<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
STX ACQUISITION CORP. STX CHEMICALS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
76-0500122 (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 76-0502785
----------------
C/O THE STERLING GROUP, INC.
EIGHT GREENWAY PLAZA, SUITE 702
HOUSTON, TEXAS 77046
(713) 877-8257
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
FRANK J. HEVRDEJS
EIGHT GREENWAY PLAZA, SUITE 702
HOUSTON, TEXAS 77046
(713) 877-8257
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
DAVID J. GRAHAM EARL S. WELLSCHLAGER MORTON A. PIERCE
ANDREWS & KURTH L.L.P. PIPER & MARBURY L.L.P. DEWEY BALLANTINE
4200 TEXAS COMMERCE TOWER 36 SOUTH CHARLES STREET 1301 AVENUE OF THE
HOUSTON, TEXAS 77002 BALTIMORE, MARYLAND 21201 AMERICAS
(713) 220-4156 (410) 576-1747 NEW YORK, NEW YORK 10019
---------------- (212) 259-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT PRICE(1) FEE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior Subordinated
Notes Due 2006(2)....... $275,000,000 100% $275,000,000 $94,828
- ----------------------------------------------------------------------------------
Units(3)................ (4) (4) $100,000,000 $34,483
- ----------------------------------------------------------------------------------
Senior Secured Discount
Notes Due 2008........ (4) (4) -- --
- ----------------------------------------------------------------------------------
Warrants to purchase
Common Stock.......... (4) (4) -- --
- ----------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee and
exclusive of accreted original issue discount, if any.
(2) The Senior Subordinated Notes will be issued by STX Chemicals Corp.
(3) The Units will be issued by STX Acquisition Corp.
(4) The amount to be registered and the proposed maximum offering price per
Unit will be calculated to result in a maximum aggregate offering price to
the public not to exceed $100,000,000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
STX ACQUISITION CORP.
STX CHEMICALS CORP.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN FORM
S-1 REGISTRATION STATEMENT CAPTION OR LOCATION IN PROSPECTUS
---------------------------------- ---------------------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus..... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus.... Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges............. Prospectus Summary; Risk Factors; The
Company; Selected Historical Financial
Data; Pro Forma Consolidated Financial
Statements and Other Information
4. Use of Proceeds.............. Use of Proceeds
5. Determination of Offering
Price........................ Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution..................... Not Applicable
7. Selling Security Holders..... Not Applicable
8. Plan of Distribution......... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to
be Registered................ Prospectus Summary; Capitalization;
Description of the Notes; Description of
the Units
10. Interests of Named Experts
and Counsel.................. Not Applicable
11. Information with Respect to
the Registrant............... Outside Front and Inside Front Cover Pages
of Prospectus; Prospectus Summary; The
Company; Risk Factors; The Transaction;
Selected Historical Financial Data; Pro
Forma Consolidated Financial Statements and
Other Information; Capitalization;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business Management; Principal
Stockholders; Certain Transactions;
Description of the Notes; Description of
the Units; Description of the Credit
Facility; Legal Matters; Experts; Financial
Statements
12. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities.................. Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 23, 1996
Sterling Chemicals, Inc.
(a subsidiary of Sterling Chemicals Holdings, Inc.
and formerly STX Chemicals Corp.)
LOGO $275,000,000 % Senior Subordinated Notes Due 2006
Sterling Chemicals Holdings, Inc.
(the survivor of the merger of
Sterling Chemicals, Inc. and STX Acquisition Corp.)
Units consisting of
$ % Senior Secured Discount Notes Due 2008
and
Warrants to Acquire 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 % Senior Subordinated
Notes Due 2006 (the "Notes"), and STX Acquisition is offering (the
"Units Offering") Units consisting of $100,000,000 in initial
proceeds and $ million in aggregate principal amount at maturity of
% Senior Secured Discount Notes Due 2008 (the "Discount Notes") and
Warrants (the "Warrants") to acquire an aggregate of shares of
common stock, par value $.01 per share, of Holdings ("Holdings
Common Stock"). 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."
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.
(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 16.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECU-
RITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR AD- EQUACY OF THIS PROSPECTUS. ANY REP-
RESENTATION 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................................... % % %
Total...................................... $ $ $
Per Unit................................... $ $ $
Total...................................... $ $ $
</TABLE>
(1) Plus accrued interest on the Notes and accreted original discount on the
Discount Notes, if any, from , 1996.
(2) Before deducting expenses payable by Holdings and Chemicals, estimated at
$ .
--------
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 in book-entry form through the facilities of The
Depository Trust Company on or about , 1996 against payment in immediately
available funds.
CS First Boston Chase Securities Inc.
The date of this Prospectus is , 1996
<PAGE>
(continued from previous page)
Interest on the Notes is payable semiannually on and of each year,
commencing , 1997. Except as described below, the Notes are not redeemable
at the option of Chemicals prior to , 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 , 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 % 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.
The Notes are unsecured senior subordinated obligations of Chemicals and
will rank subordinate in right of payment to all existing and future Senior
Debt (as defined) of Chemicals. The Notes will be effectively subordinated to
all indebtedness and other liabilities of the subsidiaries of Chemicals. As of
March 31, 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
$347.9 million. For a more complete description of the Notes, see "Description
of the Notes."
Each Unit consists of $1,000 principal amount at final maturity of Discount
Notes of Holdings and Warrants to acquire 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 $ per $1,000 principal amount at maturity assuming % of the
issue price of each Unit is allocated to the Discount Notes ( % of the
principal amount at maturity), representing a yield to maturity of %
(computed on a semiannual bond equivalent basis) calculated from , 1996.
Cash interest will not accrue on the Discount Notes prior to , 2001 at
which time cash interest will accrue on the Discount Notes at a rate of %
per annum. Interest on the Discount Notes is payable semiannually on and
of each year, commencing , 2002. Except as described below, the
Discount Notes are not redeemable at the option of Holdings prior to ,
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 , 1999, at the option of Holdings, from the net proceeds of one
or more Public Equity Offerings at a redemption price equal to % 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.
The Discount Notes will be senior secured Debt of Holdings ranking pari
passu with other Senior Debt of Holdings. The Discount Notes will be secured,
on a second priority basis, by a pledge of all of the capital stock of
Chemicals. The Discount Notes will be effectively subordinated to all Debt and
other liabilities of Chemicals and its subsidiaries. As of March 31, 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 amount of Debt of
Chemicals and its subsidiaries would have been approximately $622.9 million
(including the Notes and the Credit Facility). See "Capitalization." Because
the Discount Notes do not accrue cash interest prior to , 2001, the
Discount Notes are not suitable investments for investors seeking current
income. For a more complete description of the Discount Notes, see
"Description of the Units."
Each Warrant will entitle the holder, commencing , 1997, to acquire
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 % of
outstanding Holdings Common Stock on a fully diluted basis.
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]
FACILITY DETAIL
<TABLE>
<CAPTION>
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 May 1996; the 1995 utilization
rate is based on a production capacity of 600 million pounds.
(e) Capacity in millions of gallons. The Company is constructing a methanol
facility scheduled to begin production by July 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. Certain operating and industry terms
are defined in the Glossary included herein. 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.
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 approximately 50% complete. 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>
SIX
MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
---------------- ---------
1993 1994 1995 1995 1996
---- ---- ------ ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Petrochemicals:
Styrene............................................ $144 $288 $ 467 $256 $162
Acrylonitrile...................................... 124 138 251 129 75
Acetic acid........................................ 64 76 94 54 29
Other.............................................. 68 76 74 38 40
---- ---- ------ ---- ----
400 578 886 477 306
Pulp Chemicals....................................... 119 123 144 68 76
---- ---- ------ ---- ----
Total.............................................. $519 $701 $1,030 $545 $382
==== ==== ====== ==== ====
</TABLE>
4
<PAGE>
Styrene. The Company is the third largest North American producer of styrene
monomer, 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 May 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 nearly 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.
5
<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 increased from their recent lows in the first six months of
fiscal 1996 due to a general rebound in economic growth, inventory restocking
by customers, and increased demand in the Far East. As a result, the Company
anticipates that pricing and profitability for its styrene and acrylonitrile
products will be better in the second half of fiscal 1996 than they were in the
first half of the fiscal year. Thereafter, anticipated expansions in worldwide
production capacity of styrene in 1997 and 1998 are expected to affect pricing
of these products 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
second half 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 by 1999.
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.
6
<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 Agreement and Plan of Merger dated 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.
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 $125.0 million revolving credit facility
(the "Revolving Credit Facility"), (ii) a six and one half year $200.0 million
term loan and an eight year $125.0 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.
7
<PAGE>
The following table sets forth the estimated sources and uses of funds to
effect the Merger, as if the Merger had occurred on March 31, 1996.
<TABLE>
<CAPTION>
SOURCES OF FUNDS DOLLARS IN MILLIONS
---------------- -------------------
<S> <C>
Credit Facility (a)................................... $347.9
Notes offered hereby.................................. 275.0
Units offered hereby.................................. 100.0
Equity Private Placement (b).......................... 103.1
------
Total............................................... $826.0
======
<CAPTION>
USE OF FUNDS
------------
<S> <C>
Purchase of Company Common Stock (c).................. $640.7
Purchase of other equity interests (d)................ 14.6
Refinance outstanding debt............................ 124.2
Chemicals ESOP Loan (e)............................... 6.5
Estimated transaction expenses and fees (f)........... 40.0
------
Total............................................... $826.0
======
</TABLE>
- --------
(a) Consists of borrowings of $325.0 million under the Term Loans, $16.4
million under the Revolving Credit Facility and $6.5 million under the ESOP
Term Loan. See "Description of the Credit Facility."
(b) 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.
(c) 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.
(d) 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."
(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.
8
<PAGE>
Organizational chart depicting Sterling Chemicals Holdings, Inc.; Sterling
Chemicals, Inc.; Sterling Canada Inc.; and Sterling Pulp Chemicals, Ltd.
<PAGE>
THE OFFERING
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 %
Senior Subordinated Notes Due 2006.
Maturity Date............... , 2006.
Interest Payment Dates...... and of each year, commencing
, 1997.
Optional Redemption......... The Notes will be redeemable at the option of
Chemicals, in whole or in part, at any time on or
after , 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 , 1999, up to 35% of
the original principal amount of the Notes at %
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.
As of March 31, 1996, after giving pro forma
effect to the Transaction, Chemicals would have
had approximately $347.9 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.
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.
10
<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 $100,000,000 in initial
proceeds and $ in aggregate principal amount at
maturity of Senior Secured Discount Notes Due
2008 and Warrants to acquire 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...... $ million aggregate principal amount at
maturity of % Senior Secured Discount Notes Due
2008 ($ million aggregate initial Accreted
Value).
Maturity Date............... , 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 ,
2002. From and after , 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
and .
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 ,
2001 and no cash interest will be payable until
, 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 , 2001 at the redemption prices
set forth herein, plus accrued interest to the
date of redemption. Up to 35% of the Accreted
Value of the Discount Notes will be redeemable on
or prior to , 1999 at the option of
Holdings, from the net proceeds of one or more
Public Equity Offerings at a redemption price
equal to % of the Accreted Value thereof, plus
accrued interest.
11
<PAGE>
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. 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.
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.
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 , 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.
12
<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 March 31, 1996 and March 31, 1995 and for the six-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>
SIX MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
--------------------------------------- -------------
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 $544.6 $382.4
Cost of goods sold...... 472.4 402.6 477.9 606.9 758.6 402.7 323.6
------ ------ ------ ------ -------- ------ ------
Gross profit.......... 70.3 27.9 40.9 93.9 271.6 141.9 58.8
Selling, general and
administrative
expenses............... 9.7 10.3 25.5 24.4 31.7 16.0 16.1
SAR program expense
(benefit).............. -- -- -- 21.8 (2.8) 0.5 6.7
------ ------ ------ ------ -------- ------ ------
Income from
operations............ 60.6 17.6 15.4 47.7 242.7 125.4 36.0
Interest and debt
related expenses, net
of interest income..... 6.1 8.4 22.4 22.1 14.6 9.7 3.2
Other (income) expense.. -- -- -- (2.6) -- -- 3.6
------ ------ ------ ------ -------- ------ ------
Income (loss) before
taxes and
extraordinary item... 54.5 9.2 (7.0) 28.2 228.1 115.7 29.2
Provision (benefit) for
income taxes........... 17.7 4.7 (1.6) 9.1 75.0 37.4 10.0
------ ------ ------ ------ -------- ------ ------
Income (loss) before
extraordinary item
and change in
accounting principle. 36.8 4.5 (5.4) 19.1 153.1 78.3 19.2
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) -- --
------ ------ ------ ------ -------- ------ ------
Net income (loss)..... $ 36.8 $ (5.9) $ (5.4) $ 19.1 $ 150.0 $ 78.3 $ 19.2
====== ====== ====== ====== ======== ====== ======
OTHER DATA:
EBITDA (a).............. $ 78.5 $ 41.0 $ 52.5 $108.6 $ 281.4 $146.7 $ 63.5
Depreciation and
amortization (b)....... 17.9 23.4 37.1 39.1 41.5 20.8 20.8
Capital expenditures.... 34.4 16.0 12.2 12.3 54.0 15.8 49.0
OPERATING DATA:
Revenues:
Styrene................ $ 257 $ 151 $ 144 $ 288 $ 467 $ 256 $ 162
Acrylonitrile.......... 155 137 124 138 251 129 75
Acetic acid............ 69 66 64 76 94 54 29
Sodium chlorate........ -- 9 81 83 102 49 56
Annual capacity at
period end (MMlbs):
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............ 600 600 600 600 600 600 600
Sodium chlorate (000
tons)................. -- 340 340 340 350 340 350
Sales volume (MMlbs):
Styrene................ 1,495 1,213 1,191 1,460 1,433 773 832
Acrylontrile........... 663 573 528 668 739 401 271
Acetic acid............ 557 620 578 599 635 305 182
Sodium chlorate (000
tons)................. -- 26 248 294 336 170 167
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
---------------------------------- -------------
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 $ 69.2 $ 69.0
Net property, plant and
equipment.................... 230.6 343.8 314.3 291.1 309.1 285.6 336.4
Total assets.................. 362.5 608.5 546.8 580.9 609.9 595.5 614.5
Total long-term debt
(including current portion).. 72.6 300.2 263.9 192.6 103.6 151.4 124.2
Stockholders' equity.......... 112.2 87.3 70.3 89.7 239.3 163.3 257.1
</TABLE>
- --------
(a) EBITDA represents income from operations before taking into consideration
depreciation, amortization and the impact of accruals for the Company's
stock appreciation rights ("SAR") program. 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.
14
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The pro forma statement of operations presented below for the year ended
September 30, 1995 and the six months ended March 31, 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 March 31, 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 March 31, 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 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
----------------------- -----------------------
SIX SIX
MONTHS MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31, SEPTEMBER 30, MARCH 31,
1995 1996 1995 1996
------------- --------- ------------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................... $1,030.2 $382.4 $1,030.2 $382.4
Cost of goods sold............. 759.0 323.8 759.0 323.8
-------- ------ -------- ------
Gross profit................... 271.2 58.6 271.2 58.6
Selling, general and
administrative expenses....... 31.7 16.1 31.7 16.1
-------- ------ -------- ------
Income from operations........ 239.5 42.5 239.5 42.5
Interest expense, net.......... 64.7 31.8 78.4 38.7
Other (income) expense......... -- 3.6 -- 3.6
-------- ------ -------- ------
Income from continuing
operations before income
taxes........................ 174.8 7.1 161.1 0.2
Provision (benefit) for income
taxes......................... 56.3 2.3 51.5 (0.1)
-------- ------ -------- ------
Income from continuing
operations.................. $ 118.5 $ 4.8 $ 109.6 $ 0.3
======== ====== ======== ======
Earnings per share from
continuing operations......... $ 10.59 $ 0.03
OTHER DATA:
EBITDA......................... $ 281.4 $ 63.5 $ 281.4 $ 63.5
Depreciation and amortization.. 41.9 21.0 41.9 21.0
Cash interest expense, net..... 60.2 29.5 60.2 29.5
Ratio of EBITDA to interest
expense, net.................. 4.3x 2.0x 3.6x 1.6x
Ratio of EBITDA to cash
interest expense, net......... 4.7x 2.2x 4.7x 2.2x
Ratio of earnings to fixed
charges....................... 3.5x 1.2x 2.9x --
Deficiency of earnings to cover
fixed charges................. -- -- -- $ 1.1
BALANCE SHEET DATA:
Working capital................ $ 85.3 $ 85.3
Net property, plant and
equipment..................... 336.4 336.4
Total assets................... 646.7 649.7
Total long-term debt (including
current portion).............. 622.9 722.9
Total stockholders' equity..... (194.9) (291.9)
</TABLE>
15
<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 March 31, 1996, Holdings,
on a consolidated basis, would have had indebtedness of $722.9 million and
stockholders' equity of $(291.9) million, and Chemicals would have had
indebtedness of $622.9 million and stockholders' equity of $(194.9) million.
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 the payment of interest, principal
and other repayment obligations, 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. 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. 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 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 Credit Facility," "Description
of the Notes" and "Description of the Units."
16
<PAGE>
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. 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 Credit Facility" and "Description of the
Notes." 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 , 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 March 31, 1996,
after giving pro forma effect to the Transaction, approximately $347.9 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."
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 March 31, 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 $622.9 million. See "Capitalization." In addition, although
the Discount Notes are secured on a second priority basis by a pledge
17
<PAGE>
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 in July 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
monomer, 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 chemicals 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 monomer 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 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
18
<PAGE>
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. There can be no assurance that the Company will be able to
identify and make acquisitions on terms favorable to it or in a manner to
fulfill its acquisition plans. 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 Indentures and the Credit Facility will limit the
Company's ability to incur additional debt to finance such acquisitions. See
"Description of the Notes" and "Description of the Units."
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."
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
19
<PAGE>
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
Over 14% of the Company's revenues are derived from its Canadian operations
and 52% are 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. 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.
20
<PAGE>
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.
ORIGINAL ISSUE DISCOUNT OF DISCOUNT NOTES
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 , 2001 and there will be no periodic payments of cash
interest on the Discount Notes prior to , 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 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 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."
21
<PAGE>
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. 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 after consummation of the Transaction.
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.
22
<PAGE>
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 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."
23
<PAGE>
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 $125.0 million
revolving credit facility, (ii) a six and one half year $200.0 million term
loan, (iii) an eight year $125.0 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 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, affiliates of TSG and Unicorn 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. In connection with the Equity Private
Placement, affiliates (collectively, the "Clipper Group") of Clipper Capital
Partners, L.P. will purchase up to $25 million of equity in the Equity Private
Placement. See "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 31 acquisitions for a total consideration of
approximately $5 billion. Ten of such acquisitions, representing more than $3
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."
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<PAGE>
USE OF PROCEEDS
The net proceeds from the Offerings are estimated to be $ 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 March 31, 1996.
<TABLE>
<CAPTION>
SOURCE OF FUNDS DOLLARS IN MILLIONS
--------------- -------------------
<S> <C>
Credit Facility (a)................................... $347.9
Notes offered hereby.................................. 275.0
Units offered hereby.................................. 100.0
Equity Private Placement (b).......................... 103.1
------
Total............................................... $826.0
======
<CAPTION>
USE OF FUNDS
------------
<S> <C>
Purchase of Company Common Stock (c).................. $640.7
Purchase of other equity interests (d)................ 14.6
Refinance outstanding debt (e)........................ 124.2
Chemicals ESOP Loan (f)............................... 6.5
Estimated transaction expenses and fees (g)........... 40.0
------
Total............................................... $826.0
======
</TABLE>
- --------
(a) Consists of borrowings of $325.0 million under the Term Loans, $16.4
million under the Revolving Credit Facility and $6.5 million under the
ESOP Term Loan. See "Description of the Credit Facility."
(b) 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.
(c) 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.
(d) 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."
(e) Consists of $107.2 million outstanding under the Company's current credit
facility, on which the Company paid interest of 7.35% as of March 31,
1996. Such borrowings were incurred in 1995 to refinance existing
indebtedness. Also includes $17.0 million outstanding under a credit
facility associated with the Company's Valdosta, Georgia sodium chlorate
plant, on which the Company paid interest of 6.2% as of March 31, 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.
(f) For a description of the Chemicals ESOP Loan, see "Management--
Compensation of Executive Officers."
(g) Estimated expenses and fees include Underwriters' discounts, advisory
fees, bank fees, legal and accounting fees, printing costs and other
transaction expenses.
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<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>
MARCH 31, 1996(A)
------------------------------
(DOLLARS IN MILLIONS)
ACTUAL AS ADJUSTED
----------- ------------------
THE COMPANY CHEMICALS HOLDINGS
----------- --------- --------
<S> <C> <C> <C>
Long-term debt:
Existing credit facility..................... $107.2 $ -- $ --
Construction loan facility................... 17.0 -- --
Revolving Credit Facility.................... -- 16.4 16.4
Term Loans................................... -- 325.0 325.0
ESOP Term Loan............................... -- 6.5 6.5
Notes........................................ -- 275.0 275.0
Discount Notes............................... -- -- 100.0
------ ------ ------
Total long-term debt (b)....................... 124.2 622.9 722.9(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)................................. -- -- --
Additional paid-in capital (deficit) (f)..... 33.2 (191.7) (562.5)
Retained earnings (deficit).................. 294.3 (3.3) 291.0
Pension adjustment........................... (1.6) -- (1.6)
Accumulated translation adjustment........... (18.9) -- (18.9)
Deferred compensation (g).................... (0.1) -- --
Treasury stock (h)........................... (50.4) -- --
------ ------ ------
Total stockholders' equity................. 257.1 (194.9) (291.9)
------ ------ ------
Total capitalization........................... $381.3 $428.0 $431.0
====== ====== ======
</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 $5.8 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 and the Revolving Credit Facility 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
outstanding at $.01 par value per share. There will be 10.891 million
shares outstanding subsequent to the Transaction.
(e) Warrants to be issued in connection with the Units Offering, which will be
valued upon determination of the terms of the Units Offering, have not
been valued in the table above.
(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 March 31, 1995 and March 31, 1996 and for the six-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>
SIX MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
---------------------------------------- --------------
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 $544.6 $382.4
Cost of goods sold...... 472.4 402.6 477.9 606.9 758.6 402.7 323.6
------ ------ ------ ------ -------- ------ ------
Gross profit.......... 70.3 27.9 40.9 93.9 271.6 141.9 58.8
Selling, general and
administrative
expenses............... 9.7 10.3 25.5 24.4 31.7 16.0 16.1
SAR program expenses
(benefit).............. -- -- -- 21.8 (2.8) 0.5 6.7
------ ------ ------ ------ -------- ------ ------
Income from
operations........... 60.6 17.6 15.4 47.7 242.7 125.4 36.0
Interest and debt
related expenses, net
of interest income..... 6.1 8.4 22.4 22.1 14.6 9.7 3.2
Other (income) expense.. -- -- -- (2.6) -- -- 3.6
------ ------ ------ ------ -------- ------ ------
Income (loss) before
taxes and
extraordinary item... 54.5 9.2 (7.0) 28.2 228.1 115.7 29.2
Provision (benefit) for
income taxes........... 17.7 4.7 (1.6) 9.1 75.0 37.4 10.0
------ ------ ------ ------ -------- ------ ------
Income (loss) before
extraordinary item
and change in
accounting principle. 36.8 4.5 (5.4) 19.1 153.1 78.3 19.2
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) -- --
------ ------ ------ ------ -------- ------ ------
Net income (loss)..... $ 36.8 $ (5.9) $ (5.4) $ 19.1 $ 150.0 $ 78.3 $ 19.2
====== ====== ====== ====== ======== ====== ======
Per share data:
Income (loss) before
extraordinary item and
change in accounting
principle............. $ 0.67 $ 0.08 $(0.10) $ 0.34 $ 2.76 $ 1.41 $ 0.35
Cumulative effect of
change in accounting
for post-retirement
benefits other than
pensions.............. -- (0.19) -- -- -- -- --
Extraordinary item..... -- -- -- -- (0.06) -- --
------ ------ ------ ------ -------- ------ ------
Net income (loss) per
share................. $ 0.67 $(0.11) $(0.10) $ 0.34 $ 2.70 $ 1.41 $ 0.35
====== ====== ====== ====== ======== ====== ======
OTHER DATA:
EBITDA (a).............. $ 78.5 $ 41.0 $ 52.5 $108.6 $ 281.4 $146.7 $ 63.5
Depreciation and
amortization(b)........ 17.9 23.4 37.1 39.1 41.5 20.8 20.8
Capital expenditures.... 34.4 16.0 12.2 12.3 54.0 15.8 49.0
Ratio of earnings to
fixed charges(c)....... 7.1x 1.8x -- 2.1x 11.9x 9.5x 5.2x
Deficiency of earnings
to cover fixed charges. -- -- $ 7.3 -- -- -- --
OPERATING DATA:
Revenues:
Styrene................ $ 257 $ 151 $ 144 $ 288 $ 467 $ 256 $ 162
Acrylonitrile.......... 155 137 124 138 251 129 75
Acetic acid............ 69 66 64 76 94 54 29
Sodium chlorate........ -- 9 81 83 102 49 56
Annual capacity at
period end (MMlbs):
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............ 600 600 600 600 600 600 600
Sodium chlorate (000
tons)................. -- 340 340 340 350 340 350
Sales volume (MMlbs):
Styrene................ 1,495 1,213 1,191 1,460 1,433 773 832
Acrylontrile........... 663 573 528 668 739 401 271
Acetic acid............ 557 620 578 599 635 305 182
Sodium chlorate (000
tons)................. -- 26 248 294 336 170 167
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
---------------------------------- -------------
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 $ 69.2 $ 69.0
Net property, plant and
equipment.................... 230.6 343.8 314.3 291.1 309.1 285.6 336.4
Total assets.................. 362.5 608.5 546.8 580.9 609.9 595.5 614.5
Total long-term debt
(including current portion).. 72.6 300.2 263.9 192.6 103.6 151.4 124.2
Stockholders' equity.......... 112.2 87.3 70.3 89.7 239.3 163.3 257.1
</TABLE>
- --------
(a) EBITDA represents income from operations before taking into consideration
depreciation, amortization and the impact of accruals for the Company's
SAR program. 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 six months ended March 31, 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 March 31, 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 March 31, 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 50.1 (c) 64.7 13.7 (c) 78.4
-------- ------ -------- ----- --------
Income from continuing
operations before
income taxes......... 228.1 (53.3) 174.8 (13.7) 161.1
Provision (benefit) for
income taxes 75.0 (18.7)(d) 56.3 (4.8)(d) 51.5
-------- ------ -------- ----- --------
Income from continuing
operations........... $ 153.1 $(34.6) $ 118.5 $(8.9) $ 109.6
======== ====== ======== ===== ========
Income per share from
continuing operations.. $ 2.76 $ 10.59
Weighted average common
shares outstanding..... 55.674 10.349(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 60.2 60.2
Ratio of EBITDA to
interest expense, net.. 19.3x 4.3x 3.6x
Ratio of EBITDA to cash
interest expense, net.. 22.3x 4.7x 4.7x
Ratio of earnings to
fixed charges (h)...... 11.9x 3.5x 2.9x
</TABLE>
See accompanying Notes to Pro Forma Consolidated Financial Statements
29
<PAGE>
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR SIX MONTHS ENDED MARCH 31, 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................ $382.4 $382.4 $382.4
Cost of goods sold...... 323.6 0.2 (a) 323.8 323.8
------ ------ ------ ----- ------
Gross Profit.......... 58.8 (0.2) 58.6 58.6
Selling, general and
administrative
expenses............... 22.8 (6.7)(b) 16.1 16.1
------ ------ ------ ----- ------
Income from
operations........... 36.0 6.5 42.5 42.5
Interest expense, net... 3.2 28.6(c) 31.8 6.9(c) 38.7
Other (income) expense.. 3.6 3.6 3.6
------ ------ ------ ----- ------
Income (loss) from
continuing operations
before income taxes.. 29.2 (22.1) 7.1 (6.9) 0.2
Provision (benefit) for
income taxes........... 10.0 (7.7)(d) 2.3 (2.4)(d) (0.1)
------ ------ ------ ----- ------
Income (loss) from
continuing
operations........... $ 19.2 $(14.4) $ 4.8 $(4.5) $ 0.3
====== ====== ====== ===== ======
Income per share from
continuing operations.. $ 0.35 $ 0.03
Weighted average common
shares outstanding..... 55.682 10.349 (e)
OTHER DATA:
EBITDA (f).............. $ 63.5 $ 63.5 $ 63.5
Depreciation and
amortization(g)........ 20.8 21.0 21.0
Cash interest expense,
net.................... 2.6 29.5 29.5
Ratio of EBITDA to
interest expense, net.. 19.8x 2.0x 1.6x
Ratio of EBITDA to cash
interest expense, net.. 24.4x 2.2x 2.2x
Ratio of earnings to
fixed charges (h)...... 5.2x 1.2x --
Deficiency of earnings
to cover fixed charges.. -- -- $ 1.1
</TABLE>
See accompanying Notes to Pro Forma Consolidated Financial Statements
30
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 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.......... $ 1.3 $ -- $ 1.3 $ -- $ 1.3
Accounts receivable... 123.9 123.9 123.9
Inventories........... 58.8 58.8 58.8
Prepaid expenses...... 4.8 4.8 4.8
Deferred income taxes. 6.7 6.7 6.7
------ ------ ------ ------ ------
Total current
assets............. 195.5 -- 195.5 -- 195.5
Property, plant and
equipment, net......... 336.4 336.4 336.4
Other assets............ 82.6 32.2 (i) 114.8 3.0 (i) 117.8
------ ------ ------ ------ ------
Total............... $614.5 $ 32.2 $646.7 $ 3.0 $649.7
====== ====== ====== ====== ======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 62.3 $ -- $ 62.3 $ -- $ 62.3
Accrued expenses...... 50.8 (2.9)(j) 47.9 47.9
Current portion of
long-term debt....... 13.4 (13.4)(k) -- --
------ ------ ------ ------ ------
Total current
liabilities........ 126.5 (16.3) 110.2 -- 110.2
Revolving credit
facility............... -- 16.4 (k) 16.4 16.4
Long-term debt.......... 110.8 495.7 (k) 606.5 100.0 (k) 706.5
Deferred income taxes... 43.6 (5.5)(l) 38.1 38.1
Deferred credits and
other liabilities...... 76.5 (6.1)(j) 70.4 70.4
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.............. -- -- -- (s) --
Additional paid-in
capital (deficit).... 33.2 (224.9)(n) (191.7) (370.8)(t) (562.5)
Retained earnings
(deficit)............ 294.3 (297.6)(o) (3.3) 294.3 (u) 291.0
Pension adjustment.... (1.6) 1.6 (n) -- (1.6)(v) (1.6)
Accumulated
translation
adjustment........... (18.9) 18.9 (n) -- (18.9)(v) (18.9)
Deferred compensation. (0.1) 0.1 (j) -- --
------ ------ ------ ------ ------
307.5 (502.4) (194.9) (97.0) (291.9)
Treasury stock........ (50.4) 50.4 (p) -- --
------ ------ ------ ------ ------
Stockholders' equity.. 257.1 (452.0) (194.9) (97.0) (291.9)
------ ------ ------ ------ ------
Total............... $614.5 $ 32.2 $646.7 $ 3.0 $649.7
====== ====== ====== ====== ======
</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 SIX MONTHS ENDED
MARCH 31, 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 increase (reduction) of compensation expense
associated with the Company's SAR plan which will be terminated in
connection with the Merger.
(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>
SIX MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
1995 1996
------------- ----------
<S> <C> <C>
Holdings
Discount Notes (i)............................ $ 13.5 $ 6.8
Amortization of deferred financing costs...... 0.2 0.1
------ -----
Total Holdings.............................. $ 13.7 $ 6.9
====== =====
Chemicals
Interest expense on the Company's historical
debt......................................... (14.8) (4.4)
Amortization of historical deferred financing
costs........................................ (2.0) (0.6)
Interest expense on the Credit Facility (ii).. 29.6 14.8
Interest expense on the Notes (iii)........... 32.3 16.2
Amortization of deferred financing costs...... 4.5 2.3
Commitment Fee................................ 0.5 0.3
------ -----
Total Chemicals............................. $ 50.1 $28.6
====== =====
</TABLE>
--------
(i) For purposes of the pro forma statement of operations, the
effective annual interest rate is assumed to equal 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 $3.5 million before the effect of income taxes.
(iii) For purposes of the pro forma statement of operations, the
effective annual interest rate is assumed to equal 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 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 $6.7
million for the six months ended March 31, 1996. 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 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, 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> <C>
Chemicals
Organization and debt financing costs........................ $35.4
Historical debt financing costs.............................. (3.2)
-----
Total Chemicals............................................ $32.2
=====
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.................................................. $100.0
Warrants (s).................................................... --
------
Total Holdings................................................ $100.0
======
Chemicals
Repayment of historical Debt outstanding........................ (124.2)
Revolving Credit Facility....................................... 16.4
Term Loans and ESOP Term Loan................................... 331.5
Notes........................................................... 275.0
------
Total Chemicals............................................... $498.7
======
</TABLE>
Subject to the borrowing base (as defined), the unused portion of the
$125 million Revolving Credit Facility will be available for working
capital and general corporate purposes, including funding $5.8 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 outstanding at $.01 par value per share. There will be 10.891
million shares outstanding 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) The Warrants to be issued in connection with the Units Offering,
which will be valued upon determination of the terms of the Units Offering,
have not been valued in the pro forma financial statements.
(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 markets for the Company's primary petrochemical products, due to both
volume and volatility of the region's demand.
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 products marketing. 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 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. In
addition, in petrochemicals, the Company markets substantial volumes
(approximately 47% in fiscal 1995) 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, which is approximately 50% complete. 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 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
35
<PAGE>
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 believes that demand in the Far
East generally is beginning to improve. In recent months, styrene prices have
increased from the recent lows in the first six months of fiscal 1996. The
Company anticipates that styrene pricing and profitability will be better in
the second half of fiscal 1996 than in the first half of the fiscal year,
although the Company does not anticipate an impending return of prices and
margins to 1995 levels.
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.
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
36
<PAGE>
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 increased from their recent lows in the first six
months of fiscal 1996. The Company anticipates that acrylonitrile pricing and
profitability will be better in the second half of 1996 than in the first half
of the fiscal year, although the Company does not anticipate a return to
prices and volumes experienced in fiscal 1995.
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, in 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. However,
sales volume and revenues decreased in the second quarter of fiscal 1996 from
the first quarter, primarily as a result of weakened pulp demand.
Nevertheless, the Company expects that revenues and operating profits from its
pulp chemicals operations for fiscal 1996 will exceed fiscal 1995 levels.
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 six months ended March 31, 1995 and 1996.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
-------------------- -------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Petrochemicals:
Styrene.................................... $ 144 $ 288 $ 467 $ 256 $ 162
Acrylonitrile.............................. 124 138 251 129 75
Acetic Acid................................ 64 76 94 54 29
Other...................................... 68 76 74 38 40
Pulp Chemicals.............................. 119 123 144 68 76
------ ------ ------ ------ ------
$ 519 $ 701 $1,030 $ 545 $ 382
====== ====== ====== ====== ======
GROSS PROFIT:
Petrochemicals.............................. $ 7 $ 58 $ 225 $ 121 $ 30
Pulp Chemicals.............................. 34 36 47 21 29
------ ------ ------ ------ ------
$ 41 $ 94 $ 272 $ 142 $ 59
====== ====== ====== ====== ======
</TABLE>
(Table continued on following page)
37
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
--------------------- -------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING INCOME:
Petrochemicals............................ $ (4) $ 37 $ 212 $ 113 $ 15
Pulp Chemicals............................ 19 11 31 12 18
------ ------ ------ ------ ------
$ 15 $ 48 $ 243 $ 125 $ 33
====== ====== ====== ====== ======
SALES VOLUME:
Petrochemicals (MMlbs.):
Styrene.................................. 1,191 1,460 1,433 773 832
Acrylonitrile............................ 528 668 739 401 271
Acetic Acid.............................. 578 599 635 305 182
Sodium Chlorate (000 tons)................ 248 294 336 170 167
</TABLE>
COMPARISON OF SIX MONTHS ENDED MARCH 31, 1996 TO SIX MONTHS ENDED MARCH 31,
1995
Revenues
Revenues for the first six months of fiscal 1996 were $382 million compared
to revenues of $545 million for the first six months of fiscal 1995, a
decrease of 30%. 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 six months of fiscal 1996, the Company's revenues from its
petrochemical business decreased 36% to $306 million when compared to the
first six 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 six months of fiscal 1996 decreased
approximately 37% to $162 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 half of
fiscal 1996 decreased by approximately 42%, although sales prices began to
increase in March. Sales volumes in the first half of fiscal 1996 increased by
approximately 8% 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 112% of its 1995 rated
capacity of 1.5 billion pounds for the first six months of fiscal 1996,
compared to approximately 100% 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.
The prices of styrene's major raw materials, benzene and ethylene, were
substantially lower during the first half of fiscal 1996 compared to the same
period in fiscal 1995. Benzene prices were approximately 26% lower while
ethylene prices were approximately 32% 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 six months of fiscal 1996
decreased approximately 42% to $75 million compared to the corresponding
period in fiscal 1995 primarily due to decreases of approximately 30% in
average sales prices and 32% 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 72% of rated
capacity during the first six months of fiscal 1996 compared to approximately
98% 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
38
<PAGE>
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 22% and 19% lower, respectively, in
the first six 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 six months of fiscal 1996
decreased approximately 46% to $29 million compared to the same period of
fiscal 1995 primarily due to a 40% 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. While the
expansion of the acetic acid unit is substantially complete, the additional
capacity will not be fully utilized until the completion of the partial
oxidation plant under construction by Praxair, Inc. at the Texas City Plant
during the third quarter of fiscal 1996. The partial oxidation plant will
supply raw materials to the Company's acetic acid unit.
Other Petrochemical Products. Revenues during the first six months of fiscal
1996 from the Company's other petrochemical products increased approximately
5% to $40 million, primarily due to increases in revenues from plasticizers.
Pulp Chemicals
Revenues from the Company's pulp chemical business for the first six months
of fiscal 1996 increased by approximately 12% to $76 million compared to the
first six months of fiscal 1995 primarily due to an increase in sodium
chlorate average sales prices of approximately 14%, partially offset by a 2%
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 six months of fiscal 1996
from installed generator technology increased approximately 8% over the first
six months of fiscal 1995 as a result of higher customer operating rates and
increased capacity.
The Company's sodium chlorate plants operated at approximately 92% of rated
capacity during the second quarter and for the first six months of fiscal 1996
compared to nearly 100% 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 six
months of fiscal 1996 increased to $22.8 million compared to $16.5 million in
the first six months of fiscal 1995 primarily due to an increase in expenses
related to the Company's SAR program of $6.2 million.
Income from Operations
Income from operations for the first six months of fiscal 1996 was $36.0
million, consisting of $18.2 million from petrochemical operations and $17.8
million from pulp chemical operations. This amount represented a 71% 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 six 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 $3.7 million in start-up expenses during the first six months of
fiscal 1996 in connection with the construction of the methanol plant.
39
<PAGE>
Interest and Debt Related Expenses
Interest expense for the first six months of fiscal 1996 decreased $6.5
million compared to the 1995 period primarily due to lower outstanding debt in
fiscal 1996. The Company's average interest rates decreased to 7.2% per annum
on March 31, 1996, from 8.8% per annum on March 31, 1995, primarily due to
refinancing of debt completed in April 1996.
Provision for Income Taxes
Provision for income taxes for the first six months of fiscal 1996 was $10.0
million, with an effective tax rate of 34%, compared to $37.4 million, with an
effective tax rate of 32%, for the same period of fiscal 1995. The decrease
was primarily the result of the significant decrease in the Company's taxable
income of $29.2 million for the first six months of fiscal 1996 from $115.7
million in the corresponding period of fiscal 1995.
Net Income
Due to the factors described above as well as a $3.6 million pre-tax charge
against earnings relating to the write-off of the Company's lactic acid plant
assets, net income for the first six months of fiscal 1996 was $19.2 million
compared to $78.3 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.
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.
40
<PAGE>
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.
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 $242.7 million, consisting of
$211.8 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.
41
<PAGE>
Provision for Income Taxes
Provision for income taxes for fiscal 1995 was $75.0 million, with an
effective tax rate of 33%, compared to $9.1 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 $228.1 million for fiscal 1995
from $28.2 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 $150.0
million compared to $19.1 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.
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.
42
<PAGE>
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, 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 5% 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.
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 $21.8 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 $47.7 million, consisting of
$36.9 million from petrochemical operations and $10.8 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 $28.2 million during fiscal 1994 from a loss
before taxes of $(7.0) million in fiscal 1993, as well as $2.6 million of
income from a gain on the sale of assets.
43
<PAGE>
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 $16.2 million during the first
half of fiscal 1996 compared to $52.5 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 $7
million, net of repayments, during the first six months of fiscal 1996 due to
borrowings of $17 million to finance the construction of the Valdosta, Georgia
sodium chlorate plant. In addition, approximately $33 million was disbursed
over the first six 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.
Historically, the Company has funded its working capital needs with cash
from operations and borrowings under its credit facilities. Working capital
was $69 million at March 31, 1996, down slightly from $75 million at September
30, 1995. Higher styrene sales volumes in March 1996 compared to September
1995 resulted in a $12 million increase in accounts receivable. The high
styrene sales volume as well as the acrylonitrile shutdown in March 1995 were
the primary reasons for an $9 million decrease in inventory. Cash and cash
equivalents decreased $30 million primarily as a result of expenditures in the
first half 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 March 31, 1996, the Company had indebtedness of $107 million under
the term loan and $17 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 March 31, 1996, the Company
estimates that, in addition to the proceeds from the Offerings, it would have
borrowed $325.0 million under the Term Loans, $6.5 million under the ESOP Term
Loan and $16.4 million under the Revolving Credit Facility, with approximately
$108.6 million available for borrowings under the Revolving Credit Facility,
after giving effect to the borrowing base limitations. 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."
44
<PAGE>
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 six months of fiscal 1996 were $49 million
compared to $16 million in the same period last year. The capital expenditures
in the first half 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 March 31, 1996, the Company has
spent approximately half of its three-year $200 million capital plan. During
the remainder of fiscal 1996, the Company expects to spend an additional $50
million to $60 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 $110
million, with about $60 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 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."
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.
45
<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 approximately 50% complete. 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 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>
SIX MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
-------------------- -------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
REVENUE
Petrochemicals:
Styrene............................. $ 144 $ 288 $ 467 $ 256 $ 162
Acrylonitrile....................... 124 138 251 129 75
Acetic Acid......................... 64 76 94 54 29
Other............................... 68 76 74 38 40
------ ------ ------ ------ ------
400 578 886 477 306
Pulp Chemicals........................ 119 123 144 68 76
------ ------ ------ ------ ------
Total................................. $ 519 $ 701 $1,030 $ 545 $ 382
====== ====== ====== ====== ======
SALES VOLUMES
Petrochemicals (MMlbs.):
Styrene............................. 1,191 1,460 1,433 773 832
Acrylonitrile....................... 528 668 739 401 271
Acetic Acid......................... 578 599 635 305 182
Sodium Chlorate (000 tons)............ 248 294 336 170 167
</TABLE>
46
<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 May 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 in July 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 nearly 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. Approximately 25% of the Company's styrene and 40%
of its acrylonitrile are manufactured under long-term conversion agreements
and 100% of its acetic acid, plasticizers and tertiary butylamine are 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. Following the Merger, 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;
. 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.
47
<PAGE>
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 plywood; gasoline oxygenate
and octane enhancer
Plasticizers Polyvinyl chloride (PVC) Flexible plastics such as Alpha-Olefins, Carbon
shower curtains and liners, Monoxide, Hydrogen,
floor coverings, cable Orthoxylene and Air
insulation, upholstery and
plastic molding
TBA NA Pesticides, solvents, Isobutylene and the
pharmaceuticals and acrylonitrile co-product
synthetic rubber 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>
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 increased from their recent lows in the first six months of
fiscal 1996 due to a general rebound in economic growth, inventory restocking
by customers, and increased demand in the Far East. As a result, the Company
anticipates that pricing and profitability for its styrene and acrylonitrile
products will be better in the second half of fiscal 1996 than they were in
the first half
48
<PAGE>
of the fiscal year. Thereafter, anticipated expansions in worldwide production
capacity of styrene in 1997 and 1998 are expected to affect pricing of these
products 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 second half 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 by 1999.
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, however, and
have since rebounded as a result of the general acceleration in economic
growth, inventory re-stocking by customers, and the reemergence of Chinese
purchases. While the industry cannot predict when China's chemical imports
will return to previous levels, the Company believes that demand in the Far
East has improved in recent months. According to CMAI, spot prices for styrene
averaged approximately 19.4 cents per pound in the first quarter of fiscal
1996, but increased to approximately 30.0 cents per pound by April 1996.
According to CMAI, the North American styrene industry operated at
approximately a 97.8% utilization rate in fiscal 1995, and approximately 93.7%
in the first half 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.
49
<PAGE>
The chart below details the average selling prices and capacity utilization
rates for the North American styrene industry during the period 1985 through
March 31, 1996.
NORTH AMERICAN STYRENE PRICES AND CAPACITY UTILIZATION
<TABLE>
[GRAPH APPEARS HERE]
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
STYRENE CENTS PER LB 24.5 18.5 35 45.1 40.8 38.9 28.7 24.7 24.3 32 45.3 32
STYRENE OP RATE 87.2 92.4 95.9 98.3 96.7 88.8 89.8 88.3 88.8 97.1 94.4 95.9
</TABLE>
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 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. While the industry cannot predict when China's chemical imports
will return to previous levels, the Company believes that demand in the Far
East has improved in recent months. According to CMAI, spot prices for
acrylonitrile have increased from $0.35/lb. in the second quarter of fiscal
1996 to $0.38/lb. in April 1996.
According to CMAI, the North American acrylonitrile industry operated at
approximately a 96.9% utilization rate in fiscal 1995, and approximately
100.1% in the first half of fiscal 1996. The Company believes that during
fiscal 1997 and 1998, global industry capacity will increase by approximately
940 million pounds or
50
<PAGE>
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 March 31, 1996.
NORTH AMERICAN ACRYLONITRILE PRICES AND CAPACITY UTILIZATION
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
ACN OP. RATE 96.5 91.1 96.6 94.7 86.1 88.1 86.6 89.7 90 100.4 98 98.5
ACN CENTS PER LB. 29.8 24.6 33.1 37.9 32.3 28.5 29.3 28.5 25.4 33.6 53.6 35
</TABLE>
Source: CMAI.
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 America
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 Company believes that the
Environmental Protection Agency will promulgate "Cluster Rules" by the end of
fiscal 1996, which 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.
51
<PAGE>
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 monomer.
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 sells approximately 25% of its styrene pursuant to long-
term conversion contracts. Approximately 46% of the Company's styrene was
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 sells approximately 40% of its acrylonitrile pursuant to
long-term conversion agreements. 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 May 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.
52
<PAGE>
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 July 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, Inc. ("Praxair")
will construct 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 is
expected to begin production in the third quarter of fiscal 1996. The
Company's synthesis gas reformer, which currently is being used to produce
carbon monoxide and hydrogen at the Texas City Plant, will then be available
for use in the methanol plant. Refurbishing the existing reformer, rather than
building a new one, will enable the Company to construct the methanol plant at
significantly less than the normal capital cost of a new 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 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
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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.
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 in amount
on the then existing market conditions for the product. These conversion
agreements allow the Company to lower working capital requirements 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
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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 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.
CONTRACTS
The Company's key multi-year contracts and conversion agreements 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 these agreements 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. During fiscal 1995, the Company delivered approximately 13% of its
styrene production to BP pursuant to this agreement.
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. This agreement will expire at the end of 1998. 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
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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.
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
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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.
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 in July 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.
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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. 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 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.
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 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.
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allows licensees of both the Company and Akzo Nobel to operate their chlorine
dioxide generators within the broadest range of operating conditions.
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 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
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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 a change of control of the Company, including the Transaction.
Accordingly, any future claims the Company may have against Monsanto would
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.
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 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. 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 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.
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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.
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.
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 March 31, 1996, the Company had approximately 1,200 employees,
including approximately 300 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 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.
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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.
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, 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>
62
<PAGE>
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. It is anticipated that the
Court will consolidate 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. 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 monomer unit at its Texas City
Plant. 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, 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
63
<PAGE>
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 approximately $3,000,000. All amounts above the Company's
$1,000,000 deductible (which has been charged against earnings) have been paid
by its insurance carriers. Numerous lawsuits involving approximately 4,700
plaintiffs have been filed against the Company seeking unspecified damages for
personal injuries and property damage as a result of the release.
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.
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 previously disclosed that
it was 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. 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.
64
<PAGE>
MANAGEMENT
PRESENT DIRECTORS AND EXECUTIVE OFFICERS
Frank J. Hevrdejs is currently the President and sole director and T. 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......... 62 Chairman of the Board of Directors
Robert W. Roten......... 61 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)
Frank J. Hevrdejs....... 50 Director
T. 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.
65
<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 Holdings, Inc. since July 1993 and February
1994, respectively.
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 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.
T. 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.
COMPENSATION OF DIRECTORS
Following the Transaction, members of the Board of Directors of Holdings,
other than those directors who are employees of Holdings or Chemicals, will
receive a fee of $ per year and an attendance fee of $ 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.
66
<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 1994 177,500 71,579 -0- -0- 8,817
President and 1993 175,000 -0- -0- -0- 9,450
Chief Operating Officer
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 1994 3,409 -0- -0- -0- 31
and Chief Financial 1993 -0- -0- -0- -0- -0-
Officer
</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.
67
<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,
68
<PAGE>
limited by the maximum amount payable on such dates of $10.00 per SAR and
$11.00 per SAR, respectively, provided 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.
69
<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
70
<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 (the "Consolidated Plan"), which supercedes and replaces all
prior termination pay plans (collectively, the "Prior Plans").
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.
AFTER THE TRANSACTION
Pension Plans. The Pension Plan, the Equalization Plan and the Supplemental
Plan will remain in place following the Transaction.
71
<PAGE>
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") before 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 total number of shares of Holdings Common Stock
subject to options granted under the Option Plan may not exceed approximately
% of the Holdings Common Stock on a fully diluted basis. Subject to the
approval of the Option Plan by the holders of a majority of the Holdings
Common Stock, the Committee may grant "incentive stock options" within the
meaning of Section 422 of the Code. The Committee also may grant "nonstatutory
options," which are not intended to conform to Section 422 of the Code. The
Option Plan will provide for the discretionary grant of options to purchase
shares of Holdings Common Stock. The exercise price of incentive stock options
must not be less than the fair market value of a share of Holdings Common
Stock on the date of grant, and the exercise price of nonstatutory options
must be at a price not greater than the fair market value of a share of
Holdings Common Stock on the date of grant as determined by the Committee in
its sole discretion. The Committee may provide that the options will vest
immediately or in increments over a
72
<PAGE>
period of time. No option will be transferable by a grantee other than upon
death. Upon the death or disability of any grantee, any unvested options will
expire, but the vested options may be exercised during the next succeeding
three months, unless a longer period of time is determined by the Committee.
Upon the termination of employment of any grantee for any other reason, all
vested and unvested options will expire, unless otherwise determined by the
Committee. The Option Plan will terminate no later than 10 years after its
adoption; however, any options outstanding upon termination of the Option Plan
will remain in effect until exercised or terminated pursuant to the terms of
the agreement under which they were granted. A participant in the Option Plan
may, upon receiving approval from the Committee in its sole discretion,
relinquish all or a portion of his or her options for an amount in cash equal
to the difference between the fair market value of the Holdings Common Stock
corresponding to the options being relinquished on the day of relinquishment,
less the total option price for such corresponding shares.
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' 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.
73
<PAGE>
PRINCIPAL STOCKHOLDERS
HISTORICAL
The following table sets forth certain information regarding the beneficial
ownership of Company Common Stock as of May 14, 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 6,010,518 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................................. 4,113,033(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.................................... 997,232(4) 1.8
Robert N. Bannon................................... 163,085(5) *
Richard K. Crump................................... 476,533(6) *
Jim P. Wise........................................ 26,269(7) *
All executive officers and directors of the Company
as a group (14 persons)............................ 12,803,638(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 2,100,000 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 77,311 shares over
which Mr. Waggoner has sole voting power held by Merrill Lynch, as Trustee
of the Current ESOP as of May 14, 1996 and allocated to Mr. Waggoner's
account.
(4) Includes 49,084 shares over which Mr. Roten has sole voting power held by
Merrill Lynch, as Trustee of the Current ESOP as of May 14, 1996 and
allocated to Mr. Roten's account.
(5) Includes 28,937 shares over which Mr. Bannon has sole voting power held by
Merrill Lynch, as Trustee of the Current ESOP as of May 14, 1996 and
allocated to Mr. Bannon's account.
(6) Includes 37,391 shares over which Mr. Crump has sole voting power held by
Merrill Lynch, as Trustee of the Current ESOP as of May 14, 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 May 14, 1996 and
allocated to Mr. Wise's account.
(8) Includes 216,581 shares held by Merrill Lynch, as Trustee of the Current
ESOP and allocated through May 14, 1996 to the accounts of such officers.
74
<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. It is anticipated that upon consummation of the Transaction,
investors in the Equity Private Placement including affiliates of TSG and
Unicorn and certain stockholders of the Company will own at least
approximately 75% of Holdings Common Stock, assuming the maximum number of
Rollover Shares.
CERTAIN TRANSACTIONS
TSG and Unicorn have entered into an agreement with STX Acquisition pursuant
to which such firms are to provide to STX Acquisition consulting and advisory
services with respect to the organization of STX Acquisition, structuring and
financing of the Transaction, employee benefit and compensation arrangements
and other matters. The agreement also provides that STX Acquisition will
indemnify TSG and Unicorn against liabilities relating to their services. At
the Closing, 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.
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
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 $ 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."
75
<PAGE>
DESCRIPTION OF THE NOTES
The Notes are to be issued pursuant to the Indenture, dated as of
, 1996, (the "Notes Indenture") between Chemicals and
, as trustee (the "Trustee"). The following summaries of certain
provisions of the Notes Indenture do not purport to be complete and are
subject to and are qualified in their 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
, 2006. The Notes will bear interest at the rate per annum shown
on the front cover of this Prospectus from , 1996 or from the most
recent date to which interest has been paid as provided for, payable semi-
annually on and of each year, commencing
, 1997 to each Person in whose name a Note is registered at the
close of business on the preceding or , as the case
may be. The Notes will bear interest on overdue principal and premium, if any,
and, to the extent permitted by law, overdue interest at the rate per annum
shown on the front cover of this Prospectus plus 1%. 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 , 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 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2001........................................................... %
2002...........................................................
2003...........................................................
2004........................................................... 100.00%
</TABLE>
In addition, at any time and from time to time prior to , 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 % 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 $ aggregate principal amount of the
Notes must remain outstanding after each such redemption.
76
<PAGE>
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee on a pro rata basis, by lot or by such other
method as the Trustee in its sole discretion shall deem to be fair and
appropriate, 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 March 31, 1996,
after giving effect to the Transaction, the aggregate principal amount of
outstanding Senior Debt of Chemicals would have been approximately $347.9
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 are 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 March 31, 1996, after giving effect to the
Transaction, the aggregate liabilities (consisting of Debt and trade payables)
of Chemicals' subsidiaries would have been approximately $6.5 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 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
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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 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 (iii) 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.
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) prior to the first public offering of common stock of Holdings, the
Permitted Holders cease to be the "beneficial owners" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of a
majority of the total voting power of the Voting Stock of Holdings, whether
as a result of issuance of securities of Holdings, any merger,
consolidation, liquidation or dissolution of Holdings, any direct or
indirect transfer of securities by Holdings or otherwise (for purposes of
this clause (i) and clause (ii) below, the Permitted Holders shall be
deemed to beneficially own any Voting Stock of a corporation (the
"specified corporation") held by any other corporation (the "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);
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(ii) on or after the first public offering of common stock of Holdings
referred to in clause (i) above, (A) 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
clause (i) above 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 30% of the total voting power
of the Voting Stock of Holdings; and (B) the Permitted Holders
"beneficially own" (as defined in clause (i) 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 (ii), such other Person shall be deemed to
beneficially own any Voting Stock of a specified corporation held by a
parent corporation, if such other Person "beneficially owns" (as defined in
this clause (ii)), directly or indirectly, more than 30% of the voting
power of the Voting Stock of such parent corporation and the Permitted
Holders "beneficially own" (as defined in clause (i) 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);
(iii) 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 66-2/3% 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;
(iv) the merger or consolidation of Holdings or Chemicals with or into
another Person or the merger of another Person 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 and, in the case only of any such merger or consolidation, the
securities of Holdings that are outstanding immediately prior to such
transaction and which represent 100% of the aggregate voting power of the
Voting Stock of Holdings 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
(v) Holdings shall hold less than 100% of the Capital 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
circumstances and relevant 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.
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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 would decide to do so in the future. Subject to the limitations
discussed below, Chemicals could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Notes Indenture, but
that could increase the amount of indebtedness outstanding at such time or
otherwise affect Chemicals' capital structure or credit ratings.
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 refinance 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.
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 right 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 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 the ones
summarized below, which covenants will be applicable (unless waived or
amended) so long as any of the Notes are outstanding.
Limitation on Debt. (a) Chemicals shall not Incur, and shall not permit any
Subsidiary to, directly or indirectly, Incur any Debt unless the Consolidated
EBITDA Coverage Ratio at the date of such incurrence exceeds 2.0 to 1.0.
(b) Notwithstanding the foregoing paragraph (a), Chemicals and its
subsidiaries may Incur the following Debt: (1) Debt Incurred pursuant to the
Revolving Credit Provisions of the Credit Agreement; provided, however, that,
Debt issued pursuant to the Revolving Credit Provisions of the Credit
Agreement shall not exceed the greater of $125 million and the sum of (i)
% of the gross book value of the inventory of Chemicals and the
Subsidiaries, and (ii) % of the gross book value of the accounts
receivable of Chemicals and its Subsidiaries; (2) Debt Incurred pursuant to
the Term Loan Provisions of the Credit Agreement in an aggregate principal
amount not to exceed $325 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 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
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the issuance of such Debt by Chemicals; (5) Debt of a Subsidiary incurred and
outstanding on or prior to the date on which such Subsidiary became a
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 Subsidiary became a 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 consisting of Interest Rate Agreements
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 Subsidiaries then
outstanding (other than Debt permitted by clauses (1) through (9) of this
paragraph (b) or paragraph (a) above) does not exceed $ 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.
Limitation on Restricted Payments. (a) Chemicals shall not, and shall not
permit any 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 Subsidiary), (ii) purchase, redeem or
otherwise acquire or retire for value any Capital Stock of Chemicals, any
direct or indirect parent of Chemicals or a 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), (iv) make any
Investment in any Person (other than a Permitted Investment), or (v) make any
loan, advance or payment to Holdings or the ESOP (any such dividend,
distribution, purchase, redemption, repurchase, defeasance, other acquisition,
retirement, Investment, loan, advance or payment being herein referred to as a
"Restricted Payment"), if at the time Chemicals or such Subsidiary makes such
Restricted Payment: (1) a Default shall have occurred and be continuing (or
would result therefrom); or (2) Chemicals would not be permitted (or 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); (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 date on which the Notes
were originally issued; provided, however, that if such employee stock
ownership plan issues any Debt, such aggregate
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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; and (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).
(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 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 or
redemption 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 or
redemption 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 payment 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 preceding such
declaration or payment and 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) a payment to Holdings for the purpose of contributions by
Holdings to the ESOP on behalf of the employees of Holdings or its
Subsidiaries that do not exceed, during any fiscal year, % 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;
provided that such contributions for any year may not exceed the principal and
interest due for such year from the ESOP under the ESOP Loan; (vii) a payment
to Holdings to pay its operating and administrative expenses including,
without limitation, directors fees, legal and audit expenses, SEC compliance
expenses, ESOP administrative expenses and corporate franchise and other
taxes, in an amount not to exceed $1.0 million per year; (viii) a payment to
Holdings to be used to repurchase common stock of Holdings distributed to
participants and beneficiaries of the ESOP in accordance with the ESOP and
Section 409(h)(1)(B) of the Code and the regulations thereunder and (ix) a
payment to Holdings pursuant to a tax sharing agreement as the same may be
amended from time to time in a manner not materially adverse to Chemicals.
Limitation on Restrictions on Distributions from Subsidiaries; Limitation on
Preferred Stock of Subsidiaries. Chemicals shall not, and shall not permit any
Subsidiary to, create or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any 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 Subsidiary pursuant to an
agreement relating to any Debt Incurred by such Subsidiary on or prior to the
date on which such Subsidiary was acquired by Chemicals (other than Debt
Incurred as consideration in, or to provide all or any portion of the funds
utilized to consummate, the
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transaction or series of related transactions pursuant to which such
Subsidiary became a 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 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; and (e) in the
case of clause (iii) above, restrictions contained in security agreements
securing Debt of a Subsidiary to the extent such restrictions restrict the
transfer of the property subject to such security agreements.
Chemicals shall not permit any Subsidiary to issue, directly or indirectly,
any Preferred Stock, other than to Chemicals or any Wholly-Owned Subsidiary.
Limitation on Sales of Assets and Subsidiary Stock. (a) Chemicals shall not,
and shall not permit any Subsidiary to, directly or indirectly, consummate any
Asset Disposition unless (i) Chemicals or such 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 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 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 60 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 or any Wholly Owned
Subsidiary 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 and the Wholly Owned Subsidiaries 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 or any Wholly Owned Subsidiary of Tangible Property
or (y) the prepayment, repayment or purchase of Debt (other than any
Redeemable Stock) of Chemicals or Debt of any 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 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 $10 million. Pending application of Net Available Cash pursuant to
this paragraph, such Net Available Cash shall be invested in Permitted
Investments.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the assumption of Debt of Chemicals or any Subsidiary
and the release of Chemicals or such Subsidiary from all liability on such
Debt in connection with such Asset Disposition and (y) securities received by
Chemicals or any Subsidiary from the transferee that are promptly converted by
Chemicals or such Subsidiary into cash.
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(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).
(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 Subsidiary to, conduct any business or enter into any
transaction or series of similar transactions (including the purchase, sale,
lease or exchange of any property or the rendering of any service) with any
Affiliate of Holdings or Chemicals unless (i) the terms of such business,
transaction or series of transactions are (A) set forth in writing and (B) as
favorable to Chemicals or such Subsidiary as terms that would be obtainable at
the time for a comparable transaction or series of similar transactions in
arms-length dealings with an unrelated third Person, (ii) the disinterested
members of the Board of Directors have, by resolution, determined in good
faith that such business or transaction or series of transactions meets the
criteria set forth in (i)(B) above; and (iii) if such business, transaction or
series of transactions involves an amount in excess of $5 million, determined
by a nationally recognized investment banking firm to be fair from a financial
standpoint to Chemicals and its Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
Restricted Payment 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 and by a majority of disinterested
(as to such transactions) directors of Chemicals, (iii) loans or advances to
employees in the ordinary course of business in accordance with the past
practices of Chemicals or its Subsidiaries and their predecessors, but in any
event not to exceed $1 million in the aggregate outstanding at any one time,
(iv) the payment of reasonable and customary fees to directors of Chemicals
and its Subsidiaries who are not employees of Chemicals or its Subsidiaries,
(v) any transaction between Chemicals and a Wholly Owned Subsidiary or between
Wholly Owned Subsidiaries and (vi) one-time fees payable to Sterling and
Unicorn in connection with the Transaction in an aggregate amount not to
exceed $8 million and $4 million, respectively.
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, 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
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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; (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.
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 Preferred Stock of 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 $3
million or more; (g) certain events of bankruptcy or insolvency of Chemicals
or any Significant Subsidiary; or (h) any judgment or decree for the payment
of money in excess of $3 million is rendered against Chemicals or a
Significant Subsidiary and is not discharged and either (A) an enforcement
proceeding has been commenced by any creditor upon such judgment or decree or
(B) 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
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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 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
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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.
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" ("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 clause (d) under "--Defaults" 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
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
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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 provisions described under "--Certain
Covenants--Limitation on Restricted Payments", "--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 5% 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 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 Subsidiaries, including any
disposition by means of a merger, consolidation or similar transaction, other
than (i) a disposition by a Subsidiary to Chemicals or by Chemicals or a
Subsidiary to a Wholly Owned Subsidiary, (ii) a disposition of property or
assets (other than shares of Capital Stock of a Subsidiary and which do not
constitute all or substantially all of the assets of any division or line of
business of Chemicals or any Subsidiary) at fair market value in the ordinary
course of business and (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 permitted by the covenant
described under "--Certain Covenants--Limitation on Restricted Payments".
"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.
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"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 (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.
"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 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 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 Subsidiary
repaid, repurchased, defeased or otherwise discharged with respect to
Chemicals and its continuing Subsidiaries in connection with such Asset
Dispositions for such period (or, if the Capital Stock of any Subsidiary is
sold, the Consolidated Interest Expense for such period directly attributable
to the Debt of such Subsidiary to the extent Chemicals and its continuing
Subsidiaries are no longer liable for such Debt after such sale), (3) if since
the beginning of such period Chemicals or any Subsidiary (by merger or
otherwise) shall have made an Investment in any Subsidiary (or any person
which becomes a 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 Subsidiary or was merged
with or into Chemicals or any 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 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 Subsidiaries, plus, to the extent
not included in such interest expense, (i) interest expense
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attributable to capital leases, (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 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
Chemicals or any of its consolidated 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) 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 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 Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution to a 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; (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 Subsidiary if such Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions by such
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 Subsidiary for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Subsidiary during such period to Chemicals or another
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution to another Subsidiary, to the limitation
contained in this clause) and (B) Chemicals' equity in a net loss of any such
Subsidiary for such period shall be included in determining such Consolidated
Net Income; (iv) any gain (but not 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 (but
not 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 a Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such covenant
pursuant to clause (a)(3)(D) 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 , 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, or refinanced 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 which such
Person is a party or a beneficiary.
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"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) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Redeemable Stock or, with
respect to any Subsidiary of such Person, any Preferred Stock (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.
"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 and (c) amortization expense, 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 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).
"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
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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. 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 or Currency Agreement.
"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.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed to
protect Chemicals or any 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.
"Issue Date" means the date on which the Notes are originally issued.
"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).
"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 tax 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
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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 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 Holders" means Sterling and Unicorn and their respective
Affiliates.
"Permitted Investment" means an Investment by Chemicals or any 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 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 Subsidiary or in satisfaction of judgments; and (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".
"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.
"Public Equity Offerings" means an underwritten primary public offering of
common stock of the 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.
"Redeemable Stock" means any Capital Stock that by its terms or otherwise is
required to be redeemed on or prior to the first anniversary of the Stated
Maturity of the Notes or is redeemable at the option of the holder thereof at
any time on or prior to the first anniversary of 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
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
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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
Subsidiary that Refinances Debt of a Subsidiary.
"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Debt of Chemicals.
"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.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby Chemicals or a Subsidiary transfers such
property to a Person and Chemicals or a 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 to the extent post-filing interest is
allowed in 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
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 (i) any domestic Subsidiary of Chemicals
which at the time of determination either (A) had assets which, as of the date
of Chemicals' most recent quarterly consolidated balance sheet, constituted at
least 3% of Chemicals' total assets on a consolidated basis as of such date,
(B) had revenues for the 12-month period ending on the date of Chemicals' most
recent quarterly consolidated statement of income which constituted at least
3% of Chemicals' total revenues on a consolidated basis for such period, (ii)
any foreign Subsidiary of Chemicals which at the time of determination either
(A) had assets which, as of the date of Chemicals' most recent quarterly
consolidated balance sheet, constituted at least 5% of Chemicals' total assets
on a consolidated basis as of such date, in each case determined in accordance
with GAAP, or (B)
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had revenues for the 12-month period ending on the date of Chemicals' most
recent quarterly consolidated statement of income which constituted at least
5% of Chemicals' total revenues on a consolidated basis for such period, or
(iii) any Subsidiary of Chemicals which, if merged with all Defaulting
Subsidiaries of Chemicals, would at the time of determination either (A) have
had assets which, as of the date of Chemicals' most recent quarterly
consolidated balance sheet, would have constituted at least 10% of Chemicals'
total assets on a consolidated basis as of such date or (B) have had revenues
for the 12-month period ending on the date of Chemicals' most recent quarterly
consolidated statement of income which would have constituted at least 10% of
Chemicals' total revenues on a consolidated basis for such period (each such
determination being made in accordance with GAAP). "Defaulting Subsidiary"
means any Subsidiary of Chemicals with respect to which a Default has
occurred.
"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 such tangible property located outside the
United States of America, (ii) all rights, contracts and other intangible
assets of any nature whatsoever and (iii) 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 180 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 90 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 Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings
Group, and (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 Standard &
Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
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"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.
"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 Subsidiary all the Capital Stock of which
(other than directors' qualifying shares) 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 of Discount Notes and Warrants
to purchase 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, dated as of
, 1996 (the "Discount Notes Indenture"), between Holdings and
, as Trustee (the "Trustee"). The following summaries of certain
provisions of the Discount Notes Indenture do not purport to be complete and
is subject to and are qualified in their 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 $ million aggregate principal amount at maturity ($ million
aggregate initial Accreted Value) and will mature on , 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
$ million by , 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 , 2002. From and after , 2001, the Discount
Notes will bear interest at the rate per annum shown on the front cover of
this Prospectus from , 2001 or from the most recent date to which
interest has been paid or provided for, payable semi-annually on
and of each year, commencing , 2002 to each
Person in whose name a Discount Note is registered at the close of business on
the preceding or , as the case may be. The Discount
Notes will bear interest on overdue principal and premium, if any, and, to the
extent permitted by law, overdue interest at the rate per annum shown on the
front cover of this Prospectus plus 1%. 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 and any multiple of $1,000. 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 , 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
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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 of the years set
forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2001........................................................... %
2002...........................................................
2003...........................................................
2004...........................................................
2005...........................................................
2006 and thereafter............................................ 100.00%
</TABLE>
In addition, at any time and from time to time prior to ,
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 %
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 $ million
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, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, 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
March 31, 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 March 31,
1996, after giving effect to the Transaction, the aggregate liabilities
(consisting of Debt and trade payables) of Holdings' subsidiaries would have
been approximately $685.2 million, including the Notes and including trade
payables. 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".
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SECURITY
The Discount Notes will be secured by a second priority lien on all the
Capital Stock of Chemicals, subject to a first priority lien in favor of the
lenders under the Credit Agreement.
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) prior to the first public offering of common stock of Holdings, the
Permitted Holders cease to be the "beneficial owners" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of a
majority in the aggregate of the total voting power of the Voting Stock of
Holdings, whether as a result of issuance of securities of Holdings, any
merger, consolidation, liquidation or dissolution of Holdings, any direct
or indirect transfer of securities by Holdings or otherwise (for purposes
of this clause (i) and clause (ii) below, the Permitted Holders shall be
deemed to beneficially own any Voting Stock of a corporation (the
"specified corporation") held by any other corporation (the "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) on or after the first public offering of common stock of Holdings
referred to on clause (i) above, 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 clause
(i) above, except that for purposes of this clause (ii) such 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 30%
of the total voting power of the Voting Stock of Holdings; provided,
however, that the Permitted Holders beneficially own (as defined in clause
(i) 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 (ii), such other
person shall be deemed to beneficially own any Voting Stock of a specified
corporation held by a parent corporation, if such other person is the
beneficial owner (as defined in this clause (ii)), directly or indirectly,
of more than 30% of the voting power of the Voting Stock of such parent
corporation and the Permitted Holders beneficially own (as defined in
clause (i) 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);
(iii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of Holdings
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the shareholders of Holdings was
approved by a vote of 66-2/3% of the directors of Holdings 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
then in office;
(iv) the merger or consolidation of Holdings with or into another Person
or the merger of another Person with or into Holdings, 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, and, in the case only of
any such merger or consolidation, the securities of Holdings that are
outstanding immediately prior to such transaction and
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which represent 100% of the aggregate voting power of the Voting Stock of
Holdings 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
(v) Holdings shall hold less than 100% of the Capital Stock of Chemicals.
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 circumstances and relevant 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.
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 would decide to do so in the future. Subject to the limitations
discussed below, Holdings could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Discount Notes
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect the Holdings' capital structure or credit
ratings.
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.
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 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.
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CERTAIN COVENANTS
The Discount Notes Indenture will contain certain covenants, including the
ones summarized below, which covenants will be applicable (unless waived or
amended) so long as any of the Discount Notes are outstanding.
Limitation on Debt. (a) Holdings shall not Incur, and shall not permit any
Subsidiary to Incur, directly or indirectly, any Debt unless, on the date of
such Incurrence, the Consolidated EBITDA Coverage Ratio exceeds 2.0 to 1.0.
(b) Notwithstanding the foregoing paragraph (a), Holdings and its
Subsidiaries may Incur the following Debt: Debt Incurred by Chemicals pursuant
to the Revolving Credit Provisions of the Credit Agreement; provided, however,
that Debt Incurred pursuant to the Revolving Credit Provisions of the Credit
Agreement shall not exceed the greater of $125 million and the sum of (i)
% of the gross book value of the inventory of Chemicals and its
Subsidiaries and (ii) % of the gross book value of the accounts receivable
of Chemicals and its Subsidiaries; (2) Debt Incurred by Chemicals pursuant to
the Term Loan Provisions of the Credit Agreement in an aggregate principal
amount not to exceed $325 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
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
Subsidiary Incurred and outstanding on or prior to the date on which such
Subsidiary became a 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 Subsidiary became a 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 consisting of Interest Rate Agreements directly
related to Debt permitted to be Incurred by Holdings pursuant to the Discount
Notes Indenture; and (10) Debt in an aggregate principal amount which,
together with all other Debt of Holdings and the Subsidiaries then outstanding
(other than Debt permitted by clauses (1) through (9) above or paragraph (a))
does not exceed $ 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.
Limitation on Restricted Payments. (a) Holdings shall not, and shall not
permit any 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 Subsidiary), (ii) purchase, redeem or
otherwise acquire or retire for value any Capital Stock of Holdings, any
direct or indirect parent of Holdings, or a 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),
(iv) make any Investment in any Person (other than a Permitted Investment) or
(v) make any loan, advance or
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payment to the ESOP (any such dividend, distribution, purchase, redemption,
repurchase, defeasance, other acquisition, retirement, Investment, loan,
advance or payment or being herein referred to as a "Restricted Payment"), if
at the time Holdings or such Subsidiary makes such Restricted Payment: (1) a
Default shall have occurred and be continuing (or would result therefrom); or
(2) Holdings would not be permitted (or 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); (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; and (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).
(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 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 or
redemption 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 or redemption
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 payment 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)
contributions by Holdings to the ESOP on behalf of the employees of Holdings
or its Subsidiaries that do not exceed, during any fiscal year, % 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; provided, that such contributions for any year may not exceed the
principal and interest due for such year from the ESOP under the ESOP Loan;
(vi) repurchases of common stock of Holdings distributed to participants and
beneficiaries of the ESOP in accordance with the ESOP and Section 409(h)(1)(B)
of the Code and the regulations thereunder.
Limitation on Restrictions on Distributions from Subsidiaries; Limitation on
Preferred Stock of Subsidiaries. Holdings shall not, and shall not permit any
Subsidiary to, create or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any 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
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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 Subsidiary
pursuant to an agreement relating to any Debt Incurred by such Subsidiary on
or prior to the date on which such Subsidiary was acquired by Holdings (other
than Debt Incurred as consideration in, or to provide all or any portion of
the funds utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a 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 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; and (e) in the case of clause (iii) above, restrictions
contained in security agreements securing Debt of a Subsidiary to the extent
such restrictions restrict the transfer of the property subject to such
security agreements.
Holdings shall not permit any Subsidiary to Incur, directly or indirectly,
any Preferred Stock, other than to Holdings or any other Subsidiary.
Limitation on Sales of Assets and Subsidiary Stock. (a) Holdings shall not,
and shall not permit any Subsidiary to, directly or indirectly, consummate any
Asset Disposition unless (i) Holdings or such 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 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 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 60 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 Holdings's election
to the investment by Holdings or any Wholly Owned Subsidiary 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 and the Wholly Owned Subsidiaries 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 or any Wholly Owned Subsidiary of Tangible
Property or (y) the prepayment, repayment or purchase of Debt (other than any
Redeemable Stock) of Holdings or Debt of any Subsidiary (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 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 $10 million. Pending
application of Net Available Cash pursuant to this paragraph, such Net
Available Cash shall be invested in Permitted Investments.
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For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the assumption of Debt of Holdings or any Subsidiary and
the release of Holdings or such Subsidiary from all liability on such Debt in
connection with such Asset Disposition and (y) securities received by Holdings
or any Subsidiary from the transferee that are promptly converted by Holdings
or such Subsidiary into cash.
(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).
(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 Subsidiary to, conduct any business or enter into any
transaction or series of similar transactions (including the purchase, sale,
lease or exchange of any property or the rendering of any service) with any
Affiliate of Holdings unless (i) the terms of such business, transaction or
series of transactions are (A) set forth in writing and (B) as favorable to
Holdings or such Subsidiary as terms that would be obtainable at the time for
a comparable transaction or series of similar transactions in arms-length
dealings with an unrelated third Person, (ii) the disinterested members of the
Board of Directors have, by resolution, determined in good faith that such
business or transaction or series of transactions meets the criteria set forth
in (i)(B) above and (iii) if such business, transaction or series of
transactions involves an amount in excess of $5 million, determined by a
nationally recognized investment banking firm to be fair from a financial
standpoint to Holdings and its Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
Restricted Payment 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 and by a majority of the
disinterested (as to such transactions) directors of Holdings, (iii) loans or
advances to employees in the ordinary course of business in accordance with
the past practices of Holdings or its Subsidiaries and their predecessors, but
in any event not to exceed $1 million in the aggregate outstanding at any one
time, (iv) the payment of reasonable and customary fees to directors of
Holdings and its Subsidiaries who are not employees of Holdings or its
Subsidiaries, (v) any transaction between Holdings and a Wholly Owned
Subsidiary or between Wholly Owned Subsidiaries and (vi) one-time fees payable
to Sterling and Unicorn in connection with the Transaction in an aggregate
amount not to exceed $8 million and $4 million, respectively.
Limitation on Liens. Holdings shall not, and shall not permit any 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 Subsidiary),
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
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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 Subsidiary to, enter into any Sale/Leaseback Transaction with
respect to any property unless (i) Holdings or such 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 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".
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.
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, 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; 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.
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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 Subsidiaries;
Limitation on Preferred Stock of 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", "--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 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 $3 million or more; (g) certain events of bankruptcy
or insolvency of Holdings or any Significant Subsidiary; (h) any judgment or
decree for the payment of money in excess of $3 million is rendered against
Holdings or a Significant Subsidiary and is not discharged and either (A) an
enforcement proceeding has been commenced by any creditor upon such judgment
or decree or (B) 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
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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.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Discount Notes Indenture 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 Pledge Agreement 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 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.
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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 any
time may terminate its obligations under the covenants described under "--
Certain Covenants" and "-- Change of Control" ("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) under "--
Defaults" 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
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.
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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.
CERTAIN DEFINITIONS
"Accreted Value" means, (A) as of any date prior to , 2001, an
amount per $1,000 principal amount at maturity of Discount Notes that is equal
to the sum of (a) the initial offering price ($ 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
and at the rate of % 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
VALUE
DATE -------------------
<S> <C>
, 1996.............................................. $
, 1997..............................................
, 1997..............................................
, 1998..............................................
, 1998..............................................
, 1999..............................................
, 1999..............................................
, 2000..............................................
, 2000..............................................
, 2001..............................................
, 2001..............................................
</TABLE>
and (B) as of any date on or after , 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 Restricted Payments", "--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 5% 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 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 Subsidiaries, including any
disposition by means of a merger, consolidation or similar transaction, other
than (i) a disposition by a Subsidiary to Holdings or by Holdings or a
Subsidiary to a Wholly Owned Subsidiary, (ii) a disposition of property or
assets (other than shares of Capital Stock of a Subsidiary and which do not
constitute all or substantially all of the assets of any division or line of
business of Holdings or any Subsidiary) at fair market value in the ordinary
course of business, (iii) for purposes of the covenant described under "--
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Certain Covenants--Limitation on Sale of Assets and Subsidiary Stock" only, a
disposition that constitutes a Restricted Payment permitted by the covenant
described under "--Certain Covenants--Limitation on Restricted Payments."
"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.
"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 (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.
"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 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 Holdings or any 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 Subsidiary repaid, repurchased,
defeased or otherwise discharged with respect to Holdings and its continuing
Subsidiaries in connection with such Asset Dispositions for such period (or,
if the
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Capital Stock of any Subsidiary is sold, the Consolidated Interest Expense for
such period directly attributable to the Debt of such Subsidiary to the extent
Holdings and its continuing Subsidiaries are no longer liable for such Debt
after such sale), (3) if since the beginning of such period Holdings or any
Subsidiary (by merger or otherwise) shall have made an Investment in any
Subsidiary (or any Person which becomes a 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
Subsidiary or was merged with or into Holdings or any 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 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).
"Consolidated Interest Expense" means, for any period, the total interest
expense of Holdings and its consolidated Subsidiaries, plus, to the extent not
included in such interest expense, (i) interest expense attributable to
capital leases, (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 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 consolidated 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) 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 Subsidiary, except that (A) Holdings's 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 Holdings or a Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution to a Subsidiary, to the limitations contained in clause (iii)
below) and (B) Holdings's equity in a net loss of any such Person for such
period shall be included in determining such Consolidated Net Income; (ii) any
net income 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 Subsidiary if such Subsidiary is subject to
restrictions, directly or indirectly, on the payment of dividends or the
making of distributions by such Subsidiary, directly or indirectly, to
Holdings, except that (A) Holdings's equity in the net income of any such
Subsidiary for such period shall be included in such Consolidated Net Income
up to the aggregate amount of cash actually distributed by such Subsidiary
during such period to Holdings or another Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution to
another Subsidiary, to the limitation contained in this clause) and (B)
Holdings's equity in a net loss of any such Subsidiary for such period shall
be included in determining such Consolidated Net Income; (iv) any gain (but
not loss) realized upon the sale or other disposition of any property, plant
or equipment of Holdings or its consolidated subsidiaries (including pursuant
to any sale-and-leaseback arrangement) which is
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not sold or otherwise disposed of in the ordinary course of business and any
gain (but not loss) realized upon the sale or other disposition of any Capital
Stock of any Person; and (v) 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 as advances or other transfers of assets from a Subsidiary to the
extent such dividends, repayments or transfers increase the amount of
Restricted Payments permitted under such covenant pursuant to clause (a)(3)(D)
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 giving effect to purchase accounting
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 , 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, or refinanced 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 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) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Redeemable Stock or with
respect to Subsidiaries, any
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Preferred Stock (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 and (c) amortization expense, 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 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.
"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.
"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
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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. 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 or Currency Agreement.
"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.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed to
protect Holdings or any 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.
"Issue Date" means the date on which the Discount Notes are originally
issued.
"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).
"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 tax 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 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.
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"Permitted Holders" means Sterling and Unicorn and their respective
Affiliates.
"Permitted Investment" means an Investment by Holdings or any 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 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 Subsidiary or in satisfaction of judgments; and (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".
"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 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 Hedging Obligations so
long as such Hedging Obligations 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 Hedging Obligations; (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
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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".
"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.
"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.
"Redeemable Stock" means any Capital Stock that by its terms or otherwise is
required to be redeemed on or prior to the first anniversary of 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 first anniversary of 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
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
Subsidiary that Refinances Debt of a 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.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby Holdings or a Subsidiary transfers such
property to a Person and Holdings or a Subsidiary leases it from such Person.
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"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 or for
reorganization relating to Holdings to the extent post-filing interest is
allowed in 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 (i) any domestic Subsidiary of Holdings which
at the time of determination either (A) had assets which, as of the date of
Holdings's most recent quarterly consolidated balance sheet, constituted at
least 3% of Holdings's total assets on a consolidated basis as of such date,
(B) had revenues for the 12-month period ending on the date of Holdings's most
recent quarterly consolidated statement of income which constituted at least
3% of Holdings's total revenues on a consolidated basis for such period, (ii)
any foreign Subsidiary of Holdings which at the time of determination either
(A) had assets which, as of the date of Holdings's most recent quarterly
consolidated balance sheet, constituted at least 5% of Holdings's total assets
on a consolidated basis as of such date, in each case determined in accordance
with GAAP, or (B) had revenues for the 12-month period ending on the date of
Holdings's most recent quarterly consolidated statement of income which
constituted at least 5% of Holdings's total revenues on a consolidated basis
for such period, or (iii) any Subsidiary of Holdings which, if merged with all
Defaulting Subsidiaries of Holdings, would at the time of determination either
(A) have had assets which, as of the date of Holdings's most recent quarterly
consolidated balance sheet, would have constituted at least 10% of Holdings's
total assets on a consolidated basis as of such date or (B) have had revenues
for the 12-month period ending on the date of Holdings's most recent quarterly
consolidated statement of income which would have constituted at least 10% of
Holdings's total revenues on a consolidated basis for such period (each such
determination being made in accordance with GAAP). "Defaulting Subsidiary"
means any Subsidiary of Holdings with respect to which a Default has occurred.
"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 such tangible property located outside the
United States of
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America, (ii) all rights, contracts and other intangible assets of any nature
whatsoever and (iii) 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 180 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 90 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 rating at the time as of which any investment therein
is made of "P-1" (or higher) according to Moody's Investors Service, Inc. or
"A-1" (or higher) according to Standard and Poor's Ratings Group, and (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 Standard & Poor's Ratings
Group or "A" by Moody's Investors Service, Inc.
"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.
"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 Subsidiary all the Capital Stock of which
(other than directors' qualifying shares) is owned by Holdings or another
Wholly Owned Subsidiary.
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DESCRIPTION OF THE WARRANTS
A total of Warrants will be issued under a warrant agreement
(the "Warrant Agreement") dated as of , 1996, between
Holdings and , 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
share(s) 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 % 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 , 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 on or after the Separation 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. Upon surrender of the
Warrant certificate for exercise or sale, 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.
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 the 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 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 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) and (iv) purchases of
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Holdings Common Stock pursuant to a tender or exchange offer by Holdings or
any Subsidiary (as defined) at a price in excess of the then current market
price per share of Holdings Common Stock.
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 extent (or the record date
therefor). 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.
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
Holdings has authorized and reserved 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.
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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.
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,
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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 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 66 2/3% 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
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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 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.
TRANSFER AGENT
The Transfer Agent for the Holdings Common Stock will be KeyCorp Shareholder
Services.
DESCRIPTION OF THE CREDIT FACILITY
As part of the Transaction, Chemicals will to enter 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. The Agent and Credit Suisse
have delivered a commitment whereby each will underwrite 50% of the $456.5
million principal amount of the loan facilities described below, subject to
the preparation and negotiation of definitive documentation, no material
adverse change in the business of the Company, the closing of the Offerings
and the consummation of the Merger. The Company, STX Acquisition and the Agent
are engaged in negotiations regarding the terms of the Credit Agreement. The
following description summarizes certain provisions which the parties
currently expect to be
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included in 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 will provide for facilities consisting of (i) a six and
one half year revolving credit facility providing for up to $125.0 million in
revolving loans (the "Revolving Credit Facility"), (ii) a term loan facility
providing for up to $325.0 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
$125.0 million term loan and (iii) a four year $6.5 million ESOP Term Loan.
At the Closing, Chemicals will borrow the entire $325.0 million of the Term
Loans and approximately $16.4 million under the Revolving Credit Facility. The
proceeds from such borrowings will be used to (i) finance the Merger (ii)
refinance certain existing indebtedness of the Company 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, subject to 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 will be 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 will be 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 will contain 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 will also require Chemicals to satisfy certain financial covenants
and tests. In addition, the Credit Agreement will include various
circumstances that will constitute, subject in certain cases to notice and
grace periods, an event of default thereunder.
The Credit Agreement will require 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
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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, 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 will agree 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.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the U.S. federal income tax consequences
expected to apply to holders from the purchase, ownership and disposition of
the Notes, the Discount Notes, and the Warrants (collectively, the Notes and
the Discount Notes are sometimes referred to as "Debt Securities"). 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 income 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.
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 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"
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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, 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 minimus 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.
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
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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. Based upon the relative
valuations determined by its underwriters, Holdings will make an allocation of
the issue price between the Discount Notes and the Warrants. 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, 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 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
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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.
For purposes of applying the foregoing rules, 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 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.
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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.
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, original issue
discount, de minimis market discount and market discount, as adjusted by any
acquisition 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 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 or not 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.
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<PAGE>
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. Moreover, the holding period for the Warrants will commence on the
day following the date that the Warrant is issued to the holder as part of the
Unit.
Neither Holdings nor the holder will recognize gain or loss as a result of a
holder's receipt of Common Stock upon exercising Warrants ("Warrant Shares").
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 Warrant. 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), without
proportionate adjustments to the holders of Common Stock, Section 305 of the
Code may treat holders of the Warrants as having received a constructive
dividend distribution.
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 or perjury,
and certain other information, or otherwise establishes, in the manner
prescribed by law, an exemption from backup withholding. In addition, if 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 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 who 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
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<PAGE>
a holder of Debt Securities or Warrants that is not (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) an estate or trust whose
income is includable in gross income for United States federal income tax
purposes regardless of its source.
INTEREST AND ORIGINAL ISSUE DISCOUNT ATTRIBUTABLE TO THE DISCOUNT NOTES AND
INTEREST ATTRIBUTABLE TO THE NOTES
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), other than "portfolio interest" as defined below, 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 unless the interest is
effectively connected with the conduct of a trade or business within the
United States by the Non-United States Holder, in which case the interest will
be subject to the United States federal income tax on net income at the rates
applicable to United States persons generally (and with respect to corporate
holders and under certain circumstances, the 30 percent branch profits tax).
Non-United States Holders should consult any applicable income tax treaties,
which may provide for a lower rate of withholding, exemption from, or
reduction of branch profits taxes, 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, Holdings or their paying
agents either 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
holder 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 customers' securities in the ordinary course of its trade or
business (a "financial institution") that holds the Notes or the Discount
Notes certification under penalties of perjury that such a Form W-8 (or
substitute Form W-8) has been received by it from the beneficial owner or
qualifying intermediary and furnishes the payor a copy thereof. The portfolio
interest exemption will not apply to interest or original issue discount
income 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, or (iii) certain banks. A Non-United States holder which is subject to
United States federal income tax with respect to the Notes or the Discount
Notes because payments received with respect to such instruments are
effectively connected with a United States trade or business of the Non-United
States Holder (in which case the Non-United States Holder may be subject to
"branch profits tax" under Section 884 of the Code) and which provides
Chemicals or Holdings, as the case may be, with a properly executed Form 4224
will also be exempt from withholding.
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 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. 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.
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<PAGE>
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 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) in the case
of a Discount Note, original issue discount on such Note does not qualify for
the portfolio interest exemption.
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 and Chemicals can give no
assurances that they are not USRPHCs.
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) paid to
each Non-United States Holder, and the United States federal income tax, if
any, withheld with respect to such interest. Information reporting
requirements will also apply to payments of the cash proceeds of dispositions
of the Debt Securities or Warrants by foreign officers of United States
brokers, or foreign brokers with certain types of relationships to the United
States, 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
the holder otherwise establishes an exemption. 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.
Generally, backup withholding of U.S. income tax at a rate of 31 percent
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 furnished the issuer or its agent with a copy of such statement. The
31 percent backup withholding tax generally will not apply to dividends paid
to Non-United States holders outside the United States that are subject to the
30 percent withholding tax discussed above or that are not so subject because
a tax treaty applies that reduces or eliminates such withholding. Under
temporary regulations, dividends payable at an address located outside of the
United States to a Non-United States holder are not subject to the backup
withholding rules.
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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 dated , 1996 (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 PRINCIPAL
AMOUNT AMOUNT
UNDERWRITER OF NOTES OF UNITS
----------- ------------ ------------
<S> <C> <C>
CS First Boston Corporation.................... $ $
Chase Securities Inc...........................
------------ ------------
Total........................................ $275,000,000 $
============ ============
</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 % and % of the principal amount per
Note and Unit, respectively, and the Underwriters and such dealers may allow a
discount of % and % 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
discretionary sales by the Underwriters to exceed 5.0% of the principal amount
of each Security being offered hereby.
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 in the Equity Private Placement. 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
Schedule E to the By-Laws of the National Association of Securities Dealers,
Inc. Schedule E requires that the yields on the Securities not be lower than
that recommended by a "qualified independent underwriter" meeting certain
standards. Accordingly, Chase Securities Inc. is assuming the responsibilities
of acting as the qualified independent underwriter in pricing the Offerings
and conducting due diligence. The yields on the Securities, when sold to the
public at the public offering prices set forth on the cover page of this
Prospectus, are no lower than that recommended by Chase Securities Inc.
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."
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.
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
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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. 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 interim period
through March 31, 1996, 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 interim period
through March 31, 1996, 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.
EXPERTS
The consolidated balance sheet of Holdings as of May 13, 1996 and the
balance sheet of Chemicals as of May 13, 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.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (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.
The Company and Chemicals have filed with the SEC a registration statement
(the "Registration Statement") under the Securities Act on Form S-1 (Reg. No.
333- ) 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.
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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 March 31, 1996 and September
30, 1995 (Unaudited)................................................... F-30
Condensed Consolidated Statement of Operations for the Six Months Ended
March 31, 1996 and 1995 (Unaudited).................................... F-31
Condensed Consolidated Statement of Cash Flows for the Six Months Ended
March 31, 1996 and 1995 (Unaudited).................................... F-32
Notes to Condensed Consolidated Financial Statements (Unaudited)........ F-35
</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.
October 25, 1995
Houston, Texas
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. 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.
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. 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. 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
========== ======== ========
</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.
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.
F-27
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
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>
MARCH 31, SEPTEMBER 30,
ASSETS 1996 1995
------ --------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 1,261 $ 30,882
Accounts receivable................................... 123,867 112,102
Inventories........................................... 58,833 67,867
Prepaid expenses...................................... 4,782 3,878
Deferred income taxes................................. 6,751 5,622
-------- --------
Total current assets................................ 195,494 220,351
Property, plant and equipment, net...................... 336,371 309,084
Other assets............................................ 82,594 80,504
-------- --------
Total assets........................................ $614,459 $609,939
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable...................................... $ 62,267 $ 72,016
Accrued liabilities................................... 50,842 55,858
Current portion of long-term debt..................... 13,393 17,857
-------- --------
Total current liabilities........................... 126,502 145,731
Long-term debt.......................................... 110,750 103,581
Deferred income taxes................................... 43,577 40,297
Deferred credits and other liabilities.................. 76,507 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....................................... 294,266 275,052
Pension adjustment...................................... (1,556) (1,556)
Accumulated translation adjustment...................... (18,881) (17,307)
Deferred compensation................................... (94) (129)
-------- --------
307,563 289,932
Treasury stock, at cost, 4,637 and 4,653 shares,
respectively........................................... (50,440) (50,614)
-------- --------
Total stockholders' equity.......................... 257,123 239,318
-------- --------
Total liabilities and stockholders' equity........ $614,459 $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>
SIX MONTHS ENDED
MARCH 31,
-----------------
1996 1995
-------- --------
<S> <C> <C>
Revenues...................................................... $382,421 $544,576
Cost of goods sold............................................ 323,628 402,690
-------- --------
Gross profit.................................................. 58,793 141,886
Selling, general and administrative expenses.................. 16,108 15,977
Stock appreciation rights (SARs) expense (benefit)............ 6,658 503
Other expense (Note 8)........................................ 3,550 --
Interest and debt related expenses, net of interest income.... 3,210 9,715
-------- --------
Income before income taxes.................................... 29,267 115,691
Provision for income taxes.................................... 10,053 37,354
-------- --------
Net income.................................................... $ 19,214 $ 78,337
======== ========
Net income per share.......................................... $ 0.35 $ 1.41
Weighted average shares outstanding........................... 55,682 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>
SIX MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers............................ $ 422,542 $ 533,496
Miscellaneous cash receipts............................. 11,044 9,682
Cash paid to suppliers and employees.................... (404,391) (451,726)
Interest paid........................................... (3,280) (9,649)
Interest received....................................... 538 2,188
Income taxes paid....................................... (10,303) (31,458)
--------- ---------
Net cash provided by operating activities................. 16,150 52,533
--------- ---------
Cash flows from investing activities:
Capital expenditures.................................... (48,996) (15,774)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt............................ 38,000 --
Repayment of long-term debt............................. (34,392) (38,574)
Other................................................... (289) (50)
--------- ---------
Net cash provided by (used in) financing activities....... 3,319 (38,624)
--------- ---------
Effect of exchange rate on cash........................... (94) (31)
--------- ---------
Net decrease in cash and cash equivalents................. (29,621) (1,896)
Cash and cash equivalents--beginning of period............ 30,882 2,013
--------- ---------
Cash and cash equivalents--end of period.................. $ 1,261 $ 117
========= =========
</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>
SIX MONTHS ENDED
MARCH 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Net income.................................................. $ 19,214 $ 78,337
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............................. 21,188 20,769
Loss on disposal of assets................................ 3,329 103
Deferred tax expense...................................... 1,600 3,374
Accrued compensation...................................... 6,850 571
Change in:
Accounts receivable....................................... (15,570) (47,095)
Inventories............................................... 8,960 12,754
Prepaid expenses.......................................... (912) (1,382)
Other assets.............................................. (5,589) (1,187)
Accounts payable.......................................... (10,727) (7,301)
Accrued liabilities....................................... (18,829) (8,802)
Interest payable.......................................... 705 (2,591)
Taxes payable............................................. (840) 3,098
Other liabilities......................................... 6,771 1,885
-------- --------
Net cash provided by operating activities................... $ 16,150 $ 52,533
======== ========
</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 March 31, 1996 and its consolidated results
of operations for the three and six-month periods ended March 31, 1996 and
1995 and consolidated cash flows for the six-month periods ended March 31,
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>
MARCH 31, SEPTEMBER 30,
1996 1995
--------- -------------
<S> <C> <C>
Finished products................................. $36,317 $44,802
Raw materials..................................... 11,172 16,506
------- -------
Inventories at FIFO cost........................ 47,489 61,308
Inventories under exchange agreements............. (528) (4,783)
Stores and supplies............................... 11,872 11,342
------- -------
$58,833 $67,867
======= =======
</TABLE>
4. LONG-TERM DEBT:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1995
--------- -------------
<S> <C> <C>
Revolving credit facilities...................... $ -- $ 902
Term loan........................................ 107,143 120,536
Loan under chlorate plant credit agreement....... 17,000 --
-------- --------
Total debt outstanding......................... 124,143 121,438
Less:
Current maturities............................. (13,393) (17,857)
-------- --------
Total long-term debt............................. $110,750 $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, six 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. Sterling Chemicals, Inc., 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., Gordon A. Cain, 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. Sterling Chemicals, Inc., 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. Sterling Chemicals, Inc., 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. Sterling Chemicals, Inc., 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. 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.
These lawsuits are in their early stages and the Company is unable at this
time to predict the impact, if any, these lawsuits may have on its financial
position, results of operations or cash flows.
Petrochemicals
HUNTSMAN LAWSUIT: On November 30, 1995, the court granted the motion for
summary judgment filed by the Company in Sterling Chemicals, Inc. v. Huntsman
Chemical Corporation, Huntsman Styrene
F-35
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
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.
Pulp Chemicals
PATENT LITIGATION: 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
previously disclosed that it was 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. The settlement
did not have a material adverse effect on the Company's financial position,
results of operations or cash flows.
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. 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 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 March 31, 1996, the Company has
accrued approximately $12 million as its estimate of aggregate contingent
liability for these matters, and has also recorded aggregate receivables from
its insurers and third-party indemnitors of $11 million. In addition, at March
31, 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 $41 million. 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 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 agreement for the sale of the Company to an investment group formed
by The Sterling Group, Inc. and The Unicorn Group L.L.C. Under the terms of
the agreement, shareholders may elect to receive $12.00 per share in cash, or
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.
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 decided to stop producing lactic acid at its Texas City,
Texas facility by the end of the third quarter of fiscal 1996. In the second
quarter of fiscal 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 ($0.04 per share, after taxes).
F-37
<PAGE>
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION 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 SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE ISSUERS SINCE THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 16
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.................................................................. 46
Management................................................................ 65
Principal Stockholders.................................................... 74
Certain Transactions...................................................... 75
Description of the Notes.................................................. 76
Description of the Units.................................................. 97
Description of Capital Stock.............................................. 121
Description of the Credit Facility........................................ 123
Certain United States Federal Income Tax Consequences..................... 125
Underwriting.............................................................. 134
Notice to Canadian Residents.............................................. 135
Legal Matters............................................................. 136
Change of Accountants..................................................... 136
Experts................................................................... 136
Available Information..................................................... 137
Glossary.................................................................. A-1
Index to Financial Statements............................................. F-1
</TABLE>
------------
UNTIL , 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO OF STERLING CHEMICALS APPEARS HERE]
Sterling Chemicals, Inc.
$275,000,000
% Senior Subordinated Notes
Sterling Chemicals Holdings, Inc.
Units consisting of
$
% Senior Secured Discount Notes
and Warrants to Acquire Shares of Common Stock
PROSPECTUS
CS First Boston
Chase Securities Inc.
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below are the estimated expenses expected to be incurred in
connection with the issuance and distribution of the securities registered
hereby.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fees............ $129,311
NASD filing fee................................................. 30,500
Legal fees and expenses......................................... *
Accounting fees and expenses.................................... *
Placement Agent fees and expenses............................... *
Blue Sky fees and expenses...................................... *
Miscellaneous expenses.......................................... *
--------
Total....................................................... $ *
--------
</TABLE>
- --------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations.
Article Eighth of STX Acquisition's Certificate of Incorporation and Section
6.1 of STX Acquisition's Bylaws provide for the indemnification of directors,
officers and other authorized representatives of the Company. The Certificate
of Incorporation and Section 145 provide that the corporation may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation or enterprise. Depending on the character of the
proceeding, the corporation may indemnify against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with such action, suit or proceeding if the
person seeking indemnification acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. In the case of an action
by or in the right of the corporation, no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine that despite the adjudication of liability such person is
fairly and reasonably entitled to indemnity for such expenses which the court
shall deem proper. The Certificate of Incorporation and Section 145 further
provide that to the extent a director or officer of the corporation has been
successful in defense of any action, suit or proceeding referred to above or
in defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection therewith. The Bylaws provide for indemnification to the
maximum extent permitted by Delaware General Corporation Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the formation of STX Acquisition, Frank J. Hevrdejs, T.
Hunter Nelson and Susan O. Rheney purchased an aggregate of 84 shares of
common stock for an aggregate consideration of $1,008. In such transaction,
STX Acquisition relied on Section 4(2) under the Securities Act for an
exemption from registration under the Securities Act. In connection with the
Merger, such shares will be purchased by Holdings for the original purchase
price.
II-1
<PAGE>
Concurrently with the consummation of the Offerings, STX Acquisition is
conducting a private placement of its Common Stock. At the effective date of
this Registration Statement, it is expected that STX Acquisition will have
commitments to purchase a maximum of $103.1 million of STX Acquisition Common
Stock from investors organized by TSG and Unicorn. In connection with the
Equity Private Placement, STX Acquisition will rely on Section 4(2) of the
Securities Act for an exemption from registration under the Securities Act.
The actual number of holders of STX Acquisition Common Stock and their
ownership will not be known until such time as the number of Rollover Shares
is determinable. The consummation of the Equity Private Placement will occur
simultaneously with the consummation of the Merger.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement
2.1 Agreement and Plan of Merger between STX Acquisition Corp. and
Sterling Chemicals, Inc. dated as of April 24, 1996, incorporated
by reference from the Company's Current Report on Form 8-K dated
April 24, 1996.
*3.1 Form of Holdings' Certificate of Incorporation
*3.2 Chemicals' Certificate of Incorporation
3.3 Holdings' Bylaws (Amended Bylaws of Sterling Chemicals, Inc.),
incorporated by reference from exhibit 3.2 of the Company's
Annual Report on Form 10-K for the fiscal year ended September
30, 1994
*3.4 Chemicals' Bylaws
*4.1 Form of Common Stock Certificate
*4.2 Form of Warrant Certificate
*4.3 Form of Warrant Agreement
*4.4 Indenture governing the Discount Notes
*4.5 Form of Discount Note (included in Exhibit 4.4)
*4.6 Indenture governing the Notes
*4.7 Form of Note (included in Exhibit 4.6)
*4.8 Credit Agreement among Chemicals, Texas Commerce Bank as Agent,
Credit Suisse and Chase Securities Inc. as co-arrangers and the
lenders named therein.
*5.1 Opinion of Andrews & Kurth L.L.P.
10.1 Assets Purchase Agreement dated August 1, 1986, between Monsanto
Company and the Company, incorporated by reference from exhibit
10.1 to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1992.
10.2 Sterling Chemicals, Inc. Salaried Employees' Pension Plan
(Restated as of October 1, 1993), incorporated by reference from
exhibit 10.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1993.
10.3 Supplement to the Sterling Chemicals, Inc. Salaried Employees'
Pension Plan (Restated as of January 1, 1994), incorporated by
reference from exhibit 10.6(a) to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1994.
10.4 First and Second Amendments to the Sterling Chemicals, Inc.
Salaried Employees' Pension Plan dated April 27, 1994 and
September 23, 1994, respectively, incorporated by reference from
exhibit 10.6(b) to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1994.
10.5 Sterling Chemicals, Inc. Hourly Paid Employees' Pension Plan
(Restated as of October 1, 1993), incorporated by reference from
exhibit 10.8 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1993.
10.6 Supplement to the Sterling Chemicals, Inc. Hourly Paid
Employee's Pension Plan (Restated as of January 1, 1994),
incorporated by reference from exhibit 10.8(a) to the Company's
Annual Report on Form 10-K for the fiscal year ended September
30, 1994.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.7 First Amendment to the Sterling Chemicals, Inc. Hourly Paid
Employees' Pension Plan dated April 27, 1994, incorporated by
reference from exhibit 10.8(b) to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1994.
10.8 Sterling Chemicals, Inc. Amended and Restated Savings and
Investment Plan, incorporated by reference from exhibit 10.10 to
the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1993.
10.9 Supplements to the Sterling Chemicals, Inc. Savings and Investment
Plan for Hourly Paid Employees and Salaried Employees,
incorporated by reference from exhibit 10.10(a) to the Company's
Annual Report on Form 10-K for the fiscal year ended September 30,
1994.
10.10 First and Second Amendments to the Sterling Chemicals, Inc.
Amended and Restated Savings and Investment Plan dated April 27,
1994 and October 26, 1994, respectively, incorporated by reference
from exhibit 10.10(b) to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994.
10.11 Sterling Chemicals, Inc. Pension Benefit Equalization Plan,
incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1995.
10.12 Sterling Chemicals, Inc. 1989 Omnibus Stock and Incentive Plan,
incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1995.
10.13 Sterling Chemicals, Inc. Amended and Restated Employee Stock
Ownership Plan, incorporated by reference from exhibit 10.12 to
the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1993.
10.14 First Amendment to the Sterling Chemicals, Inc. Amended and
Restated Employees' Stock Ownership Plan dated April 27, 1994,
incorporated by reference from exhibit 10.12(a) to the Company's
Annual Report on Form 10-K for the fiscal year ended September 30,
1994.
+10.15 Styrene Monomer Conversion Contract dated November 3, 1995,
between Monsanto Company and the Company, incorporated by
reference to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1995.
+10.16 Acrylonitrile Exchange Contract dated January 1, 1994, between the
Company and Monsanto Company, incorporated by reference from
exhibit 10.19 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994.
+10.17 Production Agreement dated April 15, 1988 between BP Chemicals
Americas Inc. and the Company and First and Second Amendment
thereto, incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1995.
+10.18 Agreement dated May 2, 1988 between E. I. du Pont de Nemours and
Company and the Company, incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995.
10.19 License Agreement dated April 15, 1988, between BP Chemicals
Americas Inc. and the Company, incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995.
+10.20 Product Sales Agreement dated August 1, 1986, between BASF
Corporation and the Company, incorporated by reference from
exhibit 10.22 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1992.
+10.21 Amendment No. 3 to Product Sales Agreement as of January 1, 1994,
between BASF Corporation and the Company, incorporated by
reference from exhibit 10.22(a) to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1994.
*10.22 License Agreement dated August 1, 1986, between Monsanto Company
and the Company.
+10.23 Amended Lease and Production Agreement dated August 8, 1994,
between BP Chemicals Americas Inc. and the Company, incorporated
by reference from exhibit 10.21 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1994.
10.24 Form of Indemnity Agreement executed between the Company and each
of its officers and directors, incorporated by reference from
exhibit 10.30 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.25 Agreement dated January 30, 1987, among J. Virgil Waggoner, Gordon
A. Cain and the Company, regarding capital stock of the Company,
incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1995.
10.26 Amended and Restated Sterling Chemicals, Inc. Hourly Employees'
Profit Sharing Plan, incorporated by reference from exhibit 10.32
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1993.
10.27 Amended and Restated Sterling Chemicals, Inc. Salaried Employees'
Profit Sharing Plan, incorporated by reference from exhibit 10.31
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1993.
10.28 Sterling Chemicals, Inc. Amended and Restated Supplemental
Employee Retirement Plan, incorporated by reference from exhibit
10.34 to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1989.
10.29 Sterling Chemicals, Inc. Deferred Compensation Plan, incorporated
by reference from exhibit 10.35 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1989.
10.30 Article of Agreement between the Company, its successors and
assigns, and Texas City, Texas Metal Trades Council, AFL-CIO Texas
City, Texas, May 1, 1993 to May 1, 1996, incorporated by reference
from exhibit 10.35 to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993.
10.31 Conditional Performance Guaranty dated as of August 20, 1992, by
Albright & Wilson, Ltd. in favor of Sterling Pulp Chemicals, Ltd.,
Sterling Canada, Inc. and the Indemnities identified in Section
10.2 of the Purchase Agreement, incorporated by reference from
exhibit 10.38 to the Company's current Report on Form 8-K dated
September 3, 1992.
10.32 Performance Guaranty dated as of August 20, 1992, by the Company
in favor of Tenneco Canada Inc., Rio Linda Chemical Co., Albright
& Wilson Americas, Inc. and the Indemnities identified in Section
10.3 of the Purchase Agreement, incorporated by reference from
exhibit 10.39 to the Company's Current Report on Form 8-K dated
September 3, 1992.
10.33 Lease dated March 1, 1990 between Procter & Gamble, Inc. and
Tenneco Canada Inc., as amended by a Lease Modification Agreement
dated August 9, 1991, and Consent and Assignment Agreement dated
as of August 21, 1992 among 982174 Ontario Limited, Sterling Pulp
Chemicals, Ltd., Proctor & Gamble, Inc., Tenneco Canada Inc. and
The Bank of Nova Scotia, incorporated by reference from exhibit
10.45 to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1992.
10.34 Lease dated July 1, 1977 between Canadian National Railway Company
and ERCO Industries Limited, and Consent and Assignment Agreement
dated as of August 21, 1992 among Tenneco Canada Inc., Sterling
Pulp Chemicals, Ltd., Canadian National Railway Company and The
Bank of Nova Scotia, incorporated by reference from exhibit 10.46
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1992.
+10.35 Sales and Purchase Agreement dated April 1, 1994, between BP
Chemicals Ltd. and the Company, incorporated by reference from
exhibit 10.48 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994.
+10.36 Contract for Sale and Purchase of Ethylene dated October 28, 1988,
between Phillips 66 Company and the Company, incorporated by
reference from exhibit 10.49 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1994.
10.37 Agreement between Sterling Pulp Chemicals Ltd. North Vancouver
British Columbia and Pulp, Paper and Woodworkers of Canada Local 5
British Columbia effective December 1, 1994 to November 30, 1997,
incorporated by reference from exhibit 10.50 to the Company's
Annual Report on Form 10-K for the fiscal year ended September 30,
1994.
+10.38 Contract for Sale and Purchase of Ethylene effective January 1,
1995, between Phillips Chemical Company and the Company,
incorporated by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 1995.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
+10.39 Chemical Products Sales Agreement--Ethylene, dated December 7,
1994, between Lyondell Petrochemical Company and the Company,
incorporated by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 1995.
10.40 Agreement between Sterling Pulp Chemicals Ltd. Buckingham, Quebec
and the Energy and Chemicals Workers Union effective November 30,
1994 to November 30, 1997, incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended September
30, 1995.
10.41 Agreement between Sterling Pulp Chemicals Ltd., Buckingham,
Quebec, and the Office and Professional Employees International
Union, effective June 25, 1995 to November 14, 1997, incorporated
by reference to the Company's Annual Report on Form 10-K for the
year ended September 30, 1995.
+10.42 Product Supply Agreement dated May 15, 1995, between Praxair
Hydrogen Supply, Inc. and the Company, incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
September 30, 1995.
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1 List of subsidiaries of STX Acquisition Corp. and STX Chemicals
Corp.
21.2 List of subsidiaries of Sterling Chemicals, Inc.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Coopers & Lybrand L.L.P.
*23.3 Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1)
24.1 Powers of Attorney (included in Part II of the Registration
Statement)
*25.1 Statement of eligibility of the trustee for the Notes.
*25.2 Statement of eligibility of the trustee for the Discount Notes.
27.1 STX Acquisition Corp. Financial Data Schedule
27.2 STX Chemicals Corp. Financial Data Schedule
</TABLE>
- --------
+ Confidential treatment has been requested with respect to portions of this
Exhibit, and such request has been granted.
* To be filed by amendment.
(b) Financial Statement Schedules:
None.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
the registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1933, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas
on the 22nd day of May, 1996.
STX ACQUISITION CORP.
/s/ FRANK J. HEVRDEJS
By: _________________________________
Frank J. Hevrdejs, President
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and
directors of STX Acquisition Corp. hereby constitutes and appoints T. Hunter
Nelson and John D. Hawkins, or either of them (with full power to each of them
to act alone), his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him and on his behalf and in his name,
place and stead, in any and all capacities, to sign, execute and file this
Registration Statement under the Securities Act of 1933, as amended, and any
or all amendments (including, without limitation, post-effective amendments
and any additional registration statements filed pursuant to Rule 462(b) under
the Securities Act of 1933), with all exhibits and any and all documents
required to be filed with respect thereto, with the Securities and Exchange
Commission or any regulatory authority, granting unto such attorneys-in-fact
and agents, and each of them acting alone, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same, as fully to all intents
and purposes as he himself might or could do if personally present, hereby
ratifying and confirming all that such attorneys-in-fact and agents, or any of
them, or their substitute or substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 22nd, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C> <C>
/s/ FRANK J. HEVRDEJS President and Director
____________________________________ (Chief Executive Officer)
Frank J. Hevrdejs
/s/ T. HUNTER NELSON Vice President and Treasurer
____________________________________ (Chief Financial and
T. Hunter Nelson Accounting Officer)
</TABLE>
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1933, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas
on the 22nd day of May, 1996.
STX CHEMICALS CORP.
/s/ FRANK J. HEVRDEJS
By: _________________________________
Frank J. Hevrdejs, President
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and
directors of STX Chemicals Corp. hereby constitutes and appoints T. Hunter
Nelson and John D. Hawkins, or either of them (with full power to each of them
to act alone), his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him and on his behalf and in his name,
place and stead, in any and all capacities, to sign, execute and file this
Registration Statement under the Securities Act of 1933, as amended, and any
or all amendments (including, without limitation, post-effective amendments
and any additional registration statements filed pursuant to Rule 462(b) under
the Securities Act of 1933), with all exhibits and any and all documents
required to be filed with respect thereto, with the Securities and Exchange
Commission or any regulatory authority, granting unto such attorneys-in-fact
and agents, and each of them acting alone, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same, as fully to all intents
and purposes as he himself might or could do if personally present, hereby
ratifying and confirming all that such attorneys-in-fact and agents, or any of
them, or their substitute or substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 22nd, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C> <C>
/s/ FRANK J HEVRDEJS President and Director
____________________________________ (Chief Executive Officer)
Frank J. Hevrdejs
/s/ T. HUNTER NELSON Vice President and Treasurer
____________________________________ (Chief Financial and
T. Hunter Nelson Accounting Officer)
</TABLE>
II-7
<PAGE>
EXHIBIT 12.1
STERLING CHEMICALS, INC.
COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT RATIO AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH
YEAR ENDED SEPTEMBER 30, 31,
---------------------------------- -------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) from
continuing operations
before income taxes...... $54.5 $ 9.2 $(7.0) $28.2 $228.1 $115.7 $29.2
Add:
Interest and fixed
charges................ 6.2 8.5 22.5 22.2 17.1 11.9 3.7
Portion of rent
representative of an
interest factor........ 1.3 1.4 2.2 2.3 2.8 1.4 1.7
----- ----- ----- ----- ------ ------ -----
Total earnings available
for fixed charges........ $62.0 $19.1 $17.7 $52.7 $248.0 $129.0 $34.6
===== ===== ===== ===== ====== ====== =====
Fixed Charges:
Interest and fixed
charges.................. $ 6.2 $ 8.5 $22.5 $22.2 $ 17.1 $ 11.9 $ 3.7
Portion of rent
representative of an
interest factor.......... 1.3 1.4 2.2 2.3 2.8 1.4 1.7
Capitalized interest...... 1.2 .9 .3 .1 1.0 .3 1.3
----- ----- ----- ----- ------ ------ -----
Total fixed charges....... $ 8.7 $10.8 $25.0 $24.6 $ 20.9 $ 13.6 $ 6.7
===== ===== ===== ===== ====== ====== =====
Ratio of earnings to fixed
charges.................... 7.1x 1.8x -- 2.1x 11.9x 9.5x 5.2x
===== ===== ===== ===== ====== ====== =====
Deficiency of earnings to
cover fixed charges........ -- -- $ 7.3 -- -- -- --
===== ===== ===== ===== ====== ====== =====
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF STX ACQUISITION CORP.
STX Chemicals Corp., a Delaware corporation
SUBSIDIARIES OF STX CHEMICALS CORP.
None.
<PAGE>
EXHIBIT 21.2
SUBSIDIARIES OF STERLING CHEMICALS, INC.
Owns 100% of:
Sterling Chemicals International, Inc., a Delaware corporation
Sterling Chemicals Energy, Inc., a Delaware corporation
Sterling Chemicals Marketing, Inc., a Virgin Islands corporation
Sterling Canada, Inc., a Delaware corporation
Owns 100% of:
Sterling Pulp Chemicals U.S., Inc., a Delaware corporation
Sterling NRO, Ltd., an Ontario corporation
Sterling Pulp Chemicals, Ltd., an Ontario corporation
Owns 99% of:
Sterling Pulp Industrial, L.L.C., a Delaware limited liability
company(/1/)
- --------
(/1/) The remaining 1% is owned by Sterling Canada, Inc.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of STX Acquisition Corp.
and STX Chemicals Corp. on Form S-1 of our reports dated May 20, 1996,
appearing in the Prospectus, which is part of such Registration Statement and
to the reference to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Houston, Texas
May 21, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 of our
report dated October 25, 1995, on our audits of the consolidated financial
statements of Sterling Chemicals, Inc. We also consent to the reference to our
Firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Houston, Texas
May 21, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001014668
<NAME> STX ACQUISITION CORP.
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAY-14-1996
<CASH> 2,008
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,008
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 2,007
<TOTAL-LIABILITY-AND-EQUITY> 2,008
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001014669
<NAME> STX CHEMICALS CORP.
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAY-14-1996
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 990
<TOTAL-LIABILITY-AND-EQUITY> 1,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
