included in such individual's estate for United States federal estate
tax purposes, unless an applicable estate tax treaty provides otherwise.
Subject to applicable treaty provisions, Debt Securities held at the time of
death (or theretofore transferred subject to certain retained rights or
powers) by an individual who is not a citizen or domiciliary of the United
States at the time of death will not be included in such person's gross estate
for United States federal estate tax purposes provided that (i) the decedent
is not a 10 percent shareholder of Holdings and (ii) the decedent does not
hold the Debt Securities in connection with a trade or business within the
United States.
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UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement (the "Underwriting Agreement"), the Underwriters named below (the
"Underwriters") have severally but not jointly agreed to purchase from the
Issuers the following respective principal amounts of the Securities:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT NUMBER
UNDERWRITER OF NOTES OF UNITS
----------- ------------ --------
<S> <C> <C>
CS First Boston Corporation......................... $206,250,000 143,813
Chase Securities Inc................................ 68,750,000 47,938
------------ -------
Total............................................. $275,000,000 191,751
============ =======
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all of the Securities if any are purchased. The
Underwriting Agreement provides that, in the event of a default by an
Underwriter, in certain circumstances, the purchase commitment of the non-
defaulting Underwriter may be increased or the Underwriting Agreement may be
terminated.
The Issuers have been advised by the Underwriters that the Underwriters
propose to offer the Securities to the public initially at the public offering
prices set forth on the cover page of this Prospectus and to certain dealers
at such price less a concession of 1.5% and 1.5% of the principal amount per
Note and Unit, respectively, and the Underwriters and such dealers may allow a
discount of 0.25% and 0.25% of such principal amount per Note and Unit,
respectively, on sales to certain other dealers. After the initial public
offering, the public offering prices and concessions and discounts to dealers
may be changed by the Underwriters.
The Securities are new issues of securities with no established trading
market. The Underwriters have advised the Issuers that they intend to act as
market makers for the Securities. However, the Underwriters are not obligated
to do so and may discontinue any market making at any time without notice. No
assurance can be given as to the liquidity of the trading markets for the
Securities.
The Underwriters have informed the Issuers that they do not expect to
confirm sales to any account over which they exercise discretionary authority
without prior specific written consent.
The Issuers have agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or
contribute to payments which the Underwriters may be required to make in
respect thereof.
The Clipper Group includes investment partnerships in which affiliates of CS
First Boston Corporation and CS Holding, the principal shareholder of CS First
Boston Corporation, are limited partners. Based in Zurich, Switzerland, CS
Holding is also the principal shareholder of Credit Suisse. The Clipper Group
will purchase up to $25 million of equity and certain employees of CS First
Boston Corporation or its affiliates are expected to purchase up to $2 million
of equity in the Equity Private Placement. See "Principal Stockholders." CS
First Boston Corporation and its affiliates may be deemed to have an indirect
right to the economic benefits of a portion of such equity. The Offerings,
therefore, are being conducted in accordance with the applicable provisions of
Rule 2720 of the National Association of Securities Dealers, Inc. Conduct
Rules. Accordingly, Chase Securities Inc. is acting as the qualified
independent underwriter in pricing the Offerings and conducting due diligence.
In the ordinary course of their respective businesses, affiliates of CS
First Boston Corporation have performed, and may in the future perform,
investment banking services for the Issuers and their subsidiaries and
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have engaged, and may in the future engage, in commercial banking transactions
with the Issuers and their subsidiaries. Pursuant to an agreement among TSG,
Unicorn and CS First Boston Corporation, CS First Boston Corporation has
provided certain financial advisory services to TSG and Unicorn with respect
to the Transaction, for which CS First Boston Corporation will receive a fee
of approximately $4.0 million. Credit Suisse, an affiliate of CS First Boston
Corporation, is a co-arranger and lender under the Credit Facility and will
receive certain fees in connection therewith. See "Description of the Credit
Facility." In addition, a managing director of CS First Boston Corporation is
expected to serve as a director of Holdings following the Transaction. See
"Management."
Chase Securities Inc. is an affiliate of Texas Commerce Bank National
Association which will be administrative agent and a lender to Chemicals under
the Credit Facility and will receive customary fees in connection with the
Credit Facility. Texas Commerce Bank National Association will receive its
proportionate share of the repayment by the Company of amounts outstanding
under its existing credit facilities from the proceeds of the Offerings. Chase
Securities Inc. will act as co-arranger for the Credit Facility, for which it
will receive customary fees. Affiliates of Chase Securities Inc. have
participated and in the future may participate in various financing and
banking transactions for the Company, Chemicals, Holdings and TSG and certain
of its affiliates.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Securities in Canada is being made only on a private
placement basis exempt from the requirement that the Issuers prepare and file
a prospectus with the securities regulatory authorities in each province where
trades of Securities are effected. Accordingly, any resale of the Securities
in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the Securities.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Securities in Canada who receives a purchase confirmation
will be deemed to represent to the Issuers and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such Securities without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, such purchaser is purchasing as principal and not as agent,
and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
RIGHTS OF ACTION AND ENFORCEMENT
The Securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available,
including common law rights of action for damages or rescission or rights of
action under the civil liability provisions of the U.S. federal securities
laws.
All of the issuers' directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Ontario purchasers to effect service of process within Canada
upon the issuers or such persons. All or a substantial portion of the assets
of the issuers and such persons may be located outside of Canada and, as a
result, it may not be possible to satisfy a judgment against the issuers or
such persons in Canada or to enforce a judgment obtained in Canadian courts
against such issuers or persons outside of Canada.
149
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NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Securities to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Securities acquired by such purchaser pursuant to the Offerings. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Issuers. Only one
such report must be filed in respect of Securities acquired on the same date
and under the same prospectus exemption.
LEGAL MATTERS
Andrews & Kurth L.L.P., Houston, Texas has passed upon certain matters with
respect to the validity of Units and Notes offered hereby, as counsel for STX
Acquisition and Chemicals. After the Transaction, members of Andrews & Kurth
L.L.P. are expected to own less than 0.1% of the outstanding Common Stock of
Holdings. Certain legal matters will be passed upon for the Underwriters by
Dewey Ballantine, New York, New York.
CHANGE OF ACCOUNTANTS
On October 25, 1995, the Audit Committee of the Board of Directors of the
Company recommended and the Board of Directors of the Company approved the
engagement of the firm of Arthur Andersen LLP ("Arthur Andersen") as its
independent auditors for the year ending September 30, 1996, to replace the
firm of Coopers & Lybrand L.L.P. The termination by the Company of the
engagement of Coopers & Lybrand L.L.P. was effective upon the completion of
the audit for the year ended September 30, 1995, and the filing of the
Company's Annual Report on Form 10-K for such year. The appointment of Arthur
Andersen as the Company's independent auditors for the fiscal year ending
September 30, 1996 was ratified by the stockholders at the 1996 Annual Meeting
of Stockholders.
During the two most recent fiscal years and the subsequent period through
December 18, 1995, the date of filing of the Company's Annual Report on Form
10-K, there were no disagreements with Coopers & Lybrand L.L.P. on any matter
of accounting principles or practices, financial statement disclosure, or
audit scope or procedures, which disagreements, if not resolved to their
satisfaction, would have caused them to make reference in connection with
their report to the subject matter of the disagreement.
During the two most recent fiscal years and the subsequent period through
December 18, 1995, the date of filing of the Company's Annual Report on Form
10-K, the Company has not been advised by Coopers & Lybrand L.L.P. of any of
the reportable events listed in Item 304(a)(1)(v)(A) through (D) of SEC
Regulation S-K and during such period the Company has not consulted with
Arthur Andersen regarding any matter referenced under Item 304(a)(2) of SEC
Regulation S-K.
The audit reports of Coopers & Lybrand L.L.P. on the consolidated financial
statements of the Company as of and for the fiscal years ended September 30,
1995 and 1994, did not contain any adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles, except for an explanatory paragraph noting that the
Company changed its method of accounting for income taxes effective October 1,
1993.
The Company requested that Coopers & Lybrand L.L.P. furnish a letter
addressed to the SEC stating whether Coopers & Lybrand L.L.P. agreed with the
above statements. A copy of the Coopers & Lybrand L.L.P. letter to the SEC
stating that such firm agreed with the above statements, dated December 18,
1995, was filed as Exhibit 16 to the Company's Form 8-K, dated December 18,
1995.
150
<PAGE>
EXPERTS
The consolidated balance sheet of Holdings as of May 14, 1996 and the
balance sheet of Chemicals as of May 14, 1996 included in the Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein, and are included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
The consolidated balance sheet of Sterling Chemicals, Inc. as of September
30, 1995 and 1994 and the consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 1995, included in this Prospectus, have been included
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
STX Acquisition and Chemicals have filed with the SEC a registration
statement (the "Registration Statement") under the Securities Act on Form S-1
(Reg. No. 333-04343) with respect to the Securities offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved. The Registration Statement and any amendments thereto,
including exhibits filed or incorporated by reference as a part thereof, are
available for inspection and copying at the SEC's offices as described above.
The Company is subject to the informational requirements of the Exchange Act
and, accordingly, files reports, proxy statements and other information with
the SEC. Such reports, proxy statements and other information filed with the
SEC are available for inspection and copying at the public reference
facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549, and at the SEC's Regional Offices located
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and at Seven World Trade Center, Suite 1300, New York, New York 10048.
Copies of such documents may also be obtained from the Public Reference
Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC
20549, at prescribed rates.
STX Acquisition and Chemicals are not currently subject to the periodic
reporting and other informational requirements of the Exchange Act. Upon the
effectiveness of the Registration Statement STX Acquisition and Chemicals will
become subject to the informational requirements of the Exchange Act, and in
accordance therewith will file all reports and other information as required
thereby with the SEC.
The obligation of Holdings (as successor to STX Acquisition) to file
periodic reports with the SEC pursuant to the Exchange Act may be suspended if
(i) Holdings ceases to have a class of equity securities held by 750 or more
persons and (ii) the Discount Notes are held of record by fewer than 300
holders at the beginning of any fiscal year other than the fiscal year in
which the Registration Statement becomes effective. The obligation of
Chemicals to file periodic reports with the SEC pursuant to the Exchange Act
may be suspended if the Notes are held of record by fewer than 300 holders at
the beginning of any fiscal year other than the fiscal year in which the
Registration Statement becomes effective. The Indentures will provide,
however, that STX Acquisition and Chemicals, respectively, must file with the
SEC and provide the holders of the respective notes with copies of annual
reports and other information, documents and reports specified in Section 13
and 15(d) of the Exchange Act as long as the respective notes are outstanding.
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GLOSSARY
The following glossary lists certain of the more frequently used terms in
this Prospectus.
<TABLE>
<C> <S>
ABS acrylonitrile butadiene styrene resins.
ACRYLONITRILE a colorless flammable liquid resulting from propylene
ammoxidation, primarily used in the manufacture of
intermediate products such as acrylic fibers and ABS
resins for apparel, furnishings, upholstery, household
appliances, carpets and plastics for automotive parts.
ACETIC ACID a colorless liquid derived from the reaction of
methanol with carbon monoxide, bacterial action on
ethyl alcohol, the oxidation of acetaldehyde or other
processes; acetic acid and its derivatives have
applications in adhesives, paper, paints, solvents,
textiles and flavoring agents.
BENZENE a volatile, colorless, highly flammable liquid used by
the Company as a raw material for the manufacture of
styrene.
CHLORINE DIOXIDE a bleaching agent produced by reacting sodium chlorate
or sodium chlorite in an acid medium; used primarily in
pulp bleaching and as an antimacrobial.
CONVERSION ARRANGEMENT an arrangement whereby the Company receives the raw
materials from a customer and sells the finished
product to that customer at a price which reflects the
added value of processing.
DEBOTTLENECKING an increase in output using the same basic plant by
improving process efficiency or changing certain
equipment which currently limits production capability.
ETHYLENE a basic building block commodity chemical used to
manufacture styrene.
KRAFT PULP a strong paper or pulp made from wood chips. Bleached
kraft pulp is used to make uncoated paper, diapers and
paperboard.
METHANOL a colorless liquid obtained by the destructive
distillation of wood or the incomplete oxidation of
natural gas, or produced synthetically from carbon
monoxide and hydrogen; primarily used by the Company in
the manufacture of acetic acid.
MONOMER a molecule or compound of relatively simple structure
that can be converted to polymers through reaction with
itself or other molecules.
PLASTICIZERS products made by the Company primarily from alpha-
olefins and orthoxylene used in the manufacture of
flexible plastics.
PROPYLENE a colorless flammable gas used as a raw material in the
manufacture of acrylonitrile.
SAN styrene acrylonitrile resins, used in the production of
various consumer products.
SODIUM CHLORATE a colorless, water soluble solid primarily used in the
production of chlorine dioxide.
SODIUM CHLORITE a specialty product used to produce chlorine dioxide
primarily for water treatment and as a disinfectant for
fresh produce.
SODIUM CYANIDE a white, water soluble powder used chiefly in
electroplating and in the mining of precious metals.
STYRENE a product manufactured from ethylene and benzene.
Styrene is principally used in the manufacture of
intermediate products such as polystyrene, ABS,
synthetic rubbers, SB latex, unsaturated polyester
resins and SAN.
TBA tertiary butylamine, a product manufactured from
isobutylene and hydrogen cyanide; TBA is used in the
production of pesticides and solvents.
</TABLE>
A-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STX Acquisition Corp. and Subsidiary:
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheet as of May 14, 1996........................... F-3
Notes to Consolidated Balance Sheet..................................... F-4
STX Chemicals Corp.:
Independent Auditors' Report............................................ F-5
Balance Sheet as of May 14, 1996........................................ F-6
Note to Balance Sheet................................................... F-7
Sterling Chemicals, Inc.:
Report of Independent Accountants....................................... F-8
Consolidated Statement of Operations for the Years Ended September 30,
1995,
1994 and 1993.......................................................... F-9
Consolidated Balance Sheet as of September 30, 1995 and 1994............ F-10
Consolidated Statement of Changes in Stockholders' Equity for the Years
Ended
September 30, 1995, 1994 and 1993...................................... F-11
Consolidated Statement of Cash Flows for the Years Ended September 30,
1995,
1994 and 1993.......................................................... F-12
Notes to Consolidated Financial Statements.............................. F-13
Supplemental Financial Information--Quarterly Financial Data
(Unaudited)............................................................ F-29
Condensed Consolidated Balance Sheet as of June 30, 1996 and September
30, 1995 (Unaudited)................................................... F-30
Condensed Consolidated Statement of Operations for the Nine Months Ended
June 30, 1996 and 1995 (Unaudited)..................................... F-31
Condensed Consolidated Statement of Cash Flows for the Nine Months Ended
June 30, 1996 and 1995 (Unaudited)..................................... F-32
Notes to Condensed Consolidated Financial Statements (Unaudited)........ F-34
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
STX Acquisition Corp. and Subsidiary
We have audited the accompanying consolidated balance sheet of STX
Acquisition Corp. and Subsidiary as of May 14, 1996. This consolidated balance
sheet is the responsibility of the Company's management. Our responsibility is
to express an opinion on the consolidated balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of STX Acquisition
Corp. and Subsidiary as of May 14, 1996 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
May 20, 1996
F-2
<PAGE>
STX ACQUISITION CORP.
CONSOLIDATED BALANCE SHEET
MAY 14, 1996
<TABLE>
<S> <C>
Assets--Cash............................................................ $2,008
======
Stockholders' Equity
Common stock, $.01 par value; 900,000 shares authorized; 84 shares
issued and outstanding............................................... $ 1
Additional paid-in capital............................................ 2,007
------
Total Stockholders' Equity.............................................. $2,008
======
</TABLE>
See accompanying notes.
F-3
<PAGE>
STX ACQUISITION CORP.
NOTES TO CONSOLIDATED BALANCE SHEET
AS OF MAY 14, 1996
1. ORGANIZATION AND OPERATIONS
The consolidated balance sheet includes the accounts of STX Acquisition
Corp. ("STX Acquisition") and its wholly-owned subsidiary, STX Chemicals Corp.
("Chemicals").
STX Acquisition is a Delaware Corporation formed in April 1996 by an
investor group led by The Sterling Group, Inc. and The Unicorn Group L.L.C. to
effect the merger (the "Merger") of STX Acquisition with and into Sterling
Chemicals, Inc., (the "Company"). Pursuant to an Agreement and Plan of Merger
dated April 24, 1996 between STX Acquisition and the Company, the stockholders
of STX Acquisition will acquire a controlling interest in the Company through
the Merger, with the Company being the surviving corporation. Chemicals will
become a wholly owned subsidiary of the Company and all operating assets and
related liabilities of the Company will be conveyed to and assumed by
Chemicals.
2. COMMITMENTS AND CONTINGENCIES
In April and May, 1996 six putative class action complaints relating to the
proposed Merger and the events leading up to the recommendation of the
approval thereof by the Board of Directors of the Company were filed in the
Court of Chancery for New Castle, Delaware (the "Court"). It is anticipated
that the Court will consolidate the six actions. The complaints name the
Company and each of its directors as defendants and generally allege that the
course of conduct taken by the Company's directors in considering the
Company's strategic alternatives and in recommending the Merger has been in
violation of their fiduciary duties to the Company's stockholders and seek
injunctive relief and unspecified damages. One of the lawsuits includes STX
Acquisition as a defendant. Such lawsuit is styled Alan R. Kahn V. Sterling
Chemicals, Inc., The Sterling Group, Inc., The Unicorn Group, Inc., STX
Acquisition Corp., Gordon A. Cain, et al; Civil Action No. 14981; In the Court
of Chancery of the State of Delaware, New Castle County, Delaware. STX
Acquisition believes that this action is without merit. While this lawsuit is
in the early stages, at this time it is not anticipated to have a material
adverse effect on the financial position of STX Acquisition.
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
STX Chemicals Corp.
We have audited the accompanying balance sheet of STX Chemicals Corp. (a
wholly owned subsidiary of STX Acquisition Corp.) as of May 14, 1996. This
balance sheet is the responsibility of the Company's management. Our
responsibility is to express an opinion on the balance sheet based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for an
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of STX Chemicals Corp. as of May 14,
1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
May 20, 1996
F-5
<PAGE>
STX CHEMICALS CORP.
(A WHOLLY OWNED SUBSIDIARY OF STX ACQUISITION CORP.)
BALANCE SHEET
MAY 14, 1996
<TABLE>
<S> <C>
Assets--Cash............................................................ $1,000
======
Stockholder's Equity
Common stock, $.01 par value; 1,000 shares authorized,
issued and outstanding............................................... $ 10
Additional paid-in capital............................................ 990
------
Total Stockholder's Equity.............................................. $1,000
======
</TABLE>
See accompanying note.
F-6
<PAGE>
STX CHEMICALS CORP.
(A WHOLLY OWNED SUBSIDIARY OF STX ACQUISITION CORP.)
NOTE TO BALANCE SHEET
AS OF MAY 14, 1996
1. ORGANIZATION AND OPERATIONS
STX Chemicals Corp. ("Chemicals"), incorporated in Delaware in May 1996, is
a wholly owned subsidiary of STX Acquisition Corp. ("STX Acquisition"). STX
Acquisition was formed to effect the merger of STX Acquisition with and into
Sterling Chemicals, Inc. (the "Company"). Concurrently with the merger,
Chemicals will become a wholly owned subsidiary of the Company and all
operating assets and related liabilities of the Company will be conveyed to
and assumed by Chemicals.
F-7
<PAGE>
REPORT OF INDEPENDENT
ACCOUNTANTS
To the Board of Directors and Stockholders of Sterling Chemicals, Inc.
We have audited the consolidated balance sheet of Sterling Chemicals, Inc.
as of September 30, 1995 and 1994 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the
three years in the period ended September 30, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sterling
Chemicals, Inc. as of September 30, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended September 30, 1995, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
October 25, 1995
F-8
<PAGE>
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Revenues........................................ $1,030,198 $700,840 $518,821
Cost of goods sold.............................. 758,580 606,916 477,902
---------- -------- --------
Gross profit.................................... 271,618 93,924 40,919
Selling, general and administrative expenses
(Note 7)....................................... 28,856 46,150 25,495
Interest and debt related expenses, net of
interest income................................ 14,604 22,126 22,392
Gain on sale of assets.......................... -- (2,606)
---------- -------- --------
Income (loss) before taxes and extraordinary
item........................................... 228,158 28,254 (6,968)
Provision (benefit) for income taxes............ 75,005 9,122 (1,548)
---------- -------- --------
Income (loss) before extraordinary item......... 153,153 19,132 (5,420)
Extraordinary item, loss on early extinguishment
of debt,
net of tax (Note 3)............................ 3,104 -- --
---------- -------- --------
Net income (loss)............................... $ 150,049 $ 19,132 $ (5,420)
========== ======== ========
Per share data:
Income (loss) before extraordinary item......... $ 2.76 $ 0.34 $ (0.10)
Extraordinary item.............................. .06 -- --
---------- -------- --------
Net income (loss) per share..................... $ 2.70 $ 0.34 $ (0.10)
========== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE>
STERLING CHEMICALS, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 30,882 $ 2,013
Accounts receivable...................................... 112,102 127,705
Inventories.............................................. 67,867 69,758
Prepaid expenses......................................... 3,878 2,700
Deferred income taxes.................................... 5,622 9,332
-------- --------
Total current assets................................... 220,351 211,508
Property, plant and equipment, net......................... 309,084 291,126
Other assets............................................... 80,504 78,291
-------- --------
Total assets........................................... $609,939 $580,925
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 72,016 $ 76,857
Accrued liabilities...................................... 55,858 80,071
Current portion of long-term debt........................ 17,857 33,771
-------- --------
Total current liabilities.............................. 145,731 190,699
Long-term debt............................................. 103,581 192,621
Deferred income tax liability.............................. 40,297 38,837
Deferred credits and other liabilities..................... 81,012 69,034
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock, $.01 par value, 150,000 shares authorized,
60,327 shares issued, 55,674 and 55,660 shares
outstanding at September 30, 1995 and 1994,
respectively............................................ 603 603
Additional paid-in capital............................... 33,269 33,232
Retained earnings........................................ 275,052 125,003
Pension adjustment....................................... (1,556) (950)
Accumulated translation adjustment....................... (17,307) (17,322)
Deferred compensation.................................... (129) (68)
-------- --------
289,932 140,498
Treasury stock, at cost, 4,653 and 4,667 shares at
September 30, 1995 and 1994, respectively............... (50,614) (50,764)
-------- --------
Total stockholders' equity................................. 239,318 89,734
-------- --------
Total liabilities and stockholders' equity................. $609,939 $580,925
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE>
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED
------------- PAID-IN RETAINED PENSION TRANSLATION DEFERRED TREASURY
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT ADJUSTMENT COMPENSATION STOCK
------ ------ ---------- -------- ---------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1992................... 60,150 $602 $35,478 $114,603 $(1,009) $ (6,610) $(234) $(55,487)
Net loss................ -- -- -- (5,420) -- -- -- --
Translation adjustment.. -- -- -- -- -- (9,574) -- --
Dividends paid on common
stock $.06 per share... -- -- -- (3,312) -- -- -- --
Common stock issued..... 175 1 700 -- -- -- -- --
Treasury stock
transactions........... -- -- (1,470) -- -- -- (135) 2,286
Amortization of deferred
compensation........... -- -- -- -- -- -- 205 --
Pension adjustment...... -- -- -- -- (288) -- -- --
------ ---- ------- -------- ------- -------- ----- --------
Balance, September 30,
1993................... 60,325 603 34,708 105,871 (1,297) (16,184) (164) (53,201)
Net income.............. -- -- -- 19,132 -- -- -- --
Translation adjustment.. -- -- -- -- -- (1,138) -- --
Common stock issued..... 2 -- 6 -- -- -- -- --
Treasury stock
transactions........... -- -- (1,482) -- -- -- -- 2,437
Amortization of deferred
compensation........... -- -- -- -- -- -- 96 --
Pension adjustment...... -- -- -- -- 347 -- -- --
------ ---- ------- -------- ------- -------- ----- --------
Balance, September 30,
1994................... 60,327 603 33,232 125,003 (950) (17,322) (68) (50,764)
Net income.............. -- -- -- 150,049 -- -- -- --
Translation adjustment.. -- -- -- -- -- 15 -- --
Treasury stock
transactions........... -- -- 37 -- -- -- -- 150
Amortization of deferred
compensation........... -- -- -- -- -- -- (61) --
Pension adjustment...... -- -- -- -- (606) -- -- --
------ ---- ------- -------- ------- -------- ----- --------
Balance, September 30,
1995................... 60,327 $603 $33,269 $275,052 $(1,556) $(17,307) $(129) $(50,614)
====== ==== ======= ======== ======= ======== ===== ========
</TABLE>
F-11
<PAGE>
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers................ $1,159,192 $709,026 $558,088
Miscellaneous cash receipts................. 14,007 10,618 10,945
Cash paid to suppliers and employees........ (893,324) (614,856) (497,920)
Interest paid............................... (14,811) (20,443) (21,622)
Interest received........................... 2,540 60 86
Income taxes paid........................... (75,766) (9,156) (1,463)
---------- -------- --------
Net cash provided by operating activities..... 191,838 75,249 48,114
Cash flows from investing activities:
Capital expenditures........................ (53,962) (12,343) (12,175)
Proceeds from sale of assets................ -- 2,606 --
---------- -------- --------
Net cash used in investing activities......... (53,962) (9,737) (12,175)
Cash flows from financing activities:
Proceeds from long-term debt................ 217,000 -- --
Repayment of long-term debt................. (322,282) (65,517) (33,649)
Dividends paid.............................. -- -- (3,312)
Other....................................... (3,735) 643 (96)
---------- -------- --------
Net cash used in financing activities......... (109,017) (64,874) (37,057)
Effect of U.S./Canadian exchange rate on cash. 10 23 (155)
---------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................. 28,869 661 (1,273)
Cash and cash equivalents--beginning of year.. 2,013 1,352 2,625
---------- -------- --------
Cash and cash equivalents--end of year........ $ 30,882 $ 2,013 $ 1,352
========== ======== ========
Reconciliation of Net Income (Loss) to Cash
Provided by Operating Activities:
Net income (loss)............................. $ 150,049 $ 19,132 $ (5,420)
Adjustments to reconcile net income (loss) to
net cash provided by
operating activities:
Depreciation and amortization............... 43,033 40,953 38,679
Extraordinary item.......................... 3,104 -- --
Deferred tax expense (benefit).............. 4,280 (4,817) 1,239
Accrued compensation including SARs......... (2,638) 21,941 205
Other....................................... 1,058 (1,180) 1,494
Change in assets/liabilities:
Accounts receivable......................... 22,540 (52,304) (17,705)
Inventories................................. 1,921 (9,493) 17,708
Prepaid expenses............................ (1,183) 2,649 2,430
Other assets................................ (4,075) (1,437) (4,411)
Accounts payable............................ (4,117) 34,083 8,123
Accrued liabilities......................... (21,447) 17,604 6,332
Other liabilities........................... (687) 8,118 (560)
---------- -------- --------
Net cash provided by operating activities..... $ 191,838 $ 75,249 $ 48,114
========== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-12
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Sterling Chemicals, Inc. (the "Company") operates petrochemical facilities
in Texas City, Texas and pulp chemical facilities throughout Canada. The
significant accounting policies of the Company are described below.
Principles of Consolidation
The consolidated financial statements include all majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. The Company's investment in a cogeneration joint venture is
accounted for under the equity method with earnings from the joint venture
recorded as a reduction of cost of goods sold.
Cash Equivalents
The Company considers all investments purchased with an original maturity of
three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market; cost is determined on
the first-in, first-out ("FIFO") basis except for stores and supplies, which
are valued at average cost.
The Company enters into agreements with other companies to exchange chemical
inventories in order to minimize working capital requirements and to
facilitate distribution logistics. Balances related to quantities due to or
payable by the Company are included in inventory.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Major renewals and
improvements which extend the useful lives of the equipment are capitalized.
Major planned maintenance expenses are accrued for during the periods prior to
the maintenance, while routine repair and maintenance expenses are charged to
operations as incurred. Disposals are removed at carrying cost less
accumulated depreciation with any resulting gain or loss reflected in
operations. Depreciation is provided using the straight-line method over
estimated useful lives ranging from 5 to 25 years with the predominant life of
the plant and equipment being 15 years. The Company capitalizes interest costs
which are incurred as part of the cost of constructing major facilities and
equipment. The amount of interest capitalized for the fiscal years 1995, 1994
and 1993 was $1,024, $145 and $291, respectively.
Patents and Royalties
The cost of patents is amortized on a straight-line basis over their
estimated useful lives which approximates ten years. The Company capitalized
the value of the chlorine dioxide generator technology acquired in 1992 based
on the net present value of all estimated remaining royalty payments
associated with the technology. The resulting intangible amount is included in
other assets and is amortized over an average life for these royalty payments
of ten years.
Debt Issue Costs
Debt issue costs relating to long-term debt are amortized using the interest
method and are included in other assets.
F-13
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Income Taxes
Deferred income taxes are recorded to reflect the tax consequences in future
years of differences between the tax basis of assets and liabilities and the
financial reporting amounts at each year-end.
Revenue Recognition
The Company generates revenues through sales in the open market, raw
material conversion agreements and long-term supply contracts. In addition,
the Company has entered into shared profit arrangements with respect to
certain petrochemical products. The Company recognizes revenue from sales in
the open market, raw material conversion agreements and long-term supply
contracts as the products are shipped. Revenues from shared profit
arrangements are estimated and accrued monthly. The Company also generates
revenues from the construction and sale of chlorine dioxide generators which
are recognized using the percentage of completion method. Deferred credits are
amortized over the life of the contract which gave rise to them. The Company
also receives prepaid royalties which are recognized over a period which is
typically ten years.
Foreign Exchange
Assets and liabilities denominated in Canadian dollars are translated into
U.S. dollars at year-end exchange rates and revenues and expenses are
translated at the average monthly exchange rates. Translation adjustments are
reported as a separate component of stockholders' equity while transaction
gains and losses are included in operations when incurred.
Financial Instruments
The Company's Canadian subsidiaries enter into forward foreign exchange
contracts to minimize the short-term impact of Canadian dollar fluctuations on
certain of its Canadian dollar denominated commitments. Gains or losses on
these contracts are deferred and are included in operations in the same period
in which the related transactions are settled.
The Company has entered into interest rate swap agreements to hedge interest
rate fluctuation on its long-term debt. The differences between the floating
interest rate or the Company's debt and the fixed contract rate under the
interest rate swap agreements are reflected as a component of interest expense
in the consolidated financial statements. The impact of interest rate swaps on
interest expense in 1995 was not material. For all of the Company's financial
instruments the counterparties were large financial institutions and therefore
the risk of credit loss is considered minimal.
Income (Loss) Per Share
Income (loss) per share for fiscal years 1995, 1994 and 1993 has been
computed using a weighted average shares outstanding of 55,674,000, 55,606,000
and 55,252,000, respectively.
Environmental Costs
Environmental costs are expensed unless the expenditures extend the economic
useful life of the assets. Costs that extend the economic life of the assets
are capitalized and depreciated over the remaining life of such assets.
Reclassification
Certain amounts reported in the financial statements for the prior periods
have been reclassified to conform with the current financial statement
presentation with no effect on net income (loss) or stockholders' equity.
F-14
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
2. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Inventories:
Finished products....................................... $ 44,802 $ 49,189
Raw materials........................................... 16,506 21,761
--------- ---------
Inventories at FIFO cost................................ 61,308 70,950
Inventories under exchange agreements................... (4,783) (12,350)
Stores and supplies..................................... 11,342 11,158
--------- ---------
$ 67,867 $ 69,758
========= =========
Property, plant and equipment:
Land.................................................... $ 11,775 $ 11,771
Buildings............................................... 26,955 24,944
Plant and equipment..................................... 422,479 406,860
Construction in progress................................ 49,782 14,132
Less accumulated depreciation........................... (201,907) (166,581)
--------- ---------
$ 309,084 $ 291,126
========= =========
Other assets:
Patents and technology, net............................. $ 40,971 $ 46,918
Estimated insurance recoveries.......................... 10,315 --
Intangible pension asset................................ 3,733 4,139
Deferred catalyst....................................... 4,357 4,126
Debt issue costs........................................ 3,370 5,835
Other................................................... 17,758 17,273
--------- ---------
$ 80,504 $ 78,291
========= =========
Accrued liabilities:
Repairs................................................. $ 9,021 $ 13,468
Income taxes............................................ 2,250 13,257
Interest................................................ 574 576
Estimated contract adjustments.......................... 1,536 9,684
Property taxes.......................................... 6,179 5,796
Litigation contingency.................................. 6,000 --
Accrued compensation.................................... 10,019 21,719
Other................................................... 20,279 15,571
--------- ---------
$ 55,858 $ 80,071
========= =========
Deferred credits and other liabilities:
Deferred revenue........................................ $ 21,969 $ 27,513
Accrued postretirement benefits......................... 24,722 22,746
Additional minimum pension liability.................... 6,127 5,601
Accrued compensation.................................... 2,922 9,030
Litigation contingency.................................. 10,315 --
Other................................................... 14,957 4,144
--------- ---------
$ 81,012 $ 69,034
========= =========
</TABLE>
F-15
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
3. LONG-TERM DEBT:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1995 1994
-------- --------
<S> <C> <C>
Revolving credit facilities................................. $ 902 $ 32,940
Term loan................................................... 120,536 20,000
Project loan................................................ -- 16,134
Subsidiary term loan........................................ -- 113,050
Subordinated note........................................... -- 44,268
-------- --------
Total debt outstanding.................................... 121,438 226,392
Less:
Current maturities........................................ (17,857) (33,771)
-------- --------
Total long-term debt........................................ $103,581 $192,621
======== ========
</TABLE>
On April 13, 1995, the Company entered into a seven-year agreement (the
"Credit Agreement") with a group of 14 commercial banks to refinance the
Company's existing debt except for the revolving debt associated with Sterling
Pulp Chemicals, Ltd. ("Sterling Pulp"). The Credit Agreement provides for a
revolving credit facility of $150,000 (the "Revolver") and a term loan of
$125,000 (the "Term Loan"). On April 28, 1995, Sterling Pulp entered into a
separate agreement for a Cdn. $20,000 revolving credit facility (the "Canadian
Revolver"). The Canadian Revolver was utilized to refinance the revolving debt
associated with Sterling Pulp.
The Revolver and the Term Loan bear interest at the Base Rate or, at the
Company's option, the Eurodollar rate. The Base Rate is equal to the greater
of the Prime Rate as announced from time to time by the agent bank, or the
Federal Funds Rate plus 1/2%. The Eurodollar Rate is equal to the Eurodollar
Interbank Rate plus the Margin Percentage, which is adjustable quarterly and
can range from 0.65% to 1.25%. Subsequent to the closing of the Credit
Agreement, the Company entered into an interest rate swap, equivalent in
amount and term to the Term Loan. The swap effectively replaces the variable
rate on the Term Loan with a fixed interest rate of approximately 7% per annum
for the remaining term.
In connection with arranging the Credit Agreement, the Company incurred fees
of approximately $3,000 which will be amortized over the term of the loans.
Unamortized debt issue costs related to the retired loans were expensed in
April 1995 and are recorded as an extraordinary loss from early extinguishment
of debt of approximately $3,104, net of tax of $1,571, or $.06 per share.
At September 30, 1995, the Company had indebtedness of $120,536 under the
Term Loan and $902 under the Canadian Revolver. The carrying value of such
debt approximates the market value of the debt due to its floating rate
nature. Additionally, the Company had $2,172 in letters of credit under the
Revolver and $1,070 in letters of credit under the Canadian Revolver, both of
which reduced the amount available under these respective facilities. The
weighted average interest rate of the Company's long-term debt at September
30, 1995 was 6.6%. In addition, availability under the Revolver for loans and
letters of credit is subject to a monthly borrowing base. At September 30,
1995, the borrowing base limited availability under the Revolver to $129,398.
The Term Loan requires equal quarterly installments of $4,464 over the
seven- year term. This payment schedule has resulted in a significant decrease
in current maturities of long-term debt from $33,771 on September 30, 1994 to
$17,857 on September 30, 1995. The Revolver and the Canadian Revolver mature
at the end of their seven-year terms, and no principal payments are required
prior to that time.
F-16
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
The Revolver and the Term Loan are collateralized by substantially all of
the inventory and accounts receivable of the Company and certain of its
domestic subsidiaries, all of the Company's equity interests in Sterling
Canada, Inc. (a wholly-owned subsidiary of the Company), 65% of the equity of
Sterling Pulp and Sterling NRO, Ltd., and certain contract rights of the
Company. Additionally, certain of the Company's domestic subsidiaries have
guaranteed the Revolver and Term Loan.
The Credit Agreement contains a number of financial and other covenants that
management believes are customary in lending transactions of this type. The
Credit Agreement allows the Company to redeem, retire or acquire shares of its
capital stock and to make dividend payments, within certain conditions and
limitations, as long as no Default or Event of Default (as defined in the
Credit Agreement) has occurred or is continuing.
On September 28, 1995, Sterling Pulp entered into a seven-year credit
agreement to finance the construction of the Georgia sodium chlorate plant
(the "Chlorate Plant Credit Agreement") with the same bank group that is a
party to the Credit Agreement. Sterling Pulp can borrow up to $60 million
under the Chlorate Plant Credit Agreement to purchase taxable bonds from the
local county development authority that will use the bond proceeds to finance
the construction of the plant. The first quarterly scheduled principal payment
on the debt is due October 1, 1997 while the final scheduled payment is due
July 1, 2002. There is an annual excess cash flow test required by the
Chlorate Plant Credit Agreement that could result in mandatory prepayments of
some of the scheduled principal payments. Most of the debt is scheduled to be
paid during the last two years of the seven-year term. As a result of a
guaranty provided by the Company, the overall borrowing rate under the
Chlorate Plant Credit Agreement will be the same as under the Credit
Agreement, excluding the effect of any interest rate hedging arrangements. The
debt will be collateralized by the taxable bonds and the Company's interest in
the plant. No debt was outstanding under the Chlorate Plant Credit Agreement
at September 30, 1995.
Debt Maturities
The estimated remaining principal payments on the outstanding debt are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING PRINCIPAL
SEPTEMBER 30, PAYMENTS
------------- ---------
<S> <C>
1996........................................................ $ 17,857
1997........................................................ 17,857
1998........................................................ 17,857
1999........................................................ 17,857
2000........................................................ 17,857
2001........................................................ 17,857
2002........................................................ 14,296
--------
Total outstanding debt...................................... $121,438
========
</TABLE>
F-17
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
4. INCOME TAXES:
A reconciliation of federal statutory income taxes to the Company's
effective tax provision (benefit) before extraordinary item follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
------------------------
1995 1994 1993
------- ------ -------
<S> <C> <C> <C>
Provision (benefit) for federal income tax at
the statutory rate............................ $79,855 $9,772 $(2,994)
Foreign sales corporation...................... (7,991) -- --
State and foreign income taxes................. 2,862 90 877
Estimated income tax settlement and other...... 279 (740) 569
------- ------ -------
Effective tax provision (benefit).............. $75,005 $9,122 $(1,548)
======= ====== =======
</TABLE>
The provision (benefit) for income taxes is composed of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
From operations:
Current federal.............................. $67,393 $18,618 $(2,849)
Deferred federal............................. 1,075 (7,809) 148
Deferred foreign............................. 3,489 (1,687) 1,153
Current state................................ 2,947 -- --
Deferred state............................... 101 -- --
------- ------- -------
Total tax provision (benefit).................. $75,005 $ 9,122 $(1,548)
======= ======= =======
</TABLE>
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes("SFAS 109"), effective October
1, 1993. Under SFAS 109, deferred income taxes are provided for temporary
differences between the tax basis of assets and liabilities and amounts for
financial reporting purposes. The adoption of this statement did not have an
effect on the Company's results of operations. Upon adoption of SFAS 109, the
Company's current deferred tax asset and deferred tax liability each increased
by approximately $1,600.
The components of the deferred income taxes for 1993 (a disclosure no longer
required for years subsequent to adoption of SFAS 109) are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1993
-------------
<S> <C>
Depreciation and amortization............................... $1,709
Alternate minimum tax....................................... (959)
Accrued expenses for book purposes.......................... 484
Pension expense............................................. (729)
Postretirement expense...................................... (667)
Effect of tax rate change................................... 500
Other....................................................... 963
------
Total deferred tax expense.................................. $1,301
======
</TABLE>
F-18
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
The components of the Company's deferred income tax assets and liabilities
are summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1995 1994
------- -------
<S> <C> <C>
Assets:
Accrued liabilities...................................... $10,475 $13,099
Accrued postretirement cost.............................. 8,719 7,405
Tax loss and credit carryforward......................... 7,470 11,389
Other.................................................... -- 523
------- -------
Total deferred tax assets................................ 26,664 32,416
Less current deferred income tax benefit................. 5,622 9,332
------- -------
Noncurrent deferred tax assets........................... $21,042 $23,084
======= =======
Liabilities:
Property, plant and equipment............................ $57,466 $60,756
Accrued pension cost..................................... 2,471 1,165
Other.................................................... 1,402 --
------- -------
Total deferred tax liabilities........................... $61,339 $61,921
======= =======
</TABLE>
The Company has approximately Cdn. $25,000 in Canadian tax loss
carryforwards which will expire from 1998 through 2001.
5. EMPLOYEE BENEFITS:
The Company has established the following benefit plans:
Retirement Benefit Plans
The Company has non-contributory pension plans in the United States and
employer and employee contributory plans in Canada which cover all salaried
and wage employees. The benefits under these plans are based primarily on
years of service and employees' pay near retirement. For those Company
employees who were employed by the Company as of September 30, 1986 and were
previously employed by Monsanto, the Company recognizes their Monsanto pension
years of service for purposes of determining benefits under the Company's
plans. For those Company employees who were employed by the Company on August
21, 1992 and were previously employed by Tenneco Inc., the Company recognizes
their Tenneco Inc. pension years of service for purposes of determining
benefits under the Company's plans. The Company's funding policy is consistent
with the funding requirements of federal law and regulations. Plan assets
consist principally of common stocks and government and corporate securities.
The Company has recorded its additional minimum liability in accordance with
Statement of Financial Accounting Standards No. 87 "Employers' Accounting for
Pensions." In recognizing the additional pension liability at September 30,
1995 and 1994, the Company recorded a liability of $6,127 and $5,601, an
intangible asset of $3,733 and $4,139, which is included with other assets,
and a reduction of stockholders' equity of $1,556 and $950, net of deferred
tax of $838 and $512, respectively.
F-19
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
The components of pension expense for the years ended September 30, 1995,
1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Service cost (for benefits earned during the
period)........................................ $3,288 $3,386 $3,195
Interest cost on projected benefit obligation... 4,471 3,891 3,499
Actual return on plan assets and contributions.. (5,825) 617 (2,940)
Deferral of asset gain (loss)................... 1,909 (3,997) 59
Net amortization of unrecognized amounts........ 871 848 863
------ ------ ------
Pension expense................................. $4,714 $4,745 $4,676
====== ====== ======
</TABLE>
Assumptions used in determining the projected benefit obligation and pension
cost for the periods were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
----------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Discount rates.......................................... 7.5% 8.0% 7.5%
Rates of increase in salary compensation level.......... 5.5% 5.5% 5.5%
Expected long-term rate of return on assets............. 9.0% 9.0% 9.0%
</TABLE>
The funded status of the Company's pension plans for which assets exceed
accumulated benefits and plans for which accumulated benefits exceed assets as
of the actuarial valuation dates of August 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
----------------------- -----------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of
benefits based on service to
date and present pay levels:
Vested benefit obligation..... $ 26,222 $21,743 $19,392 $17,776
Non-vested benefit obligation. 1,029 1,293 2,040 1,309
-------- ------- ------- -------
Accumulated benefit
obligation................... 27,251 23,036 21,432 19,085
Plan assets at fair value..... 33,540 21,134 26,835 16,795
-------- ------- ------- -------
Plan assets in excess of (less
than) accumulated benefit
obligation................... 6,289 (1,902) 5,403 (2,290)
Additional amounts related to
projected salary increases... 16,431 658 14,806 812
-------- ------- ------- -------
Plan assets less than total
projected benefit obligation. (10,142) (2,560) (9,403) (3,102)
Unrecognized net loss
resulting from plan
experience and changes in
actuarial assumptions........ 5,995 2,579 4,935 1,871
Unrecognized prior service
cost......................... 2 3,689 (49) 3,949
Unrecognized transition
obligation................... 2,716 156 3,067 182
-------- ------- ------- -------
Prepaid (accrued) pension cost
before additional minimum
liability.................... (1,429) 3,864 (1,450) 2,900
Additional minimum liability.. -- (6,127) -- (5,601)
-------- ------- ------- -------
Total accrued pension
obligation.................... $ (1,429) $(2,263) $(1,450) $(2,701)
======== ======= ======= =======
</TABLE>
F-20
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Postretirement Benefits Other Than Pensions
The Company provides certain health care benefits and life insurance
benefits for retired employees. Substantially all of the Company's employees
become eligible for these benefits at normal retirement age. The Company
accrues the cost of these benefits during the period in which the employee
renders the necessary service.
Health care benefits are provided to employees who retire from the Company
with ten or more years of service except for Canadian employees subject to
collective bargaining agreements. All of the Company's employees are eligible
for postretirement life insurance. Postretirement health care benefits for
most U.S. employees are provided for under a contributory, comprehensive plan
while all other plans are non-contributory. Benefit provisions for most hourly
and some salaried employees are subject to collective bargaining. In general,
the plan stipulates that retiree health care benefits are paid as covered
expenses are incurred. For U.S. employees, postretirement medical plan
deductibles are assumed to increase at the rate of the long-term consumer
price index. Approximately two hundred seventy-four retirees and dependents
are covered under these plans. The components of postretirement benefits cost
other than pensions for the years ended September 30, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Service cost (for benefits earned during the period)....... $1,084 $1,064
Interest cost on projected benefit obligation.............. 1,835 1,688
Amortization of plan amendments............................ 29 29
------ ------
$2,948 $2,781
====== ======
</TABLE>
Actuarial assumptions used to determine fiscal year 1995 and 1994 costs and
benefit obligations for postretirement benefit plans other than pensions
include an average discount rate of 7.5% and an average rate of future
increases in benefit compensation of 5.5%. The assumed composite rate of
future increases in per capita cost of health care benefits ( health care cost
trend rate ) was 7.8% for fiscal year 1995, exclusive of demographic changes,
decreasing gradually to 5.5% by the year 2028.
These trend rates reflect current cost performance and management's
expectation that future rates will decline. Increasing the health care cost
trend rate by one percentage point would increase the accumulated
postretirement benefit obligation by $1,391 and would increase annual
aggregate service and interest costs by $173.
The following sets forth the plan's funded status reconciled with amounts
reported in the Company's consolidated balance sheet at September 30, 1995 and
1994.
Accumulated postretirement benefit obligation (APBO):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Retirees............................................... $ 7,315 $ 5,956
Fully eligible active plan participants................ 7,690 7,234
Other active plan participants......................... 11,956 11,752
------- -------
Total APBO............................................. 26,961 24,942
Plan assets at fair value.............................. -- --
Unrecognized loss...................................... (1,987) (1,915)
Unrecognized prior service cost........................ (252) (281)
------- -------
Accrued postretirement benefit liability............... $24,722 $22,746
======= =======
</TABLE>
F-21
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Postemployment Benefits
During the first quarter of fiscal 1993, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits" ("SFAS 112"). SFAS 112 requires
accrual accounting for benefits provided to former or inactive employees after
employment but before retirement. The Company implemented the provisions of
SFAS 112 in fiscal 1995 and the effect of adoption on the Company's financial
position and results of operations was not material.
Employee Stock Ownership Trust
The Employee Stock Ownership Trust ("ESOT") was formed to invest primarily
in the Company's common stock and includes only participants contributing to
the Company's Savings and Investment Plan ("SIP"). The Company's contribution
to the ESOT is 60% of the participant's SIP contributions to the extent that
such participant's contributions do not exceed 7.5% of the employee's eligible
earnings. The Company's contributions are subject to a 20% per year vesting
schedule commencing after one year of service. The Company's contributions to
the ESOT for the years ended September 30, 1995, 1994 and 1993 were $1,684,
$1,688 and $1649, respectively.
Profit Sharing Plans
The Company provides profit sharing plans for the benefit of salaried and
hourly employees meeting certain eligibility requirements. These plans were
amended and restated in fiscal 1993. The Company distributes quarterly, to
eligible employees, a specified percentage of its earnings before interest,
taxes, depreciation and amortization above a specified level. The amount of
each eligible employee's quarterly cash distribution is related to a specified
percentage of such employee's base salary or wages, with the percentage
determined by the employee's position in the Company. Profit sharing expense
for the years ended September 30, 1995 and 1994 was $13,038 and $3,815,
respectively. There was no profit sharing expense during fiscal 1993.
Omnibus Stock and Incentive Plan
The Company has an Omnibus Stock and Incentive Plan, under which the Company
may grant to key employees incentive and nonincentive stock options, stock
appreciation rights, restricted stock, performance units and performance
shares. The terms and amounts of the awards are determined by the Compensation
Committee of the Board of Directors. Upon a change of control of the Company,
all awards granted under the plan become fully vested and all performance
based awards will be paid at the higher of performance goals or actual
performance to date. 3,000,000 shares of the Company's stock were reserved
under the plan when it was established. As of September 30, 1995, 263,000
shares have been issued.
In fiscal year 1993, the Company granted stock appreciation rights ("SARs")
to certain key employees and directors. Total expense benefit is determined
based on 3,632,000 SARs granted, the vesting period (five years beginning
September 1992) and the appreciation of the Company's stock price above $4 per
share, which was the fair market value of the Company's common stock on the
date of grant of the SARs. In October 1994, the Company amended the SAR
program by modifying the vesting periods and limiting the amount of
appreciation for each SAR during each vesting period, thereby limiting the
Company's aggregate future expenses. The Company recorded expense (benefit)
for the years ended September 30, 1995 and 1994 of ($2,767) and $21,800,
respectively, and paid $8,297 in October 1994 and $5,820 in September 1995
pursuant to the SARs, as amended. There was no expense associated with the
SARs for fiscal year 1993 as the market price of the Company's stock at
September 30, 1993 was less than the price at the date of grant. The expense
(benefit) for the SARs is included in selling, general and administrative
expenses in the Company's income statement.
F-22
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
In fiscal 1995, the Company granted 82,500 stock options to certain officers
of the Company with an exercise price of $13.50 per share. The options are
exercisable from the third through the tenth anniversary of the date of the
grant.
6. COMMITMENTS AND CONTINGENCIES:
Product Contracts
The Company has certain long-term agreements which provide for the
dedication of 100% of the Company's production of acetic acid, plasticizers,
TBA and sodium cyanide, each to one customer. The Company also has various
sales and conversion agreements which dedicate significant portions of the
Company's production of styrene monomer and acrylonitrile to various
customers. These agreements generally provide for cost recovery plus an agreed
margin or element of profit based upon market price.
Lease Commitments
The Company has entered into various long-term noncancellable operating
leases. Future minimum lease commitments at September 30, 1995 are as follows:
fiscal 1996--$2,135; fiscal 1997--$1,971; fiscal 1998--$1,878; fiscal 1999--
$1,661; fiscal 2000--$1,553; and $5,701 thereafter. Rent expense for fiscal
years 1995, 1994 and 1993 was not material.
Environmental and Safety Matters
The Company's operations involve the handling, production, transportation
and disposal of materials classified as hazardous or toxic and are extensively
regulated under environmental and health and safety laws. Operating permits
which are required for the Company's operations are subject to periodic
renewal and may be revoked or modified for cause.
New laws or permit requirements and conditions may affect the Company's
operations, products or waste disposal. Past or future operations may result
in claims or liabilities. Expenditures could be required to upgrade wastewater
collection, pretreatment, disposal systems or other matters.
The Company routinely incurs expenses associated with managing hazardous
substances and pollution in ongoing operations. These operating expenses
include items such as depreciation on its waste treatment facilities, outside
waste management, fuel, electricity and salaries. The amounts of these
operating expenses were approximately $45,000 and $44,000 for fiscal years
1995 and 1994, respectively. The Company does not anticipate a material
increase in these types of expenses during fiscal 1996. The Company considers
these types of environmental expenditures normal operating expenses and
includes them in cost of goods sold.
At its Texas City facility, the Company has reduced emissions of targeted
chemicals 74% from 1987 levels under the EPA's voluntary 33/50 program. These
reductions included a 96% reduction in hydrogen cyanide emissions and an 87%
reduction in benzene emissions. Additionally, the Company will initiate
appropriate actions or preventive projects necessary to insure that the
facility continues to operate in a safe and environmentally responsible
manner. No assurances can be given that the Company will not incur material
environmental expenditures associated with its facilities, operations or
products.
The Company's sodium chlorate market is sensitive to potential environmental
regulation. In general, environmental regulations support substitution of
chlorine dioxide, which is produced from sodium chlorate, for elemental
chlorine in the pulp bleaching process. Certain environmental groups are
encouraging passage of
F-23
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
regulations which restrict the amount of Absorbable Organic Halides (AOX) or
chlorine derivatives in bleach plant effluent. Increased substitution of
chlorine dioxide for elemental chlorine in the pulp bleaching process
significantly reduces the amount of AOX and chlorine derivatives in bleach
plant effluent. As long as there is not an outright ban on chlorine-containing
compounds, regulation restricting AOX or chlorine derivatives in bleach plant
effluent should favor the use of chlorine dioxide, thus sodium chlorate. Any
significant ban on all chlorine-containing compounds could have a material
adverse effect on the Company's financial condition and results of operations.
British Columbia has a regulation in place that would effectively eliminate
the use of chlorine dioxide in the bleaching process by the year 2002. The
pulp and paper industry is working to change this regulation and believes that
the ban of chlorine dioxide in the bleaching process will yield no measurable
environmental or public health benefit. The Company is not aware of any other
laws or regulations currently in place which would restrict the use of the
product.
Legal Proceedings
Petrochemicals
HUNTSMAN LAWSUIT: On January 30, 1995, the Company filed a lawsuit against
Huntsman Chemical Corporation and certain affiliates seeking a declaratory
judgment in connection with an alleged agreement arising from discussions,
previously suspended by the Company, relating to possible future capacity
rights for a significant portion of the Company's styrene monomer unit at its
Texas City facility. In the lawsuit, the Company is requesting a judicial
determination that, among other things, there was no enforceable agreement
between the Company and any of the defendants. In response, the defendants
filed a counterclaim demanding a jury trial and asserting that a contractual
agreement existed, that the Company breached the alleged agreement, and that
as a result the defendants incurred an unspecified amount of "massive
damages". Subsequently, the Company filed a motion for summary judgment.
On November 30, 1995, summary judgment was granted in the Company's favor.
The summary judgment, which is subject to appeal, confirms that as a matter of
law, no enforceable contract or agreement ever existed between the Company and
the defendants. The Court's order also moots the defendants' counterclaim
against the Company for damages resulting from breach of the alleged contract.
The Company believes a loss with respect to this matter is not probable and
is unable to quantify a reasonably possible loss estimate (as defined in
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies") at this time.
ALLEMAND LAWSUIT: On June 19, 1995, a lawsuit was filed against the Company
and several other corporate defendants asserting personal injury and mental
anguish resulting from an incident occurring on June 16, 1995 in which a hose
being used to unload a barge of sulfuric acid at the Company's Texas City
facility ruptured, spraying sulfuric acid on an employee of Marine Fueling
Service, Inc. The plaintiffs seek an unspecified amount of damages. The
incident is under investigation and discovery is ongoing.
AMMONIA RELEASE: On May 8, 1994, an ammonia release occurred at the
Company's Texas City facility while a reactor in the acrylonitrile unit was
being restarted after a shutdown for routine maintenance. The Company
estimated that approximately three thousand pounds of ammonia were emitted
into the atmosphere.
F-24
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Approximately nine thousand individuals have filed claims directly with the
Company alleging personal injury and/or property damage as a result of
exposure to the ammonia. The Company and its insurance carriers are in the
process of evaluating these claims. Approximately two thousand of these claims
have been settled and three thousand have been denied. Settlements, costs and
expenses to date have totaled less than $2,000. All amounts above the
Company's $1,000 deductible (which has been charged against earnings) have
been paid by its insurance carriers.
Sixteen lawsuits involving approximately four thousand plaintiffs have been
filed against the Company seeking unspecified damages for personal injuries
and property damage as a result of the release. Additional claims and
litigation against the Company asserting similar claims may ensue.
SMITH LAWSUIT: On April 27, 1994, approximately one thousand two hundred
plaintiffs sued the Company and eighteen other corporate defendants in the
Texas City, Texas area. The plaintiffs seek an unspecified amount of damages
for personal injury and property damages arising from alleged chemical
releases. Discovery is proceeding and the Company is vigorously defending this
lawsuit.
ALLEN LAWSUIT: On May 9, 1991, a lawsuit was filed against the Company and
several other petrochemical companies operating in the Texas City, Texas area.
The plaintiffs in the lawsuit assert personal injury and property damage
claims arising from alleged chemical releases. The plaintiffs seek an
unspecified amount of damages. Although the court dismissed a number of the
plaintiffs for failure to comply with discovery, over three hundred plaintiffs
remain. The Company is vigorously defending this lawsuit.
The Company is subject to various other claims and legal actions that arise
in the ordinary course of its business.
Pulp Chemicals
The Company's primary competitor in the supply of patented technology for
generators which convert sodium chlorate into chlorine dioxide is Akzo Nobel
and its affiliates. The Company and Akzo Nobel are involved in numerous patent
disputes throughout the world in which the Company and Akzo Nobel are
challenging certain patents of the other and attempting to restrict the
other's operating range. If either party is successful in these disputes, the
other party may be required to make adjustments and modifications to its
commercial operations or obtain a license from the prevailing party. The
Company believes that it is entitled to certain indemnities from Tenneco
Canada with respect to the acquired technology. The Company and Akzo Nobel
have initiated discussions to resolve these disputes.
Litigation Contingency
In accordance with Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies" and Financial Accounting Standards Board
Interpretation No. 39 "Offsetting of Amounts Related to Certain Contracts",
the Company has made estimates of the reasonably possible range of liability
with regard to its outstanding litigation for which it may incur liability.
These estimates are based on management's judgments using currently available
information as well as consultation with the Company's insurance carriers and
outside legal counsel. A number of the claims in these litigation matters are
covered by the Company's insurance policies or by third-party indemnification
of the Company. The Company therefore has also made estimates of its probable
recoveries under insurance policies or from third-party indemnitors based on
its understanding of its insurance policies and indemnifications, discussions
with its insurers and indemnitors and consultation with outside legal counsel,
in addition to management's judgments. Based on the foregoing as of September
30, 1995,
F-25
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
the Company has accrued approximately $17,000 as its estimate of aggregate
contingent liability for these matters, and has also recorded aggregate
receivables from its insurers and third party indemnitors of approximately
$16,000. In addition, management estimates that at present, the reasonably
possible range of loss, in addition to the amount accrued, is from $0 to
$37,000. The Company believes that it is insured or indemnified for this
additional reasonably possible loss, except for a portion which is not
material.
While the Company has based its estimates on its evaluation of available
information to date and the other matters described above, much of the
litigation is in its early stages and it is impossible to predict with
certainty the ultimate outcome. The Company will adjust its estimates as
necessary as additional information is developed and evaluated. However, the
Company believes that the final resolution of these contingencies will not
have a material adverse impact on the financial position, results of
operations or cash flows of the Company.
The timing of probable insurance and indemnity recoveries, and payment of
liabilities, if any, is not expected to have a material effect on the
financial position, results of operations or cash flows of the Company.
7. SEGMENT AND GEOGRAPHIC INFORMATION:
Sales to individual customers constituting 10% or more of total revenues (in
any of the last three fiscal years) and sales by geographic region were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Major Customers:
British Petroleum plc and subsidiaries.......... $169,944 $103,637 $ 54,497
Mitsubishi International Corporation............ $129,812 $ 69,920 $ 60,186
Export Sales:
Export revenues................................. $534,067 $324,930 $158,804
Percentage of total revenues.................... 52% 46% 31%
Export revenues (as a percent of total exports)
by geographical area:
Asia.......................................... 64% 80% 61%
Europe........................................ 36% 16% 39%
Other......................................... -- 4% --
</TABLE>
F-26
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Geographic Segment Information:
Revenues:
United States................................. $ 886,247 $578,295 $399,486
Canada........................................ 143,951 122,545 119,335
---------- -------- --------
Total........................................... $1,030,198 $700,840 $518,821
========== ======== ========
Income before taxes and extraordinary item:
United States................................. $ 210,320 $ 27,106 $(12,877)
Canada........................................ 17,838 1,148 5,909
---------- -------- --------
Total........................................... $ 228,158 $ 28,254 $ (6,968)
========== ======== ========
Net Income:
United States................................. $ 140,382 $ 17,979 $ (8,991)
Canada........................................ 9,667 1,153 3,571
---------- -------- --------
Total........................................... $ 150,049 $ 19,132 $ (5,420)
========== ======== ========
Assets:
United States................................. $ 405,324 $376,594 $331,149
Canada........................................ 204,615 204,331 215,605
---------- -------- --------
Total........................................... $ 609,939 $580,925 $546,754
========== ======== ========
Selling, general and administrative expenses:
United States................................. $ 14,535 $ 10,232 $ 10,422
Canada........................................ 17,088 14,075 15,073
SARs.......................................... (2,767) 21,843 --
---------- -------- --------
Total........................................... $ 28,856 $ 46,150 $ 25,495
========== ======== ========
Other Information:
Depreciation and amortization:
United States................................. $ 28,386 $ 26,327 $ 25,021
Canada........................................ $ 14,647 $ 14,626 $ 13,826
Capital expenditures:
United States................................. $ 45,759 $ 7,875 $ 9,377
Canada........................................ $ 8,203 $ 4,468 $ 2,798
</TABLE>
8. FINANCIAL INSTRUMENTS:
Foreign Exchange
The Company enters into forward foreign exchange contracts to hedge Canadian
dollar currency transactions on a continuing basis for periods consistent with
its committed exposures. The forward foreign exchange contracts have varying
maturities with none exceeding 18 months. The Company makes net settlements of
U.S. dollars for Canadian dollars at rates agreed to at inception of the
contracts.
The Company does not engage in currency speculation. However, the Company
enters into forward foreign exchange contracts to reduce risk due to Canadian
dollar exchange rate movements. The Company had a notional amount of
approximately $26,000 and $20,000 of forward foreign exchange contracts
outstanding to buy Canadian dollars at September 30, 1995 and 1994,
respectively. The deferred gain on these forward foreign exchange contracts at
September 30, 1995 and 1994 was immaterial.
F-27
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Concentration of Credit Risk
The Company sells its products primarily to companies involved in the
petrochemical and pulp and paper manufacturing industries. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral for accounts receivable. However, letters of credit are
required by the Company on many of its export sales. The Company's credit
losses have been minimal.
The Company maintains cash deposits with major banks which from time to time
may exceed federally insured limits. Management periodically assesses the
financial condition of the institutions and believes that any possible loss is
minimal.
Investments
It is the policy of the Company to invest its excess cash in investment
instruments or securities whose value is not subject to market fluctuations
such as certificates of deposit, repurchase agreements or Eurodollar deposits
with domestic or foreign banks or other financial institutions. Other
permitted investments include commercial paper of major U.S. corporations with
ratings of A1 by Standard & Poor's or P1 by Moody's, loan participations of
major U.S. corporations with a short term credit rating of A1/P1 and direct
obligations of the U.S. Government or its agencies. In addition, not more than
$5,000 will be invested with any single bank, financial institution or U.S.
corporation.
9. RELATED PARTY TRANSACTIONS:
The Company, through a wholly-owned subsidiary, is a partner in a joint
venture which constructed and operates a cogeneration plant at the Texas City
facility. During fiscal years 1995, 1994 and 1993, the Company purchased
$16,622, $16,546 and $16,646 of steam and electricity from the joint venture,
respectively, and recorded earnings of $3,391, $2,788 and $2,598,
respectively. The Company's investment in the joint venture is not material.
F-28
<PAGE>
STERLING CHEMICALS, INC.
SUPPLEMENTAL FINANCIAL INFORMATION--QUARTERLY FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL FIRST SECOND THIRD FOURTH(/1/)
YEAR QUARTER QUARTER QUARTER QUARTER
------ -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Revenues........................ 1995 $240,622 $303,954 $298,491 $187,131
1994 $130,560 $154,754 $204,668 $210,858
Gross profit.................... 1995 $ 48,354 $ 93,530 $103,504 $ 26,230
1994 $ 2,971 $ 14,806 $ 27,861 $ 48,286
Income before extraordinary
item........................... 1995 $ 22,259 $ 56,077 $ 59,767 $ 15,050
1994 $ (3,489) $ 1,829 $ 5,544 $ 15,248
Net income (loss)............... 1995 $ 22,259 $ 56,077 $ 56,663 $ 15,050
1994 $ (3,489) $ 1,829 $ 5,544 $ 15,248
Per Share Data:
Income (loss) before
extraordinary item............. 1995 $ .40 $ 1.01 $ 1.08 $ .27
1994 $ (.06) $ .03 $ .10 $ .27
Net income (loss)............... 1995 $ .40 $ 1.01 $ 1.02 $ .27
1994 $ (.06) $ .03 $ .10 $ .27
</TABLE>
- --------
(1) The decline in revenues, gross profit and net income in the fourth quarter
of fiscal 1995 relative to previous quarters resulted from the decrease in
prices and margins for styrene and acrylonitrile as well as the negative
impact from the shutdowns in styrene and acrylonitrile during the quarter.
See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations."
Fourth quarter net income in fiscal 1994 included a charge of $12,159, or
$.14 per share, for expenses related to the SARs described in Note 5 of the
"Notes to Consolidated Financial Statements." In the fourth quarter of
fiscal 1995, the charge was $(4,325), or $(.05) per share. The Company's
stock price decreased from $13.50 on September 30, 1994 to $8.25 on
September 30, 1995, resulting in the reversal of the previously accrued
expenses.
F-29
<PAGE>
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
ASSETS 1996 1995
------ -------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 6,445 $ 30,882
Accounts receivable.................................... 149,139 112,102
Inventories............................................ 47,596 67,867
Prepaid expenses....................................... 7,917 3,878
Deferred income taxes.................................. 8,297 5,622
-------- --------
Total current assets................................. 219,394 220,351
Property, plant and equipment, net....................... 350,784 309,084
Other assets............................................. 88,794 80,504
-------- --------
Total assets......................................... $658,972 $609,939
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable....................................... $ 60,628 $ 72,016
Accrued liabilities.................................... 57,874 55,858
Current portion of long-term debt...................... 17,857 17,857
-------- --------
Total current liabilities............................ 136,359 145,731
Long-term debt........................................... 120,286 103,581
Deferred income taxes.................................... 46,308 40,297
Deferred credits and other liabilities................... 82,876 81,012
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 150,000 shares
authorized,
60,327 shares issued, 55,690 and 55,674 shares
outstanding, respectively............................. 603 603
Additional paid-in capital............................... 33,225 33,269
Retained earnings........................................ 310,686 275,052
Pension adjustment....................................... (1,556) (1,556)
Accumulated translation adjustment....................... (19,297) (17,307)
Deferred compensation.................................... (78) (129)
-------- --------
323,583 289,932
Treasury stock, at cost, 4,637 and 4,653 shares,
respectively............................................ (50,440) (50,614)
-------- --------
Total stockholders' equity........................... 273,143 239,318
-------- --------
Total liabilities and stockholders' equity......... $658,972 $609,939
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-30
<PAGE>
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-----------------
1996 1995
-------- --------
<S> <C> <C>
Revenues.................................................... $600,792 $843,067
Cost of goods sold.......................................... 508,749 597,677
-------- --------
Gross profit................................................ 92,043 245,390
Selling, general and administrative expenses................ 23,832 24,528
Stock appreciation rights (SARs) expense (benefit).......... 6,198 1,558
Other expense (Note 8)...................................... 3,706 --
Interest and debt related expenses, net of interest income.. 4,440 12,698
-------- --------
Income before income taxes and extraordinary item........... 53,867 206,606
Provision for income taxes.................................. 18,233 68,502
-------- --------
Income before extraordinary item............................ 35,634 138,104
Extraordinary item, loss on early extinguishment of debt,
net of tax................................................. -- 3,104
-------- --------
Net income.................................................. $ 35,634 $135,000
======== ========
Per share data:
Income before extraordinary item............................ $ 0.64 $ 2.48
Extraordinary item.......................................... -- (0.06)
-------- --------
Net income per share........................................ $ 0.64 $ 2.42
======== ========
Weighted average shares outstanding......................... 55,685 55,674
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-31
<PAGE>
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers............................ $ 645,929 $ 862,019
Miscellaneous cash receipts............................. 14,969 13,450
Cash paid to suppliers and employees.................... (613,651) (675,326)
Interest paid........................................... (4,851) (12,316)
Interest received....................................... 579 2,254
Income taxes paid....................................... (11,601) (62,454)
--------- ---------
Net cash provided by operating activities................. 31,374 127,627
--------- ---------
Cash flows from investing activities:
Capital expenditures.................................... (73,045) (26,770)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt............................ 60,350 217,535
Repayment of long-term debt............................. (42,742) (315,282)
Other................................................... (289) (4,491)
--------- ---------
Net cash provided by (used in) financing activities....... 17,319 (102,238)
--------- ---------
Effect of exchange rate on cash........................... (85) (15)
--------- ---------
Net decrease in cash and cash equivalents................. (24,437) (1,396)
Cash and cash equivalents--beginning of period............ 30,882 2,013
--------- ---------
Cash and cash equivalents--end of period.................. $ 6,445 $ 617
========= =========
</TABLE>
F-32
<PAGE>
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
(UNAUDITED)
RECONCILIATION OF NET INCOME TO CASH
PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
------------------
1996 1995
-------- --------
<S> <C> <C>
Net income.................................................. $ 35,634 $135,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............................. 32,425 32,170
Loss on disposal of assets................................ 3,080 259
Deferred tax expense...................................... 2,974 4,835
Accrued compensation...................................... 6,406 1,659
Change in:
Accounts receivable....................................... (38,671) (41,798)
Inventories............................................... 20,174 6,581
Prepaid expenses.......................................... (4,048) (2,898)
Other assets.............................................. (7,119) (11,220)
Accounts payable.......................................... (12,571) (1,706)
Accrued liabilities....................................... (20,588) (5,796)
Interest payable.......................................... (56) (2,462)
Taxes payable............................................. 5,846 (1,659)
Other liabilities......................................... 7,888 14,662
-------- --------
Net cash provided by operating activities................... $ 31,374 $127,627
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-33
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
1. BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the consolidated financial position of Sterling Chemicals, Inc. and its
subsidiaries (the "Company") as of June 30, 1996 and its consolidated results
of operations and consolidated cash flows for the nine-month periods ended
June 30, 1996 and 1995. All such adjustments are of a normal and recurring
nature. The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year. The
accompanying unaudited condensed consolidated financial statements should be,
and are assumed to have been, read in conjunction with the consolidated
financial statements and notes included in the Company's Annual Report for the
fiscal year ended September 30, 1995 (the "Annual Report").
2. RECLASSIFICATION:
Certain amounts reported in the financial statements for the prior periods
have been reclassified to conform with the current financial statement
presentation with no effect on net income or stockholders' equity.
3. INVENTORIES:
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1995
-------- -------------
<S> <C> <C>
Finished products................................. $29,325 $44,802
Raw materials..................................... 11,313 16,506
------- -------
Inventories at FIFO cost........................ 40,638 61,308
Inventories under exchange agreements............. (4,469) (4,783)
Stores and supplies............................... 11,427 11,342
------- -------
$47,596 $67,867
======= =======
</TABLE>
4. LONG-TERM DEBT:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1995
-------- -------------
<S> <C> <C>
Revolving credit facilities....................... $ -- $ 902
Term loan......................................... 107,143 120,536
Loan under chlorate plant credit agreement........ 31,000 --
-------- --------
Total debt outstanding.......................... 138,143 121,438
Less:
Current maturities.............................. (17,857) (17,857)
-------- --------
Total long-term debt.............................. $120,286 $103,581
======== ========
</TABLE>
F-34
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
5. COMMITMENTS AND CONTINGENCIES:
Product Contracts
The Company has certain long-term agreements which provide for the
dedication of 100% of the Company's production of acetic acid, plasticizers,
tertiary butylamine and sodium cyanide, each to one customer. The Company also
has various sales and conversion agreements which dedicate significant
portions of the Company's production of styrene monomer and acrylonitrile, the
Company's major petrochemical products, to various customers. These agreements
generally provide for cost recovery plus an agreed margin or element of profit
based upon market price.
Environmental Regulations
The Company's operations involve the handling, production, transportation
and disposal of materials classified as hazardous or toxic and are extensively
regulated under environmental and health and safety laws. Operating permits
which are required for the Company's operations are subject to periodic
renewal and may be revoked or modified for cause. New laws or permit
requirements and conditions may affect the Company's operations, products, or
waste disposal. Past or future operations may result in claims or liabilities.
Expenditures could be required to upgrade waste water collection,
pretreatment, or disposal systems or for other matters.
Legal Proceedings
Shareholder Lawsuits
In April and May, 1996, seven class action lawsuits were filed against the
Company and the Company's directors alleging conflict of interest and breach
of fiduciary duties relating to the sale of the Company (see Note 7). These
lawsuits are styled:
1. Kurt Kopf et al. v. Gordon A. Cain, et al; Civil Action No. 14960; In the
Court of Chancery of the State of Delaware, New Castle County, Delaware.
2. Ernest Hack v. Sterling Chemicals, Inc., et al; Civil Action No. 14962;
In the Court of Chancery of the State of Delaware, New Castle County,
Delaware.
3. Salim Shiry, et al. v. Gordon A. Cain, et al; Civil Action No. 14963; In
the Court of Chancery of the State of Delaware, New Castle County, Delaware.
4. Olga Fried, et al. v. Gordon A. Cain, et al; Civil Action No. 14969; In
the Court of Chancery of the State of Delaware, New Castle County, Delaware.
5. Maria Lerman, et al. v. Gordon A. Cain, et al; Civil Action No. 14972; In
the Court of Chancery of the State of Delaware, New Castle County, Delaware.
6. Alan R. Kahn v. Gordon A. Cain, et al; Civil Action No. 14981; In the
Court of Chancery of the State of Delaware, New Castle County, Delaware.
7. Sigmond Balaban v. Gordon A. Cain, et al.; Civil Action No. 96-26271; In
the 334th Judicial District Court of Harris County, Texas.
By order dated May 22, 1996, the Court of Chancery consolidated the six
lawsuits that had been commenced in Delaware under the name In re: Sterling
Chemicals, Inc. Shareholders Litigation, Civil Action No. 14960.
While all seven lawsuits are in their early stages, it is not anticipated
that they will have a material adverse impact on the financial position,
results of operations or cash flows of the Company.
Ammonia Litigation
A number of suits and interventions in existing suits were filed by various
plaintiffs in April and early May, 1996 alleging damages from exposure to the
May 8, 1994 ammonia release from the acrylonitrile unit at the Texas City
facility. These suits and interventions were presumably filed in anticipation
of the expiration of the
F-35
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
two year statute of limitations applicable to this release. There are now a
total of approximately 45 suits and interventions involving over 5,000
plaintiffs pending against the Company. The Company recently participated in a
binding non-appealable arbitration proceeding with respect to approximately
1500 of such plaintiffs. The outcome of this proceeding is expected to be
received in the fall of 1996. The Company does not believe that the suits
relating to the ammonia release will have a material adverse impact on the
financial position, results of operations, or cash flows of the Company and
the Company intends to vigorously defend all such suits.
Petrochemicals
HUNTSMAN LAWSUIT: On November 30, 1995, the trial court granted the
Company's motion for summary judgment filed by the Company in Sterling
Chemicals, Inc. v. Huntsman Chemical Corporation, Huntsman Styrene Corporation
and Huntsman Corporation. As discussed in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1995, the summary judgment
confirms that, as a matter of law, no enforceable contract or agreement ever
existed between the Company and the defendants. The court's order, which
includes recovery of legal fees, also moots the defendants' counterclaim
against the Company for damages resulting from breach of the alleged contract.
The defendants have appealed this decision.
The Company believes a loss with respect to this matter is not probable and
is unable to quantify a reasonably possible loss estimate (as defined in
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies") at this time.
Litigation Contingency:
In accordance with Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies," and Financial Accounting Standards Board
Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts,"
the Company has made estimates of the reasonably possible range of its
liability with regard to its outstanding litigation for which it may incur
liability. In addition, liabilities have been accrued based on the estimated
probable loss from such litigation. These estimates are based on management's
judgments using currently available information as well as consultation with
the Company's insurance carriers and outside legal counsel. A number of the
claims in these litigation matters are covered by the Company's insurance
policies or by third-party indemnification of the Company. The Company
therefore has also made estimates of its probable recoveries under these
insurance policies based on its understanding of these policies, discussions
with its insurers and consultation with outside legal counsel, in addition to
management's judgments. Based on the foregoing, as of June 30, 1996, the
Company has accrued approximately $18.8 million as its estimate of aggregate
contingent liability for these matters, and has also recorded aggregate
receivables from its insurers of $18.0 million. At June 30, 1996, management
estimates that the aggregate reasonably possible range of loss for all
litigation combined, in addition to the amount accrued, is from $0 to $49
million. The Company believes that it is insured for this additional
reasonably possible loss, except for a portion which is not material.
While the Company has based its estimates on its evaluation of available
information to date and the other matters described above, much of the
litigation is in its early stages and it is impossible to predict with
certainty the ultimate outcome. The Company will adjust its estimates as
necessary as additional information is developed and evaluated. However, the
Company believes that the final resolution of these contingencies will not
have a material adverse impact on the financial position, results of
operations, or cash flows of the Company. The timing of probable insurance
recoveries, and additional accruals or payment of liabilities, if any, are not
expected to have a material adverse effect on the financial position, results
of operations, or cash flows of the Company.
F-36
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
6. NEW ACCOUNTING STANDARDS:
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". This statement
establishes new accounting standards for measuring the impairment of long-
lived assets. The Company is required to adopt this Statement by fiscal 1997.
The Company anticipates that the adoption of this Statement will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
7. RECENT DEVELOPMENTS:
On January 29, 1996, the Company announced that it was exploring all
strategic alternatives to enhance stockholder value. In this connection, the
Board of Directors established a Special Committee which retained Lazard
Freres & Co. LLC as its financial advisor and Piper & Marbury L.L.P. as legal
advisors.
On April 25, 1996, the Company announced that it had entered into a
definitive merger agreement (the "Merger Agreement") for the sale of the
Company to an investment group, STX Acquisition Corp., formed by The Sterling
Group, Inc. and The Unicorn Group, L.L.C. Under the terms of the Merger
Agreement, shareholders will receive $12.00 per share in cash, or may elect to
retain part or all of their shares in the Company, subject to a 5,000,000
share maximum, and proration to the extent aggregate elections exceed
5,000,000 shares.
On June 21, 1996, STX Acquisition Corp. delivered to the Company Definitive
Equity Documents as required by Section 7.07(d) of the Merger Agreement; and
on June 24, 1996, STX Acquisition Corp. delivered to the Company Definitive
Bank Loan Documents as required by Section 7.07(c) of the Merger Agreement.
On July 11, 1996, Sterling's Board of Directors established August 20, 1996
as the date of the special meeting (the "Special Meeting") of the stockholders
for the purpose of approving and adopting the Amended and Restated Agreement
and Plan of Merger, and established Monday, July 15, 1996 as the record date
for determining the stockholders entitled to vote at the Special Meeting.
The transaction is expected to be concluded by late August of this year and
is subject to customary closing conditions, including shareholder approval.
8. WRITE-OFF OF LACTIC ACID PLANT:
The Company has ceased production of lactic acid at its Texas City, Texas
facility in May, 1996. The Company charged to expense the remaining net book
value and other related costs resulting in a $3.6 million pretax charge
against earnings or $0.04 per share after taxes, in the second fiscal quarter
of 1996 and $0.1 million pretax charge against earnings in the third fiscal
quarter of 1996.
F-37
<PAGE>
[PHOTOS OF PETROCHEMICAL OPERATIONS IN TEXAS CITY, TEXAS AND STERLING CHEMICALS
LOGO APPEAR HERE.]
<PAGE>
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE ISSUERS OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSE-
QUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE ISSUERS SINCE SUCH DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 15
The Transaction........................................................... 22
Use of Proceeds........................................................... 25
Capitalization............................................................ 26
Selected Historical Financial Data........................................ 27
Pro Forma Consolidated Financial Statements and Other Information......... 29
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 35
Business.................................................................. 47
Management................................................................ 67
Principal Stockholders.................................................... 77
Certain Transactions...................................................... 78
Description of the Notes.................................................. 81
Description of the Units.................................................. 105
Description of Capital Stock.............................................. 133
Description of the Credit Facility........................................ 137
Certain United States Federal Income Tax Consequences..................... 139
Underwriting.............................................................. 148
Notice to Canadian Residents.............................................. 149
Legal Matters............................................................. 150
Change of Accountants..................................................... 150
Experts................................................................... 151
Available Information..................................................... 151
Glossary.................................................................. A-1
Index to Financial Statements............................................. F-1
</TABLE>
------------
UNTIL NOVEMBER 14, 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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[LOGO OF STERLING CHEMICALS APPEARS HERE]
Sterling Chemicals, Inc.
$275,000,000
11 3/4% Senior Subordinated Notes
Due 2006
Sterling Chemicals Holdings, Inc.
$191,751,000
Representing 191,751 Units
each Unit consisting of
One 13 1/2% Senior Secured Discount Note Due 2008
and
One Warrant to Purchase Three Shares of Common Stock
PROSPECTUS
CS First Boston
Chase Securities Inc.
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