STERLING CHEMICAL INC, 424B3, 1999-10-06

STERLING CHEMICAL INC
424B3, 1999-10-06
INDUSTRIAL ORGANIC CHEMICALS

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FILED PURSUANT TO RULE 424(b)3
REGISTRATION NUMBER: 333-87471
333-87471-01
333-87471-02
333-87471-03
333-87471-04
333-87471-05
333-87471-06

PROSPECTUS

Sterling Chemicals, Inc.

Offer to Exchange
$1,000 principal amount of 12 3/8% Senior Secured Notes due 2006,
Series B for each $1,000 principal amount of existing
12 3/8% Senior Secured Notes due 2006, Series A
($295,000,000 principal amount outstanding)

THE EXCHANGE OFFER

. Expires 5:00 p.m., New York City time, November 5, 1999, unless extended.

. The exchange offer is not conditioned upon a minimum aggregate principal
amount of existing notes being tendered.

. All existing notes tendered according to the procedures in this prospectus
and not withdrawn will be exchanged.

. The exchange offer is not subject to any condition other than that it not
violate applicable laws or any applicable interpretation of the staff of the
SEC or conflict with any threatened judicial or administrative proceeding.

THE EXCHANGE NOTES

. The terms of the exchange notes to be issued in the exchange offer are
substantially identical to the existing notes, except that we have registered
the exchange notes with the SEC. In addition, the exchange notes will not be
subject to the transfer restrictions the existing notes are subject to, and
provisions relating to the payment of liquidated damages will be eliminated.

. The exchange notes will be senior secured obligations of Sterling Chemicals,
Inc. They are equal in right of payment with our senior debt and senior to
our subordinated debt. They are subordinated, however, to the extent of the
collateral securing our secured revolving credit facilities. As of August 31,
1999, we had approximately $50 million outstanding under those facilities.

. The exchange notes will bear interest at the rate of 12 3/8% per year,
payable semi-annually in arrears on each January 15 and July 15, beginning
January 15, 2000.

. The exchange notes will be fully and unconditionally guaranteed on a joint
and several basis by our current U.S. subsidiaries, excluding our U.S.
subsidiary that indirectly owns our Saskatoon facility.

You should carefully consider the risk factors beginning on page 14 of this
prospectus before participating in the exchange offer.

----------------

Neither the SEC nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is truthful or
complete. An representation to the contrary is a criminal offense.

The date of this prospectus is October 6, 1999.
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TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
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<S> <C>
Where You Can Find More Information...................................... 2
Note Regarding Forward-Looking Statements................................ 3
Note Regarding Industry Data............................................. 3
Risk Factors............................................................. 14
The Exchange Offer....................................................... 23
Use of Proceeds.......................................................... 35
Capitalization........................................................... 35
Selected Historical Consolidated Financial Data.......................... 36
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 38
The Company.............................................................. 56
Management............................................................... 73
Principal Stockholders of Holdings....................................... 83
Relationships and Transactions with Related Parties...................... 86
Description of Other Indebtedness........................................ 88
Description of Notes..................................................... 90
Plan of Distribution..................................................... 134
Legal Matters............................................................ 134
Experts.................................................................. 134
Index to Financial Statements............................................ F-1
</TABLE>

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly, and special reports, proxy statements, and other
information with the Commission under the Exchange Act. You may read and copy
any of the reports, statements, or other information that we have filed with
the Commission at the Commission's public reference room at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the Commission at 1-800-SEC-0330 for further information on the public
reference room. Our filings with the Commission are also available to the
public from commercial document retrieval services and at the Commission's web
site at "http://www.sec.gov."

You may request a copy of any of these filings, at no cost, by writing or
calling us at the following address or phone number:

Sterling Chemicals, Inc.
1200 Smith Street, Suite 1900
Houston, Texas 77002
(713) 650-3700
Attention: Investor Relations

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934. All statements other than statements of historical facts included
in this prospectus are forward-looking statements.

These forward-looking statements may use terms and phrases such as
"anticipate," "believe," "could," "estimate," "expect," "intend," "may,"
"plan," "predict," "project," "will," and similar terms and phrases, or refer
to assumptions. These statements are contained in sections entitled "Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "The Company" and other sections of this
prospectus.

These forward-looking statements involve risks and uncertainties that may
cause our actual future activities and results of operations to be materially
different from those suggested or described in this prospectus. These risks
include the risks that are identified in this prospectus, which are primarily
listed in the "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" sections. These risks are also
specifically described in our Annual Report on Form 10-K and Quarterly Reports
on Form 10-Q. If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, our actual results may vary materially
from those anticipated, estimated, or projected.

NOTE REGARDING INDUSTRY DATA

The industry production capacity, market position, and other industry data
presented in this prospectus are based upon third party data or have been
derived from sources of industry data. While we believe that this industry data
is reasonable and reliable, in certain cases the data cannot be verified by
information available from independent sources. Accordingly, we cannot give you
any assurance that the industry data is accurate in all material respects.
Unless otherwise stated:

. all information contained in this prospectus concerning the styrene
industry is derived from information supplied by Chemical Marketing
Associates, Inc., or "CMAI;"

. all information contained in this prospectus concerning the acrylonitrile
industry and the acetic acid industry is derived from information
supplied by Chem Systems, Inc., or "Chem Systems;"

. all information contained in this prospectus concerning the sodium
chlorate industry is derived from information supplied by SRI Consulting;
and

. all information contained in this prospectus concerning the acrylic
fibers industry is derived from information supplied by Petrochemical
Consultants Industries.

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SUMMARY

This summary highlights selected information from this prospectus to help
you understand our business and the terms of the exchange notes. You should
carefully read all of this prospectus to understand fully our business and the
terms of the exchange notes, as well as some of the other considerations that
may be important to you in making your investment decision. You should pay
special attention to the "Risk Factors" section of this prospectus to determine
whether an investment in the exchange notes is appropriate for you. For
purposes of this prospectus, unless the context otherwise indicates, (1) the
terms "Sterling," the "Company," "we," "our," "ours" and "us" refer to Sterling
Chemicals, Inc. and its subsidiaries, and the term "Holdings" refers to
Sterling Chemicals Holdings, Inc., our parent company, and (2) the term
"exchange notes" refers to the notes we are offering by this prospectus, the
term "existing notes" refers to our outstanding 12 3/8% Senior Secured Notes
due 2006, Series A, and the term "notes" refers to both the existing notes and
the exchange notes.

The Exchange Offer

On July 23, 1999, we completed a private offering of 12 3/8% Senior Secured
Notes due 2006. The existing notes were sold for a total purchase price of
$295,000,000.

We entered into a registration rights agreement with the initial purchasers
in the private offering in which we agreed to deliver to you this prospectus
and to use our best efforts to issue the exchange notes on the earliest
practicable date and, in any event, within 30 business days of the
effectiveness of the registration statement of which this prospectus is a part.
This exchange offer entitles you to exchange your existing notes for exchange
notes with identical terms that are registered with the SEC. If the exchange
notes are not issued by this time, each holder of existing notes will be
entitled to receive liquidated damages equal to $.05 per week per $1,000
principal amount held by the owner. The liquidated damages will be increased by
$.05 per week per $1,000 principal amount of existing notes for each 90-day
period during which the exchange notes are not issued. The maximum amount of
liquidated damages is $.50 per week per $1,000 principal amount of existing
notes. After the exchange offer is complete, you will no longer be entitled to
any exchange or registration rights for your existing notes or your exchange
notes. You should read the discussion under the heading "The Exchange Offer"
beginning on page 23 and "Description of the Notes" beginning on page 90 for
further information about the exchange notes.

The Exchange Offer........ We are offering to exchange up to $295,000,000 of
the existing notes for up to $295,000,000 of the
exchange notes. Existing notes may be exchanged
only in $1,000 increments.

The terms of the exchange notes are identical in
all material respects to the existing notes, except
that the exchange notes will not be subject to
transfer restrictions and holders of exchange notes
will have no registration rights. Also, the
exchange notes will not contain provisions for the
payment of liquidated damages.

Resale.................... We believe the exchange notes may be offered for
resale, resold and otherwise transferred by you
without compliance with the registration and
prospectus delivery provisions of the Securities
Act provided that:

. the exchange notes are acquired in the ordinary
course of your business;

. you are not participating and have no
understanding with any person to participate in
the distribution of the exchange notes issued to
you; and

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. you are not our affiliate.

Each broker-dealer that is issued exchange notes
for its own account in exchange for existing notes
acquired by the broker-dealer as a result of
market-making or other trading activities must
acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in
connection with any resale of the exchange notes. A
broker-dealer may use this prospectus for an offer
to resell, resale or other retransfer of the
exchange notes issued to it.

Expiration Date........... November 5, 1999, at 5:00 p.m., New York City time,
unless we extend the exchange offer. It is possible
that we will extend the exchange offer until all
existing notes are tendered. You may withdraw
existing notes you tendered at any time before
November 5, 1999. See "The Exchange Offer--
Expiration Date; Extensions; Amendments."

Accrued Interest on the
Exchange Notes and the
Existing Notes.......... The exchange notes will bear interest at a rate of
12 3/8% per year, payable semi-annually on January
15 and July 15, commencing January 15, 2000.
January 1 and July 1 are the record dates for
determining holders entitled to interest payments.
See "The Exchange Offer--Interest on the Exchange
Notes."

Conditions to the
Exchange Offer.......... The exchange offer is subject only to the following
conditions:

. the compliance of the exchange offer with
applicable laws or any applicable interpretation
of the staff of the SEC; and

. no judicial or administrative proceeding shall
have been threatened that would limit us from
proceeding with the exchange offer.

Conditions to the
Exchange of your
Existing Notes.......... The exchange of your existing notes is subject only
to the following conditions:

. your tender of your existing notes; and

. your representation that the exchange notes you
will receive are being acquired by you in the
ordinary course of your business and that at the
time the exchange offer is completed you have no
plans to participate in the distribution of the
exchange notes.

Procedures for Tendering
Existing Notes Held in
the Form of Book-Entry
Interests............... The existing notes were issued as global securities
and were deposited with Harris Trust Company of New
York when they were issued. Harris Trust Company of
New York issued a certificate-less depositary
interest in each existing note, which represents a
100% interest in the existing notes, to The
Depository Trust Company. Beneficial interests in
the existing notes held by participants in DTC,
which we refer to as "notes held in book-entry
form," are shown on, and transfers of the existing
notes can be made only through, records maintained
in book-entry form by DTC and its participants.

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If you are a holder of an existing note held in the
form of a book-entry interest and you wish to
tender your book-entry interest for exchange in the
exchange offer, you must transmit to Harris Trust
Company of New York, as exchange agent, before the
expiration date of the exchange offer:

EITHER

. a properly completed and executed letter of
transmittal, which accompanies this prospectus,
or a facsimile of the letter of transmittal,
including all other documents required by the
letter of transmittal, using the exchange agent's
address on the cover page of the letter of
transmittal;

. a computer-generated message transmitted by means
of DTCs Automated Tender Offer Program system and
received by the exchange agent and forming a part
of a confirmation of book entry transfer in which
you acknowledge and agree to be bound by the
terms of the letter of transmittal;

AND, EITHER

. a timely confirmation of book-entry transfer of
your existing notes into the exchange agent's
account at DTC, according to the procedure for
book-entry transfers described in this prospectus
under the heading "The Exchange Offer--Book-Entry
Transfer" beginning on page 27, must be received
by the exchange agent on or prior to the
expiration date;

. the documents necessary for compliance with the
guaranteed delivery procedures described below.

Procedures for Tendering
Existing Notes.......... If you wish to accept the exchange offer, sign and
date the letter of transmittal, and deliver the
letter of transmittal, along with the existing
notes and any other required documentation, to the
exchange agent. By executing the letter of
transmittal, you will represent to us that, among
other things:

. the exchange notes you receive will be acquired
in the ordinary course of your business;

. you have no arrangement with any person to
participate in the distribution of the exchange
notes; and

. you are not our affiliate or, if you are our
affiliate, you will comply with the registration
and prospectus delivery requirements of the
Securities Act to the extent applicable.

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Special Procedures for
Beneficial Owners....... If you are a beneficial owner whose existing notes
are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
wish to tender those existing notes in the exchange
offer, please contact the registered holder as soon
as possible and instruct them to tender the
existing notes on your behalf and comply with the
instructions in this prospectus.

Guaranteed Delivery
Procedures.............. If you wish to tender your existing notes, you may
do so according to the guaranteed delivery
procedures described in this prospectus under the
heading "The Exchange Offer--Guaranteed Delivery
Procedures."

Withdrawal Rights......... You may withdraw existing notes you tender by
furnishing a notice of withdrawal to the exchange
agent containing the information described under
the heading "The Exchange Offer--Withdrawal of
Tenders" at any time before 5:00 p.m. New York City
time on November 5, 1999.

Acceptance of Existing
Notes and Delivery of
Exchange Notes.......... We will accept for exchange any and all existing
notes that are properly tendered before the
expiration date. See "The Exchange Offer--
Procedures for Tendering." The same conditions
described under the heading "The Exchange Offer--
Conditions" will apply. The exchange notes will be
delivered promptly following the expiration date.

U.S. Federal Income Tax
Considerations.......... Generally, the exchange of existing notes for
exchange notes in the exchange offer will not be a
taxable event for U.S. federal income tax purposes.
See "The Exchange Offer--United States Federal Tax
Consequences."

Exchange Agent............ Harris Trust Company of New York is serving as
exchange agent for the exchange offer.

See "The Exchange Offer" for more detailed information concerning the terms
of the exchange offer.

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Summary of Terms of Exchange Notes

The form and terms of the exchange notes to be issued in the exchange offer
are the same as the form and terms of existing notes except that the exchange
notes will be registered under the Securities Act and, accordingly, will not
bear legends restricting their transfer. Also, the exchange notes will not
contain the liquidated damages provisions related to the registration of the
existing notes that are in the existing notes. The exchange notes will evidence
the same debt as the existing notes, and both the existing notes and the
exchange notes will be governed by the same indenture.

Issuer.................... Sterling Chemicals, Inc.
1200 Smith Street,
Suite 1900
Houston, Texas 77002
(713) 650-3700

Amount.................... Up to $295,000,000 total principal amount of
12 3/8% Senior Subordinated Notes due 2006.

Maturity.................. July 15, 2006.

Interest Payment Dates.... January 15 and July 15, beginning January 15, 2000.

Security.................. We will secure the exchange notes with (1) a second
priority lien on our U.S. chemical production
facilities and related assets, (2) a second
priority pledge of 100% of the stock of our U.S.
subsidiaries that guarantee our obligations under
the exchange notes, and (3) a first priority pledge
of 65% of the stock of our non-U.S. subsidiaries,
excluding our unrestricted subsidiaries that are
associated with our Saskatoon facility.

Ranking................... The exchange notes will be our senior secured
obligations. They will rank equally in right of
payment with all of our other existing and future
senior indebtedness and senior in right of payment
to all of our existing and future subordinated
indebtedness. The exchange notes will be
subordinated, however, to the extent of the
collateral securing our secured revolving credit
facilities. The indenture limits the amounts of
indebtedness that we can incur under these secured
revolving credit facilities. Our $70 million fixed
assets revolver is secured by a first priority lien
on our U.S. chemical production facilities and
related assets and 100% of our stock and the stock
of our U.S. subsidiaries that guarantee the
exchange notes, and by a second priority lien on
all of our accounts receivable, inventory, and
other specified assets. Our $85 million working
capital revolver is secured by a first priority
lien on all of our accounts receivable, inventory,
and other specified assets.

Assuming we had completed the initial offering and
established our secured revolving credit facilities
on June 30, 1999 and applied the initial borrowings
under these facilities and the net proceeds from
the sale of the existing notes, the existing notes
would have ranked senior in right of payment to
approximately $428 million of subordinated

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indebtedness and equally in right of payment with
approximately $33 million of other senior
indebtedness, all of which would have been
outstanding under the fixed assets revolver and,
therefore, effectively senior to the existing notes
with respect to the shared collateral.

Subsidiary Guarantees..... Our current U.S. subsidiaries, excluding our U.S.
subsidiary that indirectly owns our Saskatoon
facility, will guarantee our obligations under the
exchange notes on a joint and several basis. Each
subsidiary's guarantee will rank equally in right
of payment with all of its existing and future
senior indebtedness and senior in right of payment
to all of its existing and future subordinated
indebtedness. If we cannot make payments on the
exchange notes when they are due, the subsidiary
guarantors must make them instead. Our non-U.S.
subsidiaries will not guarantee our obligations
under the exchange notes.

Optional Redemption....... We may optionally redeem the exchange notes at any
time on or after July 15, 2003, at the redemption
prices described in the section "Description of
Notes" under the heading "Optional Redemption."

Optional Redemption
Following Sales of
Equity.................... In addition, we may optionally redeem up to 35% of
the exchange notes prior to July 15, 2002, with the
net proceeds of qualifying public offerings of
Holdings' equity at the price listed in the section
"Description of Notes" under the heading "Optional
Redemption."

Mandatory Offer to
Repurchase................ If we sell certain assets or experience specific
kinds of changes in control, we must offer to
repurchase the exchange notes at the prices listed
in the section "Description of Notes" under the
heading "Repurchase at the Option of Holders."

Limitation on Sale of
Specified Properties...... If we sell any of our principal properties, which
consist of our Texas City and Valdosta facilities
and our existing Canadian facilities, other than
our Saskatoon facility, or if we sell the capital
stock of a subsidiary that owns or operates one of
those properties, we must first repay any amounts
outstanding under our new fixed assets revolver and
permanently reduce the associated commitment, and
then use an amount equal to the balance of such
proceeds to offer to purchase exchange notes, at a
redemption price equal to the sum of the then
remaining payments of principal and interest on
those exchange notes discounted to their present
values using a specified treasury rate plus 50
basis points, plus accrued and unpaid interest.

In addition, if we make specified transfers of our
acrylic fibers business or facility, the liens on
that business and facility will be released.
However, our application of any cash proceeds will
be restricted, and we will be required to grant a
lien on any non-cash proceeds. See "Description of
Notes" under the heading "Repurchase the Option of
the Holders--Transfer of the Fibers Business."

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Basic Covenants of the
Indenture................. The indenture governing the exchange notes contains
covenants that, among other things, restrict our
ability, and the ability of some of our
subsidiaries, to:

. borrow money;

. pay dividends on stock or repurchase stock;

. make investments;

. use our existing assets as security in other
transactions; and

. sell specific assets or merge with or into other
companies.

For more details, see the section "Description of
Notes" under the heading "Certain Covenants."

Risk Factors.............. See "Risk Factors" for a discussion of factors you
should carefully consider before deciding to invest
in the exchange notes.

The Company

We are a leading North American producer of selected petrochemicals and
acrylic fibers used in the production of a wide array of consumer goods and
industrial products, and of pulp chemicals used in paper manufacturing. Our
rated annual production capacity is among the highest in North America for our
four primary products, which are:

. Styrene . Acetic Acid
. Acrylonitrile . Sodium Chlorate

We manufacture all of our petrochemicals using low cost technology at our
world-scale petrochemicals facility, which is strategically located on a 290-
acre site on Galveston Bay in Texas City, Texas. We manufacture all of our
acrylic fibers at our facility near Pensacola, Florida, and produce our pulp
chemicals in close proximity to major pulp manufacturers and competitively
priced sources of power at our U.S. facility in Valdosta, Georgia and our five
Canadian facilities.

Petrochemicals and Acrylic Fibers

Styrene. We are the fourth largest North American producer of styrene.
Styrene is used to produce intermediate products such as polystyrene and
expandable polystyrene resins, which are used in a wide variety of products
such as household goods, foam cups and containers, disposable food service
items, toys, packaging, and other consumer and industrial products. Our styrene
unit is one of the largest in the world and has a rated annual production
capacity of approximately 1.7 billion pounds, which represents approximately
12% of total North American capacity.

Acrylonitrile. We are the second largest North American producer of
acrylonitrile. Acrylonitrile is used primarily in apparel, textiles,
upholstery, and automotive parts, and is also used in a wide variety of other
applications. Our acrylonitrile facilities have a rated annual production
capacity of approximately 740 million pounds, which represents approximately
19% of total North American capacity.

Acetic Acid. We are the second largest North American producer of acetic
acid. We produce acetic acid under a long-term contract with BP Chemicals Inc.,
which markets all of our acetic acid production. Acetic acid is used primarily
to produce vinyl acetate, which in turn is used in a variety of products,
including

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adhesives, surface coatings, and cigarette filters. We recently expanded our
acetic acid facilities by approximately 25% to a rated annual production
capacity of approximately one billion pounds, which represents approximately
16% of total North American capacity.

Acrylic Fibers. We are one of only two producers of acrylic fibers in North
America. Acrylic fibers are used primarily in textiles, apparel, fleeces, and
hosiery. We are the primary North American producer of specialty fibers used in
brake linings and also produce specialty fibers for other applications. Our
acrylic fibers facility has a rated annual production capacity of approximately
150 million pounds, which represents approximately 33% of total North American
capacity.

Other Petrochemicals. We also make various other petrochemicals products,
including plasticizers, sodium cyanide, tertiary butylamine, and methanol.
Among these products is a unique plasticizer used in flexible plastics such as
shower curtains, floor coverings, automotive parts, and construction materials,
which we produce for BASF Corporation under a long-term contract.

Pulp Chemicals

Sodium Chlorate. We are the second largest North American producer of sodium
chlorate. Sodium chlorate is used primarily to make chlorine dioxide, which in
turn is used by pulp mills in the pulp bleaching process. Our six sodium
chlorate facilities have a combined rated annual production capacity of
approximately 500,000 tons, which represents approximately 23% of total North
American capacity. We are also the largest worldwide supplier of patented
technology for the generators that many pulp mills use to convert sodium
chlorate into chlorine dioxide. The sale of a generator is usually accompanied
by a technology licensing agreement, under which we typically receive royalties
for a ten-year period.

Other Pulp Chemicals. We also manufacture sodium chlorite, calcium
hypochlorite, and chlor-alkali products, which are used in numerous
applications across a diverse range of industries.

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Summary Historical Consolidated Financial Data

The following table contains summary historical consolidated financial
information of Sterling and Holdings. Prior to August 21, 1996, the operations
of Sterling were conducted by Holdings. We derived the information as of and
for the nine months ended June 30, 1998 and 1999 from Sterling's unaudited
financial statements. We derived the information for all other dates and
periods from the audited financial statements of Sterling and Holdings, some of
which appear elsewhere in this prospectus. In our opinion, the unaudited
financial information includes all adjustments, consisting solely of
adjustments of a normal and recurring nature, necessary to fairly present such
information on a basis consistent with the information we derived from our
audited financial statements.

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reclassified in fiscal years 1996, 1997, and 1998 and the nine months ended
June 30, 1998 to conform to the fiscal 1999 presentation. These costs have
not been reclassified in fiscal years 1994 and 1995.
(c) EBITDA represents income from operations before interest, taxes,
depreciation, amortization, certain merger-related expenses, certain non-
cash charges related to an early retirement program and benefit changes,
and, in the case of Holdings, the impact of accruals for its stock
appreciation rights program. The stock appreciation rights program was
terminated in connection with the 1996 recapitalization. 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 our operating performance, or as an
alternative to cash flows as a measure of liquidity. Because EBITDA
excludes some, but not all, items that affect net income (loss) and may
vary among companies, the EBITDA calculation presented above may not be
comparable to similarly titled measures of other companies. SAR expense
(income) was $8.5 million for the year ended September 30, 1996, $(2.8
million) for the year ended September 30, 1995, and $21.8 million for the
year ended September 30, 1994. Certain merger-related expenses were $3.6
million for the year ended September 30, 1996. Certain non-cash charges
related to an early retirement program and benefit changes were $6.8
million for the nine months ended June 30, 1999.
(d) Depreciation and amortization expense included herein excludes the
amortization of deferred debt financing costs which is included in interest
expense.
(e) For purposes of computing these amounts, 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. Earnings were
insufficient to cover fixed charges by $16.9 million and $53.4 million for
the years ended September 30, 1997 and 1998, respectively, and $43.3
million and $65.7 million for the nine months ended June 30, 1998 and 1999,
respectively.

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RISK FACTORS

You should carefully consider the risks described below before making an
investment decision with respect to the exchange notes. The risks described
below are not the only risks we face. Additional risks not presently known to
us or that we currently deem immaterial may also impair our business
operations.

RISKS RELATED TO OUR EXISTING DEBT, THE EXCHANGE NOTES, AND OUR NEW SECURED
REVOLVING CREDIT FACILITIES

The amount of our outstanding indebtedness is substantial and may limit our
ability to fund future working capital needs and increase our exposure during
adverse economic conditions. Additionally, our debt level could prevent us from
fulfilling our obligations under the notes.

We have now, and after the exchange offer will continue to have, a
significant amount of indebtedness. The following chart shows certain important
credit statistics and is presented assuming we had completed the initial
offering, established our secured revolving credit facilities, and applied the
proceeds of the offering and the initial borrowings under those facilities as
of June 30, 1999.

<TABLE>
<CAPTION>
As of and for
the Twelve
Months Ended
June 30, 1999
-------------
(dollars in
millions)
<S> <C>
Total indebtedness.......................................... $ 800.4
Stockholder's deficit....................................... (262.8)
Deficiency of earnings to cover fixed charges............... (75.8)
</TABLE>

Our substantial indebtedness could have important consequences to you. For
example, it could:

. make it more difficult for us to satisfy our obligations with respect to
the notes;

. make us more vulnerable to a continued downturn in our industry or a
downturn in the economy in general;

. require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, acquisitions, and other general corporate requirements;

. limit our flexibility in planning for, or reacting to, changes in our
businesses and the industries in which we operate;

. place us at a competitive disadvantage compared to our competitors that
have less debt; and

. limit our ability to borrow additional funds.

The covenants in our debt instruments restrict our flexibility.

The covenants in our secured revolving credit facilities and in the
indentures for the notes, our 11 1/4% Senior Subordinated Notes due 2007, our
11 3/4% Senior Subordinated Notes due 2006, and Holdings' 13 1/2% Senior
Secured Discount Notes due 2008 restrict our ability to:

. incur indebtedness;

. pay dividends and make other restricted payments or investments;

. sell assets;

. engage in certain mergers and acquisitions; and

. refinance existing indebtedness.

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<PAGE>

Despite current indebtedness levels, we may still be able to incur
substantially more debt, which could further exacerbate the risks described
above.

The terms of the indenture governing the notes restrict but do not prohibit
us from incurring more debt. As of August 31, 1999, we had additional borrowing
capacity under our secured revolving credit facilities of up to approximately
$101 million. If new debt is added to our current debt levels, the related
risks that we now face could increase.

Factors beyond our control may impact our ability to meet our debt service
requirements.

Our ability to meet our debt service requirements will depend on our future
performance, which in turn is dependent upon conditions in the markets for our
products, the economy generally, and other factors that are beyond our control.
We cannot assure you that our business will generate sufficient cash flow from
operations or that future borrowings will be available to us under our secured
revolving credit facilities in amounts sufficient to enable us to pay our
indebtedness, including the notes, or to fund our other liquidity needs.
Moreover, we may need to refinance all or a portion of our indebtedness,
including the notes, on or before maturity. We cannot assure you that we will
be able to refinance any of our indebtedness, including the notes, on
commercially reasonable terms or at all. If we are unable to make scheduled
debt payments or comply with the other provisions of our debt instruments, our
various lenders will be permitted to accelerate the maturity of the
indebtedness owing to them and exercise other remedies provided for in those
instruments.

The collateral for the notes does not include all of our assets. Some of the
collateral for the notes also secures our fixed assets revolver on a first
priority basis. Some of our assets that are excluded from the collateral for
the notes secure other indebtedness.

The following assets will not be available as security for the notes:

. our inventory, accounts receivable, and other specified assets that will
instead secure indebtedness under our new $155 million secured revolving
credit facilities;

. the capital stock and assets of our subsidiaries that are associated with
our Saskatoon facility;

. our Saskatoon facility, which secures a separate credit facility for that
plant; and

. assets that we acquired following the issuance of the existing notes or
will acquire in the future, other than assets that replace or improve
existing assets.

Also, some facilities and equipment at our plants are owned by third parties
and, as a result, will not be part of the collateral securing the notes.

In addition, the notes will have only a second priority lien on the
following assets:

. our U.S. chemical production facilities and related assets; and

. the stock of our U.S. subsidiaries that guarantee our obligations under
the notes.

These assets secure indebtedness under our $70 million fixed assets revolver on
a first priority basis. Because the lien in favor of the notes is expressly
subordinated to the lien in favor of our fixed assets revolver, lenders under
our fixed assets revolver will be entitled to full repayment from proceeds of
the shared collateral before any of these proceeds can be used to repay our
obligations under the notes. As of August 31, 1999, approximately $50 million
was outstanding under the fixed asset revolver.

Sterling, representatives of the lenders under the fixed assets revolver,
and the trustee entered into an intercreditor agreement defining the rights of
the parties regarding the collateral that secures both the fixed assets
revolver and the notes. With respect to such collateral, the intercreditor
agreement provides that the lenders under the fixed assets revolver are
entitled to control virtually all decisions under the security

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<PAGE>

agreements. As a result, holders of the notes will not be able to force a sale
of such collateral or otherwise exercise the remedies normally available to
secured creditors without the concurrence of the lenders under the fixed assets
revolver.

Additionally, the security interest in our Canadian operations other than
our Saskatoon facility is limited to a 65% security interest in the stock of
our Canadian subsidiaries. This 65% security interest is effectively
subordinated to all other indebtedness and payables, including trade payables,
of those subsidiaries, which as of June 30, 1999, totaled approximately $9
million.

We may be unable to pay dividends to Holdings, which may prevent Holdings from
fulfilling its obligations under its 13 1/2% Notes and may lead to a change in
control.

The dividend restrictions in our existing indentures and in the indenture
for the notes allow us to pay dividends to Holdings in connection with its
required interest payments on its 13 1/2% Notes only if the ratio of our
consolidated EBITDA to our interest expense is 2.0 to 1.0 or greater after
giving effect to the dividend. Holdings, which currently has no source of funds
other than dividends from us, must make its first interest payment on its 13
1/2% Notes on February 15, 2002. For the four quarters ended June 30, 1999, our
consolidated EBITDA coverage ratio was 0.7x. Our capital stock is pledged by
Holdings to secure its 13 1/2% Notes and our new fixed assets revolver. An
event of default under the indenture for Holdings' 13 1/2% Notes or our new
fixed assets revolver may prompt those lenders to foreclose upon our stock.
Among other things, that foreclosure would likely constitute a change of
control under our existing indentures and the indenture for the notes.

We may be unable to repurchase the notes upon a change of control, and a change
of control may trigger defaults under our debt instruments.

Upon the occurrence of specific kinds of change of control events, we are
required to offer to repurchase all of the notes and our outstanding
subordinated notes. It is possible that we will not have sufficient funds at
the time of a change of control to make the required repurchases. In addition,
provisions in our new secured revolving credit facilities prohibit these
repurchases. Further, specific kinds of change of control events, including
those described in the indenture for the notes, would constitute an event of
default under our new secured revolving credit facilities. An event of default
under our new secured revolving credit facilities, unless cured or waived,
would also be an event of default under the indentures for the notes, our
existing subordinated notes, and Holdings' 13 1/2% Notes. Some important
corporate events, such as leveraged recapitalizations that would increase the
level of our indebtedness, would not constitute a change of control event and
would not trigger the required offer to repurchase under the indentures for the
notes and our outstanding subordinated notes.

The collateral may not be sufficient to satisfy any amounts we owe under the
notes and the indenture.

We do not represent that the value of the collateral securing the notes will
be sufficient to repay the principal of the notes. If in the future the notes
are accelerated and the collateral is sold, the proceeds from the sale of any
of the shared collateral must first be used to repay outstanding indebtedness
under our new $70 million fixed assets revolver, and the remaining amounts may
not be sufficient to satisfy our obligations under the notes. Any claim for the
difference between the amount realized by holders of the notes from the sale of
the collateral securing the notes and our obligations under the notes will rank
equally in right of payment with all of our other unsecured senior
indebtedness.

The liens associated with our acrylic fibers business may be released, which
might lessen the security for the notes and reduce their value.

Although our acrylic fibers facility and the stock of our subsidiaries that
own the assets used in our acrylic fibers business will initially be included
in the collateral for the notes, the indenture permits us to have the liens

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<PAGE>

on these assets released if we sell our acrylic fibers business or contribute
it to a joint venture. If we elect to take one of those actions, our acrylic
fibers facility and the stock of those subsidiaries will no longer serve as
collateral for the notes. We would be required to use the proceeds from a sale
of the business as described in "Description of Notes--Repurchase at the Option
of Holders--Transfer of the Fibers Business." If we contribute the business to
a joint venture, we would be required to grant a security interest in our
equity interest in the joint venture. These alternatives may provide less
protection to holders of the notes than direct liens on the business.
Accordingly, either event could result in a material reduction in the
collateral securing the notes, and the perception that either event might occur
or result in a material reduction in the collateral could negatively affect the
market value of the notes.

The potential environmental liability of secured lenders may affect the value
of the collateral for the notes.

We have mortgaged all of our U.S. real property as collateral for the notes.
Real property mortgaged as security to a lender may be subject to both known
and unknown environmental risks. As a holder of a security interest in real
property, under certain circumstances you could be held liable for the
environmental costs of remediating or preventing releases or threatened
releases of hazardous substances at the mortgaged property. Under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, a
lender that participates in the management or operation of a mortgaged property
can be liable as an owner or operator for certain environmental costs.
Accordingly, if a lender forecloses on the property, but does not seek to sell
or otherwise divest itself of the property at the earliest practicable,
commercially reasonable time, the lender may be liable for these environmental
costs. Therefore, the indenture trustee or collateral agent or the holders of
the notes will need to carefully consider the possible implications of
environmental liabilities before determining whether to foreclose on any
mortgaged property. If a potential for environmental liability exists with
respect to any mortgaged property, the trustee or collateral agent may decline
to foreclose upon that property or exercise other available remedies unless it
receives adequate indemnification from the holders of the notes.

Your rights in the collateral may be adversely affected by bankruptcy
proceedings.

The right of the indenture trustee or collateral agent to repossess and
dispose of the collateral upon acceleration of our existing indebtedness is
likely to be significantly impaired by federal bankruptcy law if bankruptcy
proceedings are commenced by or against us prior to or possibly even after the
trustee or collateral agent has repossessed and disposed of the collateral.
Under the United States Bankruptcy Code, a secured creditor such as the trustee
or collateral agent is prohibited from repossessing its security from a debtor
in a bankruptcy case, or from disposing of security repossessed from such
debtor, without bankruptcy court approval. Moreover, bankruptcy law permits the
debtor to continue to retain and to use collateral, and the proceeds, products,
rents, or profits of such collateral, even though the debtor is in default
under the applicable debt instruments, provided that the secured creditor is
given "adequate protection." The term "adequate protection" is not defined
under bankruptcy law and, because of the broad discretionary powers of a
bankruptcy court, it is impossible to predict how long payments under the notes
could be delayed following commencement of a bankruptcy case, whether or when
the trustee or collateral agent would repossess or dispose of the collateral,
or whether or to what extent holders of the notes would be compensated for any
delay in payment or loss of value of the collateral through the requirements of
"adequate protection." Furthermore, in the event the bankruptcy court
determines that the value of the collateral is not sufficient to repay all
amounts due on the notes, the holders of the notes would have "undersecured
claims." Federal bankruptcy laws do not permit the payment or accrual of
interest, costs, and attorneys' fees for "undersecured claims" during the
debtor's bankruptcy case.

Federal and state statutes allow courts, under specific circumstances, to void
guarantees and require noteholders to return payments received from guarantors.

Under federal bankruptcy law and comparable provisions of state fraudulent
transfer laws, a guarantee could be voided, or claims in respect of a guarantee
could be subordinated to all other debts of that guarantor,

17
<PAGE>

if, among other things, at the time the guarantor incurred the indebtedness
evidenced by its guarantee, the guarantor received less than reasonably
equivalent value or fair consideration for the incurrence of its guarantee and:

. was insolvent or rendered insolvent by reason of such incurrence;

. was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or

. intended to incur, or believed that it would incur, debts beyond its
ability to pay those debts as they mature.

In addition, any payment by that guarantor pursuant to its guarantee could
be voided and required to be returned to the guarantor, or to a fund for the
benefit of the creditors of the guarantor.

The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:

. the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets;

. the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or

. it could not pay its debts as they become due.

On the basis of historical financial information, recent operating history,
and other factors, we believe that each subsidiary guarantor, after giving
effect to its guarantee of the notes, will not be insolvent, will not have
unreasonably small capital for the business in which it is engaged, and will
not have incurred debts beyond its ability to pay such debts as they mature.
There can be no assurance, however, as to what standard a court would apply in
making such determinations or that a court would agree with our conclusions in
this regard.

Your right to receive payments on the notes could be adversely affected if any
of our non-guarantor subsidiaries declare bankruptcy, liquidate, or reorganize.

Some but not all of our subsidiaries will guarantee the notes. In
particular, all of our current non-U.S. subsidiaries and one of our current
U.S. subsidiaries will not be guarantors. In the event of a bankruptcy,
liquidation, or reorganization of any of our non-guarantor subsidiaries,
holders of their indebtedness and their trade creditors will generally be
entitled to payment of their claims from the assets of those subsidiaries
before any assets are made available for distribution to us. Assuming we had
completed the exchange offer on June 30, 1999, the exchange notes would have
been effectively subordinated to approximately $56 million of indebtedness and
payables, including trade payables, of these non-guarantor subsidiaries. The
non-guarantor subsidiaries generated approximately 20% of our consolidated
revenues in fiscal 1998 and represented approximately 30% of our consolidated
net fixed assets as of September 30, 1998.

There is no public market for the notes and we cannot guarantee that an active
trading market will develop for the notes.

Prior to this exchange offer, there was no public market for the notes.
Firms making a market in the notes may cease their market-making activities at
any time. In addition, the liquidity of the trading market in the notes, and
the market price quoted for the notes, may be adversely affected by changes in
the overall market for high-yield debt securities and by changes in our
financial performance or prospects or in the general prospects for companies in
one or more of our industries. As a result, you cannot be sure that an active
trading market will develop for the notes.

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<PAGE>

RISKS RELATING TO OUR BUSINESS

The industries in which we participate are cyclical and many of our major
products are currently experiencing significantly depressed market conditions,
which has negatively affected our business and may make it difficult for us to
repay our debts.

The markets for our petrochemicals, acrylic fibers, and pulp chemicals
products are cyclical, and prices typically vary in response to changes in
overall supply relative to demand and the level of general business activity.
As prices decline, our profit margins generally decrease, which adversely
affects our business and our ability to pay interest and principal on our
indebtedness. Large global capacity additions of styrene and acrylonitrile were
completed in 1997 and 1998. For styrene, approximately five billion pounds of
net new capacity was added and, for acrylonitrile, approximately one billion
pounds of net new capacity was added. In addition, Solutia Inc. is constructing
a new acrylonitrile production facility which is expected to have a rated
annual production capacity of approximately 500 million pounds and begin
production in the third calendar quarter of 2000. Further, reduced operating
rates at pulp mills have reduced the rate of growth in demand for our pulp
chemicals products and services. The resulting impact on prices and margins
negatively impacted our results in fiscal 1997, 1998, and the first nine months
of fiscal 1999, and could negatively impact our results in the future. If the
markets for our primary products do not improve significantly, we may be unable
to fulfill our obligations to repay the principal on our indebtedness,
including the notes, when that indebtedness matures. We may need to refinance
all or a portion of our indebtedness, including the notes, on or before
maturity, but we may be unable to do so on commercially reasonable terms or at
all. If market conditions for our products decline significantly from current
levels, we may be unable to make scheduled interest payments on our
indebtedness, including the notes.

The petrochemicals, acrylic fibers, and pulp chemicals industries are highly
competitive.

Many of our competitors, particularly in the petrochemicals industry, are
larger and have substantially greater financial resources than we have. We
compete with some of the world's largest chemical companies, many of whom, in
contrast to us, supply much of their own raw materials requirements. In
addition, a significant portion of our business is based upon widely available
technology. The entrance of new competitors into the industry or the addition
by existing competitors of new capacity may reduce our ability to maintain
profit margins or preserve our market share, even during periods of increased
demand for our products.

Our business may be adversely affected if we are unable to obtain raw materials
from third-party suppliers at reasonable prices.

For most of our products, the combined cost of raw materials, including
utilities in the case of pulp chemicals, 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 our business. If we are unable
to obtain raw materials at reasonable prices, our results of operations would
be negatively impacted by an increase in our costs or a decrease in our
capacity or both. Most of the raw materials we use are supplied by others, and
many of them are subject to wide price fluctuations for a variety of reasons
beyond our control. For example, changes in the availability of these products
may result from major capacity additions or significant facility operating
problems. We can give no assurances that we will continue to be able to secure
adequate supplies of any of our raw materials at reasonable prices.

Our industry is subject to extensive environmental regulation, which creates
uncertainty regarding future environmental expenditures and liabilities.

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<PAGE>

for our operations are subject to periodic renewal and can be revoked or
modified for cause or when new or revised environmental requirements are
implemented. Changing and increasingly strict environmental requirements and
the potential for further expanded regulation may increase our costs and
thereby negatively affect our business. Changing and increasingly strict
environmental requirements can affect the manufacturing, handling, processing,
distribution, and use of our products. In addition, changes in these
requirements may cause us to incur substantial costs in upgrading or
redesigning our facilities and processes, including our waste treatment,
storage, disposal, and other waste handling practices and equipment. For these
reasons, we are uncertain as to the amount of our future environmental
expenditures and liabilities.

For more information regarding the environmental regulations that affect our
business, see "The Company--Environmental Matters."

The regulatory outlook for our pulp chemicals business is uncertain.

Our pulp chemicals business is sensitive to environmental regulations.
Regulations restricting, but not altogether banning, absorbable organic halides
and other chlorine derivatives in bleach plant effluent have a favorable effect
on our pulp chemicals business. Several pending lawsuits are challenging an
important group of these regulations known as the "Cluster Rules." Although we
believe that the Cluster Rules will ultimately be upheld in this litigation, we
cannot be sure that they will. Even if the Cluster Rules are upheld, the
existence of these actions adds uncertainty as to the rate of implementation of
the Cluster Rules, which may negatively affect the performance of our pulp
chemicals business. Conversely, any significant ban on all chlorine-containing
compounds in the pulp bleaching process could have a material adverse effect on
our financial condition and results of operations. British Columbia has adopted
regulations that require the elimination of the use of all chlorine products,
including chlorine dioxide, in the pulp bleaching process by the year 2002,
although the pulp and paper industry is working to change this regulation. In
the event these regulations are implemented, we plan to sell the products we
manufacture at our British Columbia facility to customers in other markets.

For more information regarding the environmental regulations that affect our
pulp chemicals business, see "The Company--Environmental Matters--Pulp
Chemicals."

We are subject to many operating risks, some of which may not be covered by
insurance.

A business risk inherent in all chemical operations is the potential for
personal injury and property damage claims from employees, contractors and
their employees, and nearby landowners and occupants. While we attempt to
operate our facilities responsibly and in compliance in all material respects
with all applicable environmental and health and safety requirements, we may
face expenses and liabilities as a result of our past or future operations. A
certain amount of risk of incurring such expenses and liabilities is inherent
in our operations and products, as it is with other companies engaged in
similar businesses, and we maintain insurance at levels that we believe are
typical for our industry. A major incident or other event at any of our
facilities, however, could result in liabilities in excess of our insurance
coverages or uncovered liabilities.

Current and future legal proceedings may have unfavorable outcomes.

We are currently a party to several legal proceedings, and additional legal
proceedings could be filed against us in the future. We are not able to predict
the final outcome of the current proceedings, and we cannot guarantee that the
ultimate resolution of current or future proceedings will not have a material
adverse effect on us. For more information, see "The Company--Legal
Proceedings."

We depend upon the continued operation of our Texas City facility.

All of the petrochemicals we manufacture, including all of our styrene,
acrylonitrile, and acetic acid, are produced at our Texas City facility.
Significant unscheduled downtime at our Texas City facility could have a

20
<PAGE>

material adverse affect on our results. Downtime can occur for a variety of
reasons, including equipment breakdowns, interruptions in the supply of raw
materials, power failures, natural forces, or other normal hazards associated
with the production of petrochemicals. Although we maintain business
interruption insurance that we consider to be adequate under the circumstances,
we cannot guarantee that a significant interruption in the operation of our
Texas City facility would be covered by this insurance or would not otherwise
have a material adverse effect on us.

We may have difficulty forming strategic joint ventures.

An element of our long-term business strategy is to pursue attractive
strategic joint ventures. However, restrictions under the indentures for the
notes, our subordinated notes and Holdings' 13 1/2% Notes, and under our
secured revolving credit facilities, may limit our ability to do so, such as
restrictions on our ability to sell assets, incur indebtedness, create liens,
and make investments and other restricted payments.

We depend upon our long-term contracts and significant customers.

We sell significant portions of our acrylonitrile, methanol, and styrene
production and all of our acetic acid and plasticizers production under long-
term contracts. These contracts are intended to provide stability in the event
that the demand for or prices of these products decline significantly, but also
limit our ability to take full advantage of attractive market conditions during
periods of higher prices for these products. During fiscal 1998, a significant
portion of the production from our Texas City facility was dedicated to multi-
year contracts with Solutia, Bayer AG, BP Chemicals, and BASF. If the markets
for these products are depressed, 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 us. Solutia is building an
acrylonitrile manufacturing facility in Chocolate Bayou, Texas and, in
anticipation of the completion of this facility, has elected to terminate its
acrylonitrile purchase agreement with us effective September 1, 2000. We do not
believe this termination will have a material adverse effect on us, although we
can give no assurance to that effect.

The success of our acrylic fibers business is dependent on our proprietary
technology.

The competitiveness of our acrylic fibers business with respect to its
specialty textiles and technical fibers products, our higher margin acrylic
fibers products, is maintained, to a significant extent, through the exclusive
ownership or use of certain product and manufacturing technology. If
competitors of our acrylic fibers business gain access to the use of similar
technology, or render our technology obsolete through the introduction of
superior technology, our acrylic fibers business would be materially adversely
affected.

We face risks related to our foreign operations that may negatively affect our
business.

Approximately 21% of our fiscal 1998 revenues were derived from our
Canadian-based pulp chemicals business and approximately 28% were derived from
export sales of all of our products. Our international operations and exports
to foreign markets make us subject to a number of special risks such as:

. currency exchange rate fluctuations;

. foreign economic conditions;

. trade barriers;

. exchange controls;

. national and regional labor strikes;

. political risks and risks of increases in duties;

. taxes;

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<PAGE>

. governmental royalties; and

. changes in laws and policies governing operations of foreign-based
companies.

The occurrence of any one or a combination of these factors may increase our
costs or have other negative effects on our business. In addition, earnings of
foreign subsidiaries and intercompany payments are subject to foreign income
tax rules that may reduce cash flow available to meet our required debt service
and other obligations.

Since we derive most of our pulp chemicals revenues from production and
sales by our subsidiaries within Canada, we have organized our subsidiary
structure and our operations in part based on assumptions regarding various
Canadian tax laws, currency exchange laws, capital repatriation laws, and other
relevant laws. While we believe that these assumptions are correct, we cannot
guarantee that Canadian taxing or other authorities will reach the same
conclusion. If our assumptions are incorrect, or if the Canadian government
changes or modifies such laws or the current interpretations thereof, we may
suffer material adverse tax and financial consequences.

A portion of our expenses and sales are denominated in Canadian dollars and,
accordingly, our revenues, cash flows, and earnings may be affected by
fluctuations in the exchange rate between the United States dollar and the
Canadian dollar, which may also have material adverse tax consequences. These
currency fluctuations could have a material adverse impact on us as increases
in the value of the Canadian dollar relative to the United States dollar have
the effect of increasing the United States dollar equivalent of cost of goods
sold and other expenses with respect to our Canadian production facilities. We
have historically entered into forward foreign exchange contracts to hedge our
exposure, although we do not engage in currency speculation. While these hedges
limit our exposure to relative increases in the value of the Canadian dollar,
they also limit the benefits that we may realize from relative decreases in
that value. The last of our existing forward exchange contracts expires in
March of 2000, and we do not currently intend to enter into any additional
forward exchange contracts.

We are subject to risks related to the Year 2000 that could negatively impact
our business.

We are dependent upon information technology and other computer systems in
operating our business. We also depend indirectly on the proper functioning of
the computer systems of third parties with which we do business. If any of
these systems fail as a result of Year 2000 deficiencies, our business could be
materially adversely affected. We are currently engaged in a process designed
to identify and rectify any potential internal Year 2000 problems. We cannot,
however, guarantee that we or the third parties with whom we transact business
will be successful in eliminating all Year 2000 problems. Specific factors that
might affect the success of our Year 2000 efforts and the occurrence of Year
2000 disruption or expense include:

. our failure or the failure of our consultant to properly identify
deficient systems;

. the failure of our selected remedial action to adequately address any
deficiencies;

. the failure of our consultant to complete the remediation in a timely
manner, due to shortages of qualified labor or other factors;

. unforeseen expenses related to the remediation of existing systems or the
transition to replacement systems; and

. the failure of third parties to become compliant or to adequately notify
us of potential non-compliance.

For additional information about our Year 2000 efforts, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Certain Known Events, Trends, and Uncertainties--Year 2000 Issue."

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<PAGE>

THE EXCHANGE OFFER

Purpose and Effect of the Exchange Offer

We sold the existing notes on July 23, 1999, to Donaldson, Lufkin & Jenrette
Securities Corporation and Credit Suisse First Boston Corporation under a
purchase agreement. These initial purchasers then sold the existing notes to
qualified institutional buyers in reliance on Rule 144A and Regulation S under
the Securities Act. As a condition to the purchase of the existing notes by the
initial purchasers, we and our subsidiary guarantors entered into a
registration rights agreement with the initial purchasers, which requires,
among other things, that promptly following the sale of the existing notes, we
and our subsidiary guarantors:

. file with the Commission the registration statement related to the
exchange notes;

. use their best efforts to cause the registration statement to become
effective under the Securities Act; and

. offer to the holders of the existing notes the opportunity to exchange
their existing notes for a like principal amount of exchange notes upon
the effectiveness of the registration statement.

The exchange notes will be issued without a restrictive legend and may be
reoffered and resold without restrictions or limitations under the Securities
Act. A copy of the registration rights agreement has been filed as an exhibit
to the registration statement of which this prospectus is a part. The term
"holder" means any person in whose name existing notes are registered on our
books.

Based on existing interpretations of the Securities Act by the staff of the
SEC described in several no-action letters to third parties, and subject to the
following sentence, we believe that the exchange notes issued in the exchange
offer may be offered for resale, resold, and otherwise transferred by their
holders, other than broker-dealers or our "affiliates," without further
compliance with the registration and prospectus delivery provisions of the
Securities Act. However, any purchaser of existing notes who is our affiliate
or who intends to participate in the exchange offer for the purpose of
distributing the exchange notes, or any broker-dealer who purchased existing
notes from us to resell under Rule 144A or any other available exemption under
the Securities Act:

. will not be able to rely on the interpretations by the staff of the SEC
described in the above-mentioned no-action letters;

. will not be able to tender its notes in the exchange offer; and

. must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or transfer of the notes
unless the sale or transfer is made under an exemption from these
requirements.

We do not intend to seek our own no-action letter, and there is no assurance
that the staff of the Commission would make a similar determination regarding
the exchange notes as it has in these no-action letters to third parties. See
"Plan of Distribution."

As a result of the filing and effectiveness of the registration statement of
which this prospectus is a part, we and our subsidiary guarantors will not be
required to pay an increased interest rate on the existing notes. Following the
closing of the exchange offer, holders of existing notes not tendered will not
have any further registration rights except in limited circumstances requiring
the filing of a shelf registration statement, and the existing notes will
continue to be subject to restrictions on transfer. Accordingly, the liquidity
of the market for the existing notes could be adversely affected.

Terms of the Exchange Offer

Upon the terms and subject to the conditions stated in this prospectus and
in the letter of transmittal, we will accept all existing notes properly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on

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<PAGE>

the expiration date. After authentication of the exchange notes by the trustee
or an authenticating agent, we will issue $1,000 principal amount of exchange
notes in exchange for each $1,000 principal amount of outstanding existing
notes accepted in the exchange offer. Holders may tender some or all of their
existing notes in denominations of $1,000 or any integral multiple of $1,000.

Each holder of existing notes who wishes to receive exchange notes in the
exchange offer will be required to represent that:

. it is not an affiliate of us or any of our subsidiary guarantors;

. any exchange notes to be received by it were acquired in the ordinary
course of its business; and

. it has no arrangement with any person to participate in the distribution
of the exchange notes.

Each broker-dealer that receives exchange notes for its own account under
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of the exchange notes. The letter of transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be judged to have admitted that it is an "underwriter" within the
meaning of the Securities Act. The SEC has taken the position that
participating broker-dealers may fulfill their prospectus delivery requirements
related to the exchange notes with the prospectus contained in the exchange
offer registration statement, other than a resale of an unsold allotment from
the original sale of the existing notes. We will be required to allow
participating broker-dealers to use the prospectus contained in the exchange
offer registration statement following the exchange offer, in connection with
the resale of exchange notes received in exchange for existing notes acquired
by participating broker-dealers for their own account as a result of market-
making or other trading activities. We may temporarily suspend the use of the
prospectus under circumstances described in the registration rights agreement.

The form and terms of the exchange notes will be identical in all material
respects to the form and terms of the existing notes except that:

. the exchange notes will be issued in a transaction registered under the
Securities Act;

. the exchange notes will not be subject to transfer restrictions; and

. provisions relating to the payment of liquidated damages provided for in
some circumstances will be eliminated.

The exchange notes will evidence the same debt as the existing notes. The
exchange notes will be issued under and entitled to the benefits of the
indenture.

As of the date of this prospectus, $295,000,000 aggregate principal amount
of existing notes were outstanding. In connection with the issuance of the
existing notes, we arranged for the existing notes to be issued and
transferable in book-entry form through the facilities of DTC. The exchange
notes will also be issuable and transferable in book-entry form through DTC.

This prospectus, together with the accompanying letter of transmittal, is
initially being sent to all registered holders as of the close of business on
October 6, 1999. We intend to conduct the exchange offer as required by the
Exchange Act, and the rules and regulations of the Commission under the
Exchange Act, including Rule 14e-1, to the extent applicable.

Rule 14e-l describes unlawful tender practices under the Exchange Act. This
section requires us, among other things:

. to hold our exchange offer open for at least twenty business days;

. to give ten days notice of any change in the terms of the exchange offer;
and

. to issue a press release in the event of an extension of the exchange
offer.

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<PAGE>

The exchange offer is not conditioned upon any minimum aggregate principal
amount of existing notes being tendered, and holders of the existing notes do
not have any appraisal or dissenters' rights under the General Corporation Law
of the State of Delaware or under the indenture in connection with the exchange
offer. We shall be considered to have accepted existing notes tendered
according to the procedures in this prospectus when, as, and if we have given
oral or written notice of acceptance to the exchange agent. See "--Exchange
Agent." The exchange agent will act as agent for the tendering holders for the
purpose of receiving exchange notes from us and delivering exchange notes to
those holders.

If any tendered existing notes are not accepted for exchange because of an
invalid tender or the occurrence of other events described in this prospectus,
certificates for these unaccepted existing notes will be returned, at our cost,
to the tendering holder of the existing notes as promptly as practicable after
the expiration date.

Holders who tender existing notes in the exchange offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
letter of transmittal, transfer taxes related to the exchange of existing notes
in the exchange offer. We will pay all charges and expenses, other than
applicable taxes, in connection with the exchange offer. See"--Solicitation of
Tenders; Fees and Expenses."

Neither we nor our Board of Directors make any recommendation to holders of
existing notes as to whether to tender or refrain from tendering all or any
portion of their existing notes under the exchange offer. Moreover, no one has
been authorized to make any recommendation of this type. Holders of existing
notes must make their own decision whether to tender in the exchange offer and,
if so, the amount of existing notes to tender after reading this prospectus and
the letter of transmittal and consulting with their advisors, if any, based on
their own financial position and requirements.

Expiration Date; Extensions; Amendments

The term "expiration date" shall mean 5:00 p.m., New York City time, on
November 5, 1999, unless we, in our sole discretion, extend the exchange offer,
in which case the term "expiration date" shall mean the latest date to which
the exchange offer is extended.

We expressly reserve the right, in our sole discretion:

. to delay acceptance of any existing notes, to extend the exchange offer,
or to terminate the exchange offer and to refuse to accept existing notes
not previously accepted, if any of the conditions described in this
prospectus under "--Conditions" shall have occurred and shall not have
been waived by us (if permitted to be waived by us), by giving oral or
written notice of the delay, extension, or termination to the exchange
agent; and

. to amend the terms of the exchange offer in any manner.

Any delay in acceptance, extension, termination, or amendment will be
followed as promptly as practicable by oral or written notice by us to the
registered holders of the existing notes. If the exchange offer is amended in a
manner determined by us to constitute a material change, we will promptly
disclose the amendment in a manner reasonably calculated to inform the holders
of the amendment.

Without limiting the manner in which we may choose to make public
announcements of any delay in acceptance, extension, termination, or amendment
of the exchange offer, we shall have no obligation to publish, advise, or
otherwise communicate any public announcement, other than by making a timely
release to the Dow Jones News Service.

You are advised that we may extend the exchange offer in the event that some
portion of the existing notes have not been tendered on a timely basis. We may
elect to do this in order to give these noteholders the ability to participate
in the exchange offer and to avoid the significant reduction in liquidity they
might experience by holding an unexchanged note.

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<PAGE>

Interest on the Exchange Notes

The exchange notes will bear interest from the date of issuance of the
existing notes that are tendered in exchange for the exchange notes (or the
most recent date on which interest was paid or provided for on the existing
notes surrendered for the exchange notes). Accordingly, holders of existing
notes that are accepted for exchange will not receive interest that is accrued
but unpaid on the existing notes at the time of tender. Interest on the
exchange notes will be payable semi-annually on each January 15 and July 15
commencing on January 15, 2000.

Procedures for Tendering

Only a holder may tender its existing notes in the exchange offer. To tender
in the exchange offer, a holder must complete, sign, and date the letter of
transmittal or a facsimile of the letter of transmittal, have the signatures
guaranteed if required by the letter of transmittal, and mail or otherwise
deliver the letter of transmittal or the facsimile, together with the existing
notes (unless the tender is being effected under the procedure for book-entry
transfer described below) and any other required documents, to the exchange
agent, prior to 5:00 p.m. New York City time, on the expiration date.

Any financial institution that is a participant in DTC's book-entry transfer
facility system may make book-entry delivery of the existing notes by causing
DTC to transfer the existing notes into the exchange agent's account using
DTC's procedure for the transfer. Although delivery of existing notes may be
effected through book-entry transfer into the exchange agent's account at DTC,
the letter of transmittal (or facsimile), with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the exchange agent at its address listed in this prospectus
under "--Exchange Agent" prior to 5:00 p.m., New York City time, on the
expiration date. Delivery of documents to DTC using its procedures does not
constitute delivery to the exchange agent.

The tender by a holder will constitute an agreement among the holder, us,
and the exchange agent according to the terms and subject to the conditions
described in this prospectus and in the letter of transmittal.

In the case of a broker-dealer that receives exchange notes for its own
account in exchange for existing notes that were acquired by it as a result of
market-making or other trading activities, the letter of transmittal will also
include an acknowledgment that the broker-dealer will deliver a copy of this
prospectus in connection with the resale by it of exchange notes received in
the exchange offer. See "Plan of Distribution."

The method of delivery of existing notes and the letter of transmittal and
all other required documents to the exchange agent is at the election and risk
of the holders. Instead of delivery by mail, we recommend that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the exchange agent prior to the expiration date.
No letter of transmittal or existing notes should be sent to us. Holders may
also request that their respective brokers, dealers, commercial banks, trust
companies, or nominees effect the tender for holders in each case as described
in this prospectus and in the letter of transmittal.

Any beneficial owner whose existing notes are registered in the name of his
broker, dealer, commercial bank, trust company, or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender the existing notes on his behalf. If the beneficial
owner wishes to tender on his own behalf, the beneficial owner must, prior to
completing and executing the letter of transmittal and delivering his existing
notes, either make appropriate arrangements to register ownership of the
existing notes in the owner's name or obtain a properly completed bond power
from the registered holder. The transfer of record ownership may take
considerable time.

Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States, or an

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<PAGE>

"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act unless the existing notes tendered with the letter of transmittal
are tendered (1) by a registered holder who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery Instructions" of the
letter of transmittal or (2) for the account of an eligible institution. If the
letter of transmittal is signed by a person other than the registered holder,
the existing notes must be endorsed or accompanied by appropriate bond powers
which authorize the person to tender the existing notes on behalf of the
registered holder, in either case signed by the registered holder as the name
of the registered holder or holders appears on the existing notes. If the
letter of transmittal or any existing notes or bond powers are signed or
endorsed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations, or others acting in a fiduciary or representative
capacity, those persons should so indicate when signing, and unless waived by
us, evidence satisfactory to us of their authority to so act must be submitted
with the letter of transmittal.

All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of the tendered existing notes will be
determined by us in our sole discretion. This determination will be final and
binding. We reserve the absolute right to reject any and all existing notes not
properly tendered or any existing notes our acceptance of which would, in the
opinion of our counsel, be unlawful. We also reserve the absolute right to
waive any irregularities or conditions of tender as to particular existing
notes. Our interpretation of the terms and conditions of the exchange offer
(including the instructions in the letter of transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of existing notes must be cured within the time as we
shall determine. Although we intend to notify holders of defects or
irregularities related to tenders of existing notes, neither we, the exchange
agent, nor any other person shall be under any duty to give notification of
defects or irregularities related to tenders of existing notes nor shall we or
any of them incur liability for failure to give notification. Tenders of
existing notes will not be considered to have been made until the
irregularities have been cured or waived. Any existing notes received by the
exchange agent that we determine are not properly tendered or the tender of
which is otherwise rejected by us and as to which the defects or irregularities
have not been cured or waived by us will be returned by the exchange agent to
the tendering holder unless otherwise provided in the letter of transmittal, as
soon as practicable following the expiration date.

In addition, we reserve the right in our sole discretion to (1) purchase or
make offers for any existing notes that remain outstanding subsequent to the
expiration date, or, as described under "--Termination," to terminate the
exchange offer and (2) to the extent permitted by applicable law, purchase
existing notes in the open market, in privately negotiated transactions or
otherwise. The terms of these purchases or offers may differ from the terms of
the exchange offer.

Book-Entry Transfer

We understand that the exchange agent will make a request promptly after the
date of this prospectus to establish accounts for the existing notes at the DTC
for the purpose of facilitating the exchange offer, and subject to their
establishment, any financial institution that is a participant in the book-
entry transfer facility's system may make book-entry delivery of existing notes
by causing the book-entry transfer facility to transfer the existing notes into
the exchange agent's account for the existing notes using the book-entry
transfer facility's procedures for transfer. Although delivery of existing
notes may be effected through book-entry transfer into the exchange agent's
account at the book-entry transfer facility, an appropriate letter of
transmittal properly completed and duly executed with any required signature
guarantee and all other required documents must in each case be transmitted to
and received or confirmed by the exchange agent at its address listed below on
or prior to the expiration date, or, if the guaranteed delivery procedures
described below are complied with, with the time period provided under the
procedures. Delivery of documents to the book-entry transfer facility does not
constitute delivery to the exchange agent.

Guaranteed Delivery Procedures

Holders who wish to tender their existing notes and whose existing notes are
not immediately available or who cannot deliver their existing notes, the
letter of transmittal, or any other required documents to the

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<PAGE>

exchange agent prior to the expiration date, and holders who cannot complete
the procedure for book-entry transfer on a timely basis, may effect a tender
if:

. the tender is made through an eligible institution;

. prior to the expiration date, the exchange agent receives from an
eligible institution a properly completed and duly executed notice of
guaranteed delivery (by facsimile transmittal, mail, or hand delivery)
setting forth the name and address of the holder, the certificate number
or numbers of the holder's existing notes, and the principal amount of
the existing notes tendered, stating that the tender is being made, and
guaranteeing that, within five business days after the expiration date,
the letter of transmittal (or facsimile), together with the
certificate(s) representing the existing notes to be tendered in proper
form for transfer and any other documents required by the letter of
transmittal will be deposited by the eligible institution with the
exchange agent; and

. the properly completed and executed letter of transmittal (or a
facsimile), together with the certificate(s) representing all tendered
existing notes in proper form for transfer (or confirmation of a book-
entry transfer into the exchange agent's account at the depositary of
existing notes delivered electronically) and all other documents required
by the letter of transmittal are received by the exchange agent within
three business days after the expiration date.

Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their existing notes according to the
guaranteed delivery procedures described above.

Withdrawal of Tenders

Except as otherwise provided in this prospectus, tenders of existing notes
may be withdrawn at any time prior to 5:00 p.m., New York City time, on the
expiration date.

To withdraw a tender of existing notes in the exchange offer, a written or
facsimile transmission notice of withdrawal must be received by the exchange
agent at its address listed below prior to 5:00 p.m., New York City time, on
the expiration date. Any notice of withdrawal must:

. specify the name of the person who deposited the existing notes to be
withdrawn;

. identify the existing notes to be withdrawn, including the certificate
number or numbers and principal amount of the existing notes or, in the
case of existing notes transferred by book-entry transfer, the name and
number of the account at the depositary to be credited;

. be signed by the depositor in the same manner as the original signature
on the letter of transmittal by which the existing notes were tendered
(including any required signature guarantee) or be accompanied by
documents of transfer sufficient to permit the trustee for the existing
notes to register the transfer of the existing notes into the name of the
depositor withdrawing the tender, and

. specify the name in which any of these existing notes are to be
registered, if different from that of the depositor.

All questions as to the validity, form, and eligibility (including time of
receipt) of the withdrawal notices will be determined by us and our
determination shall be final and binding on all parties. Any existing notes so
withdrawn will be judged not to have been tendered according to the procedures
in this prospectus for purposes of the exchange offer, and no exchange notes
will be issued in exchange for those existing notes unless the existing notes
so withdrawn are validly retendered. Any existing notes that have been tendered
but are not accepted for exchange will be returned to the holder of the
existing notes without cost to the holder as soon as practicable after
withdrawal, rejection of tender, or termination of the exchange offer. Properly
withdrawn existing notes may be retendered by following one of the procedures
described above under "--Procedures for Tendering" at any time prior to the
Expiration Date.

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<PAGE>

Conditions

The exchange offer is subject only to the following conditions:

. the compliance of the exchange offer with securities laws;

. the tender of the existing notes;

. the representation by the holders of the existing notes that the exchange
notes they will receive are being acquired by them in the ordinary course
of their business and that at the time the exchange offer is completed
the holder had no plan to participate in the distribution of the exchange
notes; and

. no judicial or administrative proceeding shall have been threatened that
would limit us from proceeding with the exchange offer.

Exchange Agent

Harris Trust Company of New York, the trustee under the indenture, has been
appointed as exchange agent for the exchange offer. In this capacity, the
exchange agent has no fiduciary duties and will be acting solely on the basis
of our directions. Requests for assistance and requests for additional copies
of this prospectus or of the letter of transmittal should be directed to the
exchange agent addressed as follows:

By Mail: Harris Trust Company of New York
Wall Street Station
P.O. Box 1023
New York, New York 10268-1023

By Hand Delivery or Overnight Courier: Harris Trust Company of New York
Receive Window
Wall Street Plaza
88 Pine Street, 19th Floor
New York, New York 10005

Facsimile Transmission: (212) 701-7636 or 7637

Confirm by Telephone: (212) 701-7624

Delivery of the letter of transmittal to an address other than as listed
above or transmission of instructions via facsimile other than as described
above does not constitute a valid delivery of the letter of transmittal.

Solicitation of Tenders; Fees and Expenses

We will bear the expenses of requesting that holders of existing notes
tender those notes for exchange notes. The principal solicitation under the
exchange offer is being made by mail. Additional solicitations may be made by
our officers and regular employees and our affiliates in person, by telegraph,
telephone, or telecopier.

We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers, or other persons
soliciting acceptances of the exchange offer. We will, however, pay the
exchange agent reasonable and customary fees for its services and will
reimburse the exchange agent for its reasonable out-of-pocket costs and
expenses in connection with the exchange offer and will indemnify the exchange
agent for all losses and claims incurred by it as a result of the exchange
offer. We may also pay brokerage houses and other custodians, nominees, and
fiduciaries the reasonable out-of-pocket expenses incurred by them in
forwarding copies of this prospectus, letters of transmittal, and related
documents to the beneficial owners of the existing notes and in handling or
forwarding tenders for exchange.

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<PAGE>

We will pay the expenses to be incurred in connection with the exchange
offer, including fees and expenses of the exchange agent and trustee and
accounting and legal fees and printing costs.

You will not be obligated to pay any transfer tax in connection with the
exchange unless you instruct us to register exchange notes in the name of, or
request that existing notes not tendered or not accepted in the exchange offer
be returned to, a person other than you. Under these circumstances, you will
be responsible for the payment of any applicable transfer tax.

Accounting Treatment

The exchange notes will be recorded at the same carrying value as the
existing notes, as reflected in our accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by us upon the closing of the exchange offer. We will amortize the
expenses of the exchange offer over the term of the exchange notes.

United States Federal Tax Consequences

This general discussion of United States federal tax consequences applies
to you if you acquired existing notes at original issue for cash and you
exchange those existing notes for exchange notes in the exchange offer. This
discussion only applies to you if you purchased existing notes in the private
placement for an amount equal to the "issue price" of the existing notes and
hold the exchange notes as a "capital asset," generally, for investment, under
Section 1221 of the Internal Revenue Code. This summary, however, does not
consider state, local, or foreign tax laws. In addition, it does not include
all of the rules which may affect the United States tax treatment of your
investment in the exchange notes. For example, special rules not discussed
here may apply to you if you are, without limitation:

. a broker-dealer, a dealer in securities, or a financial institution;

. an insurance company;

. a tax-exempt organization;

. holding the exchange notes through partnerships or other pass-through
entities; or

. holding the exchange notes as part of a hedge, straddle, or other risk
reduction or constructive sale transaction.

This discussion is based on current provisions of the Internal Revenue
Code, existing and proposed regulations, and current administrative rulings
and court decisions, all of which are subject to change. Later changes in
these authorities may cause the tax consequences to vary substantially from
the consequences described below. Accordingly, you should consult, and should
depend on, your own tax advisor in analyzing the federal, state, local, and
foreign tax consequences to you of the ownership and disposition of exchange
notes.

Tax Consequences to United States Holders

For purposes of this discussion, you are a "United States holder" if you
hold existing notes and you are:

. a citizen or resident of the United States;

. a corporation or partnership created or organized in the United States or
under the laws of the United States or of any political subdivision;

. an estate the income of which is subject to United States federal income
tax regardless of its source; or

. a trust, if a United States court can exercise primary supervision over
the administration of the trust and one or more United States persons can
control all substantial decisions of the trust, or the trust was in
existence on August 20, 1996 and has properly elected to continue to be
treated as a United States person.

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<PAGE>

Taxation of Interest

Interest on the exchange notes generally will be taxable to you as ordinary
interest income at the time payments are accrued or received in accordance with
your regular method of accounting for federal income tax purposes.

Receipt of Exchange Notes

Because the economic terms of the exchange notes and the existing notes are
identical, your exchange of existing notes for exchange notes under the
exchange offer will not constitute a taxable exchange of the existing notes. As
a result:

. you will not recognize taxable gain or loss when you receive exchange
notes in exchange for existing notes;

. your holding period in the exchange notes will include your holding
period in the existing notes; and

. your basis in the exchange notes will equal your basis in the existing
notes.

Sale or Other Taxable Disposition of Exchange Notes

You must recognize taxable gain or loss on the sale, exchange, redemption,
retirement, or other taxable disposition of an exchange note. The amount of
your gain or loss equals the difference between the amount you receive for the
exchange note in cash or other property, valued at fair market value, minus the
amount attributable to accrued qualified stated interest on the exchange note,
minus your adjusted tax basis in the exchange note. Your initial tax basis in
an exchange note equals the price you paid for the existing note which you
exchanged for the exchange note increased by any amounts previously includable
in income as original issue discount and reduced by any payments other than
payments of qualified stated interest made on such notes.

Your gain or loss will generally be a long-term capital gain or loss if your
holding period in the exchange note is more than one year. Otherwise, it will
be a short-term capital gain or loss. Payments attributable to accrued
qualified stated interest which you have not yet included in income will be
taxed as ordinary interest income.

Information Reporting and Backup Withholding

We will, when required, report to you and the Internal Revenue Service the
amount of any interest paid on the exchange notes in each calendar year and the
amounts of tax withheld, if any, with respect to such payments. You may be
subject to a 31% backup withholding tax with respect to payments of interest,
principal, and premium on, and any proceeds upon the sale or disposition of, an
exchange note. Certain holders, including, among others, corporations and
certain tax-exempt organizations, are generally not subject to backup
withholding. In addition, the 31% backup withholding tax will not apply to you
if you provide your taxpayer identification number in the prescribed manner
unless:

. the IRS notifies us or the paying agent that the taxpayer identification
number you provided is incorrect;

. you fail to report interest and dividend payments that you receive on
your tax return and the IRS notifies us or the paying agent that
withholding is required; or

. you fail to certify under penalties of perjury that you are not subject
to backup withholding.

You should consult your tax advisor as to your qualification for exemption
from backup withholding and the procedure for obtaining such an exemption. If
the 31% backup withholding tax does apply to you, you may use the amounts
withheld as a refund or credit against your federal income tax liability as
long as you provide certain information to the IRS.

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<PAGE>

Tax Consequences to Non-United States Holders

For purposes of this discussion, you are a "Non-United States holder" if you
are a beneficial owner of existing notes who is not a United States holder.

Taxation of Interest

Interest that we pay to you will not be subject to U.S. withholding tax if
you:

. do not actually or constructively own 10% or more of the total combined
voting power of all classes of Holdings' stock,

. are not a controlled foreign corporation with respect to which we are a
related person, and

. you certify to us, our paying agent, or the person who would otherwise be
required to withhold United States tax, on Form W-8BEN or applicable
substitute form, under penalties of perjury, that you are not a United
States person and provide your name and address.

If you do not satisfy the three preceding requirements, your interest on an
exchange note would generally be subject to United States withholding tax at a
flat rate of 30% or a lower applicable treaty rate.

If you are engaged in trade or business in the United States, and if
interest on an exchange note is effectively connected with the conduct of that
trade or business (or in the case of an applicable tax treaty, is attributable
to a permanent establishment maintained by you in the United States), you will
be exempt from U.S. withholding tax but will be subject to regular U.S. federal
income tax on the interest in the same manner as if you were a United States
person. In order to establish an exemption from U.S. withholding tax, you must
provide to us, our paying agent or the person who would otherwise be required
to withhold United States tax, a properly executed IRS Form W-8ECI or
applicable substitute form. In addition to regular U.S. federal income tax, if
you are a foreign corporation, you may be subject to a U.S. branch profits tax.

Receipt of Exchange Notes

. you will not recognize taxable gain or loss when you receive exchange
notes in exchange for existing notes;

. your holding period in the exchange notes will include your holding
period in the existing notes; and

. your basis in the exchange notes will equal your basis in the existing
notes.

Gain on Disposition

You generally will not be subject to United States federal income tax with
respect to gain recognized on a sale, redemption, or other disposition of an
exchange note unless:

. the gain is effectively connected with the conduct by you of a trade or
business within the United States or, under an applicable tax treaty, is
attributable to a permanent establishment maintained by you in the United
States, or

. if you are an individual, you are present in the United States for 183 or
more days in the taxable year and certain other requirements are met.

Federal Estate Taxes

If interest on the exchange notes is exempt from withholding of United
States federal income tax under the rules described above, the exchange notes
held by an individual who at the time of death is a Non-United

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<PAGE>

States holder generally will not be subject to United States federal estate tax
as a result of such individual's death provided such individual did not at the
time of death actually or constructively own 10% or more of the combined voting
power of all classes of Holdings' stock entitled to vote, and provided that, at
the time of death, payments with respect to the exchange note would not have
been effectively connected with the conduct by such individual of a trade or
business within the United States.

Information Reporting and Backup Withholding

Backup withholding tax is a withholding tax imposed at the rate of 31% on
certain payments to persons who fail to furnish the information required under
United States information reporting requirements. In the case of payments of
interest to you, backup withholding tax and certain information reporting will
not apply to such payments with respect to which either the certification
described under "--Taxation of Interest" above has been received or an
exemption has otherwise been established, provided that neither we nor our
paying agent has actual knowledge that you are a United States person or that
the conditions of any other exemption are not in fact satisfied.

Payments to you of the proceeds from the sale of an exchange note made to or
through a foreign office of a broker generally will not be subject to
information reporting or backup withholding. However, if the broker is a United
States person, a controlled foreign corporation for U.S. tax purposes, or a
foreign person 50% or more of whose gross income is effectively connected with
a United States trade or business for a specified three-year period,
information reporting (but not backup withholding) may apply to such payments,
unless the broker has documentary evidence in its records that you are not a
United States person and certain other conditions are met or you otherwise
establish an exemption.

Payments to you of the proceeds from the sale of an exchange note made to or
through the U.S. office of a broker are subject to information reporting and
backup withholding unless you certify under penalties of perjury as to your
non-U.S. status or otherwise establish an exemption from information reporting
and backup withholding.

Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against your United States
federal income tax liability as long as you provide the required information to
the IRS.

The United States Treasury Department has issued new regulations regarding
the withholding and information reporting rules discussed above. In general,
the new regulations do not significantly alter the substantive withholding and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. The new regulations
require, however, that a foreign person furnish its taxpayer identification
number in certain circumstances to claim a reduction in U.S. federal
withholding tax and new rules are provided for foreign persons that hold debt
instruments through a foreign intermediary. The new regulations are generally
effective for payments made after December 31, 2000, subject to certain
transition rules. You should consult your own tax advisor with respect to the
impact, if any, of the new regulations.

Participation in the Exchange Offer, Untendered Notes

Participation in the exchange offer is voluntary. Holders of the existing
notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.

As a result of the making of, and upon acceptance for exchange of all
existing notes tendered under the terms of, this exchange offer, we will have
fulfilled a covenant contained in the terms of the registration rights

33
<PAGE>

agreement. Holders of the existing notes who do not tender their certificates
in the exchange offer will continue to hold the certificates and will be
entitled to all the rights, and subject to the limitations applicable to the
existing notes, under the indenture, except for any rights under the
registration rights agreement that by their term terminate or cease to have
further effect as a result of the making of this exchange offer. See
"Description of the Notes." All untendered existing notes will continue to be
subject to the restrictions on transfer described in the indenture. To the
extent that existing notes are tendered and accepted in the exchange offer, the
trading market for untendered existing notes could be adversely affected. This
is because there will probably be many fewer remaining existing notes
outstanding following the exchange, significantly reducing the liquidity of the
untendered notes.

We may in the future seek to acquire untendered existing notes in the open
market or through privately negotiated transactions, through subsequent
exchange offers or otherwise. We intend to make any acquisitions of existing
notes following the applicable requirements of the Exchange Act, and the rules
and regulations of the Commission under the Exchange Act, including Rule 14e-1,
to the extent applicable. We have no present plan to acquire any existing notes
that are not tendered in the exchange offer or to file a registration statement
to permit resales of any existing notes that are not tendered in the exchange
offer.

34
<PAGE>

USE OF PROCEEDS

We will not receive any cash from the issuance of the exchange notes. In
consideration for issuing the exchange notes as contemplated in this
prospectus, we will receive in exchange existing notes in like principal
amount. The existing notes surrendered in exchange for exchange notes will be
retired and canceled and cannot be reissued. Issuance of the exchange notes
will not result in a change in our amount of outstanding debt.

CAPITALIZATION

The following table sets forth our unaudited consolidated historical
capitalization as of June 30, 1999 on a pro forma basis after giving effect to
the issuance of the existing notes, the initial borrowings under our secured
revolving credit facilities, and the application of the net proceeds therefrom:

<TABLE>
<CAPTION>
June 30, 1999
----------------
Pro
Actual Forma
------- -------
(dollars in
millions)
<S> <C> <C>
Cash and cash equivalents..................................... $ 6.3 $ 6.3
======= =======
Debt:
Secured revolving credit facilities:
Working capital revolver.................................. -- --
Fixed assets revolver..................................... -- 33.0
Existing senior credit facility............................. 311.4 --
Saskatoon Term Loans........................................ 44.8 44.8
12 3/8% Senior Secured Notes due 2006....................... -- 295.0
11 3/4% Senior Subordinated Notes due 2006.................. 275.0 275.0
11 1/4% Senior Subordinated Notes due 2007.................. 152.6 152.6
------- -------
Total debt (a)................................................ 783.8 800.4
Common stock held by ESOP..................................... 2.9 2.9
Less: Unearned compensation................................. (0.6) (0.6)
Stockholder's deficit......................................... (258.5) (262.8)
------- -------
Total capitalization.......................................... $ 527.6 $ 539.9
======= =======
</TABLE>
- --------
(a) Includes pro forma current maturities of approximately $2.6 million.

35
<PAGE>

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table contains summary historical consolidated financial
information of Sterling and Holdings. Prior to August 21, 1996, the operations
of Sterling were conducted by Holdings. We derived the information as of and
for the nine months ended June 30, 1998 and 1999 from Sterling's unaudited
financial statements. We derived the information for all other dates and
periods from the audited financial statements of Sterling and Holdings, some of
which appear elsewhere in this prospectus. In our opinion, the unaudited
financial information includes all adjustments, consisting solely of
adjustments of a normal and recurring nature, necessary to fairly present such
information on a basis consistent with the financial information derived from
our audited financial statements. The results of operations for the interim
periods presented are not necessarily indicative of the results to be expected
for the full year.

<TABLE>
<CAPTION>
Sterling
--------------------------------------------
Nine Months
Holdings(a) Year Ended Year Ended Ended June
September 30, May 14 to September 30, 30,
------------------------ September 30, -------------- --------------
1994 1995 1996 1996(a) 1997 1998 1998 1999
------ -------- ------ ------------- ------ ------ ------ ------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $700.8 $1,030.2 $790.4 $83.4 $908.8 $822.6 $640.2 $506.2
Cost of goods sold(b)... 606.9 758.6 688.3 85.0 823.3 745.3 587.0 473.0
------ -------- ------ ----- ------ ------ ------ ------
Gross profit (loss)(b).. 93.9 271.6 102.1 (1.6) 85.5 77.3 53.2 33.2
Selling, general, and
administrative
expense(b)............. 24.4 31.7 22.4 1.4 27.4 37.3 27.0 27.2
Other expense........... -- -- -- -- -- 6.0 6.0 10.8
SAR program expense
(benefit).............. 21.8 (2.8) 8.6 -- -- -- -- --
Merger related
expenses............... -- -- 3.6 -- -- -- -- --
Write-off of assets..... -- -- 3.7 -- -- -- -- --
------ -------- ------ ----- ------ ------ ------ ------
Income (loss) from
operations............. 47.7 242.7 63.8 (3.0) 58.1 34.0 20.2 (4.8)
Interest and debt
related expenses, net
of interest income..... 22.1 14.6 13.4 1.6 72.9 86.6 62.9 59.9
Interest income from
parent................. -- -- -- (5.2) (1.7) -- -- --
Gain on sale of asset... (2.6) -- -- -- -- -- -- --
------ -------- ------ ----- ------ ------ ------ ------
Income (loss) before
taxes and extraordinary
item................... 28.2 228.1 50.4 0.6 (13.1) (52.6) (42.7) (64.7)
Provision (benefit) for
income taxes........... 9.1 75.0 16.9 0.4 (2.2) (18.9) (13.2) (20.7)
------ -------- ------ ----- ------ ------ ------ ------
Income (loss) before
extraordinary item..... 19.1 153.1 33.5 0.2 (10.9) (33.7) (29.5) (44.0)
Extraordinary item, net
of tax................. -- (3.1) (1.9) -- (3.9) -- -- --
------ -------- ------ ----- ------ ------ ------ ------
Net income (loss)....... $ 19.1 $ 150.0 $ 31.6 $ 0.2 $(14.8) $(33.7) $(29.5) $(44.0)
====== ======== ====== ===== ====== ====== ====== ======
Other Data:
EBITDA(c)............... $108.6 $ 281.5 $121.2 $ 1.5 $108.0 $ 90.0 $ 62.3 $ 44.4
Cash flows provided by
(used in):
Operating activities.. 75.2 191.8 63.6 4.2 46.6 45.9 37.5 (11.5)
Investing activities.. (9.7) (54.0) (96.0) (6.4) (196.4) (26.6) (18.9) (17.8)
Financing activities.. (64.9) (109.0) 7.2 7.8 152.4 (15.2) (13.8) 24.3
Depreciation and
amortization(d)........ 39.1 41.5 41.5 4.5 49.9 56.0 42.1 42.4
Capital expenditures.... 12.3 54.0 96.0 6.4 43.4 26.6 18.9 17.8
Ratio of earnings to
fixed charges(e)....... 2.1x 12.6x 3.4x 1.2x -- -- -- --
Operating Data:
Revenues:
Styrene............... $ 288 $ 467 $ 323 $ 35 $ 310 $ 237 $ 184 $ 163
Acrylonitrile......... 138 251 159 21 146 112 88 53
Acetic acid........... 76 94 65 4 43 47 35 33
Sodium chlorate....... 83 102 112 13 131 136 104 94
Annual capacity at
period end
(million lbs):
Styrene............... 1,500 1,500 1,700 1,700 1,700 1,700 1,700 1,700
Acrylonitrile......... 700 740 740 740 740 740 740 740
Acetic acid........... 600 600 800 800 800 800 800 1,000
Sodium chlorate
(thousand tons)...... 340 350 350 350 498 498 498 498
Sales volume (million
lbs):
Styrene............... 1,460 1,433 1,685 188 1,605 1,355 1,126 1,040
Acrylonitrile......... 668 739 661 103 619 633 469 399
Acetic acid........... 599 635 516 80 760 715 550 592
Sodium chlorate
(thousand tons)...... 294 336 330 37 403 451 342 340
</TABLE>

36
<PAGE>

<TABLE>
<CAPTION>
Sterling
Holdings -------------------------------------------
September 30, September 30, June 30,
------------- ------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------- ------- ------- ------- -------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital......... $ 20.8 $ 74.6 $ 77.3 $ 119.8 $ 92.0 $ 96.0 $ 91.1
Net property, plant and
equipment.............. 291.1 309.1 365.8 492.0 450.3 461.5 432.8
Total assets............ 580.9 609.9 685.5 875.3 762.5 791.7 745.2
Total long-term debt.... 226.4 121.4 631.5 774.6 754.6 759.7 783.8
Stockholders' equity
(deficit).............. 89.7 239.3 (184.3) (175.6) (220.4) (214.0) (258.5)
</TABLE>
- --------
(a) Prior to August 21, 1996, the operations of Sterling were conducted by
Holdings. Sterling was incorporated on May 14, 1996, but prior to August
21, 1996, had no operating activities other than those related to the
recapitalization that occurred in 1996. For the period from August 21
through September 30, 1996, Holdings' results of operations were
substantially identical to those of Sterling, except for $1.7 million of
interest expense for Holdings' 13 1/2% Notes, which accreted from August 21
through September 30, 1996.
(b) Effective in the first quarter of fiscal 1999, certain costs that had
previously been included in selling, general, and administrative expense
were reclassified into cost of goods sold. These costs have been
reclassified in fiscal years 1996, 1997, and 1998, and the nine months
ended June 30, 1998 to conform to the fiscal 1999 presentation. These costs
have not been reclassified in fiscal years 1994 and 1995.
(c) EBITDA represents income from operations before interest, taxes,
depreciation, amortization, certain merger-related expenses, certain non-
cash charges related to an early retirement program and benefit changes,
and, in the case of Holdings, the impact of accruals for its stock
appreciation rights program. The stock appreciation rights program was
terminated in connection with the 1996 recapitalization. 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 our operating performance, or as an
alternative to cash flows as a measure of liquidity. Because EBITDA
excludes some, but not all, items that affect net income (loss) and may
vary among companies, the EBITDA calculation presented above may not be
comparable to similarly titled measures of other companies. SAR expense
(income) was $8.5 million for the year ended September 30, 1996, $(2.8)
million for the year ended September 30, 1995, and $21.8 million for the
year ended September 30, 1994. Certain merger-related expenses were $3.6
million for the year ended September 30, 1996. Certain non-cash charges
related to an early retirement program and benefit changes were $6.8
million for the nine months ended June 30, 1999.
(d) Depreciation and amortization expense included herein excludes the
amortization of deferred debt financing costs which is included in interest
expense.
(e) For purposes of computing these amounts, 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. Earnings were
insufficient to cover fixed charges by $16.9 million and $53.4 million for
the years ended September 30, 1997 and 1998, respectively, and $43.3
million and $65.7 million for the nine months ended June 30, 1998 and 1999,
respectively.

37
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Overview

We are the primary operating subsidiary of Holdings and own substantially
all of the consolidated operating assets of Holdings and its consolidated
subsidiaries. Holdings is a holding company whose only material asset is its
investment in us. Holdings' only material liabilities are:

. its obligation to repay its 13 1/2% Notes;

. its obligations to redeem its outstanding preferred stock; and

. various contingent obligations.

Other than the additional interest expense associated with Holdings' 13 1/2%
Notes, Holdings' results of operations are essentially the same as ours.

The primary markets in which we compete, especially styrene and
acrylonitrile, are cyclical and are sensitive to factors such as:

. changes in the balance between supply and demand;

. the price of raw materials; and

. the level of general worldwide economic activity.

Styrene prices are cyclical and sensitive to overall supply relative to
demand and the level of general business activity. During 1994 and the first
half of 1995, the styrene industry ran at high utilization rates resulting from
demand growth from worldwide economic expansion, which in turn resulted in high
styrene prices and margins. During the second half of 1995, styrene prices
decreased significantly as demand growth weakened. Increased capacity
additions, particularly in Asia, resulted in lower styrene prices and margins
beginning in 1996 and continuing to date. Economic events in various Asian
countries in 1997 and 1998 reduced demand growth for styrene and contributed
further to the declines. Global production capacity for styrene is estimated at
approximately 42 billion pounds, including approximately five billion pounds of
net capacity which was added by competitors in 1997 and 1998. The average sales
prices we received for our styrene declined by approximately 41% from fiscal
1995 to fiscal 1996, approximately 2% from fiscal 1996 to fiscal 1997, and
approximately 11% from fiscal 1997 to fiscal 1998.

The acrylonitrile market exhibits characteristics in capacity utilization,
selling prices, and profit margins similar to those of styrene. Moreover, as a
result of our high percentage of export acrylonitrile sales, demand for our
acrylonitrile is significantly influenced by export customers, particularly
those that supply acrylic fibers to China. During 1995, strong demand for
acrylic fibers and ABS resins, particularly in China, increased demand for
acrylonitrile resulting in high prices and margins. Acrylonitrile demand began
to weaken in late 1995 for the same reasons that caused the deterioration in
the styrene market. Increased acrylonitrile capacity in the United States and
Asia and weakened demand growth in Asian markets resulted in lower
acrylonitrile prices and margins beginning in fiscal 1996 and continuing to
date. Global production capacity for acrylonitrile is estimated at over 12
billion pounds, including approximately one billion pounds which was added by
competitors in 1997 and 1998. Solutia is constructing a new acrylonitrile
production facility in Chocolate

38
<PAGE>

Bayou, Texas which is expected to have a rated annual production capacity of
approximately 500 million pounds and is expected to begin production in the
third calendar quarter of 2000. The average acrylonitrile sales prices we
received declined by approximately 29% from fiscal 1995 to fiscal 1996,
approximately 3% from fiscal 1996 to fiscal 1997, and approximately 25% from
fiscal 1997 to fiscal 1998.

The sodium chlorate market has historically 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
approximately 9% as pulp mills have accelerated substitution of chlorine
dioxide for elemental chlorine in bleaching applications. Our average sodium
chlorate prices increased by approximately 8% from fiscal 1995 to 1996. During
fiscal 1997 and 1998, demand for sodium chlorate did not increase at historical
rates as a result of weak market conditions and lower operating rates in the
pulp and paper industry. Our average sodium chlorate prices decreased by
approximately 5% from fiscal 1996 to 1997 and approximately 7% from fiscal 1997
to 1998.

We primarily sell our petrochemicals products pursuant to multi-year
conversion agreements and other long-term contracts and high-volume spot
transactions in both the domestic and export markets. Our multi-year conversion
agreements and our other long-term contracts help us to maintain relatively low
selling, general, and administrative expenses relating to product marketing.
Prices for our commodity petrochemicals are determined by global market
factors, including changes in the cost of raw materials, that are largely
beyond our control and, except with respect to some of our multi-year
contracts, we generally sell our products at prevailing market prices.

We market substantial volumes of petrochemicals and generate substantial
revenues under our conversion and long-term agreements. The approximate
percentages of our total sales volumes and revenues from our conversion and
long-term agreements in the last three fiscal years are shown in the following
table:

<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Percentage of total sales volumes.......................... 50% 51% 52%
Percentage of total revenues............................... 36% 33% 38%
</TABLE>

Under our conversion agreements, the customer furnishes some or all of the
raw materials, which we process into other petrochemicals in exchange for a fee
designed to cover our fixed and variable costs of production. These conversion
agreements help us to maintain lower levels of working capital and, in some
cases, to gain access to certain improvements in manufacturing process
technology. We believe that our petrochemicals conversion agreements help us
to:

. optimize capacity utilization rates;

. lower our selling, general, and administrative expenses; and

. insulate us to some extent from the effects of declining markets and
increases in raw materials prices.

Since September 30, 1996, we have undertaken initiatives to reduce our costs
and increase our efficiency. We have reduced our annual fixed operating costs
and selling, general, and administrative expenses by approximately $50 million,
or approximately 19%, consisting of approximately $30 million in annual savings
achieved at our Texas City facility in fiscal 1997 and 1998 and annual savings
of approximately $20 million that we expect to result from measures that we
implemented at our various facilities in the first nine months of fiscal 1999.
A major portion of these savings resulted from initiatives related to our
workforce, including the following:

. We established a multiskilling program at our Texas City facility that
has reduced our contract maintenance workforce by over 100 workers.

. We established voluntary severance programs under which 111 Texas City
facility employees took early retirement in fiscal 1998, which we expect
to generate annual savings of approximately $6 million.

39
<PAGE>

. We reduced our pulp chemicals workforce by 25 employees in September of
1998, which we expect to generate annual savings of over $500,000.

. We reduced our Texas City facility and corporate office workforce by
approximately 60 employees and contractors in November of 1998, and our
Saskatoon facility workforce by 24 employees in December of 1998, which
we expect to generate combined annual savings of approximately $5 to $6
million.

. We completed a new labor contract with our unionized employees at our
Texas City facility in December of 1998, which allows reduced staffing
levels and improved work practices that we expect to lead to annual
savings of approximately $5 to $6 million.

. We reduced our pulp chemicals workforce by 27 employees in May of 1999,
which we expect to generate annual savings of approximately $1.5 million.

We have recorded pre-tax charges of approximately $6 million in fiscal 1998 and
$11 million in fiscal 1999 for costs associated with these workforce reduction
initiatives. We cannot be sure of the level of savings that will actually be
achieved as a result of the foregoing initiatives.

Recent Developments

In April of 1999, we restarted our methanol facility, which had been shut
down since August 1998 for economic reasons. A significant disparity between
prices for domestic and foreign natural gas, one of the primary raw materials
for methanol, has put domestic methanol producers at a disadvantage when
compared to foreign competitors. We continue to evaluate the best use for our
methanol facility. One of the primary uses of methanol is in the production of
MTBE used in reformulated gasolines. The State of California has recently
announced that MTBE must be phased out of reformulated gasoline used in the
state by December 31, 2002. In addition, in July of 1999, the Environmental
Protection Agency announced that it would ask Congress to develop legislation
aimed at phasing out MTBE from the existing reformulated-gas program, and to
give states the authority to ban MTBE completely. These developments are likely
to negatively impact the domestic methanol market.

Our styrene monomer unit at our Texas City plant was shutdown for
approximately one month during the second quarter of fiscal 1999 for scheduled
maintenance. While the styrene unit was restarted on March 22, 1999, the
restart of the ethylbenzene unit, an important component of the styrene unit,
was delayed until April 30, 1999 so that unscheduled maintenance work could be
performed on a process vessel. During this delay, we purchased most of our
ethylbenzene requirements on the spot market. The unscheduled work on the
process vessel and the resulting delay in restarting the ethylbenzene unit
negatively impacted pretax earnings for the third quarter of fiscal 1999 by
approximately $3 million.

On July 23, 1999, we completed a private offering of $295,000,000 of the
existing notes. In addition, on July 23, 1999, we established two new secured
revolving credit facilities providing for up to $155,000,000 in revolving
credit loans under a single revolving credit agreement. The proceeds from the
sale of the existing notes and the initial borrowings under the revolving
credit facilities were used to fully repay and terminate our three outstanding
term loans and existing revolving credit facility.

40
<PAGE>

Results of Operations

The following table sets forth revenues, gross profit, and operating income
for our primary segments for the fiscal years ended September 30, 1996, 1997,
and 1998, and for the nine-month periods ended June 30, 1998 and 1999.

<TABLE>
<CAPTION>
Nine Months Ended June
Year Ended September 30, 30,
--------------------------------------- ---------------------------
Percent Percent Percent Percent Percent
of of of of of
1996 Total 1997 Total 1998 Total 1998 Total 1999 Total
---- ------- ---- ------- ---- ------- ---- ------- ---- -------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Petrochemicals and
Acrylic Fibers......... $633 80% $728 80% $622 76% $486 76% $366 72%
Pulp Chemicals.......... 157 20 181 20 201 24 154 24 140 28
---- ---- ---- ---- ----
$790 $909 $823 $640 $506
Gross Profit:
Petrochemicals and
Acrylic Fibers......... $ 53 49% $ 33 38% $ 31 40% $ 17 32% $ 3 9%
Pulp Chemicals.......... 55 51 53 62 46 60 36 68 30 91
---- ---- ---- ---- ----
$108 $ 86 $ 77 $ 53 $ 33
Operating Income (Loss):
Petrochemicals and
Acrylic Fibers......... $ 28 44% $ 12 21% $ (2) (6)% $ (9) (45)% $(26) NM
Pulp Chemicals.......... 36 56 46 79 36 106 29 145 21 NM
---- ---- ---- ---- ----
$ 64 $ 58 $ 34 $ 20 $ (5)
</TABLE>

Comparison of Nine Months Ended June 30, 1999 to Nine Months Ended June 30,
1998

Our revenues were approximately $506 million for the first nine months of
fiscal 1999, a decrease of approximately 20% from our revenues of approximately
$640 million for the first nine months of fiscal 1998. This decrease in
revenues resulted primarily from lower styrene, acrylonitrile, methanol, and
acrylic fibers sales volumes and prices and lower sodium chlorate sales prices.
We recorded a net loss of approximately $44.0 million for the first nine months
of fiscal 1999, an increase of approximately 49% from the net loss of
approximately $29.5 million we recorded for the first nine months of fiscal
1998. This increase resulted primarily from:

. scheduled shutdowns in styrene for routine maintenance and in acetic acid
for expansion in the second quarter of fiscal 1999;

. reduced acrylonitrile, sodium chlorate, and methanol margins;

. decreased sales volumes for our styrene, acrylonitrile, methanol, and
acrylic fibers; and

. costs associated with a one-time non-cash charge related to our early
retirement programs and benefit changes,

. all of which were partially offset by a modest improvement in styrene
margins.

Revenues, Gross Profit, and Operating Income (Loss)

Petrochemicals and Acrylic Fibers. Revenues from our petrochemicals and
acrylic fibers operations were approximately $366 million for the first nine
months of fiscal 1999, a decrease of approximately 25% from revenues from our
petrochemicals and acrylic fibers operations of approximately $486 million for
the first nine months of fiscal 1998. This decrease in revenues resulted
primarily from reduced sales prices and volumes for our styrene, acrylonitrile,
methanol, and acrylic fibers. The economic conditions in Asia continued to
impact

41
<PAGE>

market conditions negatively in fiscal 1999, particularly for our styrene,
acrylonitrile, and acrylic fibers products. Our petrochemicals and acrylic
fibers operations recorded combined operating losses of approximately $26
million for the first nine months of fiscal 1999, an increase of approximately
189% from the combined operating losses recorded by our petrochemicals and
acrylic fibers operations of approximately $9 million for the first nine months
of fiscal 1998. This increase in combined operating losses recorded by our
petrochemicals and acrylic fibers operations resulted primarily from weaker
operational performance in our acrylonitrile, methanol, and acrylic fibers
operations and the one-time non-cash charge related to our early retirement
programs and benefit changes, partially offset by a modest improvement in
styrene margins.

Revenues from our styrene operations were approximately $163 million for the
first nine months of fiscal 1999, a decrease of approximately 12% from revenues
from our styrene operations of approximately $185 million for the first nine
months of fiscal 1998. Sales prices for our styrene decreased approximately 5%
for the first nine months of fiscal 1999 from sales prices for our styrene for
the first nine months of fiscal 1998. This decrease in sales prices for our
styrene resulted primarily from continued weak market conditions, particularly
in Asia. Sales volume of our styrene decreased approximately 8% for the first
nine months of fiscal 1999 from sales volumes for our styrene for the first
nine months of fiscal 1998. This decrease in sales volume of our styrene
resulted primarily from a month-long maintenance shutdown of our styrene
operations during the second quarter of fiscal 1999 and the delayed restart of
the ethylbenzene unit in the third quarter of fiscal 1999. During the first
nine months of fiscal 1999, prices for benzene, one of the primary raw
materials for styrene, were approximately 12% lower than the prices we paid for
benzene in the first nine months of fiscal 1998 and prices for ethylene, the
other primary raw material for styrene, were approximately 14% lower than the
prices we paid for ethylene in the first nine months of fiscal 1998. Margins on
our styrene sales during the first nine months of fiscal 1999 increased from
the margins on our styrene sales during the first nine months of fiscal 1998
primarily as a result of our significantly lower raw materials costs and lower
fixed manufacturing costs, which more than offset our lower styrene sales
prices.

Revenues from our acrylonitrile operations were approximately $53 million
for the first nine months of fiscal 1999, a decrease of approximately 40% from
revenues from our acrylonitrile operations of approximately $88 million for the
first nine months of fiscal 1998. Sales prices for our acrylonitrile decreased
approximately 29% for the first nine months of fiscal 1999 from sales prices
for our acrylonitrile for the first nine months of fiscal 1998. In addition,
sales volume of our acrylonitrile decreased approximately 14% for the first
nine months of fiscal 1999 from sales volumes for our acrylonitrile for the
first nine months of fiscal 1998. These decreases in sales prices and volumes
of our acrylonitrile resulted primarily from weaker market conditions for
acrylonitrile, particularly in Asia. During the first nine months of fiscal
1999, prices for propylene, one of the primary raw materials for acrylonitrile,
were approximately 29% lower than the prices we paid for propylene in the first
nine months of fiscal 1998 and prices for ammonia, the other primary raw
material for acrylonitrile, were approximately 13% lower than the prices we
paid for ammonia in the first nine months of fiscal 1998. Margins on our
acrylonitrile sales during the first nine months of fiscal 1999 decreased from
the margins on our acrylonitrile sales during the first nine months of fiscal
1998, primarily as a result of lower acrylonitrile sales prices, which more
than offset our lower raw materials costs and lower manufacturing costs.

Revenues from our acrylic fibers operations were approximately $48 million
for the first nine months of fiscal 1999, a decrease of approximately 37% from
revenues from our acrylic fibers operations of approximately $76 million for
the first nine months of fiscal 1998. Sales volume of our acrylic fibers
decreased approximately 31% for the first nine months of fiscal 1999 from sales
volumes for our acrylic fibers for the first nine months of fiscal 1998. The
performance of our acrylics fibers business in the first nine months of fiscal
1999 continued to be negatively impacted by weak market conditions and imports
from foreign suppliers.

Revenues from our other petrochemicals operations, including acetic acid,
plasticizers, methanol, TBA, and sodium cyanide, were approximately $103
million for the first nine months of fiscal 1999, a decrease of approximately
25% from revenues from our other petrochemicals operations of approximately
$137 million for the first nine months of fiscal 1998. This decrease in
revenues from our other petrochemicals products resulted

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primarily from the approximately 44% decrease in our methanol sales prices and
the approximately 19% decrease in our methanol sales volumes from our methanol
sales prices and volumes during the first nine months of fiscal 1998, which
resulted from continued overcapacity in the global methanol market. Operating
earnings for our other petrochemicals during the first nine months of fiscal
1999 decreased from the operating earnings for our other petrochemicals during
the first nine months of fiscal 1998, primarily as a result of the weak market
conditions for methanol and the shut-down of our acetic acid unit for expansion
in the second quarter of fiscal 1999.

Pulp Chemicals. Revenues from our pulp chemicals operations were
approximately $140 million for the first nine months of fiscal 1999, a decrease
of approximately 9% from revenues from our pulp chemicals operations of
approximately $154 million for the first nine months of fiscal 1998. This
decrease in revenues resulted primarily from a decrease in our average sodium
chlorate sales prices from those we received during the first nine months of
fiscal 1998. The decline in sodium chlorate sales prices was primarily due to
decreased demand as a result of lower pulp mill operating rates. Our pulp
chemicals operations recorded operating earnings of approximately $21 million
for the first nine months of fiscal 1999, a decrease of approximately 28% from
the operating earnings recorded by our pulp chemicals operations of
approximately $29 million for the first nine months of fiscal 1998. This
decrease in operating earnings resulted primarily from lower sodium chlorate
sales prices.

Selling, General, and Administrative Expenses

Our SG&A expenses were approximately $27 million during each of the first
nine months of fiscal 1999 and the first nine months of fiscal 1998. The
favorable impact of cost reduction programs in the first nine months of fiscal
1999 was mostly offset by an increase in SG&A expenses associated with upgrades
of certain of our information technology systems, including Year 2000
compliance activities.

Other Expense

We had other expense of approximately $11 million in the first nine months
of fiscal 1999 which was primarily related to the one-time non-cash charge
related to our early retirement program and benefit changes and workforce
reductions in our petrochemicals and pulp chemicals operations. We had other
expense of approximately $6 million in the first nine months of fiscal 1998
which was primarily related to the voluntary severance programs in our
petrochemicals operations.

Interest and Debt Related Expenses

Our interest and debt related expenses were approximately $60 million for
the first nine months of fiscal 1999 and approximately $63 million for the
first nine months of fiscal 1998.

Benefit for Income Taxes

Our benefit for income taxes for the first nine months of fiscal 1999 was
approximately $21 million, with an effective tax rate of approximately 32%,
whereas our benefit for income taxes was approximately $13 million, with an
effective tax rate of approximately 31%, for the first nine months of fiscal
1998. This increase in our benefit for income taxes resulted primarily from the
increase in our pre-tax losses in the first nine months of fiscal 1999.

Comparison of Fiscal 1998 to Fiscal 1997

Our revenues were approximately $823 million in fiscal 1998, a decrease of
approximately 9% from our revenues of approximately $909 million in fiscal
1997. This decrease in our revenues resulted primarily from lower styrene,
acrylonitrile, and methanol sales prices and reduced styrene sales volumes,
partially offset by a

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full year of operations from our acrylic fibers facility and our Saskatoon
facility, each of which was acquired by us during fiscal 1997. Revenues
excluding the impact of the acquisitions of our acrylic fibers facility and our
Saskatoon facility would have been $676 million in fiscal 1998 and $807 million
in 1997. We recorded a net loss of approximately $33.7 million for fiscal 1998,
an increase of approximately 126% from the net loss of approximately $14.8
million that we recorded for fiscal 1997. This increase in net loss resulted
primarily from:

. reduced styrene, acrylonitrile, sodium chlorate, and methanol margins;

. decreased styrene sales volumes;

. weak markets in acrylic fibers;

. increased interest expense resulting from financings related to the
acquisitions of our acrylic fibers facility and our Saskatoon facility
and the issuance of our 11 1/4% Senior Subordinated Notes, the proceeds
of which were used to prepay outstanding indebtedness under our existing
senior credit facility;

. increased SG&A expense; and

. costs associated with workforce reductions.

The foregoing factors were partially offset by the results of our Saskatoon
facility's operations.

Revenues, Gross Profit, and Operating Income (Loss)

Petrochemicals and Acrylic Fibers. Revenues from our petrochemicals and
acrylic fibers operations were approximately $622 million in fiscal 1998, a
decrease of approximately 15% from the revenues we received in fiscal 1997 from
our petrochemicals and acrylic fibers operations of approximately $728 million.
This decrease in revenues resulted primarily from reduced styrene,
acrylonitrile, and methanol sales prices and decreased styrene sales volumes.
The economic conditions in Asia negatively impacted market conditions in the
fiscal 1998 period, particularly for our styrene, acrylonitrile, and acrylic
fibers products. Our petrochemicals and acrylic fibers operations recorded
operating losses of approximately $2 million for fiscal 1998, whereas our
petrochemicals and acrylic fibers operations recorded operating income of
approximately $12 million for fiscal 1997. This difference resulted primarily
from weaker operational performance in styrene, acrylonitrile, and methanol,
partially offset by stronger performance in acetic acid.

Revenues from our styrene operations were approximately $237 million in
fiscal 1998, a decrease of approximately 24% from the revenues we received in
fiscal 1997 from our styrene operations of approximately $310 million. Sales
prices for our styrene decreased approximately 11% in fiscal 1998 from sales
prices for our styrene in fiscal 1997. In addition, sales volume of our styrene
decreased approximately 16% for fiscal 1998 from sales volumes of our styrene
for fiscal 1997. These decreases in sales prices and volumes of our styrene
resulted primarily from weaker market conditions, particularly in Asia. During
fiscal 1998, prices for benzene, one of the primary raw materials for styrene,
were approximately 14% lower than the prices we paid for benzene in fiscal 1997
and prices for ethylene, the other primary raw material for styrene, were
approximately 25% lower than the prices we paid for ethylene in fiscal 1997.
Margins on our styrene sales during fiscal 1998 decreased from margins on our
styrene sales during fiscal 1997, primarily as a result of lower sales prices,
which more than offset our lower raw materials costs.

Revenues from our acrylonitrile operations were approximately $112 million
in fiscal 1998, a decrease of approximately 23% from the revenues we received
in fiscal 1997 from our acrylonitrile operations of approximately $146 million.
Sales prices for our acrylonitrile decreased approximately 25% in fiscal 1998
from sales prices for our acrylonitrile in fiscal 1997. This decrease in sales
prices resulted primarily from weaker market conditions, particularly in Asia.
Sales volume of our acrylonitrile increased approximately 2% in fiscal 1998
from sales volumes of our acrylonitrile in fiscal 1997. During fiscal 1998,
prices for propylene, one of the primary raw materials for acrylonitrile, were
approximately 28% lower than the prices we paid for propylene in

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fiscal 1997 and prices for ammonia, the other primary raw material for
acrylonitrile, were approximately 25% lower than the prices we paid for ammonia
in fiscal 1997. Margins on our acrylonitrile sales during fiscal 1998 decreased
from the margins on our acrylonitrile sales during fiscal 1997, primarily as a
result of lower acrylonitrile sales prices, which more than offset our lower
raw materials costs.

Revenues from our acrylic fibers business in fiscal 1998 were approximately
$100 million. We acquired the business on January 31, 1997 and recorded
revenues of approximately $92 million in fiscal 1997. Our acrylic fibers
business' performance in fiscal 1998 was negatively impacted by weak market
conditions, particularly in Asia, and imports from European suppliers.

Revenues from our other petrochemicals operations, including acetic acid,
plasticizers, methanol, TBA, and sodium cyanide, were approximately $173
million for fiscal 1998, a decrease of approximately 5% from the revenues we
received in fiscal 1997 from our other petrochemical operations of
approximately $181 million. This decrease in revenues resulted primarily from a
16% decrease in methanol sales prices which resulted from overcapacity in the
global methanol market, which was partially offset by better operating
performance of our acetic acid operations. Our other petrochemical products
reported an increase in operating earnings in fiscal 1998 compared to fiscal
1997. This increase in operating earnings was primarily due to better operating
performance in acetic acid, partially offset by weaker pricing in methanol.

Pulp Chemicals. Revenues from our pulp chemicals operations were
approximately $201 million for fiscal 1998, an increase of approximately 11%
from the revenues we received in fiscal 1997 from our pulp chemicals operations
of approximately $181 million. This increase in revenues resulted primarily
from the approximately 12% increase in our sales volume of sodium chlorate in
fiscal 1998 from our sales volume of sodium chlorate in fiscal 1997. Our
increase in sales volume of sodium chlorate resulted primarily from the
additional volumes we had available for sale after the acquisition of our
Saskatoon facility in July of 1997 and the startup of our Valdosta facility in
December of 1996. Average sales prices for our sodium chlorate declined
approximately 7% in fiscal 1998 compared to the average sales prices for our
sodium chlorate in fiscal 1997. This decline in our sodium chlorate sales
prices was primarily due to decreased demand for sodium chlorate resulting from
lower pulp mill operating rates, partially due to the economic environment in
various countries in Asia. Our pulp chemicals operations recorded operating
earnings of approximately $36 million in fiscal 1998, a decrease of
approximately 22% from the operating earnings recorded by our pulp chemicals
operations in fiscal 1997 of approximately $46 million. This decrease in
operating earnings resulted primarily from reduced sodium chlorate sales prices
and higher energy costs in fiscal 1998, which were partially offset by
increased sodium chlorate sales volumes.

Selling, General, and Administrative Expenses

Our SG&A expenses in fiscal 1998 were approximately $37 million, whereas we
had SG&A expenses of approximately $27 million in fiscal 1997. This increase in
our SG&A expenses resulted primarily from the additional SG&A expenses
associated with our new acrylic fibers business, our new Saskatoon facility,
increased corporate development activities, and costs associated with upgrades
of certain of our information technology systems, including Year 2000
compliance activities.

Other Expense

We had other expense of approximately $6 million in fiscal 1998 which was
primarily related to the voluntary severance programs we offered in January and
April of 1998 at our Texas City facility. We did not have any other expense
during fiscal 1997.

Interest and Debt Related Expenses

Our interest and debt related expenses for fiscal 1998 were approximately
$14 million higher than our interest and debt related expenses for fiscal 1997.
This increase in our interest and debt related expenses was

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primarily due to the acquisitions of our acrylic fibers business and our
Saskatoon facility and the issuance of our 11 1/4% Senior Subordinated Notes.
The proceeds of the sale of our 11 1/4% Senior Subordinated Notes were used to
prepay outstanding indebtedness under our existing senior credit facility.

Benefit for Income Taxes

Our benefit for income taxes in fiscal 1998 was approximately $19 million,
with an effective tax rate of approximately 36%, whereas our benefit for income
taxes and debt related expenses was approximately $2 million, with an effective
tax rate of approximately 16%, in fiscal 1997. This increase in our benefit for
income taxes resulted primarily from our pre-tax loss of approximately $53
million in fiscal 1998, compared to a pre-tax loss of approximately $13 million
in fiscal 1997.

Extraordinary Item

We had a $4 million after-tax ($6 million pre-tax) extraordinary item in
fiscal 1997 related to unamortized debt issue costs which were expensed in
April of 1997 as a result of the partial prepayment of the indebtedness under
our existing senior credit facility.

Comparison of Fiscal 1997 to Fiscal 1996

The following information for fiscal 1996 is for Holdings and its
subsidiaries as (1) we had no operating activities until August 21, 1996, (2)
prior to that date our operations were conducted by Holdings, and (3) for the
period from August 21 through September 30, 1996, Holdings' results of
operations were substantially identical to ours, except for $1.7 million of
interest expense from Holdings' 13 1/2% Notes that accreted from August 21
through September 30, 1996.

Our revenues were approximately $909 million in fiscal 1997, an increase of
approximately 15% from our revenues of approximately $790 million in fiscal
1996. This increase in our revenues resulted primarily from eight months of
operations from our acrylic fibers facility and three months of operations from
our Saskatoon facility, each of which was acquired in fiscal 1997, the startup
of our Valdosta facility in December of 1996, and the startup of our methanol
unit in August of 1996. We recorded a net loss of approximately $14.8 million
for fiscal 1997, whereas we had net income of approximately $31.6 million for
fiscal 1996. This difference resulted primarily from reduced styrene and
acrylonitrile margins and volumes and increased interest expense resulting from
the financings related to our recapitalization in August of 1996 and the
acquisitions of our acrylic fibers facility and our Saskatoon facility, all
partially offset by the results of our acrylic fibers facility and our
Saskatoon facility.

Revenues, Gross Profit, and Operating Income

Petrochemicals and Acrylic Fibers. Revenues from our petrochemicals and
acrylic fibers operations were approximately $728 million in fiscal 1997, an
increase of approximately 15% from the revenues we received in fiscal 1996 from
our petrochemicals and acrylic fibers operations of approximately $633 million.
This increase in revenues resulted primarily from the acquisition of our
acrylic fibers business and the construction of our new methanol unit,
partially offset by reduced styrene and acrylonitrile average sales prices and
sales volumes. Our petrochemicals and acrylic fibers operations recorded
operating income of approximately $12 million for fiscal 1997, a decrease of
approximately 57% from the approximately $28 million of operating income
recorded by our petrochemicals and acrylic fibers operations for fiscal 1997.
This decrease in operating income resulted primarily from weaker operational
performance in styrene and acrylonitrile, mostly offset by the positive impact
of the inclusion of our methanol unit and acrylic fibers facility.

Our styrene revenues in fiscal 1997 decreased approximately 4% from our
styrene revenues in fiscal 1996, primarily as a result of an approximately 2%
decrease in average styrene sales prices which resulted primarily from weaker
market conditions, particularly in the export market. In addition, sales
volumes of our styrene

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during fiscal 1997 decreased by approximately 5% from sales volume of our
styrene in fiscal 1996. During fiscal 1997, prices for benzene and ethylene,
the primary raw materials for styrene, were substantially higher than the
prices we paid for benzene and ethylene during fiscal 1996, with benzene prices
being approximately 10% higher and ethylene prices being approximately 18%
higher. These price escalations in benzene and ethylene contributed
significantly to the decline in our styrene margins during fiscal 1997, as
market conditions prevented us from increasing styrene sales prices by an
amount sufficient to compensate for these rising costs.

Our acrylonitrile revenues in fiscal 1997 decreased approximately 9% from
our acrylonitrile revenues in fiscal 1996, primarily as a result of an
approximately 6% decline in our acrylonitrile sales volumes and an
approximately 3% decline in our average acrylonitrile sales prices. The
reduction in our acrylonitrile sales volumes in fiscal 1997 was primarily due
to a partial shutdown of our acrylonitrile operations during the third quarter
of fiscal 1997 resulting from operating difficulties we experienced following
the completion of a capital project. During fiscal 1997, prices for propylene,
one of the primary raw materials for acrylonitrile, were approximately 14%
higher than the prices we paid for propylene during fiscal 1996. Also during
fiscal 1997, prices for ammonia, the other primary raw material for
acrylonitrile, were approximately 13% higher than the prices we paid for
ammonia during fiscal 1996. The combination of lower average sales prices and
higher raw materials costs resulted in our acrylonitrile margins during fiscal
1997 being lower than our acrylonitrile margins during fiscal 1996.

Our acrylic fibers facility recorded eight months of revenues of
approximately $92 million beginning with our acquisition of this facility on
January 31, 1997.

Our revenues during fiscal 1997 from our other petrochemicals products,
including methanol, acetic acid, plasticizers, TBA, and sodium cyanide,
increased approximately 23% from our fiscal 1996 revenues from our other
petrochemicals products, primarily as a result of the impact of the completion
of our methanol unit in August of 1996, which was partially offset by a decline
in our acetic acid revenues resulting from a procedural change in the billings
under our production contract with BP Chemicals and the recording of related
revenues. Prior to the startup of our methanol unit, we purchased the methanol
used in the production of our acetic acid. Under our acetic acid contract with
BP Chemicals, such purchases were ultimately re-billed to BP Chemicals and
included in acetic acid revenues. During fiscal 1997, methanol for our acetic
acid production was supplied by our methanol facility and was included in our
methanol revenues. In addition, during fiscal 1997, our other petrochemicals
products reported an increase in operating earnings from those realized in
fiscal 1996, primarily as a result of the completion of our methanol unit and
better performance in our acetic acid operations.

Pulp Chemicals. Revenues from our pulp chemicals operations were
approximately $181 million for fiscal 1997, an increase of approximately 15%
from the revenues we received in fiscal 1996 from our pulp chemicals operations
of approximately $157 million. This increase in revenues from our pulp
chemicals operations resulted primarily from an approximately 17% increase in
our sales revenues from sodium chlorate in fiscal 1997 compared to our sales
revenue from sodium chlorate in fiscal 1996. Our increase in sales revenue from
sodium chlorate resulted primarily from the additional volumes of sodium
chlorate we had available for sale after the startup of our Valdosta facility
in fiscal 1997 and the acquisition of our Saskatoon facility in July of 1997.
During fiscal 1997, average sales prices for our sodium chlorate declined
approximately 5% from average sales prices for our sodium chlorate during
fiscal 1996. Our pulp chemicals operations recorded operating earnings of
approximately $46 million in fiscal 1997, an increase of approximately 28% from
the operating earnings recorded by our pulp chemicals operations in fiscal 1996
of approximately $36 million. This increase in operating earnings resulted
primarily from our increased sales volume of sodium chlorate.

Selling, General, and Administrative Expenses

Our SG&A expenses in fiscal 1997 were approximately $27 million, whereas we
had SG&A expenses of approximately $31 million in fiscal 1996. This decrease in
our SG&A expenses resulted primarily because there was $9 million in expenses
related to stock appreciation rights which were paid in connection with our
recapitalization in August of 1996 and included in our SG&A expenses for fiscal
1996.

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Interest and Debt Related Expenses

Our interest and debt related expenses for fiscal 1997 were approximately
$60 million higher than our interest and debt related expenses for fiscal 1996.
This increase in our interest and debt related expenses was primarily due to
the additional debt incurred in connection with our recapitalization in August
of 1996, the acquisitions of our acrylic fibers facility and our Saskatoon
facility, and the issuance of $150 million of our 11 1/4% Senior Subordinated
Notes in April of 1997.

Provision (Benefit) for Income Taxes

Our provision (benefit) for income taxes in fiscal 1997 was approximately
$(2) million, with an effective tax rate of approximately 16%, whereas our
provision (benefit) for income taxes was approximately $17 million, with an
effective tax rate of approximately 34%, for fiscal 1996. This decrease in our
provision (benefit) for income taxes resulted primarily because we had a pre-
tax loss of approximately $13 million for fiscal 1997 and had pre-tax income of
approximately $50 million in fiscal 1996.

Extraordinary Item

We had a $4 million after-tax, or $6 million pre-tax, extraordinary item in
fiscal 1997 related to unamortized debt issue costs which were expensed in
April of 1997 as a result of the partial prepayment of the indebtedness under
our senior credit facility. We had a $2 million after-tax, or $3 million pre-
tax, extraordinary item in fiscal 1996 related to the loss on early
extinguishment of debt resulting from our recapitalization in August of 1996.

Liquidity and Capital Resources

Existing Debt Structure

On a pro forma basis as adjusted for the original issuance of the existing
notes and the establishment of our two new secured revolving credit facilities,
as of June 30, 1999, our long-term debt, including current maturities, would
have totaled approximately $800 million and consisted of:

. the existing notes;

. two secured revolving credit facilities;

. two term loans under a credit facility at our Saskatoon subsidiary;

. our 11 1/4% Notes; and

. our 11 3/4% Notes.

In addition, Holdings had approximately $142 million principal amount of its
13 1/2% Notes outstanding.

Simultaneously with the sale of the existing notes, we established two new
secured revolving credit facilities with aggregate borrowing capacity of $155
million, approximately $47 million of which was drawn under the fixed assets
revolver at closing. Approximately $50 million was drawn under the fixed assets
revolver as of August 31, 1999. Our old senior credit facility was terminated
upon consummation of the refinancing. The refinancing increased our liquidity
by eliminating near-term debt amortization and financial covenants associated
with the old senior credit facility, as well as by increasing revolving credit
availability. This refinancing was designed to give us the liquidity needed to
get through the current extended petrochemical trough, although we can give you
no assurances that it will do so.

The existing notes are our senior secured obligations and rank equally in
right of payment with all our other existing and future senior indebtedness and
senior in right of payment to all our existing and future subordinated
indebtedness. The existing notes are guaranteed by all of our existing direct
and indirect U.S.

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subsidiaries, other than Sterling Chemicals Acquisitions, Inc., on a joint and
several basis. Each subsidiary's guarantee ranks equally in right of payment
with all of that subsidiary's existing and future senior indebtedness and
senior in right of payment to all existing and future subordinated indebtedness
of that subsidiary. However, the existing notes, and each subsidiary's
guarantee, is subordinated to the extent of the collateral securing our secured
revolving credit facilities. The existing notes and the subsidiary guarantees
are secured by:

. a second priority lien on all of our U.S. chemical production facilities
and related assets;

. a second priority pledge of all of the capital stock of each subsidiary
guarantor; and

. a first priority pledge of 65% of the stock of some of our subsidiaries
incorporated outside of the United States.

You should read the discussion under the heading "Description of Notes" for
further information about the terms of the existing notes.

Our secured revolving credit facilities consist of:

. a $70,000,000 revolving credit facility secured by a first priority lien
on all of our U.S. chemical production facilities and related assets, all
of our capital stock, and all of the capital stock of each subsidiary
guarantor of the existing notes and a second priority lien on all
accounts receivable, inventory, and other specified assets of us and each
subsidiary guarantor of the existing notes; and

. an $85,000,000 revolving credit facility secured by a first priority lien
on all accounts receivable, inventory, and other specified assets of us
and each subsidiary guarantor of the existing notes.

Under our secured revolving credit facilities, we and each of our direct and
indirect U.S. subsidiaries, other than Sterling Chemicals Acquisitions, Inc.,
are co-borrowers and are jointly and severally liable for any indebtedness
thereunder. You should read the discussion under the heading "Description of
Other Indebtedness" for further information about the terms of our secured
revolving credit facilities.

The commitments for each of our secured revolving credit facilities will be
permanently reduced to the extent required under the credit agreement upon
prepayments made out of specific sources of funds, including assets sales and
certain equity issuances by Holdings.

The indenture governing the notes and our credit agreement contain numerous
covenants, including, but not limited to, restrictions on the ability of us and
some of our subsidiaries to incur indebtedness, pay dividends, create liens,
sell assets, engage in mergers and acquisitions, and refinance existing
indebtedness. In addition, the indenture and our credit agreement specify
various circumstances that will constitute, upon occurrence and subject in
certain cases to notice and grace periods, an event of default thereunder.
However, neither the indenture nor our credit agreement require us to satisfy
any financial ratios or maintenance tests.

The indentures governing the notes, our 11 1/4% Notes, our 11 3/4% Notes and
our credit agreement contain provisions which restrict the payment of advances,
loans, and dividends from us to Holdings. The most restrictive of these
covenants limits those payments during fiscal 1999 to approximately $2.0
million, plus any amounts due Holdings from us under the intercompany tax
sharing agreement.

Available credit under the current assets revolver is subject to a monthly
borrowing base consisting of 85% of eligible accounts receivable and 65% of
eligible inventory with an inventory cap of $42,500,000. In addition, the
borrowing base for the current assets revolver must exceed outstanding
borrowings thereunder by $12,000,000 at all times.

Standby Equity Commitments

In December of 1998, Holdings entered into separate Standby Purchase
Agreements with each of Gordon A. Cain, William A. McMinn, James Crane, Frank
P. Diassi, Frank J. Hevrdejs, and Koch Capital Services,

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Inc. Pursuant to the terms of the Standby Purchase Agreements, the purchasers
committed to purchase up to 2.5 million shares of Holdings common stock, at a
price of $6.00 per share, if, as, and when requested by Holdings at any time or
from time to time prior to December 15, 2001. Under each of the Standby
Purchase Agreements, Holdings may only require the purchasers to purchase these
shares if it believes that such capital is necessary to maintain, reestablish,
or enhance our borrowing ability under our revolving credit facilities or to
satisfy any requirement thereunder to raise additional equity. To induce the
purchasers to enter into the Standby Purchase Agreements, Holdings issued
warrants to purchase an aggregate of 300,000 shares of Holdings common stock to
the purchasers at an exercise price of $6.00 per share. Under the Standby
Purchase Agreements, Holdings is obligated to issue additional warrants to
purchase up to 300,000 additional shares of Holdings common stock to the
purchasers if, as, and when they purchase shares of Holdings common stock under
the Standby Purchase Agreements.

Saskatoon Facility

In July of 1997, Sterling Pulp Chemicals (Sask) Ltd., our Canadian
subsidiary that operates our Saskatoon facility, entered into a credit
agreement with The Chase Manhattan Bank of Canada, individually and as
administrative agent, and certain other financial institutions. The
indebtedness under the Saskatoon credit agreement is secured by substantially
all of the assets of this subsidiary, including the Saskatoon facility. The
Saskatoon credit agreement requires that certain amounts of "Excess Cash Flow,"
as defined therein, be used to prepay amounts outstanding under the term
portion of the credit facility. A mandatory prepayment in the amount of
approximately Cdn. $5 million was made in the first quarter of fiscal 1999
pursuant to this obligation.

The Saskatoon credit agreement provides for a revolving credit facility of
Cdn. $8 million to be used by the Saskatoon subsidiary solely for its general
corporate purposes. No borrowings were outstanding under the Saskatoon
revolving credit facility as of June 30, 1999. We believe the credit available
under the Saskatoon revolving credit facility, when added to internally
generated funds and other sources of capital, will be sufficient to meet the
Saskatoon subsidiary's liquidity needs for the reasonably foreseeable future,
although we can give no assurances to that effect.

Because of restrictions in the Saskatoon credit agreement, we will generally
not have access to the cash flows of our Saskatoon subsidiary. In addition,
because of its designation as an "Unrestricted Subsidiary" under our new
secured revolving credit facilities, the indenture for the Notes, and the
indentures governing our 11 3/4% Senior Subordinated Notes, our 11 1/4% Senior
Subordinated Notes and Holdings' 13 1/2% Notes, the Saskatoon subsidiary's
results are not considered in determining compliance with the covenants
contained therein.

The Saskatoon credit agreement contains provisions which restrict the
payment of advances, loans, and dividends from our Saskatoon subsidiary to us
or Holdings. The most restrictive of these covenants limits such payments
during fiscal 1999 to approximately $2 million, plus any amounts due from our
Saskatoon subsidiary under the intercompany tax sharing agreement.

Working Capital

Our working capital was $91 million at June 30, 1999, down from $92 million
at September 30, 1998. This $1 million decrease in working capital was
primarily due to a decrease in accounts receivable resulting from lower sales
prices and volumes.

Cash Flow

Net cash provided by our operations was $46 million in fiscal 1998, a
decrease of $1 million from the net cash provided from our operations in fiscal
1997. This decrease in net cash resulted primarily from a decrease in earnings
between the same periods, partially offset by lower working capital
requirements resulting from

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lower raw materials prices, lower accounts receivable, and improved working
capital management. Net cash flow used in our investing activities was $27
million in fiscal 1998 compared to $196 million in fiscal 1997. This decrease
was primarily due to the absence of the consummation of any acquisitions in
fiscal 1998, whereas the acquisitions of both our acrylic fibers facility and
our Saskatoon facility were consummated in fiscal 1997. Net cash flow used in
our financing activities was $15 million in fiscal 1998 compared to net cash
flows provided by our financing activities of $152 million in fiscal 1997. This
decrease in net cash flows from our financing activities in fiscal 1998
compared to fiscal 1997 was primarily due to the inclusion of the proceeds from
long-term debt associated with the acquisitions of our acrylic fibers facility
and our Saskatoon facility in fiscal 1997.

Net cash used in operations was $12 million for the first nine months of
fiscal 1999 compared to net cash provided by operations of $38 million for the
first nine months of fiscal 1998. This $50 million decrease in net cash
provided by operations was primarily due to the increase in net losses
resulting from the factors discussed previously.

Capital Expenditures

Our capital expenditures were $27 million in fiscal 1998, $43 million in
fiscal 1997, and $96 million in fiscal 1996. Our fiscal 1998 capital
expenditures were primarily related to routine safety, environmental, and
replacement capital. Our fiscal 1997 capital expenditures were primarily for
construction costs related to our methanol unit and our Valdosta facility,
along with the distributive control systems upgrades at our acrylonitrile unit.
In addition, we incurred capital expenditures in fiscal 1997 for process
modernization in styrene and acrylonitrile and for routine safety,
environmental, and replacement capital in our petrochemicals, pulp chemicals,
and acrylic fibers operations. Out of our fiscal 1996 capital expenditures, $66
million were for the expansion of our acetic acid unit, construction of our
methanol unit, and construction of our Valdosta facility. The acetic acid
expansion was completed in June of 1996, our methanol unit was completed in
August of 1996, and our Valdosta facility came on stream in December of 1996.
In addition, we incurred capital expenditures in fiscal 1996 for routine
safety, environmental, and replacement capital.

Our capital expenditures for the first nine months of fiscal 1999 were $18
million compared to $19 million in the same period in fiscal 1998. Our capital
expenditures in the first nine months of fiscal 1999 were primarily related to
the acetic acid expansion, our project to reduce the levels of phenylacetylene,
or "PA," in the styrene produced at our Texas City facility, our and Monsanto
Company's plan to construct a new disodium iminodiacetate, or "DSIDA," plant at
our Texas City facility, and routine safety, environmental, and replacement
capital. During the remainder of fiscal 1999, we expect to spend approximately
$8 million to $10 million on the PA reduction project, the DSIDA project, and
routine safety, environmental, and replacement capital. We expect to fund our
remaining fiscal 1999 capital expenditures from operating cash flow, plus
borrowings under our new secured revolving credit facilities, if needed.

Foreign Exchange

We enter into forward foreign exchange contracts to reduce our exposure to
risk due to Canadian dollar exchange rate movements. We do not engage in
currency speculation. Our forward foreign exchange contracts have varying
maturities with none exceeding 18 months. We make net settlements of United
States dollars for Canadian dollars at rates agreed to at the inception of
these contracts. We had a notional amount of approximately $20 million of
forward foreign exchange contracts to buy Canadian dollars outstanding at
September 30, 1997, $54 million at September 30, 1998, and $17 million at June
30, 1999. The deferred loss on these forward foreign exchange contracts at
September 30, 1997 was less than $1 million, at September 30, 1998 was $5
million, and at June 30, 1999 was less than $1 million. The last of our
existing forward exchange contracts expires in March of 2000, and we do not
currently intend to enter into any additional forward exchange contracts.

51
<PAGE>

Accounting Changes

Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," established standards for reporting and displaying of
comprehensive income and its components. We adopted this statement as of
October 1, 1998.

Statement of Financial Accounting Standards No. 131, "Disclosure About
Segments of an Enterprise and Related Information," establishes standards for
the way that public business enterprises report information about operating
segments in interim and annual financial statements. Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," establishes revisions to employers' disclosure about
pension and other post retirement benefit plans. We adopted these statements as
of October 1, 1998, and the disclosures required thereby will be included in
our Annual Report on Form 10-K for the fiscal year ending September 30, 1999.

Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. We are
evaluating the disclosures that will be required when this statement is adopted
in the first quarter of fiscal 2001.

Certain Known Events, Trends, and Uncertainties

Year 2000 Issue

Some computer systems and other equipment with computer chips store dates as
two digits rather than four to define the applicable year. For example, these
computer systems would store the year "1999" as "99." Any clock or date
recording mechanism, including date sensitive software, which uses only two
digits to represent the year may interpret the digits "00" as the Year 1900
rather than the Year 2000. This could result in a system failure or
miscalculations causing serious disruption of operations. We are in the
process, using both internal and external resources, of addressing the Year
2000 issue. We are currently engaged in a comprehensive project intended to
upgrade our information technology systems, which include our computer systems
and software, and our non-information technology systems, which include our
process control systems and other equipment that utilize embedded chips to
control various functions, to systems that will consistently and properly
recognize the Year 2000 and subsequent years.

We have conducted an inventory of our hardware and software and made a
preliminary assessment of the Year 2000 compliance of our business and process
control systems. This preliminary assessment determined which of our business
and process control systems are critical to our business and those systems
deemed to be critical were assigned a higher priority in our Year 2000
remediation effort. In this phase of the project, we discovered some Year 2000
deficiencies in our business systems and initiated plans to rectify these
issues in the remediation and replacement phase of the project. The preliminary
assessment of our process control systems did not detect any material Year 2000
difficulties. We then engaged a nationally recognized independent consultant to
perform a more detailed survey of all of our business and process control
systems, including critical and non-critical systems, to confirm the absence of
any additional material Year 2000 deficiencies. This survey has been completed
and did not reveal any additional material Year 2000 deficiencies.

In the second phase of our Year 2000 project, we believe we are taking the
necessary steps to rectify all material Year 2000 deficiencies. A major
component of this effort involves the replacement of all critical business
systems which may not be Year 2000 compliant with new business systems intended
to be Year 2000 compliant. All of these projects are scheduled to be completed
by October of 1999. If we determine that any additional systems under review
have material Year 2000 deficiencies, we plan to take appropriate remedial
action. At this time, the instrumentation in the laboratory at our Texas City
facility requires significant remediation or replacement. However, this
instrumentation can be successfully operated with minimal manual intervention.
Even without remediation or replacement, this instrumentation would not
jeopardize the successful operation of our Texas City facility.

52
<PAGE>

The final phase of our Year 2000 project involves testing all critical
systems to confirm that these systems will react properly to the advent of the
Year 2000. We are in the process of conducting tests on all of our current
information technology and non-information technology systems that were not
identified as having Year 2000 deficiencies and anticipate that all of this
testing will be completed by September 30, 1999. Once the remediation and
replacement phase is completed, we will conduct tests on all newly installed
and updated systems to determine if they are Year 2000 compliant. This testing
is scheduled to be completed by September 30, 1999.

The total estimated expense for our Year 2000 compliance projects is
approximately $13 to $15 million, of which we have incurred approximately $6
million through June 30, 1999. We have been funding and will continue to fund
this expense out of our operating cash flow or borrowings under our credit
facilities.

Irrespective of our efforts, some Year 2000 problems, such as processing
failures, error messages, or incorrect data may still occur in some of our
computer systems if we receive programs or data from third parties who are not
Year 2000 compliant. Moreover, our business may be disrupted in other ways by
Year 2000 problems of third parties, which may affect, for example, our ability
to obtain needed materials or deliver our products. We are in the process of
determining whether our significant vendors, customers, and others with whom we
deal are Year 2000 compliant and have requested that such persons complete and
return surveys with respect to their Year 2000 issues. We have not received any
survey response that indicates that any of these persons have any specific Year
2000 problems. However, we cannot be sure that a Year 2000 problem will not
occur for us as a result of a Year 2000 problem of one of our vendors or
customers or some other person with whom we deal.

While our Year 2000 projects are scheduled to be completed by September 30,
1999, it is possible that one or more of these projects may not be completed or
that compliance efforts may be ineffective. A failure to properly and timely
correct any Year 2000 deficiencies would affect us on several levels. If our
Year 2000 remediation efforts were to prove unsuccessful, we might be unable to
operate one or more of our manufacturing facilities, take orders, sell
products, or otherwise generally conduct our business. Since our business is
characterized by large volume sales to a relatively limited number of
customers, we believe that, with the engagement of additional personnel, orders
could be processed and deliveries completed through manual means. In
preparation for this type of scenario, we have outlined a contingency plan to
guide the hiring and training of additional personnel and the processing of
paperwork manually.

Although we believe that we are taking the appropriate courses of action to
ensure that we are Year 2000 compliant, we cannot be sure that the actions
discussed above will have the anticipated results or that Year 2000 problems
will not have a material adverse effect on our financial condition or results
of operations. Specific factors that might affect the success of our Year 2000
efforts and the occurrence of Year 2000 disruption or expense include:

. our failure or the failure of our consultant to properly identify
deficient systems;

. the failure of the selected remedial action to adequately address any
deficiencies;

. the failure of our consultant to complete the remediation in a timely
manner, due to shortages of qualified labor or other factors;

. unforeseen expenses related to the remediation of existing systems or the
transition to replacement systems; and

. the failure of third parties to become compliant or to adequately notify
us of potential non-compliance.

Other Matters

Our methanol facility, which we restarted in April of 1999, is at a
disadvantage when compared to foreign competitors because of a significant
disparity between domestic and foreign prices for natural gas, one of the

53
<PAGE>

primary raw materials for methanol. One of the primary uses of methanol is in
the production of MTBE used in reformulated gasolines. Recent legislative
developments in the State of California and by the Environmental Protection
Agency are likely to negatively impact the domestic methanol market. For more
information on issues facing our methanol facility, see "--Recent
Developments."

For a description of certain other known events, trends, and uncertainties,
see "Risk Factors."

Qualitative and Quantitative Disclosures about Market Risk

The table below provides information about our market sensitive financial
instruments and constitutes a "forward-looking statement." We have market risk
exposure to changing interest rates, primarily in the United States. We may use
interest rate swaps to adjust interest rate exposure, when appropriate, based
upon market conditions. A portion of our borrowings and transactions are
denominated in foreign currencies which exposes us to market risk associated
with exchange rate movements. We have historically entered into forward foreign
exchange contracts to hedge our exposure, although we do not engage in currency
speculation. While these hedges limit our exposure to relative increases in the
value of the Canadian dollar, they also limit the benefits that we may realize
from relative decreases in that value. The last of our existing forward
exchange contracts expires in March of 2000, and we do not currently intend to
enter into any additional forward exchange contracts.

Our market risk exposure described below is as of September 30, 1998, the
end of our last fiscal year, and had not changed significantly through June 30,
1999, the end of our most recently completed fiscal quarter. As discussed
elsewhere in this prospectus, however, subsequent to that date we used the
proceeds of the sale of the existing notes and our initial borrowings under our
fixed assets revolver to fully repay and terminate our senior credit facility,
refinancing the term loans and revolving credit loans outstanding thereunder.
Our other debt instruments remained in place. Our issuance of the existing
notes and our establishment of the new secured revolving credit facilities
changed the nature and extent of our exposure to changing interest rates from
that described below.

<TABLE>
<CAPTION>
Fair Value
September 30,
Expected maturity dates 1999 2000 2001 2002 2003 Thereafter Total 1998
----------------------- ------- ------- ------- ------- ------- ---------- -------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
U.S. dollar
denominated............ $ 5,941 $13,202 $24,662 $31,442 $84,607 $708,979 $868,833 $ 767,046
Average interest rates-
fixed.................. -- -- -- -- -- 12.2%
Average interest rates-
variable (a) (a) (a) (a) (a) (a)
Interest rate swaps..... $49,107 $31,250 $13,393 -- -- -- $ 2,251(b)
Canadian dollar
denominated............ $ 2,968 $ 1,938 $ 1,938 $ 3,035 $ 3,813 $ -- $ 13,692 $ 13,692
Average interest rates-
variable (c) (c) (c) (c) (c) --
Firm Commitments,
Forward Contracts:
Contract notional
amount-U.S. dollars
sold................... $48,000 $ 6,000 -- -- -- -- $ 54,000 $49,300(d)
Average contractual
exchange rate.......... 1.40 1.40 -- -- -- --
</TABLE>
- --------
(a) Our term and revolving loans under our existing senior credit facility bear
interest, at our option, at an annual rate of either the "Eurodollar Rate"
or the "Base Rate" plus an "Applicable Margin" ranging from 0.5% to 3.5%
depending upon our "Leverage Ratio," as those terms are defined in our
existing senior credit facility. The "Base Rate" is equal to the greater of
the prime rate as announced from time to time by the agent bank for the
facility, the "Federal Funds Effective Rate" plus 1/2% or the "Base CD
Rate" plus 1%, as those terms are defined in our existing senior credit
facility. At September 30, 1998, the outstanding principal amounts and
interest rates in effect for our term loans were as follows:

54
<PAGE>

<TABLE>
<CAPTION>
Principal Interest
Loan Amount Rate
---- ----------- --------
<S> <C> <C>
"Tranche A" term loan due March 31, 2003................ $76 million 7.8%
"Tranche B" term loan due September 30, 2004............ 198 million 8.3%
"ESOP" term loan due September 30, 2000................. 3 million 7.8%
</TABLE>
(b) Represents unrealized loss.
(c) The "Tranche A" term loan and the revolving loans to our Canadian
subsidiary that operates our Saskatoon facility, Sterling Pulp Chemicals
(Sask) Ltd., under its credit facility bear interest, at its option, at an
annual rate of either the "Bankers Acceptance Rate" or the "Base Rate" plus
an "Applicable Margin" ranging from 1% to 2.5% depending upon its "Leverage
Ratio," as those terms are defined in the Saskatoon credit agreement. The
"Tranche B" term loan to the Saskatoon subsidiary under this facility bears
interest, at its option, at an annual rate of either the "Eurodollar Rate"
or the "Base Rate" plus an "Application Margin" ranging from 0% to 2.5%
depending upon its "Leverage Ratio," as those terms are defined in the
Saskatoon credit agreement. The "Base Rate" for the Tranche A term loan and
the Saskatoon revolving loans is equal to the greater of the prime rate for
Canadian dollar commercial loans made in Canada, as announced from time to
time by the agent bank, or the rate for "Canadian Dollar Bankers
Acceptances" accepted by the agent with a term to maturity of 30 days plus
1%, as those terms are defined in the Saskatoon credit agreement. The "Base
Rate" for the Tranche B term loan is equal to the greater of the Prime Rate
as announced from time to time by the agent bank, the "Federal Funds
Effective Rate" plus 1/2% or the "Base CD Rate" plus 1%, as those terms are
defined in the Saskatoon credit agreement. At September 30, 1998, the
outstanding principal amounts and interest rates in effect for the
Saskatoon subsidiary's term loans were as follows:
<TABLE>
<CAPTION>
Principal Interest
Loan Amount Rate
---- ----------- --------
<S> <C> <C>
Saskatoon "Tranche A" term loan due June 30, 2003..... $21 million 8.2%
Saskatoon "Tranche B" term loan due June 30, 2005..... 36 million 8.4%
</TABLE>
(d) Represents notional amount less unrealized foreign exchange losses.

55
<PAGE>

THE COMPANY

We are a leading North American producer of selected petrochemicals, acrylic
fibers, and pulp chemicals. We manufacture petrochemicals at our Texas City
facility, acrylic fibers at our facility near Pensacola, Florida, and pulp
chemicals at our Valdosta, Georgia facility and our five facilities in Canada.
Our petrochemicals products are generally sold to customers for use in the
production of other chemicals and products, which in turn are used in the
production of a wide array of consumer goods and industrial products. Our
acrylic fibers are used primarily in the manufacture of textiles, carpets,
outdoor furniture, and other products. Our pulp chemicals are generally used in
the paper manufacturing process. We also license acrylic fibers manufacturing
technology to other producers and license, engineer, and oversee construction
of chlorine dioxide generators for the pulp and paper industry.

Industry Overview

The primary markets in which we compete, especially styrene and
acrylonitrile, are cyclical and are sensitive to several factors including:

. changes in the balance between supply and demand;

. the price of raw materials; and

. the level of general worldwide 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 overcapacity and declining prices and profit
margins. Large global capacity additions of styrene and acrylonitrile were
completed during 1997 and 1998. In addition, events in the financial markets in
certain Asian countries have impacted the demand growth for our products,
particularly styrene and acrylonitrile, resulting in a negative impact on sales
volumes, prices, and margins in fiscal 1998 and fiscal 1999. Many industry
experts such as CMAI and Chem Systems believe that the markets for styrene and
acrylonitrile are currently at a cyclical trough. These experts believe that
this trough, like those experienced in the past, is temporary, and that
increases in demand relative to existing and expected capacity will translate
into higher capacity utilization rates and improved market conditions within
the next 24 to 36 months.

Petrochemicals and Acrylic Fibers

Styrene. Total North American styrene capacity is currently approximately 13
billion pounds per year. The industry is currently operating at an estimated
utilization rate of approximately 89%, reflecting a number of factors
influencing both supply and demand. Similar to other petrochemicals, styrene
tends to experience periods of strong demand resulting in tight supply and high
prices and margins. This tight balance in supply and demand often results in
new capacity additions. In most cases, incremental capacity comes in the form
of large new plants or major expansions of existing facilities. As this new
capacity comes on line, it often exceeds current demand growth and results in
softening of pricing and margins.

The North American styrene industry ran at utilization rates of
approximately 97% during 1994, resulting from strong demand growth from
worldwide economic expansion. Strong demand growth and high utilization rates
resulted in high styrene prices and margins. In response to favorable market
conditions, several major producers announced new capacity increases in 1997
and 1998, particularly in the Far East. At the time of this announced new
capacity, there was a general slowdown in the worldwide economic growth rate,
prompting customers to begin utilizing their available inventories and decrease
purchases of additional product. The weakening market conditions were
accelerated in the fourth quarter of fiscal 1995 by significantly decreased
purchases of styrene and styrene derivatives by customers in China. China
accounts for a significant portion of

56
<PAGE>

global purchases of styrene and styrene derivatives. Average styrene prices
declined by approximately 41% from 1995 to 1996. This softness in styrene
pricing intensified in 1997 and 1998 as the previously announced new capacity
came on line at the same time that economic events in various Asian countries
significantly reduced demand growth for styrene, resulting in prices declining
an additional 26%. Average market prices for styrene declined to their lowest
levels in approximately 20 years in 1998.

In light of current conditions, several planned capacity expansion programs,
including announced plans by Dow Chemical Company, Chevron Chemical Company,
and Huntsman Corporation, were either canceled or delayed in 1998. Except for
1998, when the Asian economic crisis impacted demand growth for all
petrochemicals products, styrene demand growth has significantly exceeded
growth in global GDP since 1985. Based on existing and expected industry
capacity, industry experts believe that continued demand growth will ultimately
result in higher capacity utilization rates and improved market conditions.

Acrylonitrile. Global acrylonitrile capacity is currently approximately 12
billion pounds per year. The industry is currently operating at an estimated
utilization rate of approximately 89%. The acrylonitrile market exhibits
similar characteristics regarding capacity utilization, selling prices, and
profit margins as those of styrene. Moreover, as a result of the high
percentage of export acrylonitrile sales, demand for acrylonitrile is
significantly influenced by export customers, particularly those that supply
acrylic fibers to customers in China. During 1995, strong demand for acrylic
fibers and ABS resins, particularly in China, increased demand for
acrylonitrile resulting in high prices and margins. High utilization rates and
prices resulted in approximately two billion pounds of capacity increases
coming on line between 1996 and 1998. At the same time, acrylonitrile demand
began to weaken in late 1995 for many of the same reasons that caused the
deterioration in the styrene market. As new acrylonitrile capacity in the
United States and Asia came on line and demand growth in Asian markets
weakened, acrylonitrile prices and margins decreased significantly in 1996,
1997, and 1998. Average market prices for acrylonitrile declined approximately
46% from 1995 to 1998, to their lowest levels since the last trough in 1993.

Solutia is constructing the only new acrylonitrile production facility in
North America, which is expected to have a rated annual production capacity of
approximately 500 million pounds and which is currently expected to begin
production in the third calendar quarter of 2000. Based upon existing industry
capacity, and taking into account the capacity to be added by Solutia, industry
experts believe that continued demand growth will ultimately result in higher
capacity utilization rates and improved market conditions.

Acrylic Fibers. There are only two manufacturers of acrylic fibers in North
America. In general, the two acrylic fibers producers sell to different
customers and focus on different segments of the market. Acrylic fibers compete
with other fibers, including polyester and wool. During 1998, the acrylic
fibers industry experienced decreased sales prices and margins due to a
significant drop in the demand for acrylic fibers products which resulted from
the economic events in various countries in Asia and increased competition from
European suppliers.

Acetic Acid. United States acetic acid capacity is currently approximately
5.7 billion pounds per year. The industry is currently operating at an
estimated utilization rate of approximately 91%. Demand for acetic acid is
linked to demand for vinyl acetate monomer, a key intermediate in the
production of a wide array of polymers.

Pulp Chemicals

Sodium Chlorate. 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 approximately 9% as pulp mills have accelerated substitution of chlorine
dioxide for elemental chlorine in bleaching applications. Substitution of
chlorine dioxide for elemental chlorine is driven primarily by environmental
concerns. The EPA recently instituted new regulations known as "Cluster Rules,"
which mandate the elimination of elemental chlorine usage in bleaching
applications, resulting in increased substitution of chlorine dioxide for
elemental chlorine by the North American pulp and paper industry.

57
<PAGE>

In 1998, demand for sodium chlorate did not increase at historical rates as
a result of weak market conditions and lower operating rates in the pulp and
paper industry. U.S. operating rates remained flat from 1997 to 1998 at 87%,
and average prices for our sodium chlorate decreased by approximately 7% from
fiscal 1997 to fiscal 1998. There are three companies which collectively
account for more than 70% of the North American sodium chlorate capacity.

Product Summary

The following table summarizes our principal products, including our
capacity, primary end uses, raw materials, and major competitors for each
product. "Capacity" represents rated annual production capacity at April 1,
1999, which is calculated by estimating the number of days in a typical year a
production facility is expected to operate after allowing for downtime for
regular maintenance and multiplying that number by an amount equal to the
facility's optimal daily output based on the design feedstock mix. As the
capacity of a facility is an estimated amount, actual production values may be
more or less than capacity.

<TABLE>
<CAPTION>
Sterling Product Intermediate
(Capacity) Products Primary End Products Raw Materials Major Competitors
---------------- ------------------ ----------------------------- ----------------------- -----------------------------
<S> <C> <C> <C> <C>
Petrochemicals and
Acrylic Fibers
Styrene Polystyrene, Building products, boat and Ethylene and benzene Dow Chemical Company,
(1.7 billion ABS/SAN resins, automotive components, Lyondell Chemical
pounds per year) styrene butadiene disposable cups and trays, Company, Amoco
latex, and packaging and containers, Chemical Company,
unsaturated and housewares, tires, audio and Chevron Chemical
polyester resins video cassettes, luggage, Company, Cos-Mar (a
children's toys, paper joint venture of General
coating, appliance parts, and Electric Company and
carpet backing FINA Inc.), and Nova
Corporation

Acrylonitrile Acrylic fibers and Apparel, furnishings, Ammonia, air, and BP Chemicals Inc., Cytec
(740 million ABS/SAN resins upholstery, household propylene Industries Inc., E.I. du Pont
pounds per year) appliances, carpets, and de Nemours and Company,
plastics for automotive parts and Solutia Inc.
using ABS and SAN
polymers

Acetic Acid Vinyl acetate Adhesives, cigarette filters, Methanol and carbon Celanese Ltd., Eastman
(1 billion and surface coatings monoxide Chemical Company, and
pounds per year) Millennium Chemicals Inc.

Methanol Acetic acid, Adhesives, cigarette filters, Natural gas, steam, and Methanex Methanol Co.,
(150 million MTBE, and and surface coatings, carbon dioxide Borden Chemicals,
gallons per year) formaldehyde gasoline oxygenate and Lyondell Methanol
octane enhancer, and Company, L.P., Celanese
plywood adhesives Ltd., and Beaumont
Methanol

Plasticizers Polyvinyl chloride Flexible plastics, such as Alpha-olefins, carbon Exxon Corporation,
(280 million (PVC) shower curtains and liners monoxide, hydrogen, Aristech Chemicals, and
pounds per year) floor coverings, cable orthoxylene, and air Eastman Chemical
insulation, upholstery, and Company
plastic molding

TBA NA Pesticides, solvents, Isobutylene, sulfuric BASF Corporation and
(21 million pharmaceuticals, and acid, caustic soda, and Nitto Chemical Industry
pounds per year) synthetic rubber hydrogen cyanide Co., Ltd.

Sodium Cyanide NA Electroplating and Caustic soda and
(100 million precious metals recovery hydrogen cyanide
pounds per year)

Regular Textile NA Apparel, fleece, hosiery, Acrylonitrile, vinyl Solutia Inc.
Fibers industrial, and sweaters acetate, sodium
thiocyanate, sodium
bisulfate, and finish
oil
</TABLE>

58
<PAGE>

<TABLE>
<CAPTION>
Intermediate
Sterling Product (Capacity) Products Primary End Products Raw Materials Major Competitors
- --------------------------- ---------------- ---------------------------- ----------------------------- ------------------------
<S> <C> <C> <C> <C>
Specialty Textile Fibers NA High-end hosiery, pile Acrylonitrile, vinyl acetate, Solutia Inc.
fabrics, and outdoor sodium thiocyanate, sodium
furniture bisulfate, and finish oil

Technical Fibers NA Friction materials (brake Acrylonitrile, vinyl acetate, Solutia Inc.
linings), gaskets, specialty sodium thiocyanate, sodium
papers, and non-wovens bisulfate, and finish oil
Pulp Chemicals
Sodium Chlorate Chlorine dioxide Bleaching agent for pulp Electricity, salt, and water Akzo Nobel N.V., CXY
(498,000 tons production; downstream Chemicals Ltd., Kerr
per year) products include high McGee Corporation, and
quality office and coated Huron Chemicals
papers

Chlorine Dioxide NA Chlorine dioxide for use NA Akzo Nobel, N.V.
Generators in the bleaching of pulp

Sodium Chlorite Chlorine dioxide Antimicrobial agent for Sodium chlorate and Vulcan Chemicals
(3,500 tons per municipal water treatment hydrochloric acid
year) and disinfectant for fresh
produce

Caustic soda NA Bleaching and digesting Electricity, salt, and water Occidental Chemical
agent for pulp and paper Company, Dow Chemical
Company, and Pioneer
Companies, Inc.

Chlorine NA Widely used in potable Electricity, salt, and water Occidental Chemical
water and wastewater Company, Dow Chemical
treatment programs and Company, and Pioneer
in swimming pools Companies, Inc.

Muriatic acid NA Stimulation agent in oil Chlorine, hydrogen, and water Occidental Chemical
and gas extraction Company, Dow Chemical
operations Company, and Pioneer
Companies, Inc.

Calcium Hypochlorite NA Sanitizing agent to control Lime, water, caustic soda, Olin Corporation and PPG
(8,500 metric bacteria and algae in and chlorine Industries
tons per year) swimming pools
</TABLE>

Products

Petrochemicals and Acrylic Fibers

Styrene. We are the fourth largest North American producer of styrene. Our
styrene unit, located at our Texas City facility, is one of the largest in the
world and has a rated annual production capacity of approximately 1.7 billion
pounds, which represents approximately 12% of total North American capacity. We
sold approximately 34% of our styrene sales volumes pursuant to conversion and
other long-term agreements during fiscal 1998. Approximately 40% of our styrene
sales volumes were exported in fiscal 1998, principally to Asia, either
directly or pursuant to arrangements with large international trading
companies.

On March 3, 1999, we announced a capital project to upgrade our styrene
plant at our Texas City facility. The project will reduce phenylacetylene, or
"PA," in our styrene by employing Raytheon/Fina technology and a Criterion
catalyst. PA is difficult to remove from styrene through conventional
distillation, but the new technology has been demonstrated to selectively
remove PA at a low processing cost and with reduced loss of styrene. We expect
lower PA styrene to be a growing segment of the styrene market. We plan to
invest approximately $7 to $8 million in the project. We began the process of
upgrading our styrene production during the recent shutdown of our styrene
unit, and we expect to be producing lower PA styrene product by December 31,
1999.

59
<PAGE>

Acrylonitrile. We are the second largest North American producer of
acrylonitrile. Our acrylonitrile unit, located at our Texas City facility, has
a rated annual production capacity of approximately 740 million pounds, which
represents approximately 19% of total North American capacity. We sold
approximately 45% of our acrylonitrile sales volumes pursuant to conversion and
other long-term agreements during fiscal 1998. Approximately 50% of our
acrylonitrile production in fiscal 1998 was exported. In April of 1998, ANEXCO,
LLC, our joint venture with BP Chemicals, commenced operations to market both
companies' acrylonitrile in Asia and South America. We currently use our
hydrogen cyanide, a by-product of acrylonitrile manufacturing, as a raw
material for the production of TBA and sodium cyanide and also burn it as fuel.

In February of 1999, we and Monsanto Company announced plans to construct a
new disodium iminodiacetate, or "DSIDA," plant at our Texas City facility.
DSIDA is an essential intermediate in the production of Monsanto's Roundup, a
glyphosate based herbicide. The DSIDA plant will use our previously under-
utilized hydrogen cyanide as a primary feedstock. When the DSIDA plant begins
production, we expect to use all of our hydrogen cyanide for chemical value.
Our implementation of these plans remains subject to the execution of a
mutually acceptable definitive agreement with Monsanto.

Acetic Acid. We are the second largest North American producer of acetic
acid. Our acetic acid unit, located at our Texas City facility, has a rated
annual production capacity of approximately 1 billion pounds, which represents
approximately 16% of total North American capacity. All of our acetic acid
production is sold to BP Chemicals pursuant to a long-term contract that
expires in 2016. In March of 1999, we completed an expansion of our acetic acid
facilities in conjunction with BP Chemicals. BP Chemicals is providing its
CativaTM technology and provided a portion of the capital for the $10 million
expansion. The expansion increased our annual acetic acid production capacity
by approximately 25%.

Methanol. In August of 1996, we completed construction of a methanol unit
with a rated annual production capacity of approximately 150 million gallons at
our Texas City facility. We share capital investment in the unit and production
capacity with BP Chemicals. Approximately 42% of our methanol production was
used as a raw material in our acetic acid unit during fiscal 1998, replacing
methanol that was previously purchased from third parties. The remaining
methanol is available for sale in the merchant market and for BP Chemicals'
worldwide acetic acid business.

Plasticizers. We produce plasticizers at our Texas City facility under an
agreement pursuant to which we sell all of our plasticizers production to BASF
through 2007. Our rated annual production capacity of plasticizers is
approximately 280 million pounds.

TBA. We use a portion of our hydrogen cyanide by-product from our Texas City
facility to produce TBA, which we sell to Flexsys America L.P. pursuant to a
long-term conversion agreement. The agreement automatically renews for
successive one-year periods unless terminated by either party on at least 24
months notice. Our rated annual production capacity for TBA is approximately 21
million pounds.

Sodium Cyanide. We operate a sodium cyanide unit at our Texas City facility
which is owned by DuPont pursuant to a long-term arrangement. The sodium
cyanide unit uses our hydrogen cyanide by-product as a raw material. The rated
annual production capacity of this unit is approximately 100 million pounds.

Acrylic Fibers. Our acrylic fibers facility is one of two North American
producers of acrylic fibers. This facility's rated annual production capacity
is approximately 150 million pounds, which represents approximately 33% of
total North American capacity. Approximately 15% of our acrylic fibers
production was exported in fiscal 1998. We produce regular textile fibers,
specialty textile fibers, and technical fibers. Regular textile fibers are
commodity fibers whose sales are primarily driven by price and service rather
than product characteristics. Specialty textile fibers are targeted for
specific applications or end uses and typically have higher margins than
regular textile fibers. Technical fibers are specially engineered for
industrial, non-textile uses such as brake linings and typically have higher
margins than textile fibers.

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Pulp Chemicals

Sodium Chlorate. We are the second largest producer of sodium chlorate in
North America. Our six sodium chlorate facilities have an aggregate rated
annual production capacity of approximately 500,000 tons, which represents
approximately 23% of total North American capacity.

Chlorine Dioxide Generators. Through our ERCO Systems Group, we are the
largest worldwide supplier of patented technology for generators that certain
pulp mills use to convert sodium chlorate into chlorine dioxide. Each mill that
uses chlorine dioxide requires at least one generator. We receive revenue when
a generator is sold to a mill and also receive royalties from the mill after
start-up, generally over a ten-year period, based on the amount of chlorine
dioxide produced by the generator. We have supplied approximately two-thirds of
all existing modern pulp mill generators worldwide.

The research and development group of ERCO 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. Pulp mills may also
convert to a newer generator to take advantage of efficiency advances and
technological improvements. Each upgrade or conversion requires a licensing
agreement, which generally provides for payment of an additional ten-year
royalty.

Sodium Chlorite. We have a rated annual production capacity of sodium
chlorite of approximately 3,500 tons.

For historical information presented on a segmented basis for our
petrochemicals and acrylic fibers business and pulp chemicals business, see
Note 9 of the Notes to Consolidated Financial Statements included in this
prospectus.

Sales and Marketing

We sell our petrochemicals products pursuant to:

. multi-year contracts;

. conversion agreements; and

. spot transactions in both the domestic and export markets.

We have certain long-term agreements that provide for the dedication of 100% of
our production of acetic acid, plasticizers, TBA, and sodium cyanide, each to
one customer. We also have various sales and conversion agreements that
dedicate significant portions of our production of styrene, acrylonitrile, and
methanol to certain customers. Some of these agreements provide for cost
recovery plus an agreed profit margin based upon market prices. These
agreements help us to:

. optimize capacity utilization rates, which can lower our selling,
general, and administrative expenses;

. reduce our working capital requirements; and

. insulate our operations to some extent from the effects of declining
markets and changes in raw materials prices.

We compete on the basis of:

. product price;

. quality; and

. deliverability.

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Prices for our petrochemicals products are determined by market factors that
are largely beyond our control and, except with respect to a number of our
multi-year contracts, we generally sell these products at prevailing market
prices.

Some of our multi-year contracts for our petrochemicals products are
structured as conversion agreements, pursuant to which the customer furnishes
raw materials that we process into finished products. In exchange, we receive a
fee typically designed to cover our fixed and variable costs of production and
to generally provide an element of profit dependent on the existing market
conditions for the product. These conversion agreements help us to maintain
lower levels of working capital and, in some cases, to gain access to certain
improvements in manufacturing process technology. We believe our conversion
agreements help insulate us to some extent from the effects of declining
markets and changes in raw materials prices, while allowing us to share in the
benefits of favorable market conditions for most of the products sold under
these arrangements. The balance of our petrochemicals products are sold by our
direct sales force.

Our acrylic fibers facility currently markets products in North America
through our internal sales staff and to international customers through non-
affiliated agents. Acrylic fibers are priced based upon market conditions,
which include, but are not limited to, raw materials costs, prices of competing
and alternative products, and type of end use.

We sell sodium chlorate primarily in Canada and the United States, 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 of our sodium chlorate sales contracts contain certain "meet or release"
pricing clauses and some contain restrictions on the amount of future price
increases.

We market chlorine dioxide generators worldwide to the pulp and paper
industry. We sell the technology and equipment, which we design and purchase
from our strategic alliance partners. In addition to being paid for the
technology and equipment, we receive royalties based on the amount of chlorine
dioxide produced by the generator, generally over a ten-year period.

For information regarding our export sales and domestic and foreign
operations, see Note 9 of the Notes to Consolidated Financial Statements
included in this prospectus.

Contracts and Customers

Our key multi-year contracts, which collectively accounted for 24% of our
fiscal 1998 revenues, are described below. BP Chemicals accounted for
approximately 12% of our revenues in fiscal 1998. No other single customer
accounted for more than 10% of our revenues in the last three fiscal years.

Styrene-Bayer

We are currently operating under a conversion agreement effective through
December 31, 2000, with Bayer Corporation, a subsidiary of Bayer AG. Under this
agreement, we provide Bayer, subject to specified minimum and maximum
quantities, with 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 us should Bayer sell
its business that uses styrene or assign the agreement, subject to our consent,
to any third-party purchaser of its business. During fiscal 1998, we delivered
approximately 9% of our styrene production pursuant to this agreement.

Styrene-BP Chemicals

Effective April 1, 1994, we entered into a styrene sales and purchase
agreement with BP Chemicals. The initial term of the agreement expired in
December of 1996, at which time the agreement was extended on

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substantially the same terms but at approximately half of the original volume
through June 30, 1999. Since June 30, 1999, we have not made any styrene sales
to BP Chemicals pursuant to this agreement. However, we are currently having
discussions with BP Chemicals with respect to a possible new agreement,
although no assurance can be given that this new agreement will be agreed upon
or, if agreed upon, for what volume of styrene. During fiscal 1998, we
delivered approximately 6% of our styrene production to BP Chemicals pursuant
to this agreement.

Acrylonitrile-Solutia

We have a multi-year conversion agreement with Solutia, formerly the
chemical business of Monsanto Company, pursuant to which we delivered
approximately 31% of our fiscal 1998 acrylonitrile production. Solutia is
constructing a new acrylonitrile production facility in Chocolate Bayou, Texas,
which is expected to have a rated annual production capacity of approximately
500 million pounds and which is currently expected to begin production in the
third calendar quarter of 2000. In anticipation of the start-up of such
facility, Solutia has elected to terminate our conversion agreement, effective
September 1, 2000.

Acrylonitrile-Cytec

In connection with the acquisition of our acrylic fibers business from Cytec
Industries Inc. on January 31, 1997, we assumed an existing supply contract for
acrylonitrile pursuant to which our acrylic fibers facility purchases its
requirements for acrylonitrile from Cytec. Upon the expiration of this supply
contract on February 28, 2002, we expect to supply all of the acrylonitrile
requirements of our acrylic fibers facility from our Texas City facility.

Acrylonitrile-BP Chemicals

In 1988, we entered into a long-term production agreement with BP Chemicals,
under which BP Chemicals contributed the majority of the capital expenditures
required for starting the third acrylonitrile reactor train at our Texas City
facility. BP Chemicals also has the option under this agreement to take up to
approximately one-sixth of our total acrylonitrile capacity. This agreement was
amended and restated during April of 1998 to, among other things, encourage
increased manufacturing and technical cooperation. Under the agreement, BP
Chemicals furnishes the necessary raw materials and pays us a conversion fee
for the amount of acrylonitrile it takes and reimburses us for a portion of the
fixed costs related to acrylonitrile production at our Texas City facility.
During fiscal 1998, we delivered approximately 17% of our acrylonitrile
production to BP Chemicals pursuant to this agreement. The acrylonitrile
reactor in which BP Chemicals invested capital incorporates certain BP
Chemicals technological improvements under a separate license agreement. We
have the right to incorporate these and any future improvements into our other
two acrylonitrile reactors. To protect BP Chemicals in the event we default
under the production agreement, BP Chemicals has a first priority security
interest in the third reactor and related equipment and in the first
acrylonitrile produced in the three reactor units to the extent BP Chemicals is
entitled to purchase the same under the production agreement.

In order to enhance the marketing of our acrylonitrile, we and BP Chemicals
commenced an exclusive 50/50 joint venture to market acrylonitrile in Asia and
South America. In the first 12 months of its operation, we sold approximately
32% of our acrylonitrile production through this joint venture.

Acetic Acid-BP Chemicals

BP Chemicals has the exclusive right to purchase all of our acetic acid
production until August of 2016. Under our agreement with BP Chemicals, which
has been in effect since August of 1986, BP Chemicals is obligated to make
certain unconditional monthly payments to us until August 2006 and to reimburse
us for operating costs. In addition, we are entitled to receive a portion of
the profits earned by BP Chemicals from the sale of the acetic acid we produce.

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Methanol-BP Chemicals

In August of 1996, we entered into a long-term production and sales
agreement with BP Chemicals, under which BP Chemicals contributed a significant
portion of the capital expenditures required for the construction of our
methanol production facility at our Texas City facility and obtained the right
to receive a substantial portion of our methanol production. The initial term
of this agreement expires July 31, 2016. A portion of the output of the
methanol facility is used in our acetic acid unit and the remainder is marketed
by BP Chemicals to the merchant market and in BP Chemicals' worldwide acetic
acid business.

In April of 1999, we restarted our methanol facility, which we had shut down
in August of 1998 for economic reasons. A significant disparity between
domestic and foreign prices for natural gas, one of the primary raw materials
for methanol, has put us and other domestic methanol producers at a
disadvantage when compared to foreign competitors. We continue to evaluate the
best use for our methanol facility. One of the primary uses of methanol is in
the production of MTBE used in reformulated gasolines. The State of California
has recently announced that MTBE must be phased out of reformulated gasoline
used in California by December 31, 2002. In addition, in July of 1999, the
Environmental Protection Agency announced that it would ask Congress to develop
legislation aimed at phasing out MTBE from the existing reformulated-gas
program, and to give states the authority to ban MTBE completely. These
developments are likely to negatively impact the domestic methanol market.

Plasticizers-BASF

We sell all of our plasticizers production to BASF pursuant to a product
sales agreement that has been in effect since August 1, 1986. In November of
1997, we signed a new agreement with BASF that expires at the end of 2007. BASF
provides certain raw materials to us and markets the plasticizers we produce.
BASF is obligated to make certain quarterly payments to us and reimburses us
monthly for actual production costs. In addition, we are entitled to a share of
the profit earned by BASF attributable to the plasticizers we supply.

Raw Materials and Energy Resources

For most of our products, the cost of raw materials, including utilities in
the case of pulp chemicals, is far greater than all other production costs
combined. Thus, an adequate supply of raw materials and utilities at reasonable
prices is critical to the success of our business. Most of the raw materials we
use are global commodities which are made by a large number of producers.
Prices for many of these raw materials are subject to wide fluctuations for a
variety of reasons beyond our control. Although we believe that we will
continue to be able to secure adequate supplies of our raw materials and energy
at acceptable prices to meet our requirements, there can be no assurance that
we will be able to do so.

Petrochemicals and Acrylic Fibers

Styrene. We manufacture styrene by converting ethylene and benzene into
ethylbenzene, which we then process into styrene. Ethylene and benzene are both
commodity petrochemicals. Prices for each can fluctuate widely due to
significant changes in the availability of these products. We have had multi-
year arrangements with three ethylene suppliers that provide our estimated
requirements for purchased ethylene at generally prevailing and competitive
market prices. Each of these arrangements expires between December 1999 and
February 2000; however, we are currently negotiating to renew or replace these
arrangements and expect to do so on terms that are at least as favorable as the
current arrangements, although we can give no assurances to that effect. Our
conversion agreements require that the other parties to these agreements
furnish us with the ethylene and benzene necessary to fulfill our conversion
obligations. Approximately 16% of our fiscal 1998 benzene requirements and
approximately 23% of our fiscal 1998 ethylene requirements were furnished by
customers pursuant to conversion arrangements.

Acrylonitrile. We produce acrylonitrile by reacting propylene and ammonia.
Propylene and ammonia are both commodity chemicals and the price for each can
fluctuate widely due to significant changes in the

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availability of these products. The requisite propylene and ammonia for the
acrylonitrile we produce under conversion agreements is furnished to us by the
customers. We purchase the rest of the propylene and ammonia we need for
acrylonitrile production. Approximately 44% of our fiscal 1998 propylene
requirements and approximately 40% of our fiscal 1998 ammonia requirements were
furnished by customers pursuant to conversion agreements. If various customers
for whom we now manufacture acrylonitrile under conversion agreements were to
cease furnishing their own raw materials and seek only to purchase
acrylonitrile from us without supplying their own raw materials, our
requirements for purchased propylene and ammonia could significantly increase.

Acetic Acid. Acetic acid is manufactured primarily from carbon monoxide and
methanol. We normally produce all of the methanol required by our acetic acid
unit. In 1996, Praxair Hydrogen Supply, Inc. constructed a partial oxidation
unit at our Texas City facility that supplies us with all of the carbon
monoxide we require for the production of acetic acid. This unit was recently
expanded in conjunction with the expansion of our acetic acid unit.

Methanol. We produce methanol primarily from natural gas and steam. We
obtain our natural gas under supply contracts and on the spot market, typically
at prevailing market prices, and we produce our own steam.

Plasticizers. The primary raw materials for plasticizers are alpha-olefins
and orthoxylene, which are supplied by BASF under our long-term conversion
agreement.

TBA. We produce TBA from hydrogen cyanide, isobutylene, sulfuric acid, and
caustic soda. We use hydrogen cyanide produced as a by-product of our
acrylonitrile manufacturing process. We sell all of our TBA to Flexsys pursuant
to a long-term conversion agreement. Flexsys supplies the isobutylene, sulfuric
acid, and caustic soda needed in our TBA operations.

Sodium Cyanide. Sodium cyanide is manufactured from hydrogen cyanide and
caustic soda. We use hydrogen cyanide produced as a by-product of our
acrylonitrile manufacturing process in the production of sodium cyanide and
DuPont supplies the caustic soda under a long-term conversion agreement with
us.

Acrylic Fibers. Acrylonitrile is the most significant raw material used in
the production of acrylic fibers, representing approximately 50% of the total
cash cost of production. Pursuant to our supply agreement with Cytec, which we
assumed in connection with our purchase of the acrylic fibers facility from
Cytec, our acrylic fibers facility is required to purchase all of its
acrylonitrile requirements from Cytec until February 28, 2002. After this
agreement expires, we expect to supply our acrylonitrile requirements from our
Texas City acrylonitrile facility.

Pulp Chemicals

Sodium Chlorate. Sodium chlorate is manufactured by passing an electric
current through an undivided cell containing a solution of sodium chloride. The
primary raw materials for the production of sodium chlorate are electricity,
salt, and water. Of these, electric power typically represents approximately
65% of the variable cost of production of sodium chlorate. Consequently, the
rates charged by local electric utilities are an important competitive factor
among sodium chlorate producers. Electric power is purchased by each of our
pulp chemicals facilities pursuant to contracts with local electric utilities.
On average, we believe that our electrical power costs at our pulp chemical
facilities are competitive with other producers in the areas in which we
operate. We purchase most of the sodium chloride that we use in the manufacture
of sodium chlorate under requirements contracts with major suppliers.

Technology and Licensing

Petrochemicals and Acrylic Fibers

In 1986, Monsanto granted us a nonexclusive, irrevocable, and perpetual
right and license to use Monsanto's technology and other technology Monsanto
acquired through third-party licenses in effect at the

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time of the acquisition of our Texas City facility from Monsanto. We use these
licenses in the production of styrene, acrylonitrile, methanol, TBA, acetic
acid, and plasticizers. During fiscal 1991, BP Chemicals Ltd. ("BPCL")
purchased the acetic acid technology from Monsanto, subject to existing
licenses.

On December 30, 1997, we entered into an Acetic Acid Technology Agreement
with BP Chemicals and BPCL, pursuant to which BPCL granted us a non-exclusive,
irrevocable, and perpetual right and license to use BPCL's acetic acid
technology at our Texas City facility, including any new acetic technology
developed by BPCL at its acetic acid facilities in England during the term of
such agreement or pursuant to the research and development program provided by
BPCL under the terms of such agreement. This agreement was recently amended to
encompass the acetic acid technology of some of BPCL's affiliates.

BPCL has also granted us a nonexclusive, perpetual, royalty-free license to
use its acrylonitrile technology at our Texas City facility as part of the 1988
acrylonitrile expansion project. This license automatically terminates upon the
termination of our acrylonitrile production agreement with BP Chemicals. We
have agreed with BPCL to cross-license any technology or improvements relating
to the manufacture of acrylonitrile at our Texas City facility.

We believe that the manufacturing processes we utilize at our Texas City
facility are cost effective and competitive. Although we do not engage in
alternative process research with respect to our Texas City facility, we do
monitor new technology developments and, when we believe it is necessary, we
typically seek to obtain licenses for process improvements.

We own substantially all of the technology used in our acrylic fibers
operations. We license certain of our acrylic fibers manufacturing technology
to producers worldwide. We hope to capitalize on increasing demand for this
technology as developing countries seek to increase acrylic fibers production
capacity. Approximately 15% of the world's total acrylic fibers capacity is
based on our technology. The competitiveness of our acrylic fibers business
with respect to our specialty textiles and technical fibers products, which are
our higher margin products, is maintained, to a significant extent, through the
exclusive ownership or use of our product and manufacturing technology. If our
competitors gain access to the use of similar technology, or render our
technology obsolete through the introduction of superior technology, our
ability to compete would be materially affected in an adverse manner.

Pulp Chemicals

We produce sodium chlorate using state-of-the-art metal cell technology. Our
principal technology business is the design, sale, and technical service of
custom-built patented chlorine dioxide generators. Our ERCO engineering group
is involved in the technical support of our sales and marketing group through
joint calling efforts which define the scope of a project, as well as producing
technical schedules and cost estimates.

We perform detailed design of chlorine dioxide generators, which are then
fabricated by contractors. Plant installation, instrumentation testing, and
generator start-up are supervised by our joint engineering/technical service
team. Prior to 1996, we were involved in a number of patent disputes with Akzo
Nobel, N.V. regarding chlorine dioxide technology. In 1996, we reached a
settlement of these disputes that allows licensees of both companies to operate
their respective chlorine dioxide generators within the broadest range of
operating conditions.

Our pulp chemicals research and development activities are carried out at
our Toronto, Ontario laboratories. Activities include the development of new or
improved chlorine dioxide generation processes and research into new
technologies focusing on electrochemical and membrane technology related to
chlorine dioxide, including improvement of quality and reduction of quantity of
pulp mill effluents and treatment of municipal water supplies.

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Competition

The industries in which we operate are highly competitive. Many of our
competitors, particularly in the petrochemicals industry, are larger and have
substantially greater financial resources than we have. Among our competitors
are some of the world's largest chemical companies that, in contrast to us,
have their own raw materials resources. In addition, a significant portion of
our business is based upon widely available technology. The entrance of new
competitors into the industry and the addition by existing competitors of new
capacity could have a negative impact on our ability to maintain existing
market share or maintain or increase profit margins, even during periods of
increased demand for our products. You can find a list of our principal
competitors in the "Product Summary" table.

Historically, profitability of the petrochemicals industry has been affected
by vigorous price competition, which may intensify due to, among other things,
new domestic and foreign industry capacity. Our 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 the margins for our products.
Beginning in fiscal 1997, economic events in various Asian countries negatively
impacted the demand growth for our products and, along with increases in
supply, had a negative impact on sales volumes, prices, and 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 fiscal 1998, our export sales were approximately 28% of our total
revenues. It is not possible to predict accurately how changes in raw materials
costs, market conditions, or other factors will affect future sales volumes,
prices, and margins for our products.

Environmental Matters

General

Our operations involve the handling, production, transportation, treatment,
and disposal of materials that are classified as hazardous or toxic waste and
that are extensively regulated by environmental and health and safety laws,
regulations, and permit requirements. Environmental permits required for our
operations are subject to periodic renewal and can be revoked or modified for
cause or when new or revised environmental requirements are implemented.
Changing and increasingly strict environmental requirements can affect the
manufacture, handling, processing, distribution, and use of our chemical
products and, if so affected, our business and operations may be materially and
adversely affected. In addition, changes in environmental requirements can
cause us to incur substantial costs in upgrading or redesigning our facilities
and processes, including our waste treatment, storage, disposal, and other
waste handling practices and equipment.

At all of our facilities, we conduct environmental management programs
designed to maintain compliance with applicable environmental requirements. We
routinely conduct inspection and surveillance programs designed to detect and
respond to leaks or spills of regulated hazardous substances and to correct
identified regulatory deficiencies. Likewise, we believe that our procedures
for waste handling are consistent with industry standards and applicable
requirements. In addition, we believe that our operations are consistent with
good industry practice through participation in the Responsible Care
initiatives as a part of membership in the Chemical Manufacturers Association
in the United States and the Canadian Chemical Producers Association. However,
a business risk frequently associated with chemical operations is the potential
for personal injury and property damage claims from employees, contractors and
their employees, and nearby landowners and occupants. While we believe our
business operations and facilities generally are operated in compliance in all
material respects with all applicable environmental and health and safety
requirements, we cannot be sure that past practices or future operations will
not result in material claims or regulatory action, require material
environmental expenditures, or result in exposure or injury claims by
employees, contractors and their employees, and the public. Some risk of
environmental costs and liabilities are inherent in our operations and
products, as it is with other companies engaged in similar businesses.

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Our operating expenditures for environmental matters, mostly waste
management and compliance, were approximately $52 million for fiscal 1998 and
$50 million for fiscal 1997. We also spent approximately $2 million for
environmentally related capital projects in fiscal 1998 and $3 million for
these types of capital projects in fiscal 1997. In fiscal 1999, we anticipate
spending approximately $2 million for capital projects related to waste
management and environmental compliance. There are no capital expenditures
related to remediation of environmental conditions projected for fiscal 1999.
We do not expect expenditures for environmentally related capital projects in
fiscal 2000 to differ materially from fiscal 1999 expenditures.

In light of our historical expenditures and expected future results of
operations, we believe we will have adequate resources to conduct our
operations in compliance with applicable environmental and health and safety
requirements. Nevertheless, we may be required to make significant site and
operational modifications that are not currently contemplated in order to
comply with changing facility permitting requirements and regulatory standards.
Additionally, we have incurred and may continue to incur liability for
investigation and cleanup of waste or contamination at our own facilities or at
facilities operated by third parties where we have disposed of waste. We
continually review all estimates of potential environmental liabilities but can
give no assurances that all potential liabilities arising out of our past or
present operations have been identified or fully assessed or that the amount
necessary to investigate and remediate such conditions will not be significant
to us.

We believe that we would be able to recover certain losses that may arise
out of claims related to environmental conditions at each of our facilities
that existed prior to their acquisition by us through contractual indemnities
and/or statutory law and common law principles, although there can be no
assurance that we would prevail against any prior owner of any of our
facilities with respect to any such claim.

Petrochemicals and Acrylic Fibers

Air emissions from our Texas City facility and our acrylic fibers facility
are subject to certain permit requirements and self-implementing emission
limitations and standards under state and federal laws. Our Texas City facility
is located in an area that the EPA has classified as not having attained the
ambient air quality standards for ozone, which is controlled by direct
regulation of volatile organic compounds and nitrogen oxide. The Texas Natural
Resource Conservation Commission has imposed strict requirements on regulated
facilities, including our Texas City facility, to ensure that the air quality
control region will achieve the ambient air quality standards for ozone. Our
acrylic fibers facility is located in an area currently designated as being in
attainment for ozone under the Clean Air Act. Our Texas City facility and our
acrylic fibers facility are subject to the federal government's June 1997
National Ambient Air Quality Standards which lower the ozone and particulate
matter threshold for attainment. Local authorities also may impose new ozone
and particulate matter standards. Compliance with these stricter standards may
substantially increase our future nitrogen oxide and particulate matter control
costs, the amount and full impact of which cannot be determined at this time.

To reduce the risk of offsite consequences from unanticipated events, we
acquired a greenbelt buffer zone adjacent to our Texas City facility in 1991
and, in connection with the acquisition of our acrylic fibers facility,
acquired a greenbelt area for our acrylic fibers facility. We also participate
in a regional air monitoring network to monitor ambient air quality in the
Texas City community. These programs are part of our commitment to the
Responsible Care initiatives of the CMA.

A December 1994 Florida Department of Environmental Protection waiver for
use of an onsite nonhazardous landfill applies to our acrylic fibers facility.
This waiver was obtained in connection with the previous owner's July 1994
petition for a rulemaking to avoid a January 1995 rule prohibiting disposal of
industrial waste in other than a Class I landfill. Upon consummation of the
acquisition of the acrylic fibers business, we succeeded to the rights of the
previous owner under that petition and waiver. Should the petition be denied or
the waiver be revoked, there are administrative options available to us.
However, we do not believe the additional cost of sending all of our waste to
an offsite facility would have a material adverse impact on us if that were
required.

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A settlement agreement entered into by the EPA, FDEP, and an environmental
group may also potentially apply to our Santa Rosa facility. This settlement
agreement imposes a no-migration standard for injection wells in underground
drinking water zones without regard to actual risk considerations. We and
several similarly situated companies have been contesting this settlement. An
April 1999 ruling by the U.S. Court of Appeals for the 11th Circuit may reduce
the likelihood that the no-migration rule becomes enforceable, although we can
give you no assurance in that regard. In the event that the no-migration rule
becomes enforceable, we may incur material costs in redesigning our waste water
handling systems.

One of the primary uses of methanol is in the production of MTBE used in
reformulated gasolines. The State of California has recently announced that
MTBE must be phased out of reformulated gasoline used in California by December
31, 2002. In addition, in July of 1999, the Environmental Protection Agency
announced that it would ask Congress to develop legislation aimed at phasing
out MTBE from the existing reformulated-gas program, and to give states the
authority to ban MTBE completely. These developments are likely to negatively
impact the domestic methanol market.

Pulp Chemicals

Our pulp chemicals business is sensitive to potential environmental
regulations. On November 14, 1997, the EPA enacted regulations that support
substitution of chlorine dioxide for elemental chlorine in paper pulp bleaching
processes to reduce the amount of absorbable organic halides and other chlorine
derivatives in bleach plant effluent. Chlorine dioxide is produced from sodium
chlorate, which is one of our pulp chemicals products. Therefore, regulations
restricting, but not altogether banning, absorbable organic halides and other
chlorine derivatives in bleach plant effluent have a favorable effect on our
business.

Conversely, a significant ban on all chlorine containing compounds could
have a materially adverse effect on us. British Columbia has a regulation in
place requiring elimination of the use of all chlorine products, including
chlorine dioxide, in the bleaching process by the year 2002. The pulp and paper
industry believes that a ban of chlorine dioxide in the bleaching process will
yield no measurable environmental or public health benefit and is working to
change this regulation, but there can be no assurance that this regulation will
be changed. In the event such a regulation is implemented, we would seek to
sell the products we manufacture at our British Columbia facility to customers
in other markets. We are not aware of any other laws or regulations in place in
North America that would restrict the use of such products for other purposes.

Four of our Canadian pulp chemicals facilities were acquired from Tenneco
Canada, Inc. in 1992. Groundwater data obtained during the acquisition of the
Tenneco facilities indicated elevated concentrations of certain chemicals in
the soil and groundwater. Prior to completion of the acquisition, we conducted
a focused baseline sampling of groundwater conditions beneath the facilities
and confirmed the previous data. We have addressed or are addressing elevated
soil or groundwater concentrations of chemicals that we have encountered from
time to time at the Tenneco facilities. We also reviewed air emissions sources
during the acquisition of the Tenneco facilities and considered all available
dustfall and vegetation stress studies. This review indicated emission
excursion episodes at specific locations in the scrubber systems at the Thunder
Bay, Buckingham, and Vancouver facilities. The conditions at the three sites
have been addressed and satisfactorily resolved. We believe that the Tenneco
facilities are otherwise in compliance in all material respects with all permit
requirements under applicable provincial law.

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Legal Proceedings

Ammonia Release

On May 8, 1994, an ammonia release occurred at our Texas City facility while
a reactor in our acrylonitrile unit was being restarted after a shutdown for
routine maintenance. Approximately 52 lawsuits and interventions involving
approximately 6,000 plaintiffs were filed against us seeking an unspecified
amount of money for alleged damages from the ammonia release. Many of these
lawsuits were filed in April and early May of 1996.

Approximately 2,600 of the plaintiffs agreed to submit their damage claims
to binding arbitration. A two week evidentiary hearing was conducted in July of
1996 before an arbitration panel to determine the amount of damages. On May 1,
1997, the panel awarded the plaintiffs an amount of damages which was well
within the limits of our insurance coverage.

Thirty-nine of the plaintiffs tried their cases to a jury in Harris County
District Court. After approximately five months of trial, the jury returned a
verdict on September 2, 1997. The total amount awarded for all 39 plaintiffs
was well within the limits of our insurance coverage.

Approximately 5,800 of these claims have now been resolved or are pending
final resolution, and we continue to vigorously defend against the claims of
the approximately 100 remaining plaintiffs. We have settled the claims of a
majority of the original plaintiffs and are engaged in ongoing settlement
discussions with the remaining plaintiffs. We believe that all or substantially
all of our future out-of-pocket costs and expenses, including settlement
payments and judgments, relating to these lawsuits will be covered by our
liability insurance policies.

We do not believe the claims and litigation arising out of this incident
will have a material adverse effect on us, although we cannot give any
assurances to that effect.

Nickel Carbonyl Release

On July 30, 1997, as our methanol unit at our Texas City facility was being
shut down for repair, nickel carbonyl was formed when carbon monoxide reacted
with nickel catalyst in the unit's reformer. After isolating the nickel
carbonyl within the methanol unit, we worked with the permission and guidance
of the Texas Natural Resources Conservation Commission to destroy the nickel
carbonyl by incineration on-site.

Prior to its incineration, several of our employees and contractor employees
may have been exposed to nickel carbonyl in the methanol unit. Eighteen
contractor employees allegedly exposed to nickel carbonyl are plaintiffs in a
lawsuit against us seeking unspecified damages for personal injuries. A
majority of these claims have been settled. Additional claims and litigation
against us relating to this incident may ensue. We believe that all or
substantially all of our future out-of-pocket costs and expenses, including
settlement payments and judgments, relating to these lawsuits will be covered
by our liability insurance policies and/or indemnification from third parties.
We do not believe that the claims and litigation arising out of this incident
will have a material adverse effect on us, although we cannot give any
assurances to that effect.

Ethylbenzene Release

On April 1, 1998, a chemical leak occurred when a line failed in the
ethylbenzene unit at our Texas City facility. The released chemicals included
ethylbenzene, benzene, polyethylbenzene, and hydrochloric acid. We do not
believe any serious injuries were sustained, although a number of citizens
sought medical examinations at local hospitals after a precautionary alert was
given to neighboring communities. There are no lawsuits

70
<PAGE>

pending against us based on this release, but we have received, and in some
instances resolved, claims from individuals for alleged damage from this
incident. We believe that our general liability insurance coverage is
sufficient to cover all costs and expenses related to this incident in excess
of the deductible.

Other Claims

We are subject to various other claims and legal actions that arise in the
ordinary course of our business.

Employees

As of August 31, 1999, we had approximately 1,180 employees, including
approximately 785 assigned to our petrochemicals/acrylic fibers operations and
approximately 395 assigned to our pulp chemicals operations. Approximately 37%
of our employees are covered by union agreements. The primary union agreement
at our Texas City facility is with the Texas City, Texas Metal Trades Council,
AFL-CIO, of Galveston County, Texas, which covers all hourly employees at our
Texas City facility. This agreement was renegotiated as of December 28, 1998
and will expire on May 1, 2002. Employees at our Vancouver facility are
represented by the Pulp, Paper, and Woodworkers Union. The Vancouver labor
agreement was renegotiated in November of 1997 and is subject to further
renegotiation in November of 2000. Employees at our Buckingham facility are
represented by either the Communications, Energy, and Paperworkers Union or an
office and professional workers union. Both Buckingham labor agreements were
renegotiated in November of 1997 and are subject to renegotiation in November
of 1999. Approximately 75% of the employees at our Saskatoon facility are
represented by the Communications, Energy, and Paperworkers of Canada. Our
collective agreement with this union expires September 30, 2001. In April of
1998, production and maintenance workers at our Valdosta facility voted to be
represented by the United Paper Workers International Union. We are currently
negotiating a labor agreement at this facility. We believe our relationship
with our employees is generally good. However, a strike by one or more of the
unions representing our employees could have a material adverse effect on us.

Insurance

We maintain full replacement value insurance coverage for property damage
to all of our facilities and business interruption insurance. Although we
carry such insurance, a significant interruption in the operation of one or
more of our facilities could have a material adverse effect on us. We also
maintain other insurance coverages for various risks associated with our
business. There can be no assurance that we will not incur losses beyond the
limits of, or outside the coverage of, our 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 can be no assurance that
in the future we will be able to maintain our existing coverage or that
premiums will not increase substantially.

Properties

Our Texas City facility 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. We have facilities to load
our products in 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. We own or lease all of
the real property which comprises our Texas City facility and all of the
equipment and facilities located there, other than the sodium cyanide unit
which is owned by DuPont, a cogeneration facility owned by a joint venture
between us and Praxair Energy Resources, Inc., and the partial oxidation unit
constructed at the site by Praxair Hydrogen Supply, Inc. In addition, if
definitive agreements are executed with Monsanto, Monsanto will own the DSIDA
plant to be constructed at our Texas City facility. We also own storage
facilities, approximately 200 rail cars, and an acetic acid barge in
connection with our petrochemicals business.

71
<PAGE>

Our acrylic fibers facility is located on 1,100 acres near Pensacola in
Santa Rosa County, Florida. We own all of the real property on which our
acrylic fibers facility is situated and own or lease all of the facilities and
equipment located there. We have recently entered into an agreement for the
construction of a co-generation facility at our acrylic fibers facility that
will be owned by Polsky Energy Corporation.

Our pulp chemicals business includes five manufacturing facilities in Canada
and our Valdosta facility. The Buckingham, Quebec and Vancouver, British
Columbia manufacturing facilities we own are located on approximately 20 acres
each. The Saskatoon facility is located on approximately 270 acres that we own.
We lease the property that our Thunder Bay, Ontario, and Grande Prairie,
Alberta manufacturing facilities are located on. Our Valdosta facility was
constructed in conjunction with, and is leased from, the Valdosta-Lowndes
County Industrial Authority. We also lease approximately 487 rail cars in
connection with our pulp chemicals business. Headquarters for our pulp
chemicals operations are located in Toronto, Ontario in an office building that
we lease.

We lease our principal executive offices, located in Houston, Texas.

We believe our properties and equipment are sufficient to conduct our
business.

72
<PAGE>

MANAGEMENT

The following is a list of the names, ages, and positions held by our
executive officers and directors. Each of these individuals holds the same
positions with Holdings. The periods during which these persons have served in
these capacities are indicated in the description of business experience of
each person below.

<TABLE>
<CAPTION>
Name and Age Age Position with Sterling
------------ --- ----------------------
<C> <C> <S>
Frank P. Diassi....................... 66 Chairman of the Board of Directors
Peter W. De Leeuw..................... 58 President, Chief Executive Officer
and Director
Gary M. Spitz......................... 43 Vice President and Chief Financial
Officer
Richard K. Crump...................... 53 Vice President--Strategic Planning
David G. Elkins....................... 57 Vice President, General Counsel
and Secretary
Robert O. McAlister................... 60 Vice President--Human Resources
and Administration
Robert W. Roten(1).................... 65 Vice Chairman of the Board of
Directors
Allan R. Dragone(2)................... 73 Director
John L. Garcia........................ 43 Director
Frank J. Hevrdejs(2).................. 54 Director
Hunter Nelson(1)...................... 46 Director
George J. Damiris(1).................. 39 Director
Rolf H. Towe(2)....................... 60 Director
William A. McMinn..................... 69 Director
</TABLE>
- --------
(1) Member of the Audit and Compliance Committee
(2) Member of Compensation Committee

Frank P. Diassi. Mr. Diassi is currently Managing General Partner of The
Unicorn Group LLC, a private financial organization. He organized Unicorn in
1981 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 petrochemicals 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. and Amerlux, Inc. In addition, he serves as a director of
Mail-Well, Inc., an envelope manufacturer and commercial printer, and several
private companies. Mr. Diassi became our Chairman of the Board of Directors in
August of 1996.

Peter W. De Leeuw. Mr. De Leeuw joined us as a member of our Board of
Directors and our President and Chief Executive Officer in April of 1998. Prior
to joining us, Mr. De Leeuw had been employed by Shell Chemical Company since
1965, most recently serving as Vice President--Growth. Shell Chemical Company,
which is a subsidiary of Houston-based Shell Oil Company, is a $5 billion
leading manufacturer and distributor of chemical products including PET,
resins, solvents, elastomers, and basic chemicals.

Gary M. Spitz. Mr. Spitz joined us as Vice President and Chief Financial
Officer in January of 1998. Mr. Spitz previously held the position of Vice
President and Chief Financial Officer of Grace Davison, a division of W.R.
Grace and Company, a catalyst manufacturing and chemicals company. Mr. Spitz
has held various financial positions with divisions of W. R. Grace and Company
since 1979.

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 of 1986. He served as our Director--
Commercial from August of 1986 until October of 1991, when he became our Vice
President--Commercial. Mr. Crump became our Vice President--Strategic Planning
in December of 1996 and assumed responsibility for our strategic planning,
which includes acquisition and merger activity.

73
<PAGE>

David G. Elkins. Mr. Elkins joined us as Vice President, General Counsel and
Secretary in January of 1998. Mr. Elkins previously was a senior partner at
Andrews & Kurth L.L.P., where he practiced law in the area of corporate and
securities matters. Mr. Elkins also serves as a director of The Houston
Exploration Company.

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 Petroleos de Venezuela, S.A., the
national oil company of Venezuela, as Vice President of Human Resources. He
joined us in 1991 as Director of Human Resources and was promoted to Vice
President--Human Resources and Administration in July of 1995.

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 our Vice President--Commercial from August of
1986 until September of 1991, when he became Vice President--Corporate
Development. Mr. Roten served as our Executive Vice President and Chief
Operating Officer from April of 1993 until August of 1996, and served as our
President and Chief Executive Officer from August of 1996 until April of 1998.
Mr. Roten has been a director since August of 1996 and has been Vice Chairman
of our Board since April of 1998. Mr. Roten is currently President of Xnet,
Inc., a Houston-based computer and systems consulting company, and has been a
director of Xnet, Inc. since June of 1995.

Allan R. Dragone. Mr. Dragone was a director of Arcadian Corporation from
1989 to 1997, and served as Chairman of the Board from 1989 to 1990. He was
President and Chief Executive Officer of Azko America, Inc., a chemicals
producer, from 1986 to 1989, and was Chairman of the Board of Fiber Industries,
Inc., a polyester fibers producer, from 1987 to 1989. He also is a director of
United Water Resources, Inc., a water services company, and of Wellman, Inc., a
polyester fibers producer and plastic reclamation company. He was Chairman of
the Board of the New York Racing Commission from 1990 to 1995, and currently
serves as a trustee. Mr. Dragone has been a director since August of 1996.

John L. Garcia. Mr. Garcia has been a Managing Director of AEA Investors
Inc. since May of 1999. Mr. Garcia was a Managing Director and Head of the
Global Chemical Investment Banking Group with Credit Suisse First Boston
Corporation from 1994 to April of 1999 and prior thereto was a Managing
Director with Wertheim Schroder & Co. Inc. Mr. Garcia also serves as a director
of Acetex Corporation. Mr. Garcia has been a director since August of 1996.

Frank J. Hevrdejs. Mr. Hevrdejs is a principal and President of The Sterling
Group, Inc., which he co-founded in 1982. Mr. Hevrdejs has actively
participated in acquisitions of over 40 businesses in the past 20 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
director of Mail-Well, Inc. and Eagle U.S.A., an air-freight company. Mr.
Hevrdejs has been a director since August of 1996.

Hunter Nelson. Mr. Nelson is currently a principal with and a director of
The Sterling Group, Inc. Prior to joining The Sterling Group, Inc. 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 laws. Mr. Nelson served on the board of Sterling
Diagnostic Imaging, Inc. until it was sold in May of 1999. Mr. Nelson has been
a director since August of 1996.

George J. Damiris. Mr. Damiris has been a director since December of 1997.
Mr. Damiris has been with Koch Industries, Inc. and its affiliates since 1989,
currently serving as Vice President of Koch Ventures, Inc.

74
<PAGE>

He was Executive Vice President of Koch's refining group from 1996 to 1997,
Vice President of Koch's chemical group from 1995 to 1996 and served as
President of Koch's gas services group from 1994 to 1995. Mr. Damiris started
Koch's international chemicals trading business in 1992 as Vice President of
Koch Supply and Trading. From 1989 through 1992, Mr. Damiris was the Business
Development Manager of Koch's petroleum group. Prior to joining Koch, he held
various positions in British Petroleum's refining and chemicals divisions.

Rolf H. Towe. Mr. Towe has served as Senior Managing Director of The Clipper
Group, L.P., since its formation in 1991 and is Vice President of Clipper Asset
Management, Inc. He was the Chairman of Executive Partner Limited, an executive
consulting firm, from 1989 to 1995. Earlier in his career, he held various
management positions over a period of nearly 20 years in Union Carbide
Corporation, a multinational chemicals and plastics manufacturer. Mr. Towe has
been a director since January of 1998. Mr. Towe also serves as a director of
American Heritage Life Insurance Company, Travel Centers of America, Inc., a
nationwide operator and franchisor of auto and truck travel centers, and
several private companies.

William A. McMinn. Mr. McMinn has been Chairman of the Board of Texas
Petrochemicals Corporation since 1996. He served as Corporate Vice President
and Manager of the Industrial Chemical Group of FMC Corporation, a manufacturer
of machinery and chemical products, from 1973 through 1985. He became President
and Chief Executive Officer of Cain Chemical Inc., a producer of
petrochemicals, in 1987 and served in that capacity until its acquisition by
Occidental Petroleum in May of 1988. He became Chairman of the Board of
Directors of Arcadian Corporation in August of 1990 and served in that capacity
until it was sold in March of 1997. Mr. McMinn has been a director since
February of 1999.

Compensation of Directors

Our non-employee directors are paid a fee of $2,500 per quarter and our Vice
Chairman is paid a fee of $5,000 per quarter. Non-employee directors are also
paid an attendance fee of $1,000 for each meeting of the Board of Directors
that the director attends and $400 for telephonic meetings lasting 30 minutes
or more. Members of committees of the Board of Directors are paid an attendance
fee of $700 for each meeting of the committee which the director attends.
Committee chairmen are paid $1,400 for these meetings. In addition, pursuant to
the terms of the Sterling Chemicals Holdings, Inc. 1997 Nonqualified Stock
Option Plan for Non-Employee Directors, each non-employee director receives
annual automatic grants of options to purchase 1,000 shares of common stock on
October 1 of each year, all of which fully vest upon the date of grant. The
Vice Chairman receives these options on 2,000 shares of common stock. Members
of the Board of Directors who are employees of the Company or its subsidiaries
do not receive a fee for their services as directors. All directors are
reimbursed for travel expenses for their services as directors.

Two of our non-employee directors are employed by stockholders of us or our
affiliates and, pursuant to established policies of these employers, all
directors' compensation earned by those non-employee directors is paid to their
respective employers.

The Non-Employee Director Plan allows each non-employee director to elect
not to participate in the Non-Employee Director Plan. Koch Capital Services,
Inc. has agreed to deliver an executed election not to participate under the
Non-Employee Director Plan from each director that it designates pursuant to
the voting agreement described under the caption "Certain Transactions." In
return, we have agreed to issue to Koch Capital a number of options equal to
those which would have otherwise been granted to its designated director under
the Non-Employee Director Plan. The terms and conditions of the options granted
to Koch Capital are substantially similar those governing options granted to
other non-employee directors, except that the options granted to Koch Capital
do not expire upon the termination of service of its designated director.

75
<PAGE>

Executive Compensation

Set forth below is information regarding compensation arrangements and
benefits paid or made available to our Chief Executive Officer and our four
most highly compensated executive officers for the three fiscal years ended
September 30, 1998. As Mr. Roten served as our Chief Executive Officer through
March 31, 1998, Mr. Roten's compensation information is also included below.
Compensation during these fiscal years included participation in certain stock
option, stock appreciation rights, and other benefit plans sponsored by
Holdings or its subsidiaries that were terminated in connection with our
recapitalization in August of 1996.

<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
--------------------------------- -----------------------
Restricted Securities
Name and Principal Fiscal Other Annual Stock Underlying All Other
Position Year Salary Bonus Compensation Award(s) Options Compensation
------------------ ------ (1) ------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Frank P. Diassi......... 1998 $300,000 $ 0 $ 0 $ 0 95,238 $34,606(2)
Chairman of the Board 1997 334,231 0 0 0 63,492 4,693(3)
of Directors
Peter W. De Leeuw (4)... 1998 162,500 0 0 95,000(5) 125,000 18,349(6)
President and Chief
Executive Officer
Robert W. Roten (7)..... 1998 120,000 0 0 0 0 118,466(8)
President and Chief 1997 231,250 0 0 0 38,942 3,247(3)
Executive Officer 1996 205,000 105,313(9) 0 0 0 9,403(10)
Richard K. Crump........ 1998 194,167 0 0 0 30,159 10,139(11)
Vice President -- 1997 187,500 0 0 0 20,106 1,080(3)
Strategic Planning 1996 180,000 92,469(9) 0 0 0 8,462(12)
Gary M. Spitz (13)...... 1998 126,818 25,000(14) 166,364(15) 50,000(16) 45,000 3,309(17)
Vice President and
Chief Financial Officer
Robert O. McAlister..... 1998 155,167 0 0 0 17,460 24,749(18)
Vice President-- 1997 151,000 0 0 0 11,640 1,357(3)
Human Resources and 1996 146,000 54,611(9) 0 0 0 7,112(19)
Administration
</TABLE>
- --------
(1) Includes amounts deferred under our 401(k) Savings and Investment Plan.
(2) Consists of $15,526 in premiums for group term life insurance and $19,080
in premiums for executive life insurance paid by us.
(3) Consists of premiums for group term life insurance paid by us.
(4) Mr. De Leeuw joined us as President and Chief Executive Officer effective
April 1, 1998, meaning that he was employed by us during fiscal 1998 for
six months.
(5) Mr. De Leeuw was granted 10,000 shares of Holdings' restricted stock on
March 16, 1998. Of these shares, 5,000 shares are subject to forfeiture if
Mr. De Leeuw's employment is terminated under certain specified
circumstances. These forfeiture provisions expire in two equal increments
on March 16, 2000 and March 16, 2001 or, if earlier, upon the occurrence of
certain specified events. As of the last day of fiscal 1998, these shares
had a value of $70,000 based on the closing market price per share on
September 30, 1998.
(6) Consists of $3,150 in premiums for group term life insurance and $15,199 in
premiums for executive life insurance paid by us.
(7) Mr. Roten resigned from Sterling effective March 31, 1998, meaning that he
was employed by us during fiscal 1998 for six months.
(8) Consists of $3,861 in premiums for group term life insurance paid by us,
compensation for unused vacation time of $62,305 paid upon Mr. Roten's
resignation from employment with us and $52,300 paid

76
<PAGE>

pursuant to a Consulting Agreement between Mr. Roten and Holdings. See
"Relationships and Transactions with Related Parties."
(9) Paid pursuant to our Profit Sharing Plan.
(10) Consists of $7,558 in matching contributions paid by us pursuant to our
401(k) Savings and Investment Plan and $1,845 in premiums for group term
life insurance paid by us.
(11) Consists of $2,508 in premiums for group term life insurance and $7,631 in
premiums for executive life insurance paid by us.
(12) Consists of $6,842 in matching contributions paid by us pursuant to our
401(k) Savings and Investment Plan and $1,620 in premiums for group term
life insurance paid by us.
(13) Mr. Spitz joined us as Vice President and Chief Financial Officer on
January 19, 1998, meaning that he was employed by us during fiscal 1998
for approximately eight and one-half months.
(14) Consists of a signing bonus paid pursuant to Mr. Spitz's employment
agreement with us and Holdings.
(15) Consists of moving expenses paid by us.
(16) Mr. Spitz was granted 5,000 shares of Holdings' restricted stock on
January 19, 1998. Of these shares, 2,500 shares are subject to forfeiture
if Mr. Spitz's employment is terminated under certain specified
circumstances. These forfeiture provisions expire in two equal increments
on January 19, 2000 and January 19, 2001 or, if earlier, upon the
occurrence of certain specified events. As of the last day of fiscal 1998,
these shares had a value of $35,000 based on the closing market price per
share on September 30, 1998.
(17) Consists of $578 in premiums for group term life insurance and $2,731 in
premiums for executive life insurance paid by us.
(18) Consists of $3,041 in premiums for group term life insurance and $21,708
in premiums for executive life insurance paid by us.
(19) Consists of $5,798 in matching contributions paid by us pursuant to our
401(k) Savings and Investment Plan and $1,314 in premiums for group term
life insurance paid by us.

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<PAGE>

Option Grants in Last Fiscal Year

The following sets forth information relating to options to purchase shares
of common stock granted to our Chief Executive Officer and our four most highly
compensated executive officers in fiscal 1998. Except as otherwise noted, all
of these options were granted under our Omnibus Stock Awards and Incentive
Plan.

<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Number of Percent of Rates of Stock Price
Securities Total Options Exercise Appreciation for Option
Underlying Granted to Price Term(3)
Options Employees Per -----------------------
Granted(#) in Fiscal Year Share(1) Expiration Date(2) 0% 5% 10%
---------- -------------- -------- ------------------ --- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Frank P. Diassi......... 95,238 13% $6.00 April 22, 2008 $ 0 $253,338 $1,080,350
Peter W. De Leeuw....... 125,000 18% 6.00 March 16, 2008(4) 0 434,312 1,580,069
100,000(5) 14% 6.00(5) September 12, 1998(5) NA NA NA
Robert W. Roten......... 0 0% NA NA NA NA NA
Richard K. Crump........ 30,159 4% 6.00 April 22, 2008 0 80,224 342,114
Gary M. Spitz........... 45,000 6% 6.00 January 19, 2008(6) 0 193,003 627,184
50,000(7) 7% 6.00 April 30, 1998(7) NA NA NA
Robert O. McAlister..... 17,460 2% 6.00 April 22, 2008 0 46,445 198,061
</TABLE>
- --------
(1) The options granted in fiscal 1998 had an original exercise price of $12.00
per share. On December 14, 1998, these options were repriced to an exercise
price of $6.00 per share.
(2) Except as otherwise noted, all options vest in increments of 25% on April
22, 1999, April 22, 2000, April 22, 2001 and August 21, 2001.
(3) The dollar amounts set forth under these columns are the result of
calculations of assumed annual rates of stock price appreciation from the
date of grant of the options awarded to the date of expiration of these
options of 0%, 5% and 10%. Based on these assumed annual rates of stock
price appreciation of 0%, 5% and 10%, our stock price (i) at January 19,
2008 is projected to be $10.00, $16.29 and $25.94, respectively, (ii) at
March 16, 2008 is projected to be $9.50, $15.47 and $24.64, respectively,
and (iii) at April 22, 2008 is projected to be $9.00, $14.66 and $23.34,
respectively. These assumptions are not intended to forecast future
appreciation of our stock price. Our 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.
(4) Options vest in increments of 20% on March 16, 1999, March 16, 2000, March
16, 2001, March 16, 2002, and March 16, 2003.
(5) Pursuant to the terms of the De Leeuw Employment Agreement, Mr. De Leeuw
was granted options with respect to 100,000 shares of common stock, each
with an exercise price per share of the lesser of $12 and the most recent
valuation per share under the ESOP. All of these options expired on
September 12, 1998 without having been exercised.
(6) Options vest in increments of 20% on January 19, 1999, January 19, 2000,
January 19, 2001, January 19, 2002, and January 19, 2003.
(7) Pursuant to the terms of the Spitz Employment Agreement, Mr. Spitz was
granted options with respect to 50,000 shares of common stock, each with an
exercise price per share of $12. All of these options expired on April 30,
1998 without having been exercised.

78
<PAGE>

Aggregate Year-End Option Values

The following table provides information on the value of the unexercised
options held by our Chief Executive Officer and our four most highly
compensated executive officers at September 30, 1998. There were no exercises
of options or SARs during fiscal 1998 by any of these officers, and none of
these officer held SARs at September 30, 1998.

<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at The-Money Options/SARS at
September 30, 1998 September 30, 1998
------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Frank P. Diassi............. 12,698 146,032 $-- $--
Peter W. De Leeuw........... -- 125,000 -- --
Robert W. Roten(1).......... 40,942 -- -- --
Richard K. Crump............ 4,021 46,244 -- --
Gary M. Spitz............... -- 45,000 -- --
Robert O. McAlister......... 2,328 26,772 -- --
</TABLE>
- --------
(1) All options held by Mr. Roten vested upon his retirement, which was
effective on March 31, 1998, and were exercisable at any time within one
year after March 31, 1998. All of these options expired on March 30, 1999
without having been exercised.

Employment Agreements

De Leeuw Employment Agreement. On March 16, 1998, Peter W. De Leeuw entered
into an employment agreement with us and Holdings pursuant to which we and
Holdings each engaged Mr. De Leeuw to serve as President and Chief Executive
Officer until Mr. De Leeuw's employment is terminated in accordance with the
terms of the employment agreement. Under the employment agreement, Mr. De Leeuw
earns a base salary initially set at $300,000 per year, which may be increased
at the discretion of the Board, and participates in Holdings' and our
bonus/incentive compensation plans. In addition, upon execution of his
employment agreement, Mr. De Leeuw was granted awards under Holdings' Omnibus
Stock Awards and Incentive Plan of 10,000 shares of Holdings' common stock,
5,000 of which are subject to forfeiture if Mr. De Leeuw's employment is
terminated at certain times under specified circumstances. Mr. De Leeuw was
also granted options to purchase 125,000 shares of common stock at $12 per
share, with 20% of these options vesting annually on each March 16, commencing
in 1999. On December 14, 1998, these options were repriced to an exercise price
of $6 per share. Mr. De Leeuw was additionally granted the right to purchase up
to 100,000 shares of common stock at a price per share equal to the lesser of
$12 or the most recent valuation under the Sterling Chemicals ESOP. This right
was not exercised and expired on September 12, 1998.

Under the terms of his employment agreement, we and Mr. De Leeuw may each
terminate Mr. De Leeuw's employment at any time and for any reason by giving
notice to the other. If, prior to March 16, 2000, Mr. De Leeuw terminates his
employment for a "Good Reason," as it is defined in his employment agreement,
or we terminate Mr. De Leeuw's employment for any reason other than
"Misconduct" or "Disability," as they are defined in his employment agreement,
we and Holdings are required to pay Mr. De Leeuw an amount equal to 200% of his
base salary plus additional sums. In addition, for 24 months after termination,
Mr. De Leeuw is entitled to continued coverage under all of Holdings' and our
life, healthcare, medical, and dental insurance plans and programs, excluding
disability, provided Mr. De Leeuw remains eligible to participate in these
plans and programs according to their terms and that he pays all required
regular employee premiums. Finally, upon termination, any vesting, lapse of
time, or other similar requirement of any of our or Holdings' plans or programs
is accelerated and all conditions to Mr. De Leeuw's entitlement to benefits
under the plan or program are deemed satisfied. However, neither we nor
Holdings is required to make any payment or provide any coverage if the
termination of Mr. De Leeuw's employment takes effect after Mr. De Leeuw's
"normal retirement date" under Holdings' Salaried Employees' Pension Plan.
Holdings' and

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<PAGE>

our obligations to continue to provide coverage under benefits plans cease if
Mr. De Leeuw becomes employed elsewhere and is provided with substantially
similar benefits.

Spitz Employment Agreement. On January 19, 1998, Gary M. Spitz entered into
an employment agreement with us and Holdings pursuant to which we and Holdings
each engaged Mr. Spitz to serve as Vice President and Chief Financial Officer
until Mr. Spitz's employment is terminated in accordance with the terms of his
employment agreement. Under the employment agreement, Mr. Spitz earns a base
salary initially set at $180,000 per year, which may be increased at the
discretion of the Board, and participates in Holdings' and our bonus/incentive
compensation plans. Under his employment agreement, Mr. Spitz was paid a
signing bonus of $25,000 when he began work. In addition, upon execution of his
employment agreement, Mr. Spitz was granted awards under Holdings' Omnibus
Stock Awards and Incentive Plan of 5,000 shares of Holdings' common stock,
2,500 of which may be forfeited if Mr. Spitz's employment is terminated at
certain times under specified circumstances. Mr. Spitz was also granted options
to purchase 45,000 shares of common stock at $12 per share, with 20% of the
options vesting annually on each January 19, commencing in 1999. On December
14, 1998, these options were repriced to an exercise price of $6 per share. Mr.
Spitz was additionally granted the right to purchase up to 50,000 shares of
common stock at $12 per share. This right was not exercised and expired on
April 30, 1998.

Under the terms of his employment agreement, we and Mr. Spitz may each
terminate Mr. Spitz's employment at any time and for any reason by giving
notice to the other. If, prior to January 19, 2000, Mr. Spitz terminates his
employment for a "Good Reason," as it is defined in his employment agreement,
after a specified change of control has occurred, or we or Holdings terminates
Mr. Spitz's employment for any reason other than "Misconduct" or "Disability,"
as they are defined in his employment agreement, we and Holdings are jointly
required to pay Mr. Spitz an amount equal to 200% of his base salary plus
additional sums. In addition, for 24 months after the date of termination, Mr.
Spitz is entitled to continued coverage under all of Holdings' and our life,
healthcare, medical and dental insurance plans and programs, excluding
disability, provided Mr. Spitz remains eligible to participate in these plans
and programs according to their terms and that he pays the required regular
employee premiums. However, neither we nor Holdings is required to make any
payment or provide any coverage if the termination of Mr. Spitz's employment
takes effect after Mr. Spitz's "normal retirement date" under the Holdings'
Salaried Employees' Pension Plan. Holdings' and our obligations to continue to
provide coverage under benefits plans cease if Mr. Spitz becomes employed
elsewhere and is provided with substantially similar benefits.

Pension Plans

Salaried Employees' Pension Plan. We maintain a defined benefit Salaried
Employees' Pension Plan covering substantially all salaried employees,
including our Chief Executive Officer and our four most highly compensated
executive officers. Pension costs are borne solely by us and determined
annually on an actuarial basis with contributions made accordingly. The pension
benefits payable under the Pension Plan for our employees who had been hired by
Monsanto, from which we acquired our Texas City, Texas petrochemicals plant,
prior to April 1, 1986 are based on each of those individual's vested
percentage times years of service multiplied by 1.4% of Average Earnings, as
defined below. All of our other employees, including our employees who had been
hired by Monsanto on or after April 1, 1986, receive a pension payable under
the Pension Plan based on the individual's vested percentage times years of
service multiplied by 1.2% of Average Earnings. Average Earnings excludes,
among other things, amounts received under our Profit Sharing Plan and is
generally defined as the greater of:

. average compensation received during the highest three of the final five
calendar years of employment and

. average compensation received during the final 36 months of employment.

However, as a result of certain limitations imposed under the Internal Revenue
Code, benefits payable under the Pension Plan are effectively limited in amount
to those payable to a participant having Average Earnings of $160,000.

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<PAGE>

For our employees who were employed by us prior to October 1, 1986 and
accruing a Monsanto pension plan benefit, we recognize Monsanto pension plan
years of service offset by any vested benefit under the Monsanto pension plan.

For our employees as of August 21, 1992 who were previously employed by
Albright & Wilson and based in the United States and were participants in the
Tenneco, Inc. Retirement Plan, we recognize Tenneco, Inc. Retirement Plan years
of service offset by any vested benefit under that plan.

For our employees who were previously employed by Cytec Industries Inc. and
joined us on January 31, 1997 and elect to retire on or before January 31,
1999, we supplement the standard pension payable so that the employee's total
combined pension from us and from the Cytec Nonbargaining Employees' Retirement
Plan equals the amount the employee would have received had he or she remained
an employee of Cytec until retirement.

The following table illustrates the aggregate of the annual normal
retirement benefits payable under the Pension Plan and the Pension Benefit
Equalization Plan and Supplemental Employee Retirement Plan, as those plans are
defined below, based on 1.4% of Average Earnings, without reduction for any
offset amounts. These benefit levels assume retirement at age 65, the years of
service shown, continued existence of the pension plans 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.................................. $ 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.................................. 28,000 56,000 84,000 112,000
250,000.................................. 35,000 70,000 105,000 140,000
300,000.................................. 42,000 84,000 126,000 168,000
350,000.................................. 49,000 98,000 147,000 196,000
400,000.................................. 56,000 112,000 168,000 224,000
</TABLE>

The following table illustrates the aggregate of the annual normal
retirement benefits payable under the Pension Plan, the Pension Benefit
Equalization Plan and the Supplemental Employee Retirement Plan based on 1.2%
of Average Earnings, without reduction for any offset amounts. These benefit
levels assume retirement at age 65, the years of service shown, continued
existence of the pension plans 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.................................. 24,000 48,000 72,000 96,000
250,000.................................. 30,000 60,000 90,000 120,000
300,000.................................. 36,000 72,000 108,000 144,000
350,000.................................. 42,000 84,000 126,000 168,000
400,000.................................. 48,000 96,000 144,000 192,000
</TABLE>

The benefits under the Salaried Employees' Pension Plan are computed by
multiplying Average Earnings by credited years of service times the respective
percentages referred to above. These benefits are not reduced by any benefits
payable under Social Security or other offset amounts. The benefits payable to
our employees who had been hired by Monsanto prior to April 1, 1986 are reduced
by the amount of pension benefits to which those participants may be entitled
under Monsanto's pension plan and the benefits payable to all of our other

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<PAGE>

employees, including our employees who had been hired by Monsanto on or after
April 1, 1986, are reduced by the amount of pension benefits to which those
participants may be entitled under Monsanto's, Tenneco's or Cytec's pension
plan. The number of credited years of service under the Pension Plan of each of
the Named Executive Officers are as follows: Peter W. De Leeuw--one year;
Robert W. Roten--37 years; Frank P. Diassi--two years; Richard K. Crump--12
years; Gary M. Spitz--one year; and Robert O. McAlister--eight years. Mr. Roten
was originally hired by Monsanto prior to April 1, 1986 and retired as our
employee on March 31, 1998. Accordingly, Mr. Roten's pension benefits commenced
on April 1, 1998 and are based upon 37 years of service and 1.4% of his Average
Earnings.

Pension Benefit Equalization Plan. We maintain the Sterling Chemicals, Inc.
Pension Benefit 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. 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 those
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. We maintain the Sterling Chemicals,
Inc. Supplemental Employee Retirement Plan. The Supplemental Plan provides
additional benefits to certain employees whose retirement benefits under the
Pension Plan are reduced, curtailed, or otherwise limited because the
employee's annual compensation is in excess of $160,000 or because certain
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 those 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 Internal Revenue Code may participate
in the Supplemental Plan. Benefits have been paid to participants under the
Supplemental Plan and those benefits are generally payable at the time, and in
the manner, benefits are payable under the Pension Plan.

Assuming retirement at age 65, or after five years of service, if later, and
the continuation of their current levels of base salary until retirement, as of
September 30, 1998, we will owe annual total retirement benefits under the
Equalization Plan and/or the Supplemental Plan of $28,008 to Mr. De Leeuw,
$18,000 to Mr. Diassi, $59,794 to Mr. Crump, $49,492 to Mr. Spitz and $26,714
to Mr. McAlister. These amounts will be reduced annually by the value of the
benefits payable under the Pension Plan, which are $14,938 for Mr. De Leeuw,
$9,600 for Mr. Diassi, $47,835 for Mr. Crump, $43,993 for Mr. Spitz and $26,548
for Mr. McAlister. Mr. Roten retired from employment with us on March 31, 1998.
The total actual retirement benefits under the Equalization Plan and the
Supplemental Plan payable to Mr. Roten are $81,223 per year, reduced by $53,282
of actual benefits payable under the Pension Plan.

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<PAGE>

PRINCIPAL STOCKHOLDERS OF HOLDINGS

All of our issued and outstanding capital stock is owned by Holdings. The
following table sets forth information regarding the beneficial ownership of
Holdings' common stock as of August 31, 1999 by:

. each person known by us to be the beneficial owner of more than 5% of the
outstanding shares of Holdings' common stock;

. each of our directors;

. our chief executive officer and our four other most highly compensated
executive officers; and

. all of these directors and executive officers as a group.

In addition, an aggregate of 615,308 shares of Holdings' common stock are
held by the Sterling Chemicals ESOP on behalf of our employees, including some
of our executive officers, representing approximately 5% of Holdings'
outstanding common stock, of which 341,608 shares have been allocated to
employees' accounts to date. These shares are held of record by Merrill Lynch &
Co. Incorporated, as trustee, which disclaims beneficial ownership of the
shares. Merrill Lynch exercises sole power to vote the shares of common stock
held by the Sterling Chemicals ESOP until such time as shares are allocated to
the account of an employee, who then has the sole power to vote his or her
respective 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 Holdings by each
individual or entity named below.

<TABLE>
<CAPTION>
Common Stock
------------------------
Number of
Name and Address of Beneficial Owner(1) Shares Percent
--------------------------------------- --------- -------
<S> <C> <C>
Frank P. Diassi...................................... 758,628(2)(3) 5.8%
Allan R. Dragone..................................... 59,385(4) *
John L. Garcia....................................... 38,757(5) *
George J. Damiris.................................... 1,181,254(6) 9.1
Frank J. Hevrdejs.................................... 939,582(2)(7) 7.2
Hunter Nelson........................................ 64,758(2)(8) *
Rolf H. Towe......................................... 2,064,204(9) 15.9
Robert W. Roten...................................... 165,297(10) 1.3
William A. McMinn.................................... 40,000(2)(11) *
Richard K. Crump..................................... 61,296(12) *
Peter W. De Leeuw.................................... 61,597(13) *
Gary M. Spitz........................................ 24,497(14) *
Robert O. McAlister.................................. 29,696(15) *
Clipper Capital Associates, Inc...................... 2,063,204(2)(16) 15.9
Koch Industries, Inc................................. 1,181,254(2)(17) 9.1
Fayez Sarofim & Co................................... 687,548(2)(18) 5.3
Olympus Growth Fund II, L.P.......................... 678,770(2)(19) 5.2
Olympus Executive Fund, L.P.......................... 7,926(2)(19) *
All executive officers and directors as a group (14
persons)............................................ 5,524,448(20) 42.7
</TABLE>
- --------
* Less than 1%
(1) Unless otherwise noted, the mailing address of each beneficial owner is
1200 Smith Street, Suite 1900, Houston, Texas 77002-4312.
(2) Each of these stockholders is a party to the voting agreement described
under "Certain Relationships and Related Transactions." Other parties to
the voting agreement include William C. Oehmig, who beneficially owns
361,772 shares of Holdings' common stock, the Rheney Living Trust (Susan O.
Rheney and Clarke Rheney, Trustees), which beneficially owns 48,307 shares,
CS First Boston Merchant

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<PAGE>

Investments 1995/96, L.P., which beneficially owns 75,900 shares, Gordon A.
Cain, who beneficially owns currently exercisable warrants to acquire
160,000 shares and James Crane, who beneficially owns currently exercisable
warrants to acquire 30,000 shares. The parties to the voting agreement may
be deemed to be members of a "group" within the meaning of Rule 13d-5(b)(1)
under the Exchange Act, and accordingly may be deemed to have beneficial
ownership of all of the shares of Holdings' common stock subject to the
voting agreement. An aggregate of 6,518,967 shares of Holdings' common
stock, representing approximately 50% of the outstanding shares, are
subject to the voting agreement. However, each party to the voting
agreement expressly disclaims membership in such group and beneficial
ownership of such shares, other than shares identified herein as
beneficially owned by such party.
(3) Includes (A) 20,000 shares held as Trustee of the Gabrielle Diassi Trust,
(B) 40,000 shares held as Trustee of the Diassi Children's Trust, (C)
10,000 shares held as Trustee of the Brianna Diassi Trust, (D) 10,000
shares held as Trustee of the Nicholas Diassi Trust, (E) 10,000 shares
held by Mr. Diassi's wife, (F) 1,161 shares held by Merrill Lynch, as
Trustee of the Employee Stock Ownership Plan, and allocated to Mr.
Diassi's account, (G) 49,207 shares subject to options granted by Holdings
that are currently exercisable, and (H) 20,000 shares subject to warrants
that are currently exercisable.
(4) Includes 4,000 shares subject to options granted by Holdings that are
currently exercisable.
(5) Of such shares, 4,000 represent shares subject to options granted by
Holdings that are currently exercisable. The remainder are held by Clipper
Capital Associates, L.P., under a nominee agreement by which it exercises
sole voting and dispositive power with respect to these shares.
(6) Represents shares held by Koch Capital Services, Inc., including 49,031
shares subject to warrants and 4,000 shares subject to options that are
currently exercisable and that are held by Koch Capital, a wholly owned
subsidiary of Koch Industries, Inc. Mr. Damiris disclaims beneficial
ownership of these shares, warrants and options, but as Vice President of
Koch Ventures, Inc., Mr. Damiris may be deemed to beneficially own them.
(7) Includes 1,990 shares owned by Mr. Hevrdejs' wife, 4,000 shares subject to
options granted by Holdings that are currently exercisable, and 20,000
shares subject to warrants that are currently exercisable.
(8) Includes 4,000 shares subject to options granted by Holdings that are
currently exercisable.
(9) Includes 1,000 shares subject to options granted by Holdings that are
currently exercisable. Also includes shares held by The Clipper Group; Mr.
Towe disclaims beneficial ownership of these shares, but as Senior
Managing Director of The Clipper Group, L.P. and Vice President of Clipper
Asset Management, Inc., he may be deemed to beneficially own them.
(10) Includes 37,470 shares held by Merrill Lynch, as Trustee of the Sterling
Chemicals ESOP, and allocated to Mr. Roten's account, and 2,000 shares
subject to options granted by Holdings that are currently exercisable.
(11) Represents shares subject to warrants that are currently exercisable.
(12) Includes 8,639 shares held by Merrill Lynch, as Trustee of the Sterling
Chemicals ESOP, and allocated to Mr. Crump's account, and 15,582 shares
subject to options granted by Holdings that are currently exercisable.
(13) Includes 25,000 shares subject to options granted by Holdings that are
currently exercisable and 497 shares that are held by Merrill Lynch, as
Trustee of the Sterling Chemicals ESOP, and allocated to Mr. De Leeuw's
account.
(14) Includes 9,000 shares subject to options granted by Holdings that are
currently exercisable and 497 shares that are held by Merrill Lynch, as
Trustee of the Sterling Chemicals ESOP, and allocated to Mr. Spitz's
account.
(15) Includes 4,419 shares held by Merrill Lynch, as Trustee of the Sterling
Chemicals ESOP, and allocated to Mr. McAlister's account, and 9,021
shares subject to options granted by Holdings that are currently
exercisable.
(16) Clipper Capital Associates, Inc. ("Clipper") may be deemed to
beneficially own these shares by virtue of its relationship with entities
that have beneficial ownership of these shares as discussed herein.
Clipper is

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<PAGE>

the sole general partner of Clipper Capital Associates, L.P. "Clipper
Associates," and is a Delaware corporation principally engaged in holding
investments, formed for the purpose of serving as general partner of
Clipper Associates. The mailing address of Clipper is 650 Madison Ave., 9th
Floor, New York, New York 10022. Clipper Associates is a Delaware limited
partnership principally engaged in making investments, directly or
indirectly through other entities and is the sole general partner of
Clipper Equity Partners I, L.P. ("Clipper I") and Clipper/Merchant
Partners, L.P. ("Clipper II"), with sole voting and dispositive power with
respect to the securities held by these partnerships. Each of Clipper I and
Clipper II is a Delaware limited partnership, principally engaged in making
investments. Clipper Associates may be deemed to directly beneficially own
11,831 shares of Holdings' common stock and indirectly beneficially own
201,776 shares by virtue of its status as nominee under several nominee
agreements, under which it exercises sole voting and dispositive power with
respect to these shares. Clipper I may be deemed to directly beneficially
own 444,537 shares. Clipper II may be deemed to directly beneficially own
516,031 shares. Each of Clipper/Merban, L.P. ("Clipper III") and
Clipper/European Re, L.P. ("Clipper IV") is a Delaware limited partnership,
principally engaged in making investments. Clipper Associates is the sole
investment general partner of Clipper III and Clipper IV, having sole
voting and dispositive power with respect to securities held by these
partnerships. Clipper III may be deemed to directly beneficially own
592,701 shares. Clipper IV may be deemed to directly beneficially own
296,328 shares. Clipper Curacao, Inc., a corporation organized under the
laws of the British Virgin Islands, is the sole administrative general
partner of Clipper III and Clipper IV, responsible for the administrative
functions of these partnerships. The share amounts include currently
exercisable warrants to purchase Holdings' common stock in the following
amounts: Clipper Associates--28 shares; Clipper I--13,605 shares; Clipper
II--18,149 shares; Clipper III--18,149 shares; Clipper IV--9,089 shares.
(17) Koch Industries may be deemed to beneficially own these shares, which are
directly beneficially owned by Koch Capital. Includes 49,031 shares
subject to warrants and 4,000 shares subject to options that are currently
exercisable. The mailing address of Koch Industries and Koch Capital is
4111 East 37th Street North, Wichita, KS 67220.
(18) Fayez Sarofim & Co. may be deemed to beneficially own these shares, which
are directly beneficially owned by FSI No. 2 Corporation, a wholly owned
subsidiary of Fayez Sarofim & Co. The majority owner of Fayez Sarofim &
Co. is Fayez Sarofim. The mailing address of Fayez Sarofim, Fayez Sarofim
& Co., and FSI No. 2 Corporation is Two Houston Center, Suite 2907,
Houston, TX 77010.
(19) Olympus Growth Fund II, L.P. ("Olympus Growth") and Olympus Executive
Fund, L.P. ("Olympus Executive") are Delaware limited partnerships
principally engaged in making investments. The foregoing share amounts
include shares subject to warrants in the amount of 58,387 shares with
respect to Olympus Growth and 633 shares with respect to Olympus
Executive. OGP II, L.P., a Delaware limited partnership ("OGP"), is the
sole general partner of Olympus Growth, and OEF, L.P., a Delaware limited
partnership ("OEF"), is the sole general partner of Olympus executive. The
three general partners of both OGP and OEF are LJM, L.L.C. ("LJM"), RSM,
L.L.C. ("RSM"), and Conroy, L.L.C. ("Conroy"). Each of LJM, RSM and Conroy
is a Delaware limited liability company. The majority owner of LJM is
Louis J. Mischianti. The majority owner of RSM is Robert S. Morris. The
majority owner of Conroy is James A. Conroy. The mailing address of
Olympus Growth, Olympus Executive, OGP, OEF, LJM, RSM, Conroy and Messrs.
Mischianti, Morris and Conroy is Metro Center, One Station Place,
Stamford, Connecticut 06902.
(20) Includes 58,133 shares held by Merrill Lynch, as Trustee of the Sterling
Chemicals ESOP, and allocated to the accounts of various officers and
directors.

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RELATIONSHIPS AND TRANSACTIONS WITH RELATED PARTIES

The holders of 6,518,967 shares of Holdings' outstanding common stock,
representing approximately 50% of the total outstanding shares, have entered
into an Amended and Restated Voting Agreement dated February 1, 1999. The
parties to the voting agreement are Frank P. Diassi, Frank J. Hevrdejs and
Hunter Nelson, each of whom are one of our directors; William C. Oehmig; Susan
O. Rheney as Trustee of the Rheney Living Trust; Koch Capital Services, Inc.;
affiliates of Clipper Capital Partners, L.P. (collectively, "The Clipper
Group"); FSI No. 2 Corporation, a wholly owned subsidiary of Fayez Sarofim &
Co.; Olympus Growth Fund II, L.P.; Olympus Executive Fund, L.P.; Credit Suisse
First Boston Corporation; Gordon A. Cain; William A. McMinn; and James Crane.
The voting agreement requires each of these parties to vote all of the shares
of Holdings' common stock owned or acquired by them in the future in favor of
three nominees to the Holdings' Board of Directors, one to be selected by each
of Koch Capital Services, Inc., The Clipper Group and Gordon A. Cain. George J.
Damiris is the current designee of Koch Capital, Rolf H. Towe is the current
designee of The Clipper Group and William A. McMinn is the current designee of
Mr. Cain. The rights of Koch Capital and The Clipper Group to select their
nominees under the voting agreement each terminates on August 21, 2006, or
sooner in the event their beneficial ownership of Holdings' common stock
represents less than 5% of the outstanding common stock. The right of Mr. Cain
to select his nominee terminates upon the earlier of (1) December 15, 2008 or
(2) the later of the expiration of the purchase agreement to which he is a
party and the time at which Mr. Cain has beneficial ownership of less than 5%
of Holdings' outstanding common stock.

The holders of 8,974,646 shares of Holdings' common stock, representing
approximately 69% of the outstanding shares of Holdings' common stock, are
parties to the Sterling Chemicals Holdings, Inc. Stockholders Agreement dated
August 21, 1996 and the Tag-Along Agreement dated August 21, 1996. The
stockholders agreement restricts the transfer of shares of Holdings' common
stock held by these stockholders, with some exceptions, unless these shares are
first offered to be sold to the Sterling Chemicals, Inc. Employee Stock
Ownership Trust created by the Sterling Chemicals ESOP, then to Holdings and
then to the other Holdings stockholders that are a party the stockholders
agreement. The Tag-Along Agreement provides that if any of the parties to the
agreement, alone or in concert, proposes to transfer, sell, or otherwise
dispose of a combined total of 51% or more of the shares of Holdings' common
stock issued and outstanding at the time of the transfer, that party must give
notice of the proposed transfer to each person that retained shares of
Holdings' common stock in the 1996 recapitalization and each of these persons
will have the right to have those shares included in the transfer on a pro rata
basis and on the same terms and conditions.

In connection with our 1996 recapitalization, Holdings and The Sterling
Group, Inc. entered into a consulting agreement, which provided that if
Holdings or any of its subsidiaries determined prior to April 23, 1998 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 the subsidiary would
retain The Sterling Group as a consultant with respect to the transaction,
provided that The Sterling Group's fees were competitive and Holdings and The
Sterling Group mutually agreed on the terms of the engagement. In addition,
under the consulting agreement, Holdings is obligated to indemnify The Sterling
Group against liabilities relating to their services. Holdings paid The
Sterling Group approximately $20,732 in fiscal 1998, primarily as reimbursement
for expenses incurred in connection with due diligence activities for various
potential acquisitions and some remaining consulting and advisory fees related
to Holdings' July 1997 acquisition of assets from Saskatoon Chemicals, Ltd. and
Holdings' January 1997 acquisition of the acrylic fibers business from Cytec.
The consulting agreement expired by its terms on April 23, 1998. Frank J.
Hevrdejs and Hunter Nelson, each of whom is a member of our Board of Directors,
are principals of The Sterling Group. Frank P. Diassi, Chairman of our Board of
Directors, William A. McMinn, one of our directors, Peter W. De Leeuw, our
President and Chief Executive Officer, J. Virgil Waggoner, who served as Vice
Chairman of our Board of Directors until April 1, 1998, Robert W. Roten, the
current Vice Chairman of our Board of Directors and our former President and
Chief Executive Officer, Gary M. Spitz, our Chief Financial Officer, and
Richard K. Crump, our Vice President--Strategic Planning, have previously co-
invested with principals of The Sterling Group in several transactions.

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<PAGE>

Since October 1, 1991, we have had ongoing commercial relationships in the
ordinary course of business with affiliates of Koch Industries, including, from
time to time, supply of raw materials or sales of petrochemicals and
transportation of natural gas. For the fiscal year ended September 30, 1998, we
made

. product sales to Koch Chemical Company, an indirect wholly owned
subsidiary of Koch Industries, Inc.;

. payments to John Zink Company, an indirect wholly owned subsidiary of
Koch Industries, in consideration for contracting and construction
services performed at our Texas City facility; and

. payments to Koch Gateway Pipeline Company for the transportation of
natural gas to our acrylic fibers facility through a pipeline in which it
is a partner.

each of which represented less than 1% of our revenues. Raw materials purchases
from Koch Chemical were in an aggregate amount equal to approximately 3% of our
revenues. In addition, we filed a lawsuit against John Zink Company in which we
are seeking recovery for damages sustained in connection with the release of
nickel carbonyl from our methanol unit on July 30, 1997. This lawsuit is
currently the subject of a tolling agreement while the parties seek to
negotiate a mutually acceptable resolution of our claims.

We entered into an engagement letter dated April 27, 1998, under which we
engaged Chem Systems to perform consulting services related to our styrene
business. In addition, on August 10, 1998, we accepted a proposal from Chem
Systems pursuant to which we engaged Chem Systems to conduct a site study of
our Texas City facility and to benchmark our best practices and organizational
structures against top quartile performers in the industry. During fiscal 1998,
we paid Chem Systems approximately $30,977 under the engagement letters and
approximately $70,000 under the benchmarking proposal. In addition, we paid
Chem Systems approximately $76,319 for various other professional services
during fiscal 1998. Peter Spitz, who is the father of Gary Spitz, our Chief
Financial Officer and Vice President, is the Director of Chem Systems. Peter
Spitz does not perform any direct services under either of these arrangements.
In connection with the offering of the existing notes, the initial purchasers
engaged Chem Systems to conduct an appraisal of our Texas City and Valdosta
facilities, for which we reimbursed the initial purchasers for all amounts paid
to Chem Systems.

Gary M. Spitz was hired as our Chief Financial Officer effective January 19,
1998. On May 25, 1998, we loaned Mr. Spitz $228,000 to be used exclusively for
the down payment of a new principal residence for Mr. Spitz and his family in
the greater Houston metropolitan area. The loan, including accrued interest at
the rate of 5.37% per annum, was fully repaid on July 1, 1998 out of the
proceeds of the sale of Mr. Spitz's previous residence in Columbia, Maryland.

On April 1, 1998, Holdings entered into a consulting agreement with Mr.
Roten, the Vice Chairman of our Board of Directors and our former President and
Chief Executive Officer. Under this agreement, Mr. Roten was paid $10,000 per
month for consulting services, minus any fees or other compensation paid to Mr.
Roten in that month for serving as a director of us, Holdings, or any of our
subsidiaries. This consulting agreement expired by its terms in March of 1999.
During fiscal 1998, Mr. Roten was paid $52,300 under this consulting agreement.

As of December 15, 1998, Holdings entered into separate standby purchase
agreements with each of Gordon A. Cain, William A. McMinn, James Crane, Mr.
Diassi, Mr. Hevrdejs, and Koch Capital Services, Inc. Pursuant to the terms of
these standby purchase agreements, the purchasers committed to purchase up to
2,500,000 shares of Holdings' common stock, at a price of $6.00 per share, if,
as, and when requested by Holdings at any time prior to December 15, 2001. In
order to induce the purchasers to enter into the purchase agreements, Holdings
issued to them warrants to purchase an aggregate of 300,000 shares of Holdings'
common stock at an exercise price of $6.00 per share. In addition, under the
terms of the purchase agreements, Holdings agreed to issue to the purchasers
additional warrants to purchase up to 300,000 additional shares of Holdings'
common stock if, as, and when they purchase shares of Holdings' common stock
under the standby purchase agreements. Any shares of Holdings' common stock
purchased under the standby purchase agreements or the warrants issued to the
purchasers as contemplated by the standby purchase agreements will be subject
to the terms of the previously discussed voting agreement, stockholder
agreement, and Tag-Along Agreement.

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<PAGE>

DESCRIPTION OF OTHER INDEBTEDNESS

Existing Subordinated Notes

As part of our 1996 recapitalization, we issued $275 million in aggregate
principal amount of 11 3/4% Senior Subordinated Notes maturing on August 15,
2006. In April of 1997, we issued $150 million in aggregate principal amount of
11 1/4% Senior Subordinated Notes maturing on April 1, 2007. The following
description of the existing subordinated notes is qualified in its entirety by
reference to the indentures for the existing subordinated notes, which we have
filed with the Commission. See "Where You Can Find More Information."

The 11 3/4% Senior Subordinated Notes bear interest at the annual rate of
11 3/4%, payable semi-annually on February 15 and August 15 of each year. We may
not redeem the 11 3/4% Senior Subordinated Notes prior to August 15, 2001, and
from thereon through August 15, 2004, we may redeem them at a premium to par
varying between 105.875% to 101.958%. Subsequent to August 15, 2004, we may
redeem the 11 3/4% Senior Subordinated Notes at their face value plus accrued
interest. Prior to August 15, 1999, we may redeem in the aggregate up to 35% of
the original principal amount of the 11 3/4% Senior Subordinated Notes with the
proceeds of one or more public offerings of Holdings' equity following which
there is a public market. We may make such redemptions at a redemption price of
111 3/4% of the face value of the 11 3/4% Senior Subordinated Notes, plus
accrued interest to the redemption date. After any such redemption, at least
$178.8 million aggregate principal amount of the 11 3/4% Senior Subordinated
Notes must remain outstanding.

The 11 1/4% Senior Subordinated Notes bear interest at the annual rate of
11 1/4%, payable semi-annually on April 1 and October 1 of each year. We may not
redeem the 11 1/4% Senior Subordinated Notes prior to April 1, 2002, and from
thereon through April 1, 2005, we may redeem them at a premium to par varying
between 105.625% to 101.875%. Subsequent to April 1, 2005, we may redeem the
11 1/4% Senior Subordinated Notes at their face value plus accrued interest.
Prior to April 1, 2000, we may redeem in the aggregate up to 35% of the original
principal amount of the 11 1/4% Senior Subordinated Notes with the proceeds of
one or more public offerings of Holdings' equity following which there is a
public market. We may make these redemptions at a redemption price of 111 1/4%
of the face value of the 11 1/4% Senior Subordinated Notes, plus accrued
interest to the redemption date. After any such redemption, at least $97.5
million aggregate principal amount of the 11 1/4% Senior Subordinated Notes must
remain outstanding.

Our subordinated notes are unsecured senior subordinated obligations, are
subordinated in right of payment to all our senior debt, and are senior in
right of payment with, or pari passu with, all our existing and future
subordinated indebtedness. These notes will rank senior to the existing
subordinated notes.

The indentures for our subordinated notes contain numerous financial and
operating covenants, including restrictions on our ability to incur
indebtedness, pay dividends, sell assets, engage in mergers and acquisitions,
and refinance existing indebtedness, and include various circumstances that
will constitute, upon occurrence and subject in certain cases to notice and
grace periods, an event of default thereunder.

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<PAGE>

Senior Secured Revolving Credit Facilities

We established two new senior secured revolving credit facilities with DLJ
Capital Funding, Inc. and Credit Suisse First Boston (New York Branch) with
aggregate borrowing capacity of $155 million simultaneously with the closing of
the sale of the existing notes. The following table summarizes the primary
terms of the two facilities:

<TABLE>
<CAPTION>
Fixed Assets Revolver Working Capital Revolver
--------------------- ------------------------
<C> <C> <S>
Facility Size........... $70 million $85 million
Term.................... 5 years, with quarterly 5 years
commitment reductions totalling
30% of the total commitment in
year four and 70% in year five
Interest Rate........... LIBOR + 3.75% for LIBOR Loans LIBOR + 3.00% for LIBOR
Loans
Alternate Base Rate + 2.25% Alternate Base Rate +
for Alternate Base Rate Loans 1.50% for Alternate Base
Rate Loans
Commitment Fee.......... Ranges from 0.75% to 1.25% 0.50%
depending on the amount drawn
Borrowing Base Lesser of $85 million
Restrictions........... None and the sum of
. 85% of eligible U.S.
accounts receivable
and
. 65% of eligible U.S.
inventory
Inventory availability
cannot exceed
$42.5 million at any
time
Security................ A first priority lien on our U.S. A first priority lien on
chemical production facilities our U.S. accounts
and related assets, a second receivable, inventory,
priority lien on our U.S. specified general
accounts receivable, inventory, intangibles, and
related general intangibles, and other specified assets
other related assets, and a
first priority pledge of
our stock and the stock of our
U.S. subsidiaries that guarantee
our obligations under the notes
Co-Borrowers............ Us and all our U.S. subsidiaries, Us and all our U.S.
excluding our U.S. subsidiary subsidiaries, excluding
that indirectly owns our our U.S. subsidiary that
Saskatoon facility indirectly owns our
Saskatoon facility
Financial Covenants..... None Our borrowing base must
generally exceed our
outstanding borrowings
by $12 million
</TABLE>

As of August 31, 1999 we had borrowed approximately $50 million under the
fixed assets revolver. We used these funds, together with the net proceeds from
the sale of the existing notes, to repay all previously existing indebtedness
under our old senior credit facility, which we then terminated. We have used
the remaining amounts available under our secured revolving credit facilities
for working capital and general corporate purposes.

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<PAGE>

DESCRIPTION OF NOTES

You can find the definitions of certain terms used in this description under
the subheading "Certain Definitions." In this description, the word "Sterling"
refers only to Sterling Chemicals, Inc. and not to any of its subsidiaries.
Unless stated otherwise, the word "notes" refers to both the existing notes and
the exchange notes.

Sterling will issue the exchange notes under the indenture among itself, the
Subsidiary Guarantors and Harris Trust Company of New York, as trustee, that
currently governs the existing notes. The terms of the notes include those
stated in the indenture and those made part of the indenture by reference to
the Trust Indenture Act. The Security Agreements referred to under the caption
"Security" define the terms of the mortgages, pledges, and other security
interests that will secure the notes.

The following description is a summary of the material provisions of the
indenture and the Security Agreements. It does not restate those agreements in
their entirety. We urge you to read the indenture and the Security Agreements
because they, and not this description, define your rights as Holders of the
notes. We have filed copies of the indenture and the Security Agreements as
exhibits to the registration statement which includes this prospectus. Certain
defined terms used in this description but not defined below under the
subheading "Certain Definitions" have the meanings assigned to them in the
indenture.

The registered Holder of a note will be treated as the owner of it for all
purposes. Only registered Holders have rights under the indenture.

Brief Description of the Notes and the Subsidiary Guarantees

The Notes

The notes:

. are general obligations of Sterling;

. are secured by:

. a second priority lien on the production facilities and related assets
that are currently owned by Sterling; and

. a second priority pledge of the Capital Stock of all of Sterling's
U.S. Subsidiaries, other than Sterling Chemicals Acquisitions, Inc.,
an Unrestricted Subsidiary which directly or indirectly owns the
Capital Stock of Sterling's other current Unrestricted Subsidiaries,
all of which are Non-U.S. Subsidiaries;

. are equal in right of payment with all existing and future Senior Debt of
Sterling, including Sterling's obligations under the Credit Agreement,
but are subordinated to borrowings under the Credit Agreement to the
extent of the collateral securing the Credit Agreement, including all
inventory, all accounts receivable, and certain other assets and the
Shared Collateral;

. are senior in right of payment to any Subordinated Obligations of
Sterling; and

. are unconditionally guaranteed by the Subsidiary Guarantors.

The Subsidiary Guarantees

The notes are guaranteed by all of the current U.S. Subsidiaries of
Sterling, other than Sterling Chemicals Acquisitions, Inc.

Each subsidiary guarantee of the notes:

. is a general obligation of the Subsidiary Guarantor;

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<PAGE>

. is secured by:

. a second priority lien on the production facilities that are located
in the United States and related assets that are currently owned by
the Subsidiary Guarantor;

. a second priority pledge of the Capital Stock of the Subsidiary
Guarantor's U.S. Subsidiaries; and

. a first priority pledge of 65% of the Capital Stock of the Subsidiary
Guarantor's Non-U.S. Subsidiaries: Sterling Pulp Chemicals, Ltd. and
Sterling NRO, Ltd. in Canada, and Sterling Chemicals Marketing, Inc.
in Barbados;

. is equal in right of payment with all existing and future Senior Debt of
the Subsidiary Guarantor, including the Subsidiary Guarantor's joint and
several liability for all obligations under the Credit Agreement, but are
subordinated to such liability under the Credit Agreement to the extent
of the collateral securing such liabilities, including all inventory,
accounts receivable, and certain other assets of the Subsidiary Guarantor
and any property of the Subsidiary Guarantor constituting part of the
Shared Collateral; and

. is senior in right of payment to any Subordinated Obligations of the
Subsidiary Guarantor.

Not all of our Subsidiaries will guarantee the notes. In the event of a
bankruptcy, liquidation, or reorganization of any of these non-guarantor
Subsidiaries, these non-guarantor Subsidiaries will pay the holders of their
debts and their trade creditors before they will be able to distribute any of
their assets to us. Our non-guarantor Subsidiaries generated approximately 20%
of our consolidated revenues in fiscal 1998 and represented approximately 30%
of our consolidated net fixed assets as of September 30, 1998.

Principal, Maturity and Interest

We will issue exchange notes with a maximum aggregate principal amount of
$295.0 million. We will issue exchange notes in denominations of $1,000 and
integral multiples of $1,000. The exchange notes will mature on July 15, 2006.

Interest on the notes will accrue at the rate of 12 3/8% per annum and will
be payable in cash semi-annually in arrears on January 15 and July 15,
commencing on January 15, 2000. Sterling will make each interest payment to the
Holders of record on the immediately preceding January 1 and July 1.

Interest on the exchange notes will accrue from the date the existing notes
were issued or, if interest has already been paid, from the date it was most
recently paid. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.

Methods of Receiving Payments on the Notes

If a Holder has given wire transfer instructions to Sterling, Sterling will
pay all principal and interest, and premium, Liquidated Damages and Make Whole
Amounts, if any, on that Holder's notes in accordance with those instructions.
All other payments on the notes will be made at the office or agency of the
paying agent and registrar within the City and State of New York unless
Sterling elects to make interest payments by check mailed to the Holders at
their addresses set forth in the register of Holders.

Paying Agent and Registrar for the Notes

The trustee will initially act as paying agent and registrar. Sterling may
change the paying agent or registrar without prior notice to the Holders, and
Sterling or any of its Subsidiaries may act as paying agent or registrar.

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<PAGE>

Transfer and Exchange

A Holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a Holder to furnish appropriate
endorsements and transfer documents in connection with a transfer of notes.
Holders will be required to pay all taxes due on transfer. Sterling is not
required to transfer or exchange any note selected for redemption. Also,
Sterling is not required to transfer or exchange any note for a period of 15
days before a selection of notes to be redeemed.

Security

The notes and the Subsidiary Guarantees will be secured by:

(1) a second priority lien on the real property, production facilities
and certain related general intangibles, and other assets currently owned
by Sterling and its Restricted Subsidiaries (collectively, the "PP&E")
located in:

. Texas City, Texas;

. Valdosta, Georgia; and

. Santa Rosa County, Florida;

(2) a second priority pledge (the "Domestic Pledge") of the Capital
Stock of all of Sterling's current U.S. Subsidiaries, other than Sterling
Chemicals Acquisitions, Inc., which is an Unrestricted Subsidiary; and

(3) a first priority pledge (the "Foreign Pledge") of 65% of the Capital
Stock of three of Sterling's Non-U.S. Subsidiaries:

. Sterling Pulp Chemicals, Ltd. and Sterling NRO, Ltd. in Canada; and

. Sterling Chemicals Marketing, Inc. in Barbados.

The PP&E, the Domestic Pledge, and the Foreign Pledge are referred to
collectively as the "Collateral." The Collateral does not include the following
assets (collectively, the "Excluded Assets"):

. all of the accounts receivable, inventory, remaining general
intangibles, and certain other assets of Sterling and the Subsidiary
Guarantors, which will secure Sterling's and the Subsidiary
Guarantors' obligations under the Credit Agreement, and

. after-acquired assets other than replacements or improvements of
existing assets.

In addition, the Collateral will not include assets owned now or in the future
by third parties that are or will be located on the mortgaged properties. The
liens granted pursuant to the mortgages are subject to the rights of third
parties under leases of any portion of the mortgaged properties and the trustee
is authorized and directed to expressly attorn to third party rights under
those leases. The Domestic Pledge and the Foreign Pledge are collectively
referred to as the "Pledge." The PP&E and the Domestic Pledge are collectively
referred to as the "Shared Collateral."

Sterling and its Restricted Subsidiaries that own the PP&E have entered into
separate mortgage agreements providing for the grant by Sterling and such
Restricted Subsidiaries to the collateral agent for the ratable benefit of the
Holders of the notes of a second mortgage in the portion of the PP&E
constituting real property and the improvements thereon.

Sterling and its Restricted Subsidiaries that own any of the Collateral have
entered into separate security and pledge agreements (together with the
mortgage agreements and the intercreditor agreement described below, the
"Security Agreements") providing for the Pledge and the grant by Sterling and
such Restricted Subsidiaries to the collateral agent for the ratable benefit of
the Holders of the notes of a second priority

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<PAGE>

security interest in the portion of the PP&E constituting equipment, related
general intangibles, and certain other assets of Sterling and such Restricted
Subsidiaries, other than the Excluded Assets.

The Security Agreements secure the payment and performance when due of all
of the obligations of Sterling and the Subsidiary Guarantors under the
indenture, the notes, and the Subsidiary Guarantees. The security interest with
respect to the Shared Collateral is a second priority security interest subject
to the prior claims of the lenders under the Fixed Assets Revolver. The
security interest with respect to the Foreign Pledge is a first priority
security interest. The security interests in the Collateral have been granted
to the trustee, as collateral agent for and on behalf of the Holders of the
notes.

The collateral release provisions of the indenture and/or the Security
Agreements permit the release of Liens and Subsidiary Guarantees in connection
with certain direct or indirect sales of the PP&E and, in the case of the Santa
Rosa acrylic fibers facility, a Joint Venture Contribution. See "--Repurchase
at the Option of Holders--Asset Sales," "--Sales of Principal Properties," and
"--Transfer of the Fibers Business."

Sterling, representatives of the lenders under the Fixed Assets Revolver,
and the trustee have entered into an intercreditor agreement defining the
rights of the parties regarding the Shared Collateral and related matters. The
security interest in the Shared Collateral created by the Security Agreements
in favor of the trustee is junior to the security interest granted under the
Credit Agreement to the extent of all of Sterling's and the Subsidiary
Guarantors' obligations under the Fixed Assets Revolver.

The intercreditor agreement provides that the lenders under the Fixed Assets
Revolver will be entitled to control virtually all decisions relating to the
exercise of remedies regarding the Shared Collateral under the Security
Agreements. As a result, Holders of the notes will not be able to force a sale
of Shared Collateral or otherwise exercise the remedies normally available to
secured creditors without the concurrence of the lenders under the Fixed Assets
Revolver.

So long as no Default or Event of Default has occurred and is continuing,
and subject to certain terms and conditions, Sterling and the Subsidiary
Guarantors will be entitled to exercise any voting and other consensual rights
pertaining to the Collateral pledged by them and to receive all dividends,
interest, and other payments with respect thereto.

Upon the occurrence and during the continuance of a Default or an Event of
Default, subject to the Security Agreements, the intercreditor agreement, and,
with respect to the Shared Collateral, the prior rights of the lenders under
the Fixed Assets Revolver:

(1) all rights of Sterling to exercise such voting or other consensual
rights will cease, and all such rights will become vested in the collateral
agent, which, to the extent permitted by law, will have the sole right to
exercise such voting and other consensual rights;

(2) all rights of Sterling to receive dividends, interest, and other
payments made upon or with respect to the Collateral will cease and such
dividends, interest, and other payments will be paid to the collateral
agent; and

(3) the collateral agent may sell the Collateral or any part thereof in
accordance with the terms of the Security Agreements.

All funds distributed under the Security Agreements and received by the
collateral agent for the benefit of the Holders of the notes will be
distributed by the collateral agent in accordance with the provisions of the
indenture.

The collateral agent will determine, subject to the Security Agreements, the
intercreditor agreement, and, with respect to the Shared Collateral, the prior
rights of the lenders under the Fixed Assets Revolver, the circumstances and
manner in which the Collateral will be disposed of, including, but not limited
to, the

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<PAGE>

determination of whether to release all or any portion of the Collateral from
the Liens created by the Security Agreements and whether to foreclose on any or
all of the Collateral following an Event of Default.

The security interests in the Collateral in favor of the notes will be
released:

(1) upon the full and final payment and performance of all obligations
of Sterling under the indenture and the notes;

(2) with respect to the Capital Stock of any Subsidiary (other than the
Principal Property Subsidiaries and the Fibers Subsidiaries) pledged to
secure the notes or its properties and assets, upon consummation of the
applicable sale if the Net Cash Proceeds or Net Available Cash, as
applicable, from that sale have been or will be applied in accordance with
the applicable provisions of the indenture and the collateral agent
receives from Sterling an Officer's Certificate certifying that those Net
Cash Proceeds or Net Available Cash, as applicable, have been or will be so
applied and an Opinion of Counsel with respect to compliance by Sterling
with the provisions of the indenture relating to the sale;

(3) with respect to the Capital Stock or the properties and assets of
one or more of the Principal Property Subsidiaries, upon the consummation
of an applicable Sale of a Principal Property; provided, that Sterling must
apply the Net Available Cash or the Net Cash Proceeds, as applicable, from
the sale of such Capital Stock, properties, or assets in accordance with
the terms of the covenant described under the caption "--Repurchase at the
Option of Holders--Sale of Principal Properties;" and

(4) with respect to the Capital Stock of the Fibers Subsidiaries or the
properties and assets of the Fibers Subsidiaries, upon the consummation of
a Transfer of the Fibers Business.

Ranking

The indebtedness evidenced by the notes will constitute senior secured
obligations of Sterling. The payment of the principal and interest, and
premium, Liquidated Damages, and Make Whole Amounts, if any, on the notes will
be senior in right of payment to all existing and future Subordinated
Obligations of Sterling, including the Existing Subordinated Notes, and will
rank equal in right of payment with all existing and future Senior Debt of
Sterling, including Sterling's obligations under the Credit Agreement. The
notes will be subordinated, however, to the extent of the collateral securing
Sterling's and the Subsidiary Guarantors' obligations under the Credit
Agreement, including all inventory, accounts receivable, related general
intangibles, and certain other assets and the Shared Collateral and, as a
result, the notes will be subordinated to the claims of those lenders.

A significant portion of Sterling's operations are conducted through its
Subsidiaries, not all of which are Subsidiary Guarantors. Claims of creditors
of the non-guarantor Subsidiaries, including trade creditors, secured
creditors, and creditors holding debt and guarantees issued by the non-
guarantor Subsidiaries, and claims of preferred stockholders (if any) of the
non-guarantor Subsidiaries, generally will have priority with respect to the
assets and earnings of the non-guarantor Subsidiaries over the claims of
creditors of Sterling, 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 the non-guarantor Subsidiaries. Although the indenture
limits the incurrence of Debt and the issuance of preferred stock of certain of
Sterling's Subsidiaries, that limitation will be subject to a number of
significant qualifications. Moreover, the indenture does not impose any
limitation on the incurrence by these Subsidiaries of liabilities that are not
considered Debt under the indenture or the incurrence of Debt by any
Unrestricted Subsidiaries. See "--Certain Covenants--Limitation on Debt" and
"Certain Definitions--Unrestricted Subsidiary."

Subsidiary Guarantees

The Subsidiary Guarantors will jointly and severally guarantee Sterling's
obligations under the notes. The obligations of each Subsidiary Guarantor under
its Subsidiary Guarantee will be limited as necessary to prevent that
Subsidiary Guarantee from constituting a fraudulent conveyance under applicable
law.

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<PAGE>

A Subsidiary Guarantor may not sell or otherwise dispose of all or
substantially all of its assets to, or consolidate with or merge with or into
(whether or not the Subsidiary Guarantor is the surviving Person), another
Person, other than Sterling or another Subsidiary Guarantor, unless immediately
after giving effect to that transaction, no Default or Event of Default exists
and either:

(1) the Person acquiring the property in any such sale or disposition or
the Person formed by or surviving any such consolidation or merger assumes
all the obligations of that Subsidiary Guarantor under the indenture, its
Subsidiary Guarantee, and the registration rights agreement pursuant to a
supplemental indenture and appropriate collateral documents satisfactory to
the trustee; or

(2) if applicable, the Net Available Cash from such sale or other
disposition is applied in accordance with the "Asset Sales" provisions of
the indenture; or

(3) if applicable, that transaction is made in accordance with the terms
of the covenant described under the caption "--Repurchase at the Option of
Holders--Sale of Principal Properties;" or

(4) if applicable, that transaction is made in accordance with the terms
of the covenant described under the caption "--Repurchase at the Option of
Holders--Transfer of the Fibers Business."

The Subsidiary Guarantee of a Subsidiary Guarantor will be released:

(1) with respect to any Subsidiary Guarantor other than a Principal
Property Subsidiary or a Fibers Subsidiary, in connection with any sale or
other disposition of all or substantially all of the assets of that
Subsidiary Guarantor (including by way of merger or consolidation) or any
sale or other disposition of all of the Capital Stock of that Subsidiary
Guarantor to a Person that is not (either before or after giving effect to
such transaction) a Subsidiary Guarantor or Sterling, provided, that
Sterling must apply the Net Available Cash or the Net Cash Proceeds, as
applicable, from such sale or other disposition in accordance with the
"Asset Sales" provisions of the indenture. See "--Repurchase at the Option
of Holders--Asset Sales;"

(2) with respect to any Principal Property Subsidiary, in connection
with the sale or other disposition of any Principal Property owned by such
Principal Property Subsidiary, or a sale or other disposition of the
Capital Stock of such Principal Property Subsidiary, provided, that
Sterling must apply the Net Available Cash or the Net Cash Proceeds, as
applicable, from such sale or other disposition in accordance with the
terms of the covenant described under the caption "--Repurchase at the
Option of Holders--Sale of Principal Properties;"

(3) with respect to the Fibers Subsidiaries, upon the consummation of a
Transfer of the Fibers Business made in accordance with the terms of the
covenant described under the caption "--Repurchase at the Option of
Holders--Transfer of the Fibers Business."

Optional Redemption

At any time prior to July 15, 2002, Sterling may on any one or more
occasions redeem up to 35% of the aggregate principal amount of notes issued
under the indenture at a redemption price of 112.375% of the principal amount
of the notes redeemed, plus accrued and unpaid interest and Liquidated Damages,
if any, to the redemption date, with the net cash proceeds of one or more
Public Equity Offerings; provided that:

(1) at least 65% of the aggregate principal amount of the notes
originally issued under the indenture remain outstanding immediately after
the occurrence of such redemption (excluding notes held by Sterling and its
Subsidiaries); and

(2) the redemption occurs within 60 days of the date of the closing of
the Public Equity Offering.

Except pursuant to the preceding paragraph, the notes will not be redeemable
at Sterling's option prior to July 15, 2003.

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<PAGE>

After July 15, 2003, Sterling may redeem all or a part of the notes upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued
and unpaid interest and Liquidated Damages, if any, on the notes redeemed to
the applicable redemption date, if redeemed during the twelve-month period
beginning on July 15 of the years indicated below:

<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003........................................................... 106.188%
2004........................................................... 103.094%
2005 and thereafter............................................ 100.000%
</TABLE>

Mandatory Redemption

Sterling is not required to make mandatory redemption or sinking fund
payments with respect to the notes.

Repurchase at the Option of Holders

Change of Control. Upon the occurrence of a Change of Control, each Holder
will have the right to require Sterling to repurchase such Holder's notes at a
purchase price in cash equal to 101% of the principal amount of notes
repurchased 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 and Liquidated Damages, if any, due on the relevant
interest payment date).

The occurrence of any of the following events will constitute a "Change of
Control" under the indenture:

(1) Any "Person" (as that term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more of the Permitted Holders, is or
becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act except that a Person will be deemed to have "beneficial
ownership" of all shares that any such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 35% of the total voting power
of the Voting Stock of Holdings; provided, however, that the Permitted
Holders "beneficially own," as defined above, directly or indirectly, in
the aggregate a lesser percentage of the total voting power of the Voting
Stock of Holdings than such other Person and do not have the right or
ability by voting power, contract, or otherwise to elect or designate for
election a majority of the Board of Directors of Holdings. For the purposes
of this clause (1):

(a) such other Person will be deemed to beneficially own any Voting
Stock of a corporation (the "specified corporation") held by any other
corporation (the "parent corporation"), if such other Person
"beneficially owns" (as defined above), directly or indirectly, more
than 35% of the voting power of the Voting Stock of such parent
corporation and the Permitted Holders "beneficially own" (as defined
above), directly or indirectly, in the aggregate a lesser percentage of
the voting power of the Voting Stock of such parent corporation and do
not have the right or ability by voting power, contract, or otherwise to
elect or designate for election a majority of the Board of Directors of
such parent corporation; and

(b) the Permitted Holders will be deemed to beneficially own any
Voting Stock of a specified corporation held by any parent corporation
so long as the Permitted Holders beneficially own (as so defined),
directly or indirectly, in the aggregate a majority of the voting power
of the Voting Stock of the parent corporation.

(2) During any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of Holdings or
Sterling (together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of Holdings
or Sterling, as the case may be, was approved by a majority of the
directors of Holdings or Sterling, as the case may be, then still in office
who were either directors at the beginning of such period or whose election
or

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nomination for election was previously so approved), cease for any reason
to constitute a majority of the Board of Directors of Holdings or Sterling,
as the case may be, then in office.

(3) The merger or consolidation of Holdings or Sterling with or into
another Person or the merger of another Person (other than a Permitted
Holder) with or into Holdings or Sterling, or the sale or transfer in one
or a series of transactions of all or substantially all the assets of
Holdings or Sterling to another Person (other than a Permitted Holder) and,
in the case only of any such merger or consolidation, the securities of
Holdings or Sterling that are outstanding immediately prior to such
transaction and which represent 100% of the aggregate voting power of the
Voting Stock of Holdings or Sterling 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.

(4) For so long as a holding company ownership structure is maintained
over Sterling, Holdings holds less than a majority of the Capital Stock of
Sterling (other than Preferred Stock of Sterling issued in accordance with
the terms of the indenture) or less than a majority of the Voting Stock of
Sterling.

Within 30 days following any Change of Control, Sterling will 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 Sterling to purchase such Holder's notes at a purchase
price in cash equal to 101% of the principal amount of notes repurchased
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);

(2) the material circumstances and facts regarding such Change of
Control (including, without limitation, information with respect to pro
forma historical income, cash flow, and capitalization 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); and

(4) the instructions, determined by Sterling consistent with the
indenture, that a Holder must follow in order to have its notes
repurchased.

Sterling will 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 the covenant described
hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
Sterling will comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under the covenant
described hereunder by virtue of such conflict and compliance. Neither the
Board of Directors nor the trustee may waive compliance by Sterling with its
obligation to repurchase notes upon a Change of Control. However, the
provisions under the indenture relating to Sterling's obligation to make an
offer to repurchase the notes as a result of a Change of Control may be waived
or modified with the prior written consent of the Holders of a majority in
principal amount of the notes.

The Change of Control purchase feature is a result of negotiations between
Sterling and the initial purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that Sterling or Holdings would decide to do so in the future. The provisions
of the indenture relating to a Change of Control may not afford Holders
protection in the event of a highly leveraged transaction, reorganization,
restructuring, merger, or similar transaction (including, in certain
circumstances, a transaction involving Sterling's management or its affiliates)
that may adversely affect Holders, if such transaction does not constitute a
Change of Control, as defined above. Any such transaction will result in a
Change of Control only if it is the type of transaction specified by such
definition. For example, a merger or

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consolidation with, or sale of assets to, a Permitted Holder would not meet the
definition of Change of Control and, therefore, Holders of notes would not be
entitled to require Sterling to purchase their notes.

The Credit Agreement places restrictions on Sterling's ability to purchase
notes, and also provides that the occurrence of certain change of control
events with respect to Sterling would constitute a default under the Credit
Agreement. In the event a Change of Control occurs at a time when Sterling is
prohibited from purchasing any notes, Sterling could seek the consent of its
lenders to the purchase of notes or could attempt to refinance the borrowings
that contain such prohibition. If Sterling does not obtain such a consent or
repay such borrowings, Sterling will remain prohibited from purchasing any
notes. In such case, Sterling's failure to purchase tendered notes would
constitute an Event of Default under the indenture which would, in turn,
constitute a default under the Credit Agreement.

The indentures relating to the Existing Subordinated Notes contain change of
control provisions similar to those contained in the indenture for the notes.
Future indebtedness of Sterling may contain prohibitions on the occurrence of
certain events that would constitute a Change of Control or require such
indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the Holders of their rights to require Sterling 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 Sterling.
Finally, Sterling's ability to pay cash to the Holders of notes following the
occurrence of a Change of Control may be limited by Sterling's 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 Sterling and,
thus, removal of incumbent management.

Asset Sales. Sterling will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, consummate any Asset Disposition, which
term does not include a Sale of a Principal Property or a Transfer of the
Fibers Business, unless:

(1) Sterling or the Restricted Subsidiary receives consideration at the
time of such Asset Disposition at least equal to the fair market value, as
determined in good faith by the Board of Directors (including as to the
value of all noncash consideration), of the shares and assets subject to
such Asset Disposition and at least 85% of the consideration thereof
received by Sterling or such Restricted Subsidiary is in the form of cash
or cash equivalents; and

(2) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by Sterling (or such Restricted Subsidiary, as the
case may be):

(A) first, to the extent Sterling elects (or is required by the
terms of any Senior Debt), to prepay, repay, or purchase Senior Debt or
Senior Debt (other than any Redeemable Stock) of a Wholly Owned
Subsidiary (in each ease other than Debt owed to Sterling or an
Affiliate of Sterling or Holdings) within 180 days from the later of
the date of such Asset Disposition or the receipt of such Net Available
Cash;

(B) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (A), at Sterling's election
to the investment by Sterling, any Wholly Owned Subsidiary, or the
Restricted Subsidiary making such Asset Disposition in assets to
replace the assets that were the subject of such Asset Disposition or
an asset that (as determined by the Board of Directors) will be used in
the business of Sterling, any Wholly Owned Subsidiary, or the
Restricted Subsidiary making such Asset Disposition existing on the
date of original issuance of the notes or in businesses reasonably
related thereto, in each case within the later of one year from the
date of such Asset Disposition or the receipt of such Net Available
Cash;

(C) third, to the extent of the balance of such Net Available Cash
after application and in accordance with clauses (A) and (B), to make
an offer to purchase notes (and any other Senior Debt

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of Sterling designated by Sterling) pursuant to and subject to the
conditions contained in the 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 Sterling, any Wholly Owned Subsidiary, or
the Restricted Subsidiary making such Asset Disposition of Tangible
Property, or

(y) the prepayment, repayment, or purchase of Debt (other than
any Redeemable Stock) of Sterling or Debt of any Restricted
Subsidiary (in either case other than Debt owed to Sterling or an
Affiliate of Sterling), 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 (C) above is consummated;

provided, however, that in connection with any prepayment, repayment,
or purchase of Debt pursuant to clause (A), (C), or (D) above, Sterling
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, Sterling and its
Restricted Subsidiaries shall not be required to apply any Net Available Cash
in accordance with this paragraph except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which are not applied in accordance
with this paragraph exceeds $20.0 million. Pending application of Net Available
Cash pursuant to this paragraph, such Net Available Cash shall be invested in
Temporary Cash Investments.

For the purposes of this covenant, the following are deemed to be "cash
equivalents":

(1) the express assumption of Debt of Sterling or any Restricted
Subsidiary and the release of Sterling or such Restricted Subsidiary from
all liability on such Debt; and

(2) securities received by Sterling or any Restricted Subsidiary that
are converted by Sterling or such Restricted Subsidiary into cash within 90
days of the receipt of such securities.

The 85% limitation referred to in the previous paragraph shall not apply to any
Asset Disposition in which the cash portion of the consideration received
therefor, determined in accordance with the previous sentence, is equal to or
greater than what the after tax proceeds would have been had such Asset
Disposition complied with such 85% limitation.

In the event of an Asset Disposition that requires the purchase of the notes
(and other Senior Debt) pursuant to clause (2)(C) above, Sterling will be
required to purchase notes tendered pursuant to an offer by Sterling for the
notes (and other Senior Debt) at a purchase price of 100% of their principal
amount (without premium) plus accrued but unpaid interest and Liquidated
Damages, if any (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 indenture. If the aggregate purchase price of notes (and any other
Senior Debt) tendered pursuant to such offer is less than the Net Available
Cash allotted to the purchase thereof, Sterling will be required to apply the
remaining Net Available Cash in accordance with clause (2)(D) above. Sterling
shall not be required to make such an offer to purchase notes (and other Senior
Debt) pursuant to this covenant if the Net Available Cash available therefor is
less than $10.0 million (which lesser amount shall be carried forward for
purposes of determining whether such an offer is required with respect to any
subsequent Asset Disposition).

To the extent that any or all of the Net Available Cash of any Foreign Asset
Sale is prohibited or delayed by applicable local law from being repatriated to
the United States, the portion of such Net Available Cash so affected shall not
be required to be applied at the time provided above, but may be retained by
the applicable Restricted Subsidiary (and invested in accordance with the last
sentence of the first paragraph of this covenant) so long, but only so long, as
the applicable local law will not permit repatriation to the United States.
Sterling

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will agree to cause the applicable Restricted Subsidiary to promptly take all
actions required by the applicable local law to permit such repatriation. Once
such repatriation of any of such affected Net Available Cash is permitted under
the applicable local law, such repatriation shall be immediately effected and
such repatriated Net Available Cash will be applied in the manner as described
in this covenant.

Sterling 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
the provisions of this covenant, Sterling shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under this clause by virtue of such conflict and compliance.

Sale of Principal Properties. Sterling will not, and will not permit any
Restricted Subsidiary (including each Principal Property Subsidiary) to,
directly or indirectly, consummate a sale, lease, transfer, or other
disposition (or series of related sales, leases, transfers, or other
dispositions) of any Principal Property or the Capital Stock of any Principal
Property Subsidiary or any material part thereof (each, a "Sale of a Principal
Property"), except in compliance with the following provisions:

(1) Upon the Sale of a Principal Property, Sterling must apply an amount
equal to any Net Available Cash or Net Cash Proceeds, as applicable, from
such transaction remaining after complying with its obligations under the
Fixed Assets Revolver to offer to purchase outstanding notes at a
repurchase price equal to the Make Whole Amount, according to the
procedures set forth in "Repurchase at the Option of Holders--Change of
Control." "Make Whole Amount" means an amount equal to, as determined by an
Independent Investment Banker, the sum of the present values of the
remaining scheduled payments of principal of the notes and the scheduled
payment of interest thereon to originally scheduled maturity, discounted to
the repurchase date (assuming a 360-day year consisting of twelve 30-day
months) at the Special Adjusted Treasury Rate, plus accrued and unpaid
interest thereon and Liquidated Damages, if any, to the repurchase date. If
the aggregate principal amount of notes tendered into such offer to
repurchase exceeds the amount of any Net Available Cash or Net Cash
Proceeds, as applicable, from such transaction remaining after complying
with applicable obligations under the Fixed Assets Revolver, the trustee
shall select the notes to be repurchased on a pro rata basis based upon the
principal amount of notes tendered.

(2) With respect to the Texas City Facility, prior to consummating such
transaction, Sterling must deliver to the trustee a certificate from a
nationally recognized firm of independent accountants that expresses their
opinion that the Net Available Cash or Net Cash Proceeds, as applicable,
from such transaction will be sufficient at the proposed repurchase date
(a) to pay all obligations, including principal, interest, premium, if any,
and other charges, under the Fixed Assets Revolver and (b) to purchase all
of the notes at the Make Whole Amount plus accrued and unpaid interest
thereon and Liquidated Damages, if any, to the repurchase date.

(3) With respect to the Sale of a Principal Property other than the
Texas City Facility, prior to consummating such transaction, Sterling must
either (a) deliver to the trustee a certificate from a nationally
recognized firm of independent accountants that expresses their opinion
that the Net Available Cash or Net Cash Proceeds, as applicable, from such
proposed transaction, will be sufficient at the proposed repurchase date
(1) to pay all obligations, including principal, interest, premium, if any,
and other charges under the Fixed Assets Revolver and (2) to purchase all
of the outstanding notes at the Make Whole Amount plus accrued and unpaid
interest thereon and Liquidated Damages, if any, to the repurchase date; or
(b) if such certificate is not delivered:

(1) the consideration Sterling or its Restricted Subsidiary receives
in such Sale of a Principal Property must consist solely of cash; and

(2) Sterling must deliver an opinion to the trustee, in form and
substance reasonably satisfactory to the trustee, as to the fairness of
the transaction to Sterling from a financial point of view, issued by
an Independent Financial Advisor.

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(4) Sterling or its Restricted Subsidiaries may sell, transfer, or
dispose of any part of a Principal Property which is worn out or obsolete
or no longer used or useful in the business of Sterling and its
subsidiaries, provided, such sale, transfer, or other disposition is
consistent with past practice, and does not significantly reduce the value
or usefulness of any Principal Property.

(5) With respect to any Sale of a Principal Property, subject to the
prior rights, if any, of the lenders under the Fixed Assets Revolver, an
amount equal to any Net Available Cash or Net Cash Proceeds, as applicable,
from such Sale of a Principal Property shall, concurrently with the closing
of such sale, be deposited with the trustee, who will hold such amount
pending its application to satisfy obligations and the purchase of the
notes. To the extent that funds remain after repayment of all obligations
in connection with the Fixed Assets Revolver and the purchase of the notes,
such excess amounts and any interest thereon shall be returned to Sterling.
Pending such application of such amounts or return of excess amounts to
Sterling, the trustee shall invest such amounts at Sterling's direction in
Temporary Cash Investments, provided that the maturity of those investments
is prior to the repurchase date of the notes.

Transfer of the Fibers Business. (a) Notwithstanding anything contained in
the indenture to the contrary, Sterling and the Fibers Subsidiaries shall be
entitled at any time, in a single transaction or series of related
transactions, to make a Transfer of the Fibers Business if each of the
following conditions is satisfied:

(1) no Default or Event of Default shall have occurred and be
continuing;

(2) the Transfer of the Fibers Business shall be in the best interests
of Sterling and the consideration received by Sterling and its Restricted
Subsidiaries from such Transfer of the Fibers Business shall be at least
equal to the fair market value of such transaction, in each case, as
determined by a written resolution adopted in good faith by the Board of
Directors;

(3) if less than 85% of the consideration received in a Transfer of the
Fibers Business is in the form of cash or cash equivalents, Sterling must
deliver an opinion to the trustee, in form and substance reasonably
satisfactory to the trustee, as to the fairness of the transaction to
Sterling from a financial point of view, issued by an Independent Financial
Advisor;

(4) in the case of any Joint Venture Contribution, immediately after
giving effect to such transaction, Sterling will be the beneficial owner of
60% or less of the Equity Interests of the entity to which such Joint
Venture Contribution is made;

(5) in the case of any Sale of the Fibers Business, the transferee in
such Transfer of the Fibers Business shall be a Person other than an
Affiliate of Sterling;

(6) Sterling (or, if applicable, the Fibers Subsidiaries) shall legally
and effectively grant the trustee a second priority security interest in
any noncash proceeds received by Sterling (or the Fibers Subsidiaries) in
such Transfer of the Fibers Business, including any Equity Interest, as
additional security for the repayment of the notes and deliver an Opinion
of Counsel as to the validity of the creation and the perfection of such
security interest in form and substance satisfactory to the trustee; and

(7) all Net Available Cash received in such Transfer of the Fibers
Business shall be applied as provided in paragraph (b) below.

For the purposes of this covenant, the following are deemed to be cash
equivalents:

(1) the express assumption of Debt of Sterling or any Restricted
Subsidiary and the release of Sterling or such Restricted Subsidiary from
all liability on such Debt in connection with such Transfer of the Fibers
Business; and

(2) securities received by Sterling or any Restricted Subsidiary that
are converted by Sterling or such Restricted Subsidiary into cash within 90
days of the receipt of such securities.

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(b) Upon the receipt by Sterling or any of its Subsidiaries of any Net
Available Cash or Net Cash Proceeds, as applicable, in connection with a
Transfer of the Fibers Business, Sterling shall apply or cause to be applied
100% of such Net Available Cash or Net Cash Proceeds:

(i) first, to the extent that Sterling elects, to prepay or repay
Debt under the Fixed Assets Revolver within 180 days after the later of
the consummation of the Transfer of the Fibers Business or the receipt
of such Net Available Cash or Net Cash Proceeds; provided, however,
that Sterling causes the related loan commitment, if any, to be
permanently reduced in an amount equal to the principal amount so
prepaid or repaid;

(ii) second, to the extent that Sterling elects, to the investment
by Sterling or any Restricted Subsidiary in Tangible Property that (as
determined by the Board of Directors of Sterling) will be used or
useful in the business of Sterling or any of its Restricted
Subsidiaries as conducted on the Issue Date or in a business reasonably
related thereto, in each case, within one year from the later of the
consummation of such Transfer of the Fibers Business or the receipt of
such Net Available Cash or Net Cash Proceeds; provided, however, that
Sterling or such Restricted Subsidiary legally and effectively grants
the trustee a second priority security interest in such assets (or the
trustee otherwise has a second priority security interest in such
assets) as additional security for the repayment of the notes and
delivers to the trustee an Opinion of Counsel as to the validity of the
creation and perfection of such security interest in form and substance
reasonably satisfactory to the trustee; and

(iii) third, to the extent that at least $10,000,000 in Net
Available Cash or Net Cash Proceeds remains after giving effect to
clauses (i) and (ii) above, to offer to purchase the notes at a
repurchase price equal to 100% of the principal amount thereof (without
premium), plus accrued and unpaid interest, according to the procedures
set forth in "Repurchase at the Option of Holders--Change of Control."

To the extent that any Net Available Cash or Net Cash Proceeds remains after
giving effect to clauses (i), (ii), and (iii) above, such Net Available Cash or
Net Cash Proceeds shall cease to be subject to this covenant and Sterling shall
be entitled to retain such Net Available Cash or Net Cash Proceeds and use it
for general corporate purposes.

(c) Upon any Transfer of the Fibers Business, (i) any security interest in
the assets of the Fibers Subsidiaries securing the repayment of the notes or
the performance of Sterling under the indenture shall automatically cease and
terminate and (ii) if more than 50% of the Capital Stock of the Fibers
Subsidiaries is transferred by Sterling in connection with such Transfer of the
Fibers Business, any security interest in such Capital Stock and the Subsidiary
Guarantees made by the Fibers Subsidiaries shall immediately cease and
terminate. Upon the receipt of written notice from Sterling of a proposed
Transfer of the Fibers Business, the trustee shall be authorized and directed
to execute and deliver to Sterling, concurrently with the closing of such
Transfer of the Fibers Business, at Sterling's expense, such documents as
Sterling shall reasonably request to evidence such release of liens and, if
applicable, the termination of the Subsidiary Guarantees made by the Fibers
Subsidiaries.

(d) Unless a Default or an Event of Default shall have occurred and be
continuing, Sterling (or, if applicable, the Fibers Subsidiaries) shall be
entitled to (i) receive cash interest payments on any deferred payment of
principal under any promissory note, installment receivable, or other
arrangement received in connection with any Transfer of the Fibers Business and
use such payments for general corporate purposes, (ii) receive and use all
distributions in respect of any Equity Interest for general corporate purposes,
(iii) vote any Equity Interest, and (iv) give consents, approvals, waivers, and
ratifications in respect of any Equity Interest; provided, however, that (A)
Sterling shall legally and effectively grant the trustee a second priority
security interest in any distributions paid or payable other than in cash in
respect of, and instruments and other property received, receivable, or
otherwise distributed in respect of, or in exchange for, any Equity Interest as
additional security for the notes and deliver to the trustee an Opinion of
Counsel as to the validity of the creation and perfection of such security
interest in form and substance reasonably satisfactory to the trustee, (B) no
vote

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shall be cast or consent, approval, waiver, or ratification given or action
taken which would have a material adverse effect on the value of any Equity
Interest or be inconsistent with or violate the provisions of the indenture
and (C) Sterling shall apply the proceeds of any distribution received as a
Return of Capital as provided in paragraph (b) above.

(e) Sterling shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Securities Act of 1934, as amended, and any other
securities laws or regulations in connection with the repurchase of any notes
pursuant to this covenant. To the extent that the provisions of any securities
laws or regulations conflict with any of the provisions of this covenant,
Sterling shall comply with all applicable securities laws and regulations and
shall not be deemed to have breached its obligations under this covenant by
virtue of such conflict and compliance.

Certain Covenants

The indenture contains certain covenants, including among others the ones
summarized below:

Limitation on Debt. (a) Sterling will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, Incur any Debt unless the
Consolidated EBITDA Coverage Ratio at the date of such Incurrence exceeds 2.0
to 1.0.

(b) The preceding sentence will not prohibit the incurrence of any of the
following Debt (collectively, "Permitted Debt"):

(1) Debt Incurred by Sterling and any Restricted Subsidiary pursuant to
the Credit Agreement or any other revolving credit facility which, when
taken together with all letters of credit and the principal amount of all
other outstanding Debt Incurred under this clause (1), does not exceed the
greater of $100 million and the sum of:

(a) 65% of the gross book value of the inventory of Sterling and its
Restricted Subsidiaries; and

(b) 85% of the gross book value of the accounts receivable of
Sterling and its Restricted Subsidiaries;

(2) Debt of Sterling 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) will be deemed, in each case, to constitute the issuance of
such Debt by Sterling;

(3) Debt of a Restricted Subsidiary incurred and outstanding on or prior
to the date on which such Restricted Subsidiary:

(A) became a Restricted Subsidiary; or

(B) was acquired by Sterling (other than Debt issued in connection
with, or to provide all or any portion of the funds or credit support
utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by Sterling);

(4) the incurrence by Sterling and the Subsidiary Guarantors of Debt
represented by the notes and the related Subsidiary Guarantees to be issued
on the date of the indenture and the Exchange Notes and the related
Subsidiary Guarantees to be issued pursuant to the registration rights
agreement;

(5) Debt outstanding on the Issue Date (other than Debt described in
clause (1), (2), (3), or (4);

(6) Refinancing Debt in respect of Debt Incurred pursuant to paragraph
(a), or pursuant to clause (4) or (5) or this clause (6);

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(7) Hedging Obligations; provided, however, that with respect to
Interest Rate Agreements and Currency Agreements (if such Currency
Agreements relate to Debt), only to the extent directly related to Debt
permitted to be incurred by Sterling pursuant to the indenture; and

(8) Debt in an aggregate principal amount which, together with all other
Debt of Sterling and the Restricted Subsidiaries then outstanding (other
than Debt permitted by clauses (1) through (7) of this paragraph) does not
exceed $5.0 million.

For purposes of determining compliance with this "Limitation on Debt"
covenant, in the event that an item of proposed Debt meets the criteria of more
than one of the categories of Permitted Debt described in clauses (1) through
(8) above, or is entitled to be Incurred, in whole or in part, pursuant to the
first paragraph of this covenant, Sterling will be permitted to classify such
item of Debt on the date of its incurrence in any manner that complies with
this covenant.

(c) Notwithstanding paragraphs (a) and (b), Sterling and its Restricted
Subsidiaries will 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 will be subordinate to the notes.

Limitation on Restricted Payments. Sterling will not, and will not permit
any Restricted Subsidiary, directly or indirectly, to:

(1) declare or pay any dividend or make any other payment or
distribution on or in respect of its or any of its Restricted Subsidiaries'
Capital Stock (including, without limitation, any payment in connection
with any merger or consolidation involving Sterling or any Restricted
Subsidiary) 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 Sterling or a Restricted Subsidiary), other than
pro rata dividends or other distributions made by a Restricted Subsidiary
of Sterling that is not a Wholly Owned Subsidiary to minority shareholders
(or owners of an equivalent interest in the case of a Restricted Subsidiary
that is an entity other than a corporation);

(2) purchase, redeem, or otherwise acquire or retire for value any
Capital Stock of Sterling, any direct or indirect parent of Sterling, or
any Restricted Subsidiary (other than any such Capital Stock owned by
Sterling or any Wholly Owned Subsidiary);

(3) purchase, repurchase, redeem, defease, or otherwise acquire or
retire for value, prior to scheduled maturity, scheduled repayment, or
scheduled sinking fund payment, any Subordinated Obligations (other than
purchase, repurchase, or other acquisition of Subordinated Obligations
purchased in anticipation of satisfying a sinking fund obligation,
principal installment, or final maturity, in each case due within one year
of the date of acquisition); or

(4) make any Investment in any Person (other than a Permitted
Investment);

unless, at the time of and after giving effect to such Restricted Payment:

(1) no Default shall have occurred and be continuing (or would result
therefrom); and

(2) Sterling, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at the
beginning of the applicable four-quarter period, would be permitted to
Incur an additional $1.00 of Debt pursuant to clause (a) under "Limitation
on Debt;" and

(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date is less than the sum, without
duplication, of:

(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the first
fiscal quarter commencing after the date of the indenture to the end of
Sterling's most recent fiscal quarter for which financial statements
are available at the time

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such Restricted Payment (or, in case such Consolidated Net Income shall
be a deficit, minus 100% of such deficit); provided, however, that if
the notes achieve an Investment Grade Rating during any fiscal quarter,
the percentage for such fiscal quarter (and for any other fiscal
quarter where, on the first day of such fiscal quarter, the notes shall
have an Investment Grade Rating) will be 100% of Consolidated Net
Income during such fiscal quarter; and provided, further, however, that
if such Restricted Payment is to be made in reliance upon an additional
amount permitted pursuant to the immediately preceding proviso, the
notes must have an Investment Grade Rating at the time such Restricted
Payment is declared or, if not declared, made; plus

(B) the aggregate Net Cash Proceeds received by Sterling 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); plus

(C) the aggregate Net Cash Proceeds received by Sterling 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 will be limited
to an amount equal to any increase in the Consolidated Net Worth of
Sterling 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; plus

(D) the amount by which Debt of Sterling is reduced on Sterling's
balance sheet upon the conversion or exchange (other than by a
Subsidiary) subsequent to the Issue Date, of any Debt of Sterling
convertible or exchangeable for Capital Stock (other than Redeemable
Stock or Exchangeable Stock) of Sterling (less the amount of any cash,
or other property, distributed by Sterling upon such conversion or
exchange); plus

(E) an amount equal to the sum of:

(i) the net reduction in Investments in Unrestricted Subsidiaries
resulting from dividends, repayments of loans or advances, or other
transfers of assets, in each case to Sterling or any Restricted
Subsidiary from Unrestricted Subsidiaries, and

(ii) the portion (proportionate to Sterling's equity interest in
such Subsidiary) of the fair market value of the net assets of an
Unrestricted Subsidiary at the time such Unrestricted Subsidiary is
designated a Restricted Subsidiary; provided, however, that the
foregoing sum shall not exceed, in the case of any Unrestricted
Subsidiary, the amount of Investments previously made (and treated
as a Restricted Payment) by Sterling or any Restricted Subsidiary in
such Unrestricted Subsidiary; plus

(F) to the extent not covered in clauses (A) through (E) above, the
aggregate net cash proceeds received after the Issue Date by Sterling
as capital contributions (other than from any of its Restricted
Subsidiaries); plus

(G) $5.0 million; provided, however, that, to the extent used, such
$5.0 million will reduce the amount available for Investments pursuant
to clause (10) of the definition of "Permitted Investments" set forth
under "--Certain Definitions;" and provided, further, however, that the
amounts available under this clause (G) and under clause (10) of the
definition of "Permitted Investments" shall in no event exceed $10.0
million in the aggregate.

So long as no Default or Event of Default has occurred and is continuing or
would be caused thereby, the provisions of the foregoing paragraph shall not
prohibit:

(1) any purchase or redemption of any Subordinated Obligations of
Sterling or any Subsidiary Guarantor or any Capital Stock of Sterling made
by exchange for, or out of the proceeds of the substantially concurrent
sale of, Capital Stock of Sterling (other than Redeemable Stock or
Exchangeable

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Stock of Sterling and other than Capital Stock of Sterling 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 the preceding paragraph;

(2) any purchase, redemption, defeasance, or other acquisition or
retirement for value of Subordinated Obligations of Sterling or any
Subsidiary Guarantor made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Debt of Sterling or a Subsidiary
Guarantor which is permitted to be incurred pursuant to the covenant
described under "Limitation on Debt" above; provided, however, that such
purchase, redemption, defeasance, or other acquisition or retirement for
value shall be excluded in the calculation of the amount of Restricted
Payments;

(3) any purchase or redemption of Subordinated Obligations of Sterling
or any Subsidiary Guarantor from Net Available Cash to the extent permitted
under "Repurchase at the Option of Holders--Asset Sales" above; provided,
however, that such purchase or redemption shall be excluded in the
calculation of the amount of Restricted Payments;

(4) dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividend would have complied with this
provision; provided, however, that at the time of declaration of such
dividend, no other Default will 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;

(5) the declaration or payment of any dividend on shares of Sterling's
Common Stock so long as:

(A) Sterling would be permitted immediately after giving pro forma
effect to such declaration or payment to Incur an additional $1.00 of
Debt pursuant to clause (a) under "Limitation on Debt;"

(B) 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

(C) the full amount of such payment is applied by Holdings on such
date as payment of such cash interest on the Discount Notes; provided,
however, that such dividend shall be included in the calculation of the
amount of Restricted Payments;

(6) payments to the ESOP on behalf of the employees of Holdings or its
Subsidiaries; provided, however, that all such payments by Sterling and its
Subsidiaries may not exceed, during any fiscal year, 10% of the aggregate
compensation expense during such fiscal year attributable to employees of
Holdings and its Subsidiaries who are eligible to participate in the ESOP;
provided, however, that such amount shall be excluded in the calculation of
the amount of Restricted Payments;

(7) a payment to Holdings to pay its operating and administrative
expenses including, without limitation, directors fees, legal and audit
expenses, Commission compliance expenses, and corporate franchise and other
taxes, in an amount not to exceed the greater of $2.0 million per fiscal
year and 0.2% of revenues of Sterling for the preceding fiscal year;
provided, however, that such amount shall be excluded in the calculation of
the amount of Restricted Payments;

(8) a payment by Sterling to Holdings or to the ESOP, or directly by
Sterling, to be used to repurchase Holdings Common Stock distributed to
participants and beneficiaries of the ESOP as required by and in accordance
with the ESOP as in effect on the Issue Date and Section 409(h)(l)(B) of
the Code and the regulations thereunder; provided, however, that such
amount shall be excluded in the calculation of the amount of Restricted
Payments;

(9) a payment by Sterling to Holdings or the ESOP, or directly by
Sterling, to be used to repurchase, redeem, acquire, or retire for value
any Capital Stock of Holdings pursuant to any stockholder's

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agreement, management equity subscription plan or agreement, stock option
plan or agreement, or employee benefit plan in effect as of the Issue Date
or such employee plan or agreement or employee benefit plan as may be
adopted by Sterling or Holdings from time to time; provided, however, that
the aggregate price paid for all Capital Stock repurchased, redeemed,
acquired, or retired by Sterling or on behalf of Holdings or Sterling shall
not exceed $5.0 million in any fiscal year; and provided, further, however,
that such amount, to the extent related to the ESOP, shall be excluded in
the calculation of the amount of Restricted Payments;

(10) a payment to Holdings pursuant to the tax sharing agreement as the
same may be amended from time to time in a manner not materially adverse to
Sterling; provided, however, that such amount shall be excluded in the
calculation of the amount of Restricted Payments;

(11) a payment to Holdings to permit Holdings to comply with the terms
of the Discount Notes indenture relating to the application of proceeds
from an Asset Disposition (relating to the sale or disposition of property
by Sterling) as defined in the indenture relating to the Discount Notes;
provided, however, that such amount shall be excluded in the calculation of
the amount of Restricted Payments;

(12) an investment made or received in connection with a Transfer of the
Fibers Business; provided, however, that such amount shall be excluded from
the calculation of the amount of Restricted Payments; and

(13) a loan to the ESOP; provided, however, that:

(A) the aggregate amount of any such loan does not exceed 5% of the
cash received subsequent to the Issue Date by Sterling or any
Restricted Subsidiary as capital contributions from the proceeds of a
substantially contemporaneous issue or sale of any Capital Stock of
Holdings made in connection with or to provide part of the
consideration for a direct or indirect acquisition by Sterling or any
Restricted Subsidiary of all or substantially all of the Capital Stock
or assets of a Person that is not an Affiliate of Sterling or any
business or division of a Person that is not an Affiliate of Sterling;

(B) in the case of an acquisition of Capital Stock, immediately
after giving effect to such acquisition, the Person whose Capital Stock
is acquired is a Restricted Subsidiary and, in the case of an asset
acquisition, such assets are acquired by Sterling or any Restricted
Subsidiary; and

(C) any individuals that become employees of Sterling or such
Restricted Subsidiary in connection with such acquisition, to the
extent eligible, are permitted to participate in the ESOP;

provided, however, that the amount of any such loan shall be included
in the calculation of the amount of Restricted Payments.

Limitation on Restrictions on Distributions from Restricted Subsidiaries.
Sterling will not, and will not permit any Restricted Subsidiary to, create or
permit to exist or become effective any consensual encumbrance or restriction
on the ability of any Restricted Subsidiary to:

(1) pay dividends or make any other distributions on its Capital Stock
or pay any Debt or other obligation owed to Sterling;

(2) make any loans or advances to Sterling; or

(3) transfer any of its property or assets to Sterling;

except:

(A) any encumbrance or restriction pursuant to the Credit Agreement
or any other agreement in effect on the Issue Date or pursuant to the
issuance of the notes;

(B) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Debt Incurred by
such Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by Sterling (other than Debt
Incurred as consideration

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in, or to provide all or any portion of the funds or credit support
utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by Sterling) 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) above or contained in any amendment to
an agreement referred to in clause (A) or (B) above; provided, however,
that the encumbrances and restrictions contained in any such
Refinancing agreement or amendment are no less favorable to the Holders
than encumbrances and restrictions with respect to such Restricted
Subsidiary contained in such agreements,

(D) any such encumbrance or restriction consisting of customary non-
assignment provisions in leases governing leasehold interests to the
extent such provisions restrict the transfer of the lease or other
customary non-assignment provisions in contracts (other than contracts
that constitute Debt) entered into the ordinary course of business to
the extent such provisions restrict the transfer of the assets subject
to such contracts;

(E) in the case of clause (3) above, restrictions contained in
security agreements or mortgages securing Debt of a Restricted
Subsidiary to the extent such restrictions restrict the transfer of the
property subject to such security agreements or mortgages;

(F) encumbrances or restrictions imposed by operation of applicable
law; and

(G) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of
all or substantially all of the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition.

Limitation on Transactions with Affiliates. Sterling will not, and will not
permit any Restricted Subsidiary to, conduct any business or enter into any
transaction or series of related transactions (including the purchase, sale,
lease, or exchange of any property or the rendering of any service) with any
Affiliate of Holdings or Sterling (an "Affiliate Transaction") unless:

(1) the terms of such Affiliate Transaction are:

(A) set forth in writing; and

(B) as favorable to Sterling or such Restricted Subsidiary as terms
that would be obtainable at the time for a comparable transaction or
series of related transactions in arm's length dealings with an
unrelated third Person;

(2) if such Affiliate Transaction involves an amount in excess of $2.5
million, the disinterested members of the Board of Directors have, by
resolution, determined in good faith that such Affiliate Transaction meets
the criteria set forth in (1)(B) above; and

(3) if such Affiliate Transaction involves an amount in excess of $7.5
million, such Affiliate Transaction is determined by an Independent
Financial Advisor to be fair from a financial standpoint to Sterling or its
Restricted Subsidiary, as the case may be.

The foregoing requirements shall not be applicable to:

(1) contracts with Koch Capital Services, Inc. or its affiliates in the
ordinary course of business on terms as favorable to Sterling or the
relevant Restricted Subsidiary as would be obtainable at the time for a
comparable transaction in arm's length dealings with an unrelated third
Person;

(2) any purchase or supply contracts in the ordinary course of business
on terms as favorable to Sterling or the relevant Restricted Subsidiary as
would be obtainable at the time for a comparable transaction in arm's
length dealings with an unrelated third Person; provided, however, that the
Board of Directors will, not later than the 60th day after the end of each
six-month period following the Issue Date, have reviewed such contracts and
determined that such contracts meet the criteria set forth in this clause
(2);

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(3) any Restricted Payment permitted to be paid and any Permitted
Investment not prohibited pursuant to the covenant described under "--
Limitation on Restricted Payments;"

(4) 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 or the board of directors of the relevant Restricted
Subsidiary;

(5) loans or advances to employees in the ordinary course of business,
but in any event not to exceed $2.0 million in the aggregate outstanding at
any one time;

(6) the payment of reasonable and customary fees to directors of
Sterling and its Restricted Subsidiaries who are not employees of Sterling
or its Restricted Subsidiaries;

(7) any transaction between Sterling and a Wholly Owned Subsidiary or
between Wholly Owned Subsidiaries; and

(8) indemnification payments to directors and officers of Sterling in
accordance with applicable state laws.

Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. Sterling will not sell or otherwise dispose of any shares of
Capital Stock of a Restricted Subsidiary, and will not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of
any shares of its Capital Stock except:

(1) to Sterling or a Wholly Owned Subsidiary;

(2) in connection with a Transfer of the Fibers Business;

(3) if, immediately after giving effect to such issuance, sale, or other
disposition, such Restricted Subsidiary remains a Restricted Subsidiary; or

(4) if all shares of Capital Stock of such Restricted Subsidiary are
sold or otherwise disposed of; provided, however, that in connection with
any sale pursuant to this clause (4), Sterling may retain no more than 10%
of the outstanding Capital Stock of the Restricted Subsidiary being sold as
a portion of the purchase price in connection with such sale. In connection
with any such sale or disposition of Capital Stock, Sterling or any such
Restricted Subsidiary shall comply with the covenant described under
"Repurchase at the Option of Holders--Asset Sales" or the covenant
described under "Repurchase at the Option of Holders--Sale of Principal
Properties" above, as applicable.

Commission Reports. Notwithstanding that Sterling may not be required to
remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, Sterling will, as long as it is permitted to do so by the
Commission, file with the Commission and provide the trustee and Holders with
such annual reports and such information, documents, and other reports as are
specified in Sections 13 and 15(d) of the Exchange Act, including, without
limitation, Forms 8-K, 10-Q and 10-K, such information, documents and other
reports to be so filed and provided at the times specified for the filing of
such information, documents and reports under such Sections.

Liens. Sterling will not and will not permit any of its Restricted
Subsidiaries to, create, incur, assume, or otherwise cause or suffer to exist
or become effective any Lien of any kind upon any of their other property or
assets, now owned or hereafter acquired other than Permitted Liens.

Merger and Consolidation

Sterling will not consolidate with or merge with or into, or convey,
transfer, or lease, in one transaction or a series of related transactions, all
or substantially all its assets to, any Person unless:

(1) the resulting, surviving, or transferee Person (the "Successor
Company") is a Person organized and existing under the laws of the United
States or any State thereof or the District of Columbia and the

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Successor Company (if not Sterling) expressly assumes by a supplemental
indenture, executed and delivered to the trustee, in form satisfactory to
the trustee, all the obligations of Sterling under the indenture and the
notes;

(2) 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 will have occurred and be continuing;

(3) 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 "--Certain Covenants--Limitation on Debt;"

(4) 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 Sterling immediately prior to such transaction
minus any costs incurred in connection with the transaction; and

(5) Sterling 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
indenture.

The Successor Company will be the successor to Sterling and will succeed to,
and be substituted for, and may exercise every right and power of, Sterling
under the indenture, but the predecessor company in the case of a conveyance,
transfer, or lease will not be released from the obligation to pay the
principal of and interest on the notes.

No Personal Liability of Directors, Officers, Employees, and Stockholders

No director, officer, employee, incorporator, or stockholder of Sterling or
any Subsidiary Guarantor, as such, will have any liability for any obligation
of Sterling or the Subsidiary Guarantors under the notes, the indenture, or the
Subsidiary Guarantees, or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of notes by accepting a
note waives and releases all such liability. The waiver and release are part of
the consideration for issuance of the notes. The waiver may not be effective to
waive liabilities under the federal securities laws.

Defaults

An "Event of Default" is defined in the indenture as:

(1) 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;

(2) 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;

(3) the failure by Sterling to comply with its obligations under "--Merger
and Consolidation;"

(4) the failure by Sterling to comply for 30 days after the notice
specified below with any of its obligations in the covenants described above
under "Repurchase at the Option of Holders--Change of Control," "--Asset
Sales" or "--Sale of Principal Properties" (in each case, 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 Transactions
with Affiliates," or "--Commission Reports;"

(5) the failure by Sterling to comply with any of its agreements in the
notes or the indenture (other than those referred to in (1), (2), (3), or
(4) above) and such failure continues for 60 days after the notice
specified below;

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(6) 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 Sterling or any of its Restricted Subsidiaries (or
the payment of which is Guaranteed by Sterling or any of its Restricted
Subsidiaries) whether such Debt or Guarantee now exists, or is created
after the date of the indenture, which default:

(a) 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

(b) results in the acceleration of such Debt prior to its express
maturity;

and, in each case, the principal amount of any such Debt, together with
the principal amount of any other such Debt under which there has been
a Payment Default or the maturity of which has been so accelerated,
aggregates $10 million or more;

(7) certain events of bankruptcy or insolvency of Sterling or any
Significant Subsidiary; or

(8) any final non-appealable judgment or decree not covered by insurance
or as to which the insurance carrier has denied responsibility for the
payment of money in excess of $10 million is rendered against Sterling or
any Significant Subsidiary and is not discharged and there is a period of
60 days following such judgment during which such judgment or decree is not
discharged, waived, or the execution thereof stayed.

A Default under clause (4) or (5) is not an Event of Default until the
trustee or the Holders of at least 25% in principal amount of the notes notify
Sterling of the Default and Sterling 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 Sterling) occurs and is continuing, the trustee or the
Holders of at least 25% in principal amount of the outstanding notes may
declare the principal of and accrued but unpaid interest on all the notes to be
due and payable. Upon such a declaration, such principal and interest shall be
due and payable immediately. If an Event of Default relating to certain events
of bankruptcy, insolvency, or reorganization of Sterling or any 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 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
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 indenture or the notes unless:

(1) such Holder has previously given the trustee notice that an Event of
Default is continuing;

(2) Holders of at least 25% in principal amount of the outstanding notes
have requested the trustee to pursue the remedy;

(3) such Holders have offered the trustee reasonable security or
indemnity against any loss, liability, or expense;

(4) the trustee has not complied with such request within 60 days after
the receipt thereof and the offer of security or indemnity; and

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(5) 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 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, or 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, Sterling 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. Sterling
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 Sterling is taking or proposes to take in respect
thereof.

Amendments and Waivers

Subject to certain exceptions, the indenture and the Security Agreements 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:

(1) reduce the amount of notes whose Holders must consent to an
amendment;

(2) reduce the rate of or extend the time for payment of interest on any
note;

(3) reduce the principal of or extend the Stated Maturity of any note;

(4) reduce the premium payable upon the redemption of any note or change
the time at which any note may or shall be redeemed;

(5) make any note payable in money other than that stated in the note;

(6) 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;

(7) make any change in the amendment provisions which requires each
Holder's consent or in the waiver provisions;

(8) release any Subsidiary Guarantor from any of its obligations under
its Subsidiary Guarantee or the indenture, except in accordance with the
terms of the indenture; or

(9) deprive any of the Holders of the benefit of the Liens created by
the Security Agreements except in accordance with the terms of the Security
Agreements.

Without the consent of any Holder of the notes, Sterling, the Subsidiary
Guarantors, and the trustee may amend or supplement the indenture and the
Security Agreements to cure any ambiguity, omission, defect, or inconsistency,
to provide for the assumption by a successor corporation of the obligations of
Sterling or the Subsidiary Guarantors, to provide for uncertificated notes in
addition to or in place of certificated notes (provided that the uncertificated
notes are issued in registered form for purposes of Section 163(f) of the Code,
or in a manner such that the uncertificated notes are described in Section
163(f)(2)(B) of the Code), to add Guarantees with respect to the notes, to add
to the covenants of Sterling and its Subsidiaries for the benefit of the
Holders or to surrender any right or power conferred upon Sterling, to make any
change that would provide additional rights or benefits to the Holders of the
notes or that does not adversely affect the rights of any

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Holder or to comply with any requirement of the Commission in connection with
the qualification of the indenture under the Trust Indenture Act.

The consent of the Holders is not necessary under the 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 indenture becomes effective, Sterling 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.
Sterling 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

Sterling at any time may terminate all its obligations under the notes and
the indenture ("legal defeasance"), except for certain obligations, including
those respecting the defeasance trust and obligations 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.
Sterling at any time may terminate its obligations under the covenants
described under "--Certain Covenants" and "--Change of Control" above, the
operation of the cross acceleration provision, the bankruptcy provisions with
respect to Significant Subsidiaries and the judgment default provision
described under "--Defaults" above and the limitations contained in clauses (3)
and (4) of the first paragraph under "--Merger and Consolidation" above
("covenant defeasance").

Sterling may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If Sterling exercises its legal
defeasance option, payment of the notes may not be accelerated because of an
Event of Default with respect thereto. If Sterling exercises its covenant
defeasance option, payment of the notes may not be accelerated because of an
Event of Default specified in clauses (4), (6), (7) (with respect only to
Significant Subsidiaries), or (8) under "--Defaults" above or the failure of
Sterling to comply with "--Change of Control," "--Asset Sales," "--Sale of
Principal Properties," or "Transfer of the Fibers Business" above.

In order to exercise either defeasance option, Sterling must irrevocably
deposit in trust (the "defeasance trust") with the trustee money or U.S.
Government Obligations for the payment of principal of, and 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

Harris Trust Company of New York is the trustee under the indenture and has
been appointed by Sterling 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 indenture provides that if an Event of Default occurs
(and is not cured), the

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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 indenture at the request of any Holder of notes,
unless such Holder shall have offered to the trustee security and indemnity
satisfactory to the trustee against any loss, liability, or expense and then
only to the extent required by the terms of the indenture.

Governing Law

The 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.

Book-Entry, Delivery, and Form

Description of DTC

The description of the operations and procedures of DTC set forth below is
provided solely as a matter of convenience. These operations and procedures are
solely within the control of DTC and are subject to change from time to time.
Sterling does not take any responsibility for these operations or procedures,
and investors are urged to contact DTC or its participants directly to discuss
these matters.

DTC has advised Sterling that it is a:

. limited purpose trust organized under the laws of the State of New York;

. "banking organization" within the meaning of the New York Banking Law;

. member of the Federal Reserve System;

. "clearing corporation" within the meaning of the Uniform Commercial
Code; and

. "clearing agency" registered under Section 17A of the Exchange Act.

DTC was created to hold securities for its participants and facilitates the
clearance and settlement of securities transactions between participants
through electronic book-entry changes to the accounts of its participants,
thereby eliminating the need for physical transfer and delivery of
certificates.

DTC's participants include securities brokers and dealers, banks and trust
companies, clearing corporations, and other organizations. Indirect access to
DTC's system is also available to other entities such as banks, brokers,
dealers, and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. Investors who
are not participants may beneficially own securities held by or on behalf of
DTC only through participants or indirect participants.

The exchange notes will initially be represented by one or more permanent
global notes (the "Global Notes") in definitive, fully registered book-entry
form that will be registered in the name of Cede & Co., as nominee of DTC. The
Global Notes will be deposited with a custodian for DTC for credit to the
respective accounts of the acquirors of the exchange notes or to the other
accounts as the acquirors may direct at DTC. See "The Exchange Offer--Book
Entry Transfer."

The Global Notes

Sterling expects that under procedures established by DTC:

. upon deposit of the Global Notes with DTC or its custodian, DTC will
credit on its internal system the portion of the Global Notes
corresponding to the respective amounts of the Global Notes registered
to the respective accounts of persons who have accounts with the
depository;

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. ownership of the exchange notes will be shown on records maintained by
DTC or its nominee; and

. transfers of ownership of the new notes will be effected only through
records maintained by DTC or its nominee.

So long as DTC or its nominee is the registered owner of the Global Notes,
DTC or its nominee, as the case may be, will be considered the sole owner or
holder of the exchange notes represented by the Global Notes for all purposes
under the indenture. Except as provided below, owners of beneficial interests
in Global Notes will not:

. be entitled to have exchange notes represented by Global Notes
registered in their names;

. receive or be entitled to receive physical delivery of certificated
exchange notes; or

. be considered the owners or holders of the Global Notes under the
applicable indenture for any purpose, including with respect to the
giving of any direction, instruction, or approval to the trustee.

Payments on the exchange notes represented by Global Notes will be made to
DTC, or its nominee, as the registered owner. None of Sterling, the trustee, or
the paying agent will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interest in the Global Notes or for maintaining, supervising, or reviewing any
records relating to beneficial ownership interest under the indenture.

Sterling expects that DTC or its nominees, upon receipt of any payment on
the exchange notes represented by the Global Notes, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interest in the Global Notes as shown in the records of DTC or its nominee.
Sterling also expects that participants will be governed by standing
instructions and customary practice as is now the case with securities held for
the accounts of customers registered in the names of nominees for the
customers. Payment will be the responsibility of the participants.

Transfers between participants in DTC will be effected according to DTC's
procedures and will be settled in same-day funds. If a holder requires physical
delivery of a certificated security for any reason, including to sell exchange
notes to persons in states that require physical delivery of the security or to
pledge the security, a holder must transfer its interest in the Global Notes
according to the normal procedures of DTC and the procedures in the indenture.

Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Notes among participants in DTC, it is under no
obligation to perform or to continue to perform procedures, and procedures may
be discontinued at any time. Neither Sterling nor the trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their obligations under the rules and procedures governing
their operations.

Exchange of Global Notes for Certificated Notes

A Global Note is exchangeable for definitive notes in registered
certificated form ("Certificated Notes") if:

(1) DTC (a) notifies Sterling that it is unwilling or unable to continue
as depositary for the Global Notes and Sterling fails to appoint a
successor depositary or (b) has ceased to be a clearing agency
registered under the Exchange Act;

(2) Sterling, at its option, notifies the trustee in writing that it
elects to cause the issuance of the Certificated Notes; or

(3) there shall have occurred and be continuing a Default or Event of
Default with respect to the notes.

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In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the trustee by or on
behalf of DTC in accordance with the indenture. In all cases, Certificated
Notes delivered in exchange for any Global Note or beneficial interests in
Global Notes will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary (in accordance with
its customary procedures) and will bear the applicable restrictive legend
referred to in "Notice to Investors," unless that legend is not required by
applicable law.

Exchange of Certificated Notes for Global Notes

Certificated Notes may not be exchanged for beneficial interests in any
Global Note unless the transferor first delivers to the trustee a written
certificate (in the form provided in the indenture) to the effect that such
transfer will comply with the appropriate transfer restrictions applicable to
such notes. See "Notice to Investors."

Same Day Settlement and Payment

Sterling will make payments in respect of the notes represented by the
Global Notes (including principal, premium, if any, interest and Make Whole
Amounts, if any) by wire transfer of immediately available funds to the
accounts specified by the Global Note Holder. Sterling will make all payments
of principal, premium, if any, interest and Make Whole Amounts, if any, with
respect to Certificated Notes by wire transfer of immediately available funds
to the accounts specified by the Holders thereof or, if no such account is
specified, by mailing a check to each such Holder's registered address. The
notes represented by the Global Notes are expected to be eligible to trade in
the PORTAL market and to trade in DTC's Same-Day Funds Settlement System, and
any permitted secondary market trading activity in such notes will, therefore,
be required by DTC to be settled in immediately available funds. Sterling
expects that secondary trading in any Certificated Notes will also be settled
in immediately available funds.

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
Transactions with Affiliates" and "--Repurchase at the Option of Holders--Asset
Sales" only, "Affiliate" shall also mean any beneficial owner (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act) of Capital Stock representing 10%
or more of the total voting power of the Voting Stock (on a fully diluted
basis) of Sterling or of rights or warrants to purchase such Capital Stock
(whether or not currently exercisable) and any Person who would be an Affiliate
of any such beneficial owner pursuant to the first sentence hereof.

"Asset Disposition" means any sale, lease, transfer, or other disposition
(or series of related sales, leases, transfers, or dispositions) of shares of
Capital Stock of a Restricted Subsidiary (other than directors' qualifying
shares), property or other assets (each referred to for the purposes of this
definition as a "disposition") by Sterling or any of its Restricted
Subsidiaries, including any disposition by means of a merger, consolidation, or
similar transaction, for gross proceeds in excess of $2.0 million, other than:

(1) a disposition by a Restricted Subsidiary to Sterling or by Sterling or
a Restricted Subsidiary to a Wholly Owned Subsidiary,

(2) a disposition of property or assets (other than shares of Capital
Stock of a Restricted Subsidiary and which do not constitute all or
substantially all of the assets of any division or line of business of
Sterling or any Restricted Subsidiary) at fair market value in the
ordinary course of business,

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(3) for purposes of the covenant described under "--Repurchase at the
Option of Holders--Asset Sales" only, a disposition that constitutes a
Restricted Payment permitted or a Permitted Investment not prohibited
by the covenant described under "--Certain Covenants--Limitation on
Restricted Payments,"

(4) the disposition of all or substantially all of the assets of Sterling
permitted by the covenant described under "--Merger and
Consolidation,"

(5) the disposition of assets in exchange for other assets that satisfy
the requirements set forth in clause (2)(B) of the covenant described
under "--Repurchase at the Option of Holders--Asset Sales,"

(6) a Transfer of the Fibers Business made in accordance with the terms of
the covenant described under the caption "--Repurchase at the Option
of Holders--Transfer of the Fibers Business;" and

(7) a Sale of a Principal Property made in accordance with the terms of
the covenant described under the caption "--Repurchase at the Option
of Holders--Sale of Principal Properties."

"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:

(1) 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

(2) the sum of all such payments.

"Board of Directors" means the Board of Directors of Sterling or any
committee thereof duly authorized to act on behalf of such Board.

"Borrowers" means collectively, Sterling Chemicals, Inc., Sterling Canada,
Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling
Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals
International, Inc.

"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 GAAP 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, or participations (or other equivalents thereof)
in such Person (however designated), including any Preferred Stock, but
excluding any debt securities convertible into or exchangeable for such equity.

"Code" means the Internal Revenue Code of 1986.

"Commission" means the Securities and Exchange Commission.

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"Commodity Agreement" means any commodity future contract, commodity option,
or other similar agreement or arrangement (limited in amount to underlying
exposure, and not for speculative purposes) entered into by Sterling or any
Restricted Subsidiary that is designed to protect Sterling or any Restricted
Subsidiary against fluctuations in the price of commodities used by Sterling or
a Restricted Subsidiary as raw materials in the ordinary course of business.

"Comparable Treasury Issue" means the United States Treasury security
selected by an Reference Treasury Dealer as having a maturity comparable to
July 15, 2006 that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of
corporate debt securities of comparable maturity to the remaining life of the
notes.

"Comparable Treasury Price" means, with respect to any date of redemption,
(i) the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
Business Day preceding such date of redemption, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities," or (ii) if such release (or any successor release) is
not published or does not contain such prices on such Business Day, the average
of the Reference Treasury Dealer Quotations.

"Consolidated EBITDA Coverage Ratio" as of any date of determination means
the ratio of

(1) 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

(2) Consolidated Interest Expense for such four fiscal quarters;
provided, however, that

(a) if Sterling or any Restricted Subsidiary has Incurred any Debt
since the beginning of such period that remains outstanding or if the
transaction giving rise to the need to calculate the Consolidated
EBITDA Coverage Ratio is an Incurrence of Debt, or both, EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving effect on a pro forma basis to such Debt as if such Debt had
been Incurred on the first day of such period and the discharge of any
other Debt repaid, repurchased, defeased, or otherwise discharged with
the proceeds of such new Debt as if such discharge had occurred on the
first day of such period,

(b) if since the beginning of such period Sterling or any
Restricted Subsidiary shall have made any Asset Disposition, EBITDA for
such period shall be reduced by an amount equal to 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 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 Sterling or any Restricted Subsidiary repaid,
repurchased, defeased, or otherwise discharged with respect to Sterling
and its continuing Restricted Subsidiaries in connection with such
Asset Dispositions for such period (or, if the Capital Stock of any
Restricted Subsidiary is sold, the Consolidated Interest Expense for
such period directly attributable to the Debt of such Restricted
Subsidiary to the extent Sterling and its continuing Restricted
Subsidiaries are no longer liable for such Debt after such sale),

(c) if since the beginning of such period Sterling or any
Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any Person which becomes a
Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction
causing a calculation to be made hereunder, which constitutes all or
substantially all of an operating unit of a business, EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of any Debt)
as if such Investment or acquisition occurred on the first day of such
period, and

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(d) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into
Sterling or any Restricted Subsidiary since the beginning of such
period) shall have made any Asset Disposition or any Investment that
would have required an adjustment pursuant to clause (b) or (c) above
if made by Sterling or a Restricted Subsidiary during such period,
EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset
Disposition or Investment occurred on the first day of such period.

For purposes of this definition, whenever pro forma effect is to be given to
an acquisition of assets, the amount of income or earnings relating thereto,
and the amount of Consolidated Interest Expense associated with any Debt
Incurred in connection therewith, the pro forma calculations shall be
determined in good faith by a responsible financial or accounting officer of
Sterling. 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 Sterling and its consolidated Restricted Subsidiaries, plus, to the
extent not included in such interest expense:

(1) interest expense attributable to Capital Lease Obligations;

(2) amortization of debt discount and debt issuance cost;

(3) capitalized interest;

(4) noncash interest payments;

(5) commissions, discounts, and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing;

(6) net costs under Interest Rate Agreements (including amortization of
fees);

(7) Preferred Stock dividends in respect of all Redeemable Stock of
Sterling and all Preferred Stock of Restricted Subsidiaries held by Persons
other than Sterling or a Wholly Owned Subsidiary;

(8) interest incurred in connection with Investments in discontinued
operations;

(9) interest actually paid by Sterling or any of its Restricted
Subsidiaries under any Guarantee of Debt or other obligation of any other
Person; and

(10) 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 Sterling or any
Restricted Subsidiary) in connection with Debt Incurred by such plan or
trust.

"Consolidated Net Income" means, for any period, the net income of Sterling
and its consolidated Subsidiaries; provided, however, that there shall not be
included in such Consolidated Net Income:

(1) any net income of any Person if such Person is not a Restricted
Subsidiary, except that:

(a) subject to the exclusion contained in clause (4) below,
Sterling'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 Sterling or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution
to a Restricted Subsidiary, to the limitations contained in clause (3)
below); and

(b) Sterling's equity in a net loss of any such Person for such
period shall be included in determining such Consolidated Net Income to
the extent of any cash actually contributed by Sterling or a Restricted
Subsidiary to such Person during such period;

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(2) any net income (or loss) of any Person acquired by Sterling or a
Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition;

(3) any net income of any Restricted Subsidiary to the extent such
Restricted Subsidiary is subject to restrictions, directly or indirectly,
on the payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to Sterling, except that:

(a) subject to the exclusion contained in clause (4) below,
Sterling's equity in the net income of any such Restricted Subsidiary
for such period shall be included in such Consolidated Net Income up to
the aggregate amount of cash actually distributed by such Restricted
Subsidiary during such period to Sterling or another Restricted
Subsidiary as a dividend or other distribution (subject, in the case of
a dividend or other distribution to another Restricted Subsidiary, to
the limitation contained in this clause); and

(b) Sterling's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such
Consolidated Net Income;

(4) any gain or loss realized upon the sale or other disposition of any
assets of Sterling or its consolidated Subsidiaries (including pursuant to
any sale-and-leaseback arrangement) which is not sold or otherwise disposed
of in the ordinary course of business and any gain or loss realized upon
the sale or other disposition of any Capital Stock of any Person;

(5) extraordinary gains or losses; and

(6) the cumulative effect of a change in accounting principles.

Notwithstanding the foregoing, for the purposes of the covenant described
under "--Certain Covenants --Limitation on Restricted Payments" only, there
shall be excluded from Consolidated Net Income any dividends, repayments of
loans or advances, or other transfers of assets from Unrestricted Subsidiaries
to Sterling or a Restricted Subsidiary to the extent such dividends,
repayments, or transfers increase the amount of Restricted Payments permitted
under such covenant pursuant to clause (3)(E) thereof.

"Consolidated Net Worth" of any Person means the total of the amounts shown
on the balance sheet of such Person and its consolidated subsidiaries,
determined on a consolidated basis in accordance with GAAP, as of the end of
the most recent fiscal quarter of such Person ending at least 45 days prior to
the taking of any action for the purpose of which the determination is being
made, as

(1) the par or stated value of all outstanding Capital Stock of such
Person; plus

(2) paid-in capital or capital surplus relating to such Capital Stock;
plus

(3) any retained earnings or earned surplus;

less:

(1) any accumulated deficit;

(2) any amounts attributable to Redeemable Stock; and

(3) any amounts attributable to Exchangeable Stock.

"Credit Agreement" means that certain Credit Agreement dated as of the Issue
Date (as amended, supplemented, and restated or otherwise modified from time to
time) among the Borrowers, DLJ Capital Funding, Inc., as syndication agent, The
CIT Group/Business Credit, Inc., as administrative agent, Credit Suisse First
Boston, as documentation agent, and the other lenders party thereto providing
for the Fixed Assets Revolver and the Working Capital Revolver.

"Currency Agreement" means, with respect to any Person, any foreign exchange
contract, currency swap agreement, or other similar agreement (limited in
amount to underlying exposure, and not for speculative purposes) to which such
Person is a party or a beneficiary.

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"Debt" of any Person means, without duplication:

(1) 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 the payment of which such Person is responsible or
liable;

(2) all Capital Lease Obligations of such Person and all Attributable
Debt in respect of Sale/Leaseback Transactions entered into by such Person;

(3) 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);

(4) 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 (1) through (3) 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);

(5) all Redeemable Stock of such Person and, with respect to any
Subsidiary of such Person, all Preferred Stock other than pay-in-kind
dividends in the form of Preferred Stock (the amount of Debt represented
thereby shall equal the greater of its liquidation preference and the
redemption, repayment or other repurchase obligations with respect thereto,
not excluding any accrued dividends);

(6) all Hedging Obligations of such Person;

(7) all obligations of the type referred to in clauses (1) through (4)
of other Persons and all dividends of other Persons 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

(8) all obligations of the type referred to in clauses (1) through (6)
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 on 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 the passage of time
or both would be, an Event of Default.

"Discount Notes" means the 13 1/2% Senior Secured Discount Notes due 2008 of
Holdings.

"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:

(1) all income tax expense of Sterling;

(2) depreciation expense;

(3) amortization expense;

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(4) an amount equal to any extraordinary loss realized in connection
with an Asset Disposition, any Transfer of the Fibers Business, or the sale
or other disposition of any Sale of a Principal Property; and

(5) all other noncash items reducing such Consolidated Net Income
(excluding any noncash item to the extent it represents an accrual of, or
reserve for, cash disbursements for any subsequent period) less all noncash
items increasing such Consolidated Net Income (such amount calculated
pursuant to this clause (5) not to be less than zero), in each case for
such period.

Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization of, a Subsidiary of Sterling
shall be added to Consolidated Net Income to compute EBITDA only to the extent
(and in the same proportion) that the net income of such Subsidiary was
included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be dividended or
otherwise paid to Sterling by such Subsidiary without further approval,
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.

"Equity Interests" means:

(1) in the case of a corporation, corporate stock;

(2) in the case of an association or business entity, any and all
shares, interests, participations, rights, or other equivalents (however
designated) of corporate stock;

(3) in the case of a partnership or limited liability company,
partnership, or membership interests (whether general or limited);

(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person; and

(5) any options, warrants, and other rights to acquire or purchase any
of the foregoing.

"Equity Private Placement" means the private placement of shares of common
stock of STX Acquisition Corp. consummated immediately prior to the merger of
STX Acquisition Corp. into Sterling Chemicals, Inc. on August 21, 1996, which
shares were converted into shares of common stock of Holdings upon consummation
of such transaction.

"ESOP" means the Sterling Chemicals ESOP as in existence on the Issue Date
and as may be modified or amended from time to time in accordance with its
terms, provided that any such modifications or amendments are not adverse to
the Holders of the notes, or as otherwise required by applicable law.

"Exchange Act" means the Securities Exchange Act of 1934.

"Exchange Notes" means the notes issued by Sterling in exchange for the
notes upon consummation of the Exchange Offer pursuant to the registration
rights agreement.

"Exchangeable Stock" means any Capital Stock which is exchangeable or
convertible into another security (other than Capital Stock of Sterling or any
Wholly Owned Subsidiary which is neither Exchangeable Stock nor Redeemable
Stock).

"Existing Subordinated Notes" means $275,000,000 in original principal
amount of Sterling's 11 3/4% Senior Subordinated Notes Due 2006 and
$150,000,000 in original principal amount of Sterling's 11 1/4% Senior
Subordinated Notes Due 2007.

"Fibers Subsidiaries" means Sterling Chemicals International, Inc. and
Sterling Fibers, Inc. which collectively own the assets which constitute the
Santa Rosa County acrylic fibers facility.

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"Fixed Assets Revolver" means the five year senior secured revolving credit
facility under the Credit Agreement pursuant to which the Borrowers may borrow,
repay, and reborrow up to $70 million secured by first priority liens on the
Shared Collateral and a second priority lien on the accounts receivable,
inventory, related general intangibles, and certain other assets of Sterling
and the other Borrowers and any Refinancing Debt with respect thereto provided
that the Stated Maturity of such Refinancing Debt does not extend beyond the
Stated Maturity of the Fixed Assets Revolver.

"Foreign Asset Sale" means an Asset Disposition in respect of Capital Stock
or assets of a Non-U.S. Subsidiary or a Restricted Subsidiary of the type
described in Section 936 of the Code to the extent that the proceeds of such
Asset Disposition are received by a Person subject in respect of such proceeds
to the tax laws of a jurisdiction other than the United States or any state
thereof or the District of Columbia.

"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth:

(1) in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants;

(2) in statements and pronouncements of the Financial Accounting
Standards Board;

(3) in such other statements by such other entity as have been approved
by a significant segment of the accounting profession; and

(4) in the rules and regulations of the Commission 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 Commission.

"Guarantee" means, with respect to any Person, any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt or other
obligation of any other Person and any obligation, direct or indirect,
contingent or otherwise of such Person:

(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) any Debt or other obligation of any other 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

(2) entered into for purposes of assuring in any other manner the
obligee of any Debt or other obligation of any other Person 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 deposits in the ordinary course of business or guarantees of
obligations of a Subsidiary in the ordinary course of business if such
obligations do not constitute Debt of such Subsidiary. The term "Guarantee"
used as a verb has a corresponding meaning.

"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement, Currency Agreement, or Commodity
Agreement (limited in amount to underlying exposure, and not for speculative
purposes).

"Holder" means the Person in whose name a note is registered on the
registrar's books.

"Incur" means issue, assume, Guarantee, incur, or otherwise become liable
for; provided, however, that any Debt or Capital Stock of a Person existing at
the time such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition, or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary. The term "Incurrence" when used as a noun
shall have a correlative meaning. The

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accretion of principal of a non-interest bearing or other discount security
shall be deemed the Incurrence of Debt.

"Independent Financial Advisor" means a reputable accounting, appraisal, or
investment banking firm that, in the reasonable good faith judgment of the
Board of Directors of Sterling, is qualified to perform the task for which such
firm has been engaged and is independent with respect to Sterling and its
Affiliates.

"Independent Investment Banker" means one of the Reference Treasury Dealers
appointed by the trustee after consultation with Sterling.

"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement, or other financial agreement or arrangement (limited in
amount to underlying exposure, and not for speculative purposes) designed to
protect Sterling or any Restricted Subsidiary against fluctuations in interest
rates.

"Investment" means, with respect to any Person, 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), any other Person.
For purposes of the definition of "Unrestricted Subsidiary," the definition of
"Restricted Payment" and the covenant described under "--Certain Covenants--
Limitation on Restricted Payments":

(1) "Investment" shall include the portion (proportionate to Sterling's
equity interest in such Subsidiary) of the fair market value of the net
assets of any Subsidiary of Sterling at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that if such
designation is made in connection with the acquisition of such Subsidiary
or the assets owned by such Subsidiary, the "Investment" in such Subsidiary
shall be deemed to be the consideration paid in connection with such
acquisition; and provided, further, however, that upon a redesignation of
such Subsidiary as a Restricted Subsidiary, Sterling shall be deemed to
continue to have a permanent "Investment" in an Unrestricted Subsidiary
equal to an amount (if positive) equal to:

(a) Sterling's "Investment" in such Subsidiary at the time of such
redesignation; less

(b) the portion (proportionate to Sterling's equity interest in
such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and

(2) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such transfer, in
each case as determined in good faith by the Board of Directors.

"Investment Grade Rating" means a rating of BBB- or higher by S&P and Baa3
or higher by Moody's or the equivalent of such rating by S&P and Moody's or by
any other Rating Agencies selected as provided in the definition of Rating
Agency.

"Issue Date" means the date on which the notes are originally issued.

"Joint Venture Contribution" means any transfer, assignment, conveyance, or
contribution of the Capital Stock of the Fibers Subsidiaries or all or
substantially all of the assets of the Fibers Subsidiaries to a corporation,
partnership, limited liability company, joint venture, or other entity in which
Sterling and its Affiliates will, immediately after giving effect to such
transaction, beneficially own or hold any Equity Interest in the Person to
which such contribution is made, including any such contribution made through
any merger, consolidation, or similar transaction or any agreement to operate
all or substantially all of the assets of the Fibers Subsidiaries under any
similar arrangement.

"Lien" means any mortgage, pledge, security interest, encumbrance, lien, or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).

"Moody's" means Moody's Investors Service, Inc.

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"Net Available Cash" from an Asset Disposition, a Transfer of the Fibers
Business, or a Sale of a Principal Property means cash payments received
therefrom (including, to the extent permitted, any cash payments received by
way of deferred payment of principal pursuant to a promissory note or
installment receivable or any Return of Capital 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), in each case net of:

(1) all legal, title, and recording expenses, commissions, and other
fees and expenses incurred, and all Federal, state, provincial, foreign,
and local taxes required to be accrued as a liability under GAAP, as a
consequence of such transaction;

(2) all payments made on any Debt which is secured by any assets
subject to such transaction, 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
transaction, or by applicable law be repaid out of the proceeds from such
transaction;

(3) all distributions and other payments required to be made to any
minority interest holders in Subsidiaries or joint ventures as a result of
such transaction; and

(4) 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 transaction and retained by
Sterling or any Restricted Subsidiary after such transaction.

"Net Cash Proceeds" means, with respect to any issuance or sale of Capital
Stock, the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions, and brokerage, consultants', and other fees, and other costs and
expenses 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 Capital Stock of such
corporation; provided, however, that Non-Convertible Capital Stock shall not
include any Redeemable Stock or Exchangeable Stock.

"Non-U.S. Subsidiary" means a Restricted Subsidiary that is incorporated in
a jurisdiction other than the United States or a State thereof or the District
of Columbia and with respect to which more than 66 2/3% of any of its sales,
earnings, or assets (determined on a consolidated basis in accordance with
GAAP) are located in, generated from, or derived from operations located in
territories or jurisdictions outside the United States.

"Permitted Holders" means:

(1) each of Frank J. Hevrdejs, William C. Oehmig, J. Virgil Waggoner,
Robert W. Roten, and Gordon Cain;

(2) any Permitted Transferee with respect to any Person covered by the
preceding clause (1);

(3) any savings or investment plan sponsored by Sterling or Holdings,
including the ESOP;

(4) the purchasers in the Equity Private Placement; or

(5) any Person who on August 21, 1996 was an officer, director,
stockholder, employee, or consultant of The Sterling Group, Inc. or The
Unicorn Group, L.L.C.

"Permitted Investment" means an Investment by Sterling or any Restricted
Subsidiary in:

(1) a Wholly Owned Subsidiary or a Person that will, upon the making of
such Investment, become a Wholly Owned Subsidiary;

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(2) Temporary Cash Investments;

(3) receivables owing to Sterling or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms;

(4) stock, obligations, or securities received in settlement of debts
created in the ordinary course of business and owing to Sterling or any
Restricted Subsidiary or in satisfaction of judgments;

(5) any Person to the extent such Investment represents the noncash
portion of the consideration received for:

(A) an Asset Disposition as permitted pursuant to the covenant
described under "--Repurchase at the Option of Holders--Asset Sales";

(B) a Sale of a Principal Property as permitted, and other sales,
transfers, and dispositions as permitted, pursuant to the covenant
described under "Repurchase at the Option of Holders--Sale of Principal
Properties"; or

(C) a Transfer of the Fibers Business as permitted pursuant to the
covenant described under "--Repurchase at the Option of Holders--
Transfer of the Fibers Business";

(6) Investments by Sterling or a Restricted Subsidiary in a Person to
the extent the consideration for such Investment consists of shares of
Capital Stock of Sterling or Holdings (other than Redeemable Stock of
Sterling);

(7) payroll, travel, and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of
business;

(8) loans or advances to employees or to a trust for the benefit of
such employees that are made in the ordinary course of business of Sterling
or such Restricted Subsidiary;

(9) another Person if as a result of such Investment such Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all of its assets to, Sterling or a Restricted Subsidiary;
provided, however, that such Person's primary business is reasonably
related to the business of Sterling and its Restricted Subsidiaries; and

(10) Investments in Unrestricted Subsidiaries or joint ventures
(whether in corporate or partnership form or otherwise), in either case in
entities engaged in businesses reasonably related to the business of
Sterling and its Restricted Subsidiaries, in an aggregate amount not to
exceed $10 million outstanding at any time; provided, however, that the
amount available for Investments pursuant to this clause (10) shall be
reduced in accordance with clause (3)(G) of the first paragraph under
"--Certain Covenants --Limitation on Restricted Payments."

"Permitted Liens" means:

(1) Liens existing on the Issue Date, including those that secure Debt
and other obligations under the Credit Agreement that the indenture
permitted to be Incurred;

(2) Liens for taxes, assessments, or other governmental charges or
levies not yet due or that are being contested in good faith by appropriate
action or proceedings promptly instituted and diligently pursued to
conclusion and with respect to which adequate reserves in conformity with
GAAP are being maintained;

(3) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, materialmen, repairmen, workmen, crews, maritime liens, and
other Liens imposed by law created in the ordinary course of business for
amounts that are not past due or that are being contested in good faith by
appropriate action or proceedings and with respect to which adequate
reserves in accordance with GAAP are being maintained;

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(4) Liens incurred or deposits or pledges made in the ordinary course
of business in connection with workers' compensation, unemployment
insurance, and other types of social security, old age, or other similar
obligations, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds, and other similar obligations
(exclusive of obligations for the payment of borrowed money) incurred in
the ordinary course of business;

(5) minor irregularities in title, boundaries, or other survey defects,
easements, rights-of-way, restrictions, servitudes, permits, reservations,
exceptions, zoning regulations, conditions, covenants, mineral or royalty
rights, or reservations or oil, gas and mineral leases and rights of others
in any property of Sterling or any Restricted Subsidiary for streets,
roads, bridges, pipes, pipe lines, railroads, electric transmission and
distribution lines, telegraph and telephone lines, the removal of oil, gas,
or other minerals, or other similar purposes, flood control, water rights,
rights of others with respect to navigable waters, sewage and drainage
rights, and other similar charges or encumbrances existing as of the Issue
Date (or granted by Sterling or any Restricted Subsidiary in the ordinary
course of business) that do not, in the aggregate, materially impair the
value of the property of Sterling or any Restricted Subsidiary and the
occupation, use, and enjoyment by Sterling or any of its Restricted
Subsidiaries of any of their respective properties in the normal course of
business;

(6) Liens securing Debt neither created, assumed, nor guaranteed by
Sterling or any Restricted Subsidiary upon lands over which easements or
similar rights are acquired by Sterling or any Restricted Subsidiary in the
ordinary course of business of Sterling or any Restricted Subsidiary;

(7) terminable or short term leases or permits for occupancy, which
leases or permits expressly grant to Sterling or any Restricted Subsidiary
the right to terminate them at any time on not more than six months' notice
and which occupancy does not interfere with the operation of the business
of Sterling or any Restricted Subsidiary;

(8) any Lien or privilege arising solely by operation of law and vested
in any lessor, licensor, or permittor on personal property located on
premises leased by Sterling or any Restricted Subsidiary, for rent to
become due or for other obligations or acts to be performed, the payment of
which rent or the performance of which other obligations or acts is
required under leases, subleases, licenses, or permits;

(9) Liens or privileges of any employee of Sterling or any Restricted
Subsidiary for salary or wages earned but not yet payable;

(10) any obligations or duties affecting any of the property of
Sterling or its Subsidiaries to any municipality or public authority with
respect to any franchise, grant, license, or permit that do not materially
impair the use of such property for the purposes for which it is held;

(11) Liens upon property or assets other than as described in clause
(12) immediately below acquired by Sterling after the Issue Date; provided,
however, that such Liens do not extend to any property or assets other than
such property or assets;

(12) Liens on property or shares of Capital Stock of another Person at
the time such other Person becomes a Restricted Subsidiary of such Person;
provided, however, that such Liens are in existence prior to the
contemplation of such Person becoming a Restricted Subsidiary and are not
created, incurred, or assumed in connection with, or in contemplation of,
such other Person becoming such a Restricted Subsidiary and do not extend
to any assets other than those of the Person that becomes a Restricted
Subsidiary;

(13) Liens resulting from operation of law with respect to any
judgments, awards, or orders to the extent that such judgments, awards, or
orders do not cause or constitute an Event of Default;

(14) Liens on any property in favor of domestic or foreign
governmental bodies to secure partial, progress, advance, or other payments
pursuant to any contract or statute, not yet due and payable;

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(15) Liens securing Debt incurred to finance the construction,
purchase, or lease of, or repairs, improvements, or additions to, property
of such Person used in the business of Sterling, to the extent such Debt is
otherwise permitted by the indenture;

(16) Liens with respect to the so-called "greenbelt" or "buffer zone"
properties, for as long as those properties are used solely for "greenbelt"
or "buffer zone" purposes;

(17) leases and ground leases of underutilized or vacant properties of
Sterling or any Restricted Subsidiary to third parties with which Sterling
has a production, co-production, co-generation, operating, or other
arrangement or to third party providers of energy or raw materials in the
ordinary course of business of Sterling or a Restricted Subsidiary,
provided such leases do not materially interfere with the operation of the
business of Sterling or any Restricted Subsidiary or materially diminish
the value of the PP&E;

(18) easements, rights-of-way, restrictions, and other similar charges
or encumbrances granted to others, in each case incidental to, and not
interfering with, the ordinary conduct of the business of Sterling or any
of its Subsidiaries, provided that such Liens are not violated by the
existing PP&E and do not, in the aggregate, materially diminish the value
of the PP&E;

(19) the burdens of any law or governmental regulation or permit
requiring Sterling to maintain certain facilities or perform certain acts
as a condition of its occupancy of or interference with any public lands or
any river or stream or navigable waters;

(20) Liens on accounts receivable and inventory and other specified
assets of the type securing the Working Capital Revolver, in each case
other than assets constituting part of the Collateral, which Liens secure
either (a) extensions, renewals, modifications, replacements, or increases
of the Working Capital Revolver in whole or in part from time to time or
(b) any revolving credit agreement of any Non-U.S. Subsidiary; provided,
however, that in each case the Debt secured by such Liens is permitted by
the terms of the indenture to be Incurred;

(21) extensions, renewals, modifications, or replacements of any Lien
referred to in clauses (1) through (21) of this definition, provided that
such Lien is otherwise permitted by the terms hereof and, with respect to
Liens securing Debt, no extension or renewal Lien shall (A) secure more
than the amount of the Debt or other obligations secured by the Lien being
so extended or renewed, other than as permitted by clause (11) or (20)
hereof, or (B) extend to any property or assets not subject to the Lien
being so extended or renewed, other than as permitted by clause (11) or
(20) hereof, or (C) with respect to the Shared Collateral, relate to any
Debt that has a Stated Maturity that extends beyond the Stated Maturity of
the Fixed Assets Revolver;

(22) Liens incurred in the ordinary course of business of Sterling and
its Restricted Subsidiaries that do not secure Debt and which have a value
that in the aggregate does not exceed $5.0 million at any one time
outstanding.

"Permitted Transferee" means with respect to any Person:

(1) in the case of an entity, any Affiliate of such Person; and

(2) in the case of an individual, any person related by lineal or
collateral consanguinity to such individual or to the spouse of such
individual (adopted persons shall be considered the natural born child of
their adoptive parents).

Lineal consanguinity is that relationship that exists between persons of whom
one is descended (or ascended) in a direct line from the other, as between son,
father, grandfather, and great-grandfather. Collateral consanguinity is that
relationship that exists between persons who have the same ancestors, but who
do not descend (or ascend) from the other, as between uncle and nephew, or
cousin and cousin), in each case to whom such Person has transferred Common
Stock of Holdings.

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"Person" means any individual, corporation, partnership, limited liability
company, 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.

"Principal Properties" means each of the chemical facilities at the
following locations:

(1) Texas City, Texas;

(2) Valdosta, Georgia;

(3) Buckingham, Quebec;

(4) Vancouver, British Columbia;

(5) Thunder Bay, Ontario; and

(6) Grande Prairie, Alberta

"Principal Property Subsidiary" means each of Sterling Pulp Chemicals, Inc.,
Sterling Pulp Chemicals, Ltd., and Sterling NRO, Ltd. and any other Affiliate
that may hereafter own any Principal Property.

"Rating Agency" means S&P and Moody's, or if S&P or Moody's or both shall
not make a rating on the notes publicly available, a nationally recognized
statistical rating agency or agencies, as the case may be, selected by Sterling
(as certified by a resolution of the Board of Directors) which shall be
substituted for S&P or Moody's or both, as the case may be.

"Redeemable Stock" means any Capital Stock that by its terms or otherwise is
required to be redeemed on or prior to the Stated Maturity of the notes or is
redeemable at the option of the Holder thereof without regard to the occurrence
of any contingency at any time on or prior to the Stated Maturity of the notes.

"Reference Treasury Dealer" means each of: (1) Donaldson, Lufkin & Jenrette
Securities Corporation, or its successors, and Credit Suisse First Boston
Corporation, or its successors; provided, however, that if the foregoing shall
not be a primary U.S. Government securities dealer in New York City (a "Primary
Treasury Dealer"), Sterling shall substitute therefor another Primary Treasury
Dealer; and (2) any Primary Treasury Dealer selected by Sterling.

"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer on any date of redemption, the average, as determined by the
trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the trustee by such Reference Treasury Dealer at 5:00 p.m. on the
third business day preceding such date of redemption.

"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 Debt. "Refinanced" and "Refinancing" shall
have correlative meanings.

"Refinancing Debt" means Debt that Refinances any Debt of Sterling or any
Restricted Subsidiary existing on the Issue Date or Incurred in compliance with
the indenture including Debt that Refinances Refinancing Debt; provided,
however that:

(1) such Refinancing Debt has a Stated Maturity no earlier than the
Stated Maturity of the Debt being Refinanced;

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(2) 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;

(3) 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

(4) 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; and

provided, further, however, that Refinancing Debt shall not include:

(1) Debt of a Subsidiary (other than a Wholly Owned Subsidiary which is
also a Subsidiary Guarantor) that Refinances Debt of Sterling; or

(2) Debt of Sterling or a Restricted Subsidiary that Refinances Debt of
an Unrestricted Subsidiary.

"Representative" means any trustee, agent, or representative (if any) for
an issue of Senior Debt of Sterling.

"Restricted Subsidiary" means any Subsidiary of Sterling that is not an
Unrestricted Subsidiary.

"Return of Capital" means, with respect to any Equity Interest, any sums
paid on or in respect of such Equity Interest: (1) as a return, in whole or in
part, of the capital of the issuer of such Equity Interest as constituted
immediately following the consummation of the Transfer of the Fibers Business
pursuant to which such Equity Interest was issued to Sterling or either of the
Fibers Subsidiaries; (2) in redemption of, or in exchange for, such Equity
Interest; or (3) in connection with a partial or total liquidation or
dissolution of the issuer of such Equity Interest.

"Sale of the Fibers Business" means any sale, transfer, assignment,
conveyance, or other disposition of the Capital Stock of the Fibers
Subsidiaries or all or substantially all of the assets of the Fibers
Subsidiaries (other than pursuant to a Joint Venture Contribution), including,
in either case, any such sale, transfer, assignment, conveyance, or
disposition made through any merger, consolidation, or similar transaction.

"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby Sterling or a Restricted Subsidiary
transfers such property to a Person (other than Sterling or a Wholly Owned
Subsidiary which is also a Subsidiary Guarantor) and Sterling or a Restricted
Subsidiary leases it from such Person.

"Secured Debt" means any Debt of Sterling secured by a Lien.

"Senior Debt" means:

(1) all Debt of Sterling or any Restricted Subsidiary outstanding under
the Credit Agreement;

(2) any other Debt of Sterling or any Restricted Subsidiary permitted
to be incurred under the terms of the indenture, unless the instrument
under which such Debt is incurred expressly provides that it is
subordinated in right of payment to the notes or any Subsidiary Guarantee;
and

(3) all obligations with respect to the items listed in the preceding
clauses (1) and (2).

Notwithstanding anything to the contrary in the preceding, Senior Debt will
not include:

(1) any liability for federal, state, local, or other taxes owed or
owing by Sterling;

(2) any Debt of Sterling to any of its Restricted Subsidiaries or other
Affiliates;

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(3) any trade payables; or

(4) the portion of any Debt that is incurred in violation of the
indenture.

"Senior Subordinated Debt" means the Existing Subordinated Notes and any
other Debt of Sterling that specifically provides that such Debt is subordinate
to the notes in right of payment and which is not subordinated by its terms in
right of payment to any Debt or other obligation of Sterling which is not
Senior Debt.

"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" of Sterling as defined in Rule 1-02 of Regulation S-X,
promulgated by the Commission.

"S&P" means Standard & Poor's Ratings Group.

"Special Adjusted Treasury Rate" means, with respect to any date of
redemption, the rate per annum equal to the semiannual equivalent yield to
maturity of the Comparable Treasury Issue, assuming a price equal to the
Comparable Treasury Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price for such date of redemption, plus 0.50%.

"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 Sterling (whether outstanding on
the 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:

(1) Sterling;

(2) Sterling and one or more Subsidiaries; or

(3) one or more Subsidiaries.

"Subsidiary Guarantees" means the guarantees of the notes by the Subsidiary
Guarantors.

"Subsidiary Guarantors" means Sterling Canada, Inc., Sterling Chemicals
Energy, Inc., Sterling Chemicals Fibers, Inc., Sterling Pulp Chemicals, Inc.,
and Sterling Pulp Chemicals US, Inc., and any other entities that at any time
guarantees Sterling's obligations with respect to the notes.

"Tangible Property" means all land, buildings, machinery, and equipment and
leasehold interests and improvements which would be reflected on a balance
sheet of Sterling prepared in accordance with GAAP, excluding:

(1) all rights, contracts, and other intangible assets of any nature
whatsoever; and

(2) all inventories and other current assets.

"Temporary Cash Investments" means any of the following:

(1) 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;

131
<PAGE>

(2) investments in time deposit accounts, certificates of deposit, and
money market deposits maturing within 270 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws
of the United States of America, any state thereof, or any foreign country
recognized by the United States, and which bank or trust company has
capital, surplus, and undivided profits aggregating in excess of $50
million (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;

(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2) above;

(4) investments in commercial paper, maturing not more than 180 days
after the date of acquisition, issued by a corporation (other than an
Affiliate of Sterling 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-l" (or higher) according to Moody's or
"A-1" (or higher) according to S&P;

(5) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth, or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by S&P or "A" by Moody's;

(6) participations (for a tenor of not more than 90 days) in loans to
Persons having short-term credit ratings of at least "A-1" and "P-1" by S&P
and Moody's, respectively;

(7) with respect to any Non-U.S. Subsidiary organized in Canada,
commercial paper of Canadian companies rated R-l High or the equivalent
thereof by Dominion Bond Rating Services with maturities of less than one
year; and

(8) with respect to Foreign Subsidiaries not organized in Canada,
government obligations of another country whose debt securities are rated
by S&P and/or Moody's "A-1" or "P-1", or the equivalent thereof (if a
short-term debt rating is provided by either), or at least "AA" or "AA2",
or the equivalent thereof (if a long-term unsecured debt rating is provided
by either), in each case, with maturities of less than 12 months.

"Texas City Facility" means the petrochemicals production facility that is
located at Texas City, Texas and is a Principal Property.

"Transfer of the Fibers Business" means any Joint Venture Contribution or
any Sale of the Fibers Business or any combination thereof.

"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.

"Unrestricted Subsidiary" means:

(1) any Subsidiary of Sterling that at the time of determination shall
be designated an Unrestricted Subsidiary by the Board of Directors in the
manner provided below; and

(2) any Subsidiary of an Unrestricted Subsidiary.

The Board of Directors may designate any Subsidiary of Sterling (including
any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary
unless such Subsidiary or any of its Subsidiaries owns any

132
<PAGE>

Capital Stock or Debt of, or holds any Lien on any property of, Sterling or any
other Subsidiary of Sterling that is not a Subsidiary of the Subsidiary to be
so designated; provided, however, that either:

(1) the Subsidiary to be so designated has total assets of $1,000 or
less; or

(2) if such Subsidiary has assets of greater than $1,000, such
designation would be permitted under the covenant described under
"--Certain Covenants--Limitation on Restricted Payments;"

and provided, further, however, that:

(1) no Subsidiary of Sterling that is a Restricted Subsidiary on the
Issue Date (other than a Restricted Subsidiary with total assets of $1,000
or less on the Issue Date) may be designated an Unrestricted Subsidiary;
and

(2) no Subsidiary holding, directly or indirectly, any assets (other
than assets totaling $1,000 or less which constituted the only assets of a
Restricted Subsidiary on the Issue Date) held by Sterling or a Restricted
Subsidiary on the Issue Date may be designated an Unrestricted Subsidiary.

The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to such designation:

(1) if such Unrestricted Subsidiary at such time has Debt, Sterling
could Incur $1.00 of additional Debt under paragraph (a) of the covenant
described under "--Certain Covenants--Limitation on Debt"; and

(2) no Default shall have occurred and be continuing.

Any such designation by the Board of Directors shall be communicated by
Sterling to the trustee by promptly filing with the trustee a copy of the board
resolution giving effect to such designation and an officers' certificate
certifying that such designation complied with the foregoing provisions.

Notwithstanding the foregoing, any entity formed or in which an Equity
Interest is acquired as a result of a Transfer of the Fibers Business, and if
the Capital Stock of the Fibers Subsidiaries is transferred in connection with
such Transfer of the Fibers Business, each of the Fibers Subsidiaries, shall
automatically be an Unrestricted Subsidiary without complying with the
foregoing requirements; provided, however, that such Transfer of the Fibers
Business is made in accordance with the terms of the covenant described under
the caption "--Repurchase at the Option of Holders--Transfer of the Fibers
Business," unless the Board of Directors substantially contemporaneously with
such Transfer of the Fibers Business designates any such entity as a Restricted
Subsidiary.

As of the Issue Date, each of Sterling Chemicals Acquisitions, Inc.,
Sterling (Sask) Holdings Ltd., Sterling Pulp Chemicals (Sask) Ltd., 619220
Saskatchewan Ltd., and Sterling Pulp Chemicals Fuzhou Ltd. is an Unrestricted
Subsidiary.

"U.S. Subsidiary" means a Restricted Subsidiary that is incorporated in a
jurisdiction in the United States, or a state thereof or the District of
Columbia.

"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.

"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by Sterling
and/or another Wholly Owned Subsidiary; provided, however, that a Foreign
Subsidiary shall be a Wholly Owned Subsidiary if more than 90% of the Capital
Stock and Voting Stock thereof is owned by Sterling and/or another Wholly Owned
Subsidiary.

"Working Capital Revolver" means the senior secured revolving credit
facility under the Credit Agreement pursuant to which Sterling may borrow,
repay, and reborrow up to $85 million, secured by a first

133
<PAGE>

priority lien on all of the property and assets of Sterling and the other
Borrowers except for real property, fixtures, certain related general
intangibles, and equipment and any Capital Stock owned by Sterling or any
Subsidiary Guarantor.

PLAN OF DISTRIBUTION

Each broker-dealer that receives exchange notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of the exchange notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of exchange notes received in exchange for existing notes where
the existing notes were acquired as a result of market-making activities or
other trading activities.

Sterling will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
in the exchange offer may be sold from time to time in one or more transactions
in the over-the-counter market, in negotiated transactions, through the writing
of options on the exchange notes or a combination of these methods of resale,
at market prices prevailing at the time of resale, at prices related to those
prevailing market prices or at negotiated prices. Any resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any broker-dealer
or the purchasers of any exchange notes. Any broker-dealer that resells
exchange notes that were received by it for its own account in the exchange
offer and any broker or dealer that participates in a distribution of the
exchange notes may be an "underwriter" within the meaning of the Securities Act
and any profit on any resale of exchange notes and any commission or
concessions received by any person may be considered underwriting compensation
under the Securities Act. The letter of transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a broker-
dealer will not be regarded as an admission that it is an "underwriter", within
the meaning of the Securities Act.

Sterling has agreed to pay all expenses incident to the exchange offer other
than commissions or concessions of any broker-dealers, and will indemnify the
holders of the notes against some liabilities, including liabilities under the
Securities Act.

There has been no public market for the existing notes or the exchange notes
prior to the exchange offer. We do not intend to apply for listing of the
exchange notes on any securities exchange or for quotation through The Nasdaq
Stock Market. We cannot assure you that an active market for the exchange notes
will develop. To the extent that a market for the exchange notes does develop,
future trading prices of the exchange notes will depend on many factors,
including, among other things, prevailing interest rates, and the market for
similar securities as well as our results of operations and financial
condition.

LEGAL MATTERS

Certain legal matters with respect to the exchange notes will be passed upon
for us by Andrews & Kurth L.L.P., Houston, Texas.

EXPERTS

The following financial statements included in this 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 that
firm given upon their authority as experts in accounting and auditing:

(1) Sterling Chemicals Holdings, Inc.--consolidated balance sheets as of
September 30, 1997 and 1998 and the related consolidated statements of
operations, changes in stockholders' equity (deficiency in assets), and
cash flows for each of the three years in the period ended September
30, 1998;

134
<PAGE>

(2) Sterling Chemicals, Inc.--consolidated balance sheets as of September
30, 1997 and 1998, and the related consolidated statements of
operations, changes in stockholder's equity (deficiency in assets), and
cash flows for the period from May 14, 1996 (date of incorporation) to
September 30, 1996 and for each of the two years in the period ended
September 30, 1998;

(3) Sterling Chemicals U.S. Subsidiaries--combined balance sheets as of
September 30, 1997 and 1998 and the related combined statements of
operations, changes in stockholder's equity, and cash flows for each of
the three years in the period ended September 30, 1998;

The following financial statements included in this prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and are included in reliance upon the reports of that
firm given upon their authority as experts in accounting and auditing:

(1) Sterling Pulp Chemicals, Ltd.--balance sheets as of September 30, 1997
and 1998 and the related statements of operations, changes in
stockholder's equity, and cash flows for each of the three years in the
period ended September 30, 1998.

135
<PAGE>

INDEX TO FINANCIAL STATEMENTS

Unaudited Interim Financial Statements

<TABLE>
<S> <C>
Sterling Chemicals Holdings, Inc. and Sterling Chemicals, Inc.

Sterling Chemicals Holdings, Inc. Consolidated Balance Sheets as of June
30, 1999 and September 30, 1998 (Unaudited)............................. F-3

Sterling Chemicals Holdings, Inc. Consolidated Statements of Operations
for the Nine Months Ended June 30, 1999 and 1998 (Unaudited)............ F-4

Sterling Chemicals Holdings, Inc. Consolidated Statements of Cash Flows
for the Nine Months Ended June 30, 1999 and 1998 (Unaudited)............ F-5

Sterling Chemicals, Inc. Consolidated Balance Sheets as of June 30, 1999
and September 30, 1998 (Unaudited)...................................... F-6

Sterling Chemicals, Inc. Consolidated Statements of Operations for the
Nine Months Ended June 30, 1999 and 1998 (Unaudited).................... F-7

Sterling Chemicals, Inc. Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 1999 and 1998 (Unaudited).................... F-8

Notes to Consolidated Financial Statements (Unaudited)................... F-9

Sterling Chemicals U.S. Subsidiaries

Sterling Chemicals U.S. Subsidiaries Combined Balance Sheets as of June
30, 1999 and September 30, 1998 (Unaudited)............................. F-15

Sterling Chemicals U.S. Subsidiaries Combined Statements of Operations
for the Nine Months Ended June 30, 1999 and 1998 (Unaudited)............ F-16

Sterling Chemicals U.S. Subsidiaries Combined Statements of Cash Flows
for the Nine Months Ended June 30, 1999 and 1998 (Unaudited)............ F-17

Notes to Combined Financial Statements (Unaudited)....................... F-18

Sterling Pulp Chemicals, Ltd.

Sterling Pulp Chemicals, Ltd. Balance Sheets as of June 30, 1999 and
September 30, 1998 (Unaudited).......................................... F-21

Sterling Pulp Chemicals, Ltd. Statements of Operations for the Nine
Months Ended June 30, 1999 and 1998 (Unaudited)......................... F-22

Sterling Pulp Chemicals, Ltd. Statements of Cash Flows for the Nine
Months Ended June 30, 1999 and 1998 (Unaudited)......................... F-23

Notes to Financial Statements (Unaudited)................................ F-24

Audited Financial Statements

Sterling Chemicals Holdings, Inc. and Sterling Chemicals, Inc.

Reports of Independent Auditors.......................................... F-26

Sterling Chemicals Holdings, Inc. Consolidated Statements of Operations
for the years ended September 30, 1998, 1997, and 1996.................. F-28

Sterling Chemicals Holdings, Inc. Consolidated Balance Sheets as of
September 30, 1998 and 1997............................................. F-29

</TABLE>

F-1
<PAGE>

<TABLE>
<S> <C>
Sterling Chemicals Holdings, Inc. Consolidated Statements of Changes in
Stockholders' Equity (Deficiency in Assets) for the years ended
September 30, 1998, 1997, and 1996...................................... F-30

Sterling Chemicals Holdings, Inc. Consolidated Statements of Cash Flows
for the years ended September 30, 1998, 1997, and 1996.................. F-31

Sterling Chemicals, Inc. Consolidated Statements of Operations for the
years ended September 30, 1998 and 1997 and the period from May 14, 1996
to September 30, 1996................................................... F-32

Sterling Chemicals, Inc. Consolidated Balance Sheets as of September 30,
1998 and 1997........................................................... F-33

Sterling Chemicals, Inc. Consolidated Statements of Changes in
Stockholders's Equity (Deficiency in Assets) for the years ended
September 30, 1998 and 1997 and the period from May 14, 1996 to
September 30, 1996...................................................... F-34

Sterling Chemicals, Inc. Consolidated Statements of Cash Flows for the
years ended September 30, 1998 and 1997 and the period from May 1, 1996
to September 30, 1996................................................... F-35

Notes to Consolidated Financial Statements............................... F-36

Sterling Chemicals U.S. Subsidiaries

Report of Independent Auditors........................................... F-63

Sterling Chemicals U.S. Subsidiaries Combined Statements of Operations
for the years ended September 30, 1998 , 1997, and 1996................. F-64

Sterling Chemicals U.S. Subsidiaries Combined Balance Sheets as of
September 30, 1998 and 1997............................................. F-65

Sterling Chemicals U.S. Subsidiaries Combined Statements of Changes in
Stockholder's Equity for the years ended September 30, 1998, 1997, and
1996.................................................................... F-66

Sterling Chemicals U.S. Subsidiaries Combined Statements of Cash Flows
for the years ended September 30, 1998, 1997, and 1996.................. F-67

Notes to Combined Financial Statements................................... F-68

Sterling Pulp Chemicals, Ltd.

Report of Independent Auditors........................................... F-80

Sterling Pulp Chemicals, Ltd. Statements of Operations for the years
ended September 30, 1998, 1997, and 1996................................ F-81

Sterling Pulp Chemicals, Ltd. Balance Sheets as of September 30, 1998 and
1997.................................................................... F-82

Sterling Pulp Chemicals, Ltd. Statements of Changes in Stockholder's
Equity for the years ended September 30, 1998, 1997 and 1996............ F-83

Sterling Pulp Chemicals, Ltd. Statements of Cash Flows for the years
ended September 30, 1998, 1997, and 1996................................ F-84

Notes to Financial Statements............................................ F-85
</TABLE>

F-2
<PAGE>

STERLING CHEMICALS HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts In Thousands Except Share Data)

(Unaudited)

<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
--------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 6,327 $ 11,168
Accounts receivable.................................. 117,678 114,571
Inventories.......................................... 78,915 73,225
Prepaid expenses..................................... 11,202 15,571
Deferred tax asset................................... 8,817 5,140
--------- ---------
Total current assets............................... 222,939 219,675
Property, plant and equipment, net..................... 432,827 450,315
Deferred tax asset..................................... 7,370 --
Other assets........................................... 94,597 95,966
--------- ---------
Total assets....................................... $ 757,733 $ 765,956
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN
ASSETS)
Current liabilities:
Accounts payable..................................... $ 64,912 $ 46,983
Accrued liabilities.................................. 64,297 71,873
Current portion of long-term debt.................... 2,633 8,909
--------- ---------
Total current liabilities.......................... 131,842 127,765
Long-term debt......................................... 923,613 873,616
Deferred tax liability................................. -- 11,123
Deferred credits and other liabilities................. 78,095 80,289
Common stock held by ESOP.............................. 2,946 5,938
Less: unearned compensation............................ (595) (2,845)
Redeemable preferred stock............................. 20,225 18,249
Commitments and contingencies (Note 4)................. -- --
Stockholders' equity (deficiency in assets):
Common stock, $.01 par value, 20,000,000 shares
authorized, 12,305,000 shares issued and 12,098,000
outstanding at June 30, 1999, and 12,273,000 shares
issued and 12,073,000 outstanding at September 30,
1998................................................ 123 123
Additional paid-in capital........................... (542,712) (542,701)
Retained earnings.................................... 174,892 229,590
Pension adjustment................................... (121) (121)
Accumulated translation adjustment................... (28,052) (32,559)
Deferred compensation................................ (70) (111)
--------- ---------
(395,940) (345,779)
Treasury stock, at cost, 207,000 and 200,000 shares
at June 30, 1999 and September 30, 1998,
respectively........................................ (2,453) (2,400)
--------- ---------
Total stockholders' equity (deficiency in assets).. (398,393) (348,179)
--------- ---------
Total liabilities and stockholders' equity
(deficiency in assets).......................... $ 757,733 $ 765,956
========= =========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-3
<PAGE>

STERLING CHEMICALS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts In Thousands Except Per Share Data)

(Unaudited)

<TABLE>
<CAPTION>
Nine Months Ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues.................................................. $506,190 $640,154
Cost of goods sold........................................ 472,963 586,968
-------- --------
Gross profit.............................................. 33,227 53,186
Selling, general and administrative expenses.............. 27,594 28,094
Other expense............................................. 10,809 5,962
Interest and debt related expenses, net of interest
income................................................... 74,711 76,021
-------- --------
Loss before income taxes ................................. (79,887) (56,891)
Benefit for income taxes.................................. (25,552) (17,340)
-------- --------
Net loss.................................................. (54,335) (39,551)
Preferred stock dividends................................. 1,975 1,826
-------- --------
Net loss attributable to common stockholders.............. $(56,310) $(41,377)
======== ========
Net loss per common share (Note 5)........................ $ (4.43) $ (3.40)
======== ========
Weighted average shares outstanding....................... 12,469 12,007
======== ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-4
<PAGE>

STERLING CHEMICALS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts In Thousands)

(Unaudited)

<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................ $ (54,335) $(39,551)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization......................... 42,375 42,205
Interest amortization................................. 1,781 2,830
Deferred tax benefit.................................. (19,198) (14,557)
Discount notes amortization........................... 13,738 12,898
Early retirement programs and benefit changes......... 6,782 --
Other................................................. 1,089 1,890
Change in assets/liabilities:
Accounts receivable................................... (2,604) 36,246
Inventories........................................... (5,195) 9,810
Prepaid expenses...................................... (4,896) (1,672)
Other assets.......................................... (12,553) 1,055
Accounts payable...................................... 31,747 (19,247)
Accrued liabilities................................... (16,616) (2,221)
Other liabilities..................................... 6,366 7,836
--------- --------
Net cash provided (used in) by operating activities....... (11,519) 37,522
--------- --------
Cash flows from investing activities:
Capital expenditures.................................... (17,836) (18,861)
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt............................ 220,769 48,562
Repayment of long-term debt............................. (196,412) (62,448)
Other................................................... (58) 104
--------- --------
Net cash provided (used in) by financing activities....... 24,299 (13,782)
--------- --------
Effect of United States /Canadian exchange rate on cash... 215 (390)
--------- --------
Net increase (decrease) in cash and cash equivalents...... (4,841) 4,489
Cash and cash equivalents--beginning of year.............. 11,168 7,958
--------- --------
Cash and cash equivalents--end of period.................. $ 6,327 $ 12,447
========= ========
Supplement disclosures of cash flow information:
Interest paid, net of interest income received.......... $ (56,534) $(58,534)
Income tax refunds received............................. 5,042 6,833
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-5
<PAGE>

STERLING CHEMICALS, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts In Thousands Except Share Data)

(Unaudited)

<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
--------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 6,307 $ 11,159
Accounts receivable................................. 117,701 116,398
Inventories......................................... 78,915 73,225
Prepaid expenses.................................... 9,031 13,632
Deferred tax asset.................................. 8,817 5,140
--------- ---------
Total current assets.............................. 220,771 219,554
Property, plant and equipment, net.................... 432,827 450,315
Other assets.......................................... 91,635 92,634
--------- ---------
Total assets...................................... $ 745,233 $ 762,503
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN
ASSETS)
Current liabilities:
Accounts payable.................................... $ 63,008 $ 46,764
Accrued liabilities................................. 64,051 71,884
Current portion of long-term debt................... 2,633 8,909
--------- ---------
Total current liabilities........................... 129,692 127,557
Long-term debt........................................ 781,180 745,709
Deferred tax liability................................ 9,431 23,301
Deferred credits and other liabilities................ 81,095 83,288
Common stock held by ESOP............................. 2,946 5,938
Less: unearned compensation........................... (595) (2,845)
Commitments and contingencies (Note 4)................ -- --
Stockholder's equity (deficiency in assets):
Common stock, $.01 par value........................ -- --
Additional paid-in capital.......................... (140,013) (139,786)
Accumulated deficit................................. (90,260) (47,868)
Pension adjustment.................................. (121) (121)
Accumulated translation adjustment.................. (28,052) (32,559)
Deferred compensation............................... (70) (111)
--------- ---------
Total stockholder's equity (deficiency in assets)... (258,516) (220,445)
--------- ---------
Total liabilities and stockholder's equity
(deficiency in assets)............................. $ 745,233 $ 762,503
========= =========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-6
<PAGE>

STERLING CHEMICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts In Thousands)

(Unaudited)

<TABLE>
<CAPTION>
Nine Months Ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues.................................................. $506,190 $640,154
Cost of goods sold........................................ 472,963 586,968
-------- --------
Gross profit.............................................. 33,227 53,186
Selling, general and administrative expenses.............. 27,235 27,066
Other expense............................................. 10,809 5,962
Interest and debt related expenses, net of interest
income................................................... 59,881 62,867
-------- --------
Loss before income taxes.................................. (64,698) (42,709)
Benefit for income taxes.................................. (20,694) (13,219)
-------- --------
Net loss.................................................. $(44,004) $(29,490)
======== ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-7
<PAGE>

STERLING CHEMICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts In Thousands)

(Unaudited)

<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................ $ (44,004) $(29,490)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization......................... 42,375 42,205
Debt fee amortization................................. 1,461 2,362
Deferred tax benefit.................................. (19,198) (10,451)
Early retirement programs and benefit changes......... 6,782 --
Other................................................. 307 1,890
Change in assets/liabilities:
Accounts receivable................................... 188 36,208
Inventories........................................... (5,195) 9,810
Prepaid expenses...................................... (4,662) (1,658)
Other assets.......................................... (7,928) 1,017
Accounts payable...................................... 28,612 (20,182)
Accrued liabilities................................... (16,616) (2,221)
Other liabilities..................................... 6,348 8,030
--------- --------
Net cash provided by (used in) operating activities....... (11,530) 37,520
--------- --------
Cash flows from investing activities:
Capital expenditures.................................... (17,836) (18,861)
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt............................ 220,769 48,562
Repayment of long-term debt............................. (196,412) (62,448)
Other................................................... (58) 104
--------- --------
Net cash provided by (used in) financing activities....... 24,299 (13,782)
--------- --------
Effect of United States /Canadian exchange rate on cash... 215 (390)
--------- --------
Net increase (decrease) in cash and cash equivalents...... (4,852) 4,487
Cash and cash equivalents--beginning of year.............. 11,159 7,958
--------- --------
Cash and cash equivalents--end of period.................. $ 6,307 $ 12,445
========= ========
Supplement disclosures of cash flow information:
Interest paid, net of interest income received.......... $ (56,545) $(58,534)
Income tax refunds received............................. 5,042 6,833
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-8
<PAGE>

STERLING CHEMICALS HOLDINGS, INC.

STERLING CHEMICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments necessary to present fairly the
consolidated financial position of Sterling Chemicals Holdings, Inc.
("Holdings") and its subsidiaries (Holdings and its subsidiaries collectively,
the "Company") and Sterling Chemicals, Inc. and its subsidiaries (Sterling
Chemicals, Inc. and its subsidiaries collectively, "Chemicals") as of June 30,
1999, and their consolidated results of operations and cash flows for the
applicable three month and nine month periods ended June 30, 1999 and 1998. 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
consolidated financial statements should be, and are assumed to have been, read
in conjunction with the consolidated financial statements and notes included in
Holdings' and Chemicals' combined Annual Report on Form 10-K for the fiscal
year ended September 30, 1998 (the "Annual Report"). The accompanying
consolidated balance sheets as of September 30, 1998, have been derived from
the audited consolidated balance sheets as of September 30, 1998, included in
the Annual Report.

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 loss or stockholders' equity (deficiency in
assets).

2. Inventories
<TABLE>
<CAPTION>
June
30, September 30,
1999 1998
------- -------------
<S> <C> <C>
Inventories consisted of the following (in thousands):
Finished products........................................ $46,641 $42,436
Raw materials............................................ 14,753 8,089
Inventories under exchange agreements.................... 1,830 3,031
Stores and supplies...................................... 15,691 19,669
------- -------
$78,915 $73,225
======= =======
</TABLE>

3. Long-Term Debt

<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
-------- -------------
<S> <C> <C>
Long-term debt consisted of the following (in
thousands):
Revolving credit facility............................. $ 36,450 $ --
Term loans............................................ 273,000 274,000
Saskatoon term loans.................................. 44,764 49,552
ESOP term loan........................................ 2,031 3,250
11 1/4% Notes......................................... 152,568 152,816
11 3/4% Notes......................................... 275,000 275,000
-------- --------
Total Chemicals' debt outstanding................... 783,813 754,618
13 1/2% Notes....................................... 142,433 127,907
-------- --------
Total Holdings' debt outstanding.................... 926,246 882,525
Less:
Current maturities.................................. (2,633) (8,909)
-------- --------
Total long-term debt.................................. $923,613 $873,616
======== ========
</TABLE>

F-9
<PAGE>

STERLING CHEMICALS HOLDINGS, INC.

STERLING CHEMICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited)--(Continued)

On July 23, 1999, Chemicals completed a private offering (the "12 3/8% Notes
Offering") of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006 (the
"12 3/8% Notes"). The 12 3/8% Notes are senior secured obligations of Chemicals
and rank equally in right of payment with all other existing and future senior
indebtedness of Chemicals and senior in right of payment to all existing and
future subordinated indebtedness of Chemicals. The 12 3/8% Notes are guaranteed
by all of Chemicals' existing direct and indirect U.S. subsidiaries (other than
Sterling Chemicals Acquisitions, Inc.) on a joint and several basis. Each
subsidiary's guarantee ranks equally in right of payment with all of such
subsidiary's existing and future senior indebtedness and senior in right of
payment to all existing and future subordinated indebtedness of such
subsidiary. However, the 12 3/8% Notes, and each subsidiary's guarantee, is
subordinated to the extent of the collateral securing Chemicals' new secured
revolving credit facilities described below. The 12 3/8% Notes and the
subsidiary guarantees are secured by (i) a second priority lien on all of
Chemicals' U.S. chemical production facilities and related assets, (ii) a
second priority pledge of all of the capital stock of each subsidiary
guarantor, and (iii) a first priority pledge of 65% of the stock of certain of
the Company's subsidiaries incorporated outside of the United States.

In addition, on July 23, 1999, Chemicals established two new secured
revolving credit facilities providing for up to $155,000,000 in revolving
credit loans (the "New Revolvers") under a single Revolving Credit Agreement
(the "New Credit Agreement"). Under the New Credit Agreement, Chemicals and
each of its direct and indirect U.S. subsidiaries (other than Sterling
Chemicals Acquisitions, Inc.) are co-borrowers and are jointly and severally
liable for any indebtedness thereunder. The New Revolvers consist of (i) a
$70,000,000 revolving credit facility (the "Fixed Assets Revolver") secured by
a first priority lien on all of Chemicals' U.S. chemical production facilities
and related assets, all of the capital stock of Chemicals and all of the
capital stock of each co-borrower and a second priority lien on all accounts
receivable, inventory and other specified assets of Chemicals and each co-
borrower, and (ii) an $85,000,000 revolving credit facility (the "Current
Assets Revolver") secured by a first priority lien on all accounts receivable,
inventory and other specified assets of Chemicals and each co-borrower.

Funding under the 12 3/8% Notes Offering and the New Revolvers occurred on
July 23, 1999. The proceeds of the 12 3/8% Notes Offering and the initial
borrowings under the New Revolvers were used to completely repay all
outstanding indebtedness under Chemicals existing senior credit facility.
Accordingly, amounts classified as current under the terms of the existing
senior credit facility have been reclassified as long-term under the terms of
the 12 3/8% Notes and the New Revolvers.

Borrowings under the Fixed Assets Revolver bear interest, at Chemicals'
option, at an annual rate of either the "LIBOR Rate" (as defined in the New
Credit Agreement) plus 3.75% or the Alternate Base Rate plus 2.25%. Borrowings
under the Current Assets Revolver bear interest, at Chemicals' option, at an
annual rate of either the LIBOR Rate plus 3.00% or the Alternate Base Rate plus
1.50%. The "Alternate Base Rate" is equal to the greater of the Base Rate as
announced from time to time by The Chase Manhattan Bank in New York, New York
or the "Federal Funds Effective Rate" plus 1/2% (as such terms are defined in
the New Credit Agreement.). The New Credit Agreement also requires Chemicals
and the co-borrowers to pay an aggregate commitment fee ranging from 0.75% to
1.25% on the unused portion of the commitment for the Fixed Assets Revolver,
depending on the amount drawn, and an aggregate commitment fee of 0.5% on the
unused portion of the commitment for the Current Assets Revolver. Available
credit under the Current Assets Revolver is subject to a monthly borrowing base
consisting of 85% of eligible accounts receivable and 65% of eligible inventory
with an inventory cap of $42,500,000. In addition, the borrowing base for the
Current Assets Revolver must exceed outstanding borrowings thereunder by
$12,000,000 at all times.

F-10
<PAGE>

STERLING CHEMICALS HOLDINGS, INC.

STERLING CHEMICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited)--(Continued)

The Fixed Assets Revolver matures in five years, with quarterly commitment
reductions totalling 30% of the total commitment in year four and 70% in year
five. The Current Assets Revolver matures in five years, with no scheduled
commitment reductions prior to that time. However, the commitments for each of
the Fixed Assets Revolver and the Current Assets Revolvers will be permanently
reduced to the extent required under the New Credit Agreement upon prepayments
made out of specific sources of funds, including asset sales and certain equity
issuances by Holdings.

The indenture governing the 12 3/8% Notes (the "Indenture") and the New
Credit Agreement contain numerous covenants, including, but not limited to,
restrictions on the ability of Chemicals and certain of its subsidiaries to
incur indebtedness, pay dividends, create liens, sell assets, engage in mergers
and acquisitions and refinance existing indebtedness. In addition, the
Indenture and the New Credit Agreement specify various circumstances that will
constitute, upon occurrence and subject in certain cases to notice and grace
periods, an event of default thereunder. However, neither the Indenture nor the
New Credit Agreement requires the Company to satisfy any financial ratios or
maintenance tests.

The Indenture, the indenture governing the 11 1/4% Notes, the indenture
governing the 11 3/4% Notes, and the New Credit Agreement contain provisions
which restrict the payment of advances, loans and dividends from Chemicals to
Holdings. The most restrictive of the covenants limits such payments during
fiscal 1999 to approximately $2.0 million, plus any amounts due Holdings from
Chemicals under the intercompany tax sharing agreement.

4. Commitments and Contingencies

Product Contracts

The Company has certain long-term agreements that 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
dedicates a significant portion of its acrylonitrile, methanol, and styrene
production under long-term arrangements. Some of these agreements provide for
cost recovery plus an agreed profit margin based upon market prices.

Environmental Regulations

The Company's operations involve the handling, production, transportation,
treatment, and disposal of materials that are classified as hazardous or toxic
waste and that are extensively regulated by environmental and health and safety
laws, regulations, and permit requirements. Environmental permits required for
the Company's operations are subject to periodic renewal and can be revoked or
modified for cause or when new or revised environmental requirements are
implemented. Changing and increasingly strict environmental requirements can
affect the manufacturing, handling, processing, distribution, and use of the
Company's chemical products and the raw materials used to produce such products
and, if so, the Company's business and operations may be materially and
adversely affected. In addition, changes in environmental requirements can
cause the Company to incur substantial costs in upgrading or redesigning its
facilities and processes, including waste treatment, storage, disposal, and
other waste handling practices and equipment.

F-11
<PAGE>

STERLING CHEMICALS HOLDINGS, INC.

STERLING CHEMICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited)--(Continued)

contractors and their employees or the public. Some risk of environmental costs
and liabilities is inherent in the operations and products of the Company, as
it is with other companies engaged in similar businesses. In addition, a
catastrophic event at any of the Company's facilities could result in
liabilities to the Company substantially in excess of its insurance coverages.

Legal Proceedings

Ammonia Release. A description of the ammonia release lawsuits is found
under "Legal Proceedings" in Note 7 of the "Notes to Consolidated Financial
Statements" of the Annual Report and is incorporated herein by reference. As
discussed therein, the Company continues to vigorously defend against the
claims of the approximately 100 remaining plaintiffs. The Company has settled
the claims of a majority of the original plaintiffs and is engaged in ongoing
settlement discussions with the remaining plaintiffs. The Company believes that
all or substantially all of its future out-of-pocket costs and expenses
(including settlement payments and judgements) relating to these lawsuits will
be covered by the Company's liability insurance policies.

Nickel Carbonyl Release. A description of the nickel carbonyl lawsuit is
found under "Legal Proceedings" in Note 7 of the "Notes to Consolidated
Financial Statements" of the Annual Report and is incorporated herein by
reference. As discussed therein, a total of eighteen contractor employees
allegedly exposed to nickel carbonyl have filed a lawsuit against Chemicals
seeking unspecified damages for personal injuries. A majority of these claims
have been settled. Additional claims and litigation against Chemicals relating
to this incident may ensue. The Company believes that all or substantially all
of its future out-of-pocket costs and expenses (including settlement payments
and judgements) relating to these lawsuits will be covered by the Company's
liability insurance policies and/or indemnification from third parties.

Ethylbenzene Release. A description of this release is found under "Legal
Proceedings" in Note 7 of the "Notes to Consolidated Financial Statements" of
the Annual Report and is incorporated herein by reference. There is no lawsuit
pending against the Company based on this release, but the Company has
received, and in some instances resolved, claims from individuals for alleged
damage from this incident. The Company believes that its liability insurance
coverage is sufficient to cover all out-of-pocket costs and expenses stemming
from this incident in excess of its $1 million deductible.

Other Lawsuits. The Company is subject to various other claims and legal
actions that arise in the ordinary course of its business.

Litigation Contingency

The Company has made estimates of the reasonably possible range of liability
with regard to its outstanding litigation for which it may incur any liability.
These estimates are based on the Company'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 contractual indemnification
obligations of third parties to the benefit 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 indemnification arrangements, discussions with its
insurers and indemnitors, and consultation with outside legal counsel, in
addition to the Company's judgments. Based on the foregoing, as of June 30,
1999, the Company has accrued approximately $9.9 million as its estimate of its
aggregate contingent liability for these matters and has also recorded
aggregate receivables from its insurers and third-party indemnitors of
approximately $8.8 million. At June 30, 1999, management estimates that the
aggregate reasonably possible range of loss for all litigation combined, in
addition to the amount accrued, is between zero and $12 million. The Company
believes that this additional reasonably possible loss would be substantially
covered by insurance or indemnification.

F-12
<PAGE>

STERLING CHEMICALS HOLDINGS, INC.

STERLING CHEMICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited)--(Continued)

While the Company has based its estimates on its evaluation of available
information and the other matters described above, much of the litigation
remains in the discovery stage and it is impossible to predict with certainty
the ultimate outcome of such litigation. 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, are not expected to have a material adverse effect on the
financial position, results of operations, or cash flows of the Company.

5. Loss Per Share Calculation

For purposes of computing net loss per common share, net loss has been
reduced by an amount equal to the fair market value of Released Shares (as
hereinafter defined) at the end of the period minus the sum of the amount
previously recognized as compensation expense with respect to Released Shares
and the amount of depreciation/appreciation in value of Released Shares in
prior periods. This reduction results from the Company being required, under
certain circumstances, to purchase for cash common stock distributed to
participants by Chemicals' employee stock ownership plan (the "ESOP").
"Released Shares" are shares held by the ESOP but allocated to employees. The
weighted average number of outstanding shares and computation of the net loss
per common share is as follows (in thousands, except net loss per common
share):

<TABLE>
<CAPTION>
Nine Months Ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss attributable to common stockholders............... $(56,310) $(41,377)
Plus depreciation in value of Released Shares.............. 1,048 505
-------- --------
Net loss for purpose of computing loss per share........... $(55,262) $(40,872)
======== ========
Net loss per common share.................................. $ (4.43) $ (3.40)
======== ========
Weighted average shares outstanding........................ 12,469 12,007
======== ========
</TABLE>

6. Capital Stock

In December 1998, the Company entered into separate Standby Purchase
Agreements (collectively, the "Standby Purchase Agreements") with each of
Gordon A. Cain, William A. McMinn, James Crane, Frank P. Diassi, Frank J.
Hevrdejs and Koch Capital Services, Inc. (collectively, the "Standby
Purchasers"). Pursuant to the terms of the Standby Purchase Agreements, the
Standby Purchasers committed to purchase up to 2.5 million shares of the common
stock, par value $0.01 per share, of Holdings ("Common Stock"), at a price of
$6.00 per share, if, as, and when requested by Holdings at any time or from
time to time prior to December 15, 2001. Under each of the Standby Purchase
Agreements, Holdings may only require the Standby Purchasers to purchase such
shares if it believes that the purchase price paid by the Standby Purchasers
for such shares is necessary to maintain, reestablish, or enhance the Company's
borrowing ability under its revolving credit facilities or to satisfy any
requirement thereunder to raise additional equity. In order to induce the
Standby Purchasers to enter into the Standby Purchase Agreements, Holdings
issued to them warrants to purchase an aggregate of 300,000 shares of Common
Stock at an exercise price of $6.00 per share. In addition, under the terms of
the Standby Purchase Agreements, Holdings agreed to issue to the Standby
Purchasers additional

F-13
<PAGE>

STERLING CHEMICALS HOLDINGS, INC.

STERLING CHEMICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited)--(Continued)

warrants to purchase up to 300,000 additional shares of Common Stock if, as,
and when they purchase shares of Common Stock under the Standby Purchase
Agreements. Any shares of Common Stock purchased under the Standby Purchase
Agreements, any warrants issued to the Standy Purchasers pursuant to the
Standby Purchase Agreements and any shares of Common Stock purchased pursuant
to such warrants will be subject to the terms of the Third Amended and Restated
Voting Agreement dated as of February 1, 1999, the Sterling Chemicals Holdings,
Inc. Stockholders Agreement dated effective as of August 21, 1996, as amended,
the Tag-Along Agreement dated as of August 21, 1996, and the Registration
Rights Agreement dated as of August 21, 1996.

7. Pension Plans and Other Post-retirement Benefits

The Company recorded a net $6.8 million charge, included in Other Expense,
increasing its pension liability and other post-retirement benefits liability
in the second quarter of fiscal 1999, as a result of an early retirement
program for employees at the Texas City, Texas plant and certain benefit
changes for all U.S. employees. The early retirement program resulted in
curtailment expense for the pension plan and special termination benefits
expenses for both the pension and the other post-retirement benefits plans,
partially offset by the curtailment gain from the reduction of post-retirement
life insurance benefits for currently active U.S. employees.

8. New Accounting Standards

As of October 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and displaying of comprehensive net
income and its components. The components of comprehensive net loss, net of
tax, are as follows:

<TABLE>
<CAPTION>
Nine Months Ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss attributable to common stockholders............... $(56,310) $(41,377)
Depreciation in value of Released Shares................... 1,048 505
Change in accumulated translation adjustment............... 4,507 (9,371)
-------- --------
Comprehensive net loss..................................... $(50,755) $(50,243)
======== ========
</TABLE>

SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information", establishes standards for the way that public business
enterprises report information about operating segments in interim and annual
financial statements. SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits", establishes revisions to employers' disclosures
about pension and other post retirement benefit plans. The Company adopted
these statements as of October 1, 1998, and the disclosures required thereby
will be included in Holdings' and Chemicals' combined Annual Report on Form 10-
K for the fiscal year ending September 30, 1999.

SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. The Company is evaluating the disclosures
that will be required when this statement is adopted in the first quarter of
fiscal 2001.

F-14
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

COMBINED BALANCE SHEETS

(Amounts In Thousands)

(Unaudited)

<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
-------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 2,404 $ 4,093
Accounts receivable.................................... 38,772 38,562
Inventories............................................ 31,532 32,532
Prepaid expenses....................................... 10,011 6,090
-------- --------
Total current assets.................................. 82,719 81,277

Property, plant and equipment, net...................... 202,530 207,177
Due from affiliates..................................... 125,941 131,771
Other assets............................................ 41,554 51,635
-------- --------
Total assets.......................................... $452,744 $471,860
======== ========

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable....................................... $ 17,918 $ 20,432
Accrued liabilities.................................... 12,780 16,277
-------- --------
Total current liabilities............................. 30,698 36,709

Long-term debt due to Parent............................ 316,755 323,303
Deferred income taxes................................... 6,829 6,509
Deferred credits and other liabilities.................. 12,000 12,019
Commitments and contingencies (Note 4).................. -- --
Stockholder's equity:
Common stock........................................... -- --
Additional paid-in capital............................. 92,734 92,734
Retained earnings...................................... 20,729 31,399
Accumulated translation adjustment..................... (27,001) (30,813)
-------- --------
Total stockholder's equity............................ 86,462 93,320
-------- --------
Total liabilities and stockholder's equity........... $452,744 $471,860
======== ========
</TABLE>

The accompanying notes are an integral part of the combined financial
statements.

F-15
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

COMBINED STATEMENTS OF OPERATIONS

(Amounts In Thousands)

(Unaudited)

<TABLE>
<CAPTION>
Nine Months Ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues................................................... $152,414 $199,605
Cost of goods sold......................................... 127,010 161,946
-------- --------
Gross profit............................................... 25,404 37,659

Selling, general and administrative expenses............... 14,329 16,176
Other expense.............................................. 682 --
Interest and debt related expenses......................... 25,978 27,650
-------- --------
Net loss before income taxes............................... (15,585) (6,167)
Benefit for income taxes................................... (4,915) (1,670)
-------- --------
Net loss................................................... $(10,670) $ (4,497)
======== ========
</TABLE>

The accompanying notes are an integral part of the combined financial
statements.

F-16
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

COMBINED STATEMENTS OF CASH FLOWS

(Amounts In Thousands)

(Unaudited)

<TABLE>
<CAPTION>
Nine Months
Ended June 30,
-----------------
1999 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(10,670) $(4,497)
Adjustments to reconcile net loss to net cash provided by
Operating activities:
Depreciation and amortization............................. 18,003 17,628
Deferred tax benefit...................................... 206 (3,496)
Other..................................................... (151) 377
Change in assets/liabilities:
Accounts receivable....................................... (210) 10,693
Inventories............................................... 1,000 (3,234)
Prepaid expenses.......................................... (3,921) (3,653)
Due from affiliates....................................... 9,756 3,776
Other assets.............................................. 1,836 62
Accounts payable.......................................... (2,515) 1,556
Accrued liabilities....................................... (3,497) 3,214
Other liabilities......................................... (19) (2,869)
-------- -------

Net cash flows from operating activities.................... 9,818 19,557
-------- -------

Cash flows from investing activities:
Capital expenditures....................................... (5,111) (8,063)
-------- -------

Cash flows from financing activities:
Net change in long-term debt due to Parent................. (6,548) (13,233)
-------- -------

Effect of United States/Canadian exchange rate on cash...... 152 (237)
-------- -------

Net decrease in cash and cash equivalents................... (1,689) (1,976)
Cash and cash equivalents--beginning of year................ 4,093 6,215
-------- -------
Cash and cash equivalents--end of period.................... $ 2,404 $ 4,239
======== =======

Supplement disclosures of cash flow information:
Income tax refunds received................................ $ -- $(3,290)
</TABLE>

The accompanying notes are an integral part of the combined financial
statements.

F-17
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Unaudited)

1. Basis of Presentation

On July 23, 1999, Sterling Chemicals, Inc. ("Chemicals") completed a private
offering of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006 (the
"12 3/8% Notes"). The 12 3/8% Notes are guaranteed by all of Chemicals' existing
direct and indirect United States ("U.S.") subsidiaries (other than Sterling
Chemicals Acquisitions, Inc.) on a joint and several basis and are secured by,
among other things, a second priority pledge of 100% of the stock of these same
U.S. subsidiaries. These U.S. subsidiary companies consist of Sterling Canada,
Inc. and its U.S. subsidiaries, Sterling Chemicals Energy, Inc., Sterling
Chemicals International, Inc., and Sterling Fibers, Inc. The consolidated
financial statements of these companies (except for Sterling Chemicals Energy,
Inc., whose securities do not constitute a substantial portion of the
collateral) have been combined to present the accompanying financial statements
of the Company. Sterling Canada, Inc. (including its U.S. and Canadian
subsidiaries), Sterling Chemicals International, Inc., and Sterling Fibers,
Inc. are hereinafter collectively referred to as the "Company".

The Company manufactures chemicals for use primarily in the pulp and paper
industry at four plants in Canada and one plant in Valdosta, Georgia (the
"Valdosta Plant"), and manufactures acrylic fibers in a plant near Pensacola,
Florida (the "Santa Rosa Plant"). Sodium chlorate is produced at the four
plants in Canada and the Valdosta Plant. Sodium chlorite is produced at one of
the Canadian locations. The Company licenses, engineers, and overseas
construction of large-scale chlorine dioxide generators for the pulp and paper
industry as part of the pulp chemical business. These generators convert sodium
chlorate into chlorine dioxide at pulp mills. The Company produces regular
textiles, specialty textiles, and technical fibers at the Santa Rosa Plant, as
well as licensing the acrylic fibers manufacturing technology to producers
worldwide, collectively the acrylic fibers business or "AFB".

In the opinion of management, the accompanying unaudited combined financial
statements reflect all adjustments necessary to present fairly the combined
financial position of the Company as of June 30, 1999, and its combined results
of operations and cash flows for the nine-month periods ended June 30, 1999 and
1998. 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 combined
financial statements should be, and are assumed to have been, read in
conjunction with the audited combined financial statements of the Company
included in this registration statement. The accompanying combined balance
sheet as of September 30, 1998 has been derived from the Company's audited
combined balance sheet as of September 30, 1998, included in this registration
statement.

2. Inventories

<TABLE>
<CAPTION>
June
30, September 30,
1999 1998
------- -------------
<S> <C> <C>
Inventories consisted of the following (in thousands):
Finished products........................................ $19,445 $20,198
Raw materials............................................ 6,908 2,784
Inventories under exchange agreements.................... 117 34
Stores and supplies...................................... 5,062 9,516
------- -------
$31,532 $32,532
======= =======
</TABLE>

3. Long-Term Debt

As of June 30, 1999 and September 30, 1998, debt allocated to the Company by
Chemicals amounted to $316.8 million and $323.3 million respectively. At June
30, 1999, interest rates ranged from 8.3% to 11.25%.

F-18
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Unaudited)--(Continued)

On July 23, 1999, Chemicals completed a private offering of its 12 3/8%
Senior Secured Notes due 2006 (the "12 3/8% Notes"). The 12 3/8% Notes are
guaranteed by all of Chemicals' existing direct and indirect U.S. subsidiaries
(other than Sterling Chemicals Acquisitions, Inc.) on a joint and several
basis. Each subsidiary's guarantee ranks equally in right of payment with all
of such subsidiary's existing and future senior indebtedness and senior in
right of payment to all existing and future subordinated indebtedness of such
subsidiary. However, the 12 3/8% Notes and each subsidiary's guarantee, is
subordinated to the extent of the collateral securing Chemicals' new secured
revolving credit facilities. The 12 3/8% Notes and the subsidiary guarantees
are secured by (i) a second priority lien on all of Chemicals' U.S. chemical
production facilities and related assets, (ii) a second priority pledge of all
of the capital stock of each subsidiary guarantor, and (iii) a first priority
pledge of 65% of the stock of certain of the Chemicals' subsidiaries
incorporated outside of the United States. The proceeds of the offering of the
12 3/8% Notes were used to fully repay and terminate Chemicals' three
outstanding term loans. Upon consummation of the offering of the 12 3/8% Notes,
the debt allocated to the Company by Chemicals increased to $325.4 million.

4. Commitments and Contingencies

Environmental Regulations

The Company's operations involve the handling, production, transportation,
treatment, and disposal of materials that are classified as hazardous or toxic
waste and that are extensively regulated by environmental and health and safety
laws, regulations, and permit requirements. Environmental permits required for
the Company's operations are subject to periodic renewal and can be revoked or
modified for cause or when new or revised environmental requirements are
implemented. Changing and increasingly strict environmental requirements can
affect the manufacturing, handling, processing, distribution, and use of the
Company's products and the raw materials used to produce such products and, if
so, the Company's business and operations may be materially and adversely
affected. In addition, changes in environmental requirements can cause the
Company to incur substantial costs in upgrading or redesigning its facilities
and processes, including waste treatment, storage, disposal, and other waste
handling practices and equipment.

While the Company believes that its business operations and facilities
generally are operated in compliance in all material respects with all
applicable environmental and health and safety requirements, there can be no
assurance that past practices or future operations will not result in material
claims or regulatory action, require material environmental expenditures, or
result in exposure or injury claims by employees, contractors and their
employees or the public. Some risk of environmental costs and liabilities is
inherent in the operations and products of the Company, as it is with other
companies engaged in similar businesses. In addition, a catastrophic event at
any of the Company's facilities could result in liabilities to the Company
substantially in excess of its insurance coverages.

Any significant ban on all chlorine containing compounds could have a
materially adverse effect on the Company's financial condition and results of
operations. British Columbia has a regulation in place requiring elimination of
the use of all chlorine products, including chlorine dioxide, in the bleaching
process by the year 2002. Chlorine dioxide is produced from sodium chlorate,
which is one of the Company's pulp chemical products. The pulp and paper
industry believes that a ban of chlorine dioxide in the bleaching process will
yield no measurable environmental or public health benefit and is working to
change this regulation but there can be no assurance that the regulation will
be changed. In the event such a regulation is implemented, the Company would
seek to sell the products it manufactures at its British Columbia facility to
customers in other markets. The Company is not aware of any other laws or
regulations in place in North America which would restrict the use of such
products for other purposes.

F-19
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Unaudited)--(Continued)

Legal Proceedings

The Company is subject to various claims and legal actions that arise in the
ordinary course of its business. The Company believes that the ultimate
liability, if any, with respect to these claims and legal actions will not have
a material effect on the financial position or results of operations of the
Company.

5. New Accounting Standards

<TABLE>
<CAPTION>
Nine Months Ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss................................................... $(10,670) $ (4,497)
Change in accumulated translation adjustment............... 3,812 (13,140)
-------- --------
Comprehensive net loss..................................... $ (6,858) $(17,637)
======== ========
</TABLE>

SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", establishes revisions to employers' disclosures about
pension and other post retirement benefit plans. The Company adopted these
statements as of October 1, 1998, and the disclosures required thereby will be
included in the Company's combined annual financial statements for the fiscal
year ending September 30, 1999. SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. The Company is
currently evaluating the accounting impact and disclosures that will be
required when this statement is adopted in the first quarter of fiscal 2001.

F-20
<PAGE>

STERLING PULP CHEMICALS, LTD.

BALANCE SHEETS
(U.S. dollars in thousands)
(unaudited)

<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
-------- -------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents............................. $ 1,779 $ 3,426
Accounts receivable................................... 15,078 14,015
Due from related parties.............................. 3,128 954
Other receivables..................................... 2,195 1,744
Inventories (Note 2).................................. 7,430 6,660
Prepaid expenses...................................... 1,139 592
-------- --------
30,749 27,391
Property, plant and equipment, net...................... 80,189 80,038
Other assets............................................ 944 4,878
-------- --------
$111,882 $112,307
======== ========
LIABILITIES
Current
Accounts payable...................................... $ 10,816 $ 13,400
Accrued generator construction costs.................. 1,010 1,175
Accrued liabilities................................... 5,919 5,213
Due to related parties................................ 13,357 7,400
Current portion of long-term debt..................... 5,500 5,500
-------- --------
36,602 32,688
Note Payable (Note 3)................................... 55,879 53,122
Deferred income taxes................................... 6,829 6,509
Deferred credits and other liabilities.................. 4,197 3,681
-------- --------
103,507 96,000
-------- --------
Stockholder's equity
Common stock.......................................... 1 1
Retained earnings..................................... 16,808 25,296
Accumulated other comprehensive loss.................. (8,434) (8,990)
-------- --------
8,375 16,307
-------- --------
$111,882 $112,307
======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-21
<PAGE>

STERLING PULP CHEMICALS, LTD.

STATEMENTS OF OPERATIONS
(U.S. dollars in thousands)
(unaudited)

<TABLE>
<CAPTION>
Nine Months
Ended
June 30,
----------------
1999 1998
------- -------
<S> <C> <C>
Revenue....................................................... $69,584 $85,807
Cost of goods sold............................................ 53,589 66,670
------- -------
Gross profit.................................................. 15,995 19,137
Selling, general and administrative expenses.................. 11,864 11,010
Interest and debt related expenses............................ 4,157 3,502
------- -------
(26) 4,625
Provision for income taxes.................................... 84 1,740
------- -------
Net (loss) income............................................. $ (110) $ 2,885
======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-22
<PAGE>

STERLING PULP CHEMICALS, LTD.

STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
(unaudited)

<TABLE>
<CAPTION>
Nine Months
Ended
June 30,
-----------------
1999 1998
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income......................................... $ (110) $ 2,885
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization........................... 5,768 5,737
Loss on disposal/write off of assets.................... 40 63
Deferred tax expense/(benefit).......................... 206 (3,496)
Accrued compensation and other.......................... 936 103
Changes in assets/liabilities:
Accounts receivable..................................... (1,063) 3,633
Due from related parties................................ (2,174) 2,580
Other receivables....................................... (451) 6,249
Inventories............................................. (770) (17)
Prepaid expenses........................................ (547) (435)
Other assets--net....................................... 324 1,263
Accounts payables....................................... (2,585) 1,407
Accrued generator construction costs.................... (165) (3,500)
Other accrued liabilities............................... 706 (3,595)
Due to related parties.................................. 5,957 2,895
Other liabilities....................................... 3,952 (1,085)
------- --------
10,024 14,687
------- --------
Cash flows from investing activities:
Capital expenditures...................................... (2,317) (3,522)
------- --------
Cash flows from financing activities:
Distribution to parent.................................... -- (2,062)
Dividends................................................. (8,384) (10,872)
------- --------
(8,384) (12,934)
------- --------
Effect of exchange rate on cash............................. (970) 210
------- --------
Net (decrease) increase in cash and cash equivalents........ (1,647) (1,559)
Cash and cash equivalents, beginning of period.............. 3,426 5,180
------- --------
Cash and cash equivalents, end of period.................... $ 1,779 $ 3,621
======= ========
Supplement disclosures of cash flow information:
Interest paid, net of interest income received............ $ 901 $ 214
Income taxes received..................................... $ -- $ (3,290)
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-23
<PAGE>

STERLING PULP CHEMICALS, LTD.

NOTES TO THE FINANCIAL STATEMENTS--(unaudited)

(U.S. dollars in thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Sterling Pulp Chemicals, Ltd. (the "Company") is a Canadian company which
operates four pulp chemical facilities in Canada. These plants primarily
produce sodium chlorate, a chemical used primarily to make chlorine dioxide,
which in turn is used by pulp mills in the pulp bleaching process. The Company
also oversees construction of large scale chlorine dioxide generators for the
pulp and paper industry. The Company is a wholly-owned subsidiary of Sterling
Canada, Inc. ("Parent"), which is a wholly-owned subsidiary of Sterling
Chemicals, Inc. ("Chemicals").

In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments necessary to present fairly the financial
position of the Company as of June 30, 1999 and its results of operations and
cash flows for the nine-month periods ended June 30, 1999 and 1998. 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 financial statements
should be, and are assumed to have been, read in conjunction with the Company's
annual financial statements included in this registration statement. The
accompanying balance sheet as of September 30, 1998, has been derived from the
Company's audited balance sheet as of September 30, 1998 included in this
registration statement.

2. INVENTORIES

<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
-------- -------------
<S> <C> <C>
Inventories
Finished products................................... $3,840 $3,455
Raw materials....................................... 214 253
------ ------
Inventories at FIFO cost.............................. 4,054 3,708
Inventories under exchange agreements................. 21 78
Stores and supplies................................... 3,355 2,874
------ ------
$7,430 $6,660
====== ======
</TABLE>

3. NOTES PAYABLE

On August 20, 1992, the Company entered into an agreement for a $109,087
demand note facility with Sterling NRO, Ltd (Sterling NRO). Sterling NRO is
also owned by the Parent and is therefore related by virtue of common control.
The note has no scheduled terms of repayment and interest is calculated and
payable monthly in arrears at 1 and 1/2% above the Bank of Nova Scotia prime
rate. All but $5,500 of the note is classified as long-term because Chemicals
has represented that no other repayments will be made before July 1, 2000.
Interest expensed for the nine-month period ended June 30, 1999 and 1998 were
$4,317 and $3,677 respectively.

4. COMMITMENTS AND CONTINGENCIES

Environmental and safety matters

The Company's operations are subject to extensive federal, provincial and
local environmental regulations. The Company may incur significant expenditures
in order to comply with environmental regulations.

F-24
<PAGE>

STERLING PULP CHEMICALS, LTD.

NOTES TO THE FINANCIAL STATEMENTS--(unaudited)--(Continued)

While the Company believes that its business operations and facilities
generally are operated in compliance with all material aspects of applicable
environmental and health and safety laws, regulations, and disclosure
requirements, there can be no assurance that past practices and future
operations will not result in material claims or regulatory action, require
material environmental expenditures, or result in exposure or injury claims by
employees and the public. Some risk of environmental costs and liabilities is
inherent in the operations and products of the Company, as it is with other
companies engaged in similar business. In addition, a catastrophic event at any
of the Company's facilities could result in liabilities to the Company
substantially in excess of its insurance coverages.

Legal proceedings

The Company is subject to claims and legal actions that arise in the
ordinary course of its business. The Company believes that the ultimate
liability, if any, with respect to these claims and legal actions will not have
a material effect on the financial position or results of operations of the
Company.

5. NEW ACCOUNTING STANDARDS

As of October 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes standards for the reporting and displaying of comprehensive net
income and its components. The components of comprehensive net (loss) income,
net of tax, are as follows:

<TABLE>
<CAPTION>
Nine Months Ended
June 30,
------------------
1999 1998
-------- ---------
<S> <C> <C>
Net (loss) income........................................... $ (110) $ 2,885
Change in accumulated translation adjustment................ 556 (2,065)
------- ---------
Comprehensive net income.................................... $ 446 $ 820
======= =========
</TABLE>

SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," establishes revisions to employers' disclosure about
pension and other post retirement benefit plans. The Company adopted this
statement as of October 1, 1998, and the disclosures required thereby will be
included in their annual financial statements for the fiscal year ending
September 30, 1999.

SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Management is currently evaluating the
accounting impact and disclosures required when this statement is adopted in
the first quarter of fiscal 2001.

F-25
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Sterling Chemicals Holdings, Inc.

We have audited the consolidated balance sheets of Sterling Chemicals Holdings,
Inc. and subsidiaries as of September 30, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity
(deficiency in assets) and cash flows for each of the three years in the period
ended September 30, 1998. 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 Holdings, Inc. and subsidiaries as of September 30, 1998 and 1997 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 1998 in conformity with
generally accepted accounting principles.

DELOITTE & TOUCHE LLP

December 4, 1998 (December 17, 1998 as to Notes 4, 11, and 12)
Houston, Texas

F-26
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Stockholder of Sterling Chemicals, Inc.

We have audited the consolidated balance sheets of Sterling Chemicals, Inc. and
subsidiaries as of September 30, 1998 and 1997, and the related consolidated
statements of operations, changes in stockholder's equity (deficiency in
assets) and cash flows for the years ended September 30, 1998 and 1997 and for
the period from May 14, 1996 (date of incorporation) to September 30, 1996.
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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sterling
Chemicals, Inc. and subsidiaries as of September 30, 1998 and 1997 and the
consolidated results of their operations and their cash flows for the years
ended September 30, 1998 and 1997 and for the period from May 14, 1996 (date of
incorporation) to September 30, 1996 in conformity with generally accepted
accounting principles.

DELOITTE & TOUCHE LLP

December 4, 1998 (December 17, 1998 as to Notes 4, 11, and 12)
Houston, Texas

F-27
<PAGE>

STERLING CHEMICALS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars In Thousands Except Per Share Data)

<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues........................................ $822,590 $908,787 $790,465
Cost of goods sold.............................. 732,411 813,148 679,039
-------- -------- --------
Gross profit.................................... 90,179 95,639 111,426
Selling, general and administrative expenses.... 51,427 38,170 40,305
Other expense................................... 5,962 -- --
Merger related expenses......................... -- -- 3,633
Write-off of assets............................. -- -- 3,706
Interest and debt related expenses, net of
interest income................................ 104,455 88,901 13,380
-------- -------- --------
Income (loss) before taxes and extraordinary
item........................................... (71,665) (31,432) 50,402
Provision (benefit) for income taxes............ (25,546) (7,296) 16,898
-------- -------- --------
Income (loss) before extraordinary item......... (46,119) (24,136) 33,504
Extraordinary item, loss on early extinguishment
of debt, net of tax (Note 4)................... -- 3,924 1,900
-------- -------- --------
Net income (loss)............................... (46,119) (28,060) 31,604
Preferred stock dividends....................... 2,460 905 --
-------- -------- --------
Net income (loss) attributable to common
stockholders................................... $(48,579) $(28,965) $ 31,604
======== ======== ========
Per share data:
Income (loss) before extraordinary item....... $ (3.99) $ (2.23) $ 0.66
Extraordinary item............................ -- (0.35) (0.04)
-------- -------- --------
Net income (loss) per common share.............. $ (3.99) $ (2.58) $ 0.62
======== ======== ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-28
<PAGE>

STERLING CHEMICALS HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS
(Amounts In Thousands Except Share Data)

<TABLE>
<CAPTION>
September 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 11,168 $ 7,958
Accounts receivable.................................... 114,571 167,248
Inventories............................................ 73,225 87,870
Prepaid expenses....................................... 15,571 10,956
Deferred income tax benefit............................ 5,140 10,005
--------- ---------
Total current assets................................. 219,675 284,037
Property, plant and equipment, net....................... 450,315 492,036
Other assets............................................. 95,966 102,898
--------- ---------
Total assets......................................... $ 765,956 $ 878,971
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN
ASSETS)
Current liabilities:
Accounts payable....................................... $ 46,983 $ 80,658
Accrued liabilities.................................... 71,873 77,565
Current portion of long-term debt...................... 8,909 5,710
--------- ---------
Total current liabilities............................ 127,765 163,933
Long-term debt........................................... 873,616 876,281
Deferred income tax liability............................ 11,123 36,038
Deferred credits and other liabilities................... 80,289 73,336
Common stock held by ESOP................................ 5,938 7,688
Less: unearned compensation.............................. (2,845) (5,570)
Redeemable preferred stock............................... 18,249 15,793
Commitments and contingencies (Note 7)................... -- --
Stockholders' equity (deficiency in assets):
Common stock, $.01 par value, 20,000,000 shares
authorized, 12,273,000 shares issued and 12,073,000
outstanding at September 30, 1998; and 11,942,000
shares issued and 11,714,000 outstanding at September
30, 1997.............................................. 123 120
Additional paid-in capital............................. (542,701) (542,485)
Retained earnings...................................... 229,590 277,691
Pension adjustment..................................... (121) (31)
Accumulated translation adjustment..................... (32,559) (21,093)
Deferred compensation.................................. (111) --
--------- ---------
(345,779) (285,798)
Treasury stock, at cost, 200,000 and 228,000 shares at
September 30, 1998 and 1997, respectively............. (2,400) (2,730)
--------- ---------
Total stockholders' equity (deficiency in assets).... (348,179) (288,528)
--------- ---------
Total liabilities and stockholders' equity
(deficiency in assets).............................. $ 765,956 $ 878,971
========= =========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-29
<PAGE>

STERLING CHEMICALS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
(Amounts In Thousands)

<TABLE>
<CAPTION>
Additional Accumulated
Common Stock 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,
1995................... 60,327 $ 603 $ 33,269 $275,052 $(1,556) $(17,307) $(129) $(50,614)
Net income.............. -- -- -- 31,604 -- -- -- --
Redemption of common
stock.................. (50,690) (507) (616,892) -- -- -- -- --
Common stock issued in
the 1996
Recapitalization....... 5,349 54 64,084 -- -- -- -- --
Employee stock
purchase............... 250 2 3,000 -- -- -- -- --
Stock warrants.......... -- -- 6,900 -- -- -- -- --
Translation adjustment.. -- -- -- -- -- (1,817) -- --
Treasury stock
transactions........... (4,637) (46) (50,438) -- -- -- -- 50,614
Amortization of deferred
compensation........... -- -- -- -- -- -- 129 --
Pension adjustment...... -- -- -- -- 1,556 -- -- --
------- ----- --------- -------- ------- -------- ----- --------
Balance, September 30,
1996................... 10,599 106 (560,077) 306,656 -- (19,124) -- --
Net loss................ -- -- -- (28,060) -- -- -- --
Common stock issued in
connection with AFB
Acquisition, net....... 778 8 9,331 -- -- -- -- --
Preferred stock
dividends.............. -- -- -- (905) -- -- -- --
Translation adjustment.. -- -- -- -- -- (1,969) -- --
Employee stock
purchase............... (44) -- (531) -- -- -- -- --
Treasury stock
purchases.............. (228) -- -- -- -- -- -- (2,730)
Common stock issued in
connection with the
Saskatoon Acquisition,
net.................... 609 6 6,379 -- -- -- -- --
Stock warrants.......... -- -- 2,413 -- -- -- -- --
Pension adjustment...... -- -- -- -- (31) -- -- --
------- ----- --------- -------- ------- -------- ----- --------
Balance, September 30,
1997................... 11,714 120 (542,485) 277,691 (31) (21,093) -- (2,730)
Net loss................ -- -- -- (46,119) -- -- -- --
Common stock issued in
connection with the
exercise of warrants... 345 3 -- -- -- -- -- --
Preferred stock
dividends.............. -- -- -- (2,460) -- -- -- --
Treasury shares issued
as restricted stock.... 23 -- (48) -- -- -- (222) 270
Treasury shares issued
to ESOP................ -- -- (168) -- -- -- -- 168
Revaluation of ESOP
shares to independently
appraised market
value.................. -- -- -- 478 -- -- -- --
Amortization of deferred
compensation........... -- -- -- -- -- -- 111 --
Translation adjustment.. -- -- -- -- -- (11,466) -- --
Treasury stock
purchases.............. (9) -- -- -- -- -- -- (108)
Pension adjustment...... -- -- -- -- (90) -- -- --
------- ----- --------- -------- ------- -------- ----- --------
Balance, September 30,
1998................... 12,073 $ 123 $(542,701) $229,590 $ (121) $(32,559) $(111) $ (2,400)
======= ===== ========= ======== ======= ======== ===== ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-30
<PAGE>

STERLING CHEMICALS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)

<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................ $(46,119) $ (28,060) $ 31,604
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.............. 55,963 49,849 41,539
Interest amortization...................... 4,376 4,163 1,163
Loss on disposal/write off of assets....... 353 241 3,706
Extraordinary item......................... -- 3,924 1,900
Deferred tax expense (benefit)............. (14,877) 2,866 4,172
Accrued compensation including SARs........ -- -- 8,984
Merger related expenses.................... -- -- 3,633
Discount notes amortization................ 16,878 15,499 1,656
Other...................................... 1,467 2,087 (3,766)
Change in assets/liabilities:
Accounts receivable........................ 44,419 (8,985) (18,297)
Inventories................................ 13,675 (6,674) 14,147
Prepaid expenses........................... (2,852) (7,767) (5,173)
Other assets............................... 654 (1,754) (8,900)
Accounts payable........................... (32,896) (1,424) (5,454)
Accrued liabilities........................ (9,300) 27,305 (7,018)
Other liabilities.......................... 14,143 (3,956) (295)
-------- --------- ---------
Net cash provided by operating activities...... 45,884 47,314 63,601
-------- --------- ---------
Cash flows from investing activities:
Capital expenditures......................... (26,622) (43,428) (95,957)
Business acquisitions........................ -- (152,923) --
-------- --------- ---------
Net cash used in investing activities.......... (26,622) (196,351) (95,957)
-------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt................. 59,862 375,260 800,350
Repayment of long-term debt.................. (75,152) (236,104) (196,285)
Redemption of common stock................... -- -- (616,160)
Purchase of other equity interests........... -- -- (14,587)
Issuance of common stock, net................ 3 18,721 64,040
Sale of warrants............................. -- 2,413 6,900
Debt issuance costs.......................... -- (9,684) (33,070)
Other merger fees............................ -- -- (3,709)
Issuance of preferred stock.................. -- 4,887 --
Purchase of treasury stock................... (105) (3,256) --
Other........................................ 154 (627) (289)
-------- --------- ---------
Net cash provided by (used in) financing
activities.................................... (15,238) 151,610 7,190
Effect of United States /Canadian exchange rate
on cash....................................... (814) (224) (107)
-------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................... 3,210 2,349 (25,273)
Cash and cash equivalents--beginning of year... 7,958 5,609 30,882
-------- --------- ---------
Cash and cash equivalents--end of year......... $ 11,168 $ 7,958 $ 5,609
======== ========= =========
Supplement disclosures of cash flow
information:
Interest paid, net of interest income
received.................................... $(80,223) $ (60,387) $ (8,378)
Income taxes received (paid)................. 6,653 3,116 (15,618)
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-31
<PAGE>

STERLING CHEMICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars In Thousands)

<TABLE>
<CAPTION>
Year Ended
September 30, May 14, 1996
------------------ (Date of Inception)
1998 1997 to September 30, 1996 (1)
-------- -------- -------------------------
<S> <C> <C> <C>
Revenues......................... $822,590 $908,787 $83,410
Cost of goods sold............... 732,411 813,148 83,047
-------- -------- -------
Gross profit..................... 90,179 95,639 363
Selling, general and
administrative expenses......... 50,231 37,475 3,426
Other expense.................... 5,962 -- --
Interest and debt related
expenses........................ 86,618 72,931 1,615
Interest income from parent...... -- (1,692) (5,236)
-------- -------- -------
Income (loss) before taxes and
extraordinary item.............. (52,632) (13,075) 558
Provision (benefit) for income
taxes........................... (18,963) (2,148) 384
-------- -------- -------
Income (loss) before
extraordinary item.............. (33,669) (10,927) 174
Extraordinary item, loss on early
extinguishment of debt, net of
tax (Note 4).................... -- 3,924 --
-------- -------- -------
Net income (loss)................ $(33,669) $(14,851) $ 174
======== ======== =======
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for a discussion
of merger activities and related financing. Prior to August 21, 1996,
Chemicals had no operating activities, other than those related to merger
activities.

The accompanying notes are an integral part of the consolidated financial
statements.

F-32
<PAGE>

STERLING CHEMICALS, INC.

CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands Except Share Data)

<TABLE>
<CAPTION>
September 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 11,159 $ 7,958
Accounts receivable.................................... 116,398 167,898
Inventories............................................ 73,225 87,870
Prepaid expenses....................................... 13,632 10,031
Deferred income tax benefit............................ 5,140 10,005
--------- ---------
Total current assets................................. 219,554 283,762
Property, plant and equipment, net..................... 450,315 492,036
Other assets........................................... 92,634 99,519
--------- ---------
Total assets......................................... $ 762,503 $ 875,317
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN
ASSETS)
Current liabilities:
Accounts payable....................................... $ 46,764 $ 80,658
Accrued liabilities.................................... 71,873 77,565
Current portion of long-term debt...................... 8,909 5,710
--------- ---------
Total current liabilities............................ 127,546 163,933
Long-term debt........................................... 745,720 768,870
Deferred income tax liability............................ 23,301 42,646
Deferred credits and other liabilities................... 83,288 73,337
Common stock held by ESOP................................ 5,938 7,688
Less: unearned compensation.............................. (2,845) (5,570)
Commitments and contingencies............................ --
Stockholder's equity (deficiency in assets):
Common stock, $.01 par value........................... -- --
Additional paid-in capital............................. (139,786) (139,786)
Accumulated deficit.................................... (47,868) (14,677)
Pension adjustment..................................... (121) (31)
Accumulated translation adjustment..................... (32,559) (21,093)
Deferred Compensation.................................. (111) --
--------- ---------
Total stockholder's equity (deficiency in assets).... (220,445) (175,587)
--------- ---------
Total liabilities and stockholder's equity
(deficiency in assets).............................. $ 762,503 $ 875,317
========= =========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-33
<PAGE>

STERLING CHEMICALS, INC.

CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
(Dollars In Thousands)

<TABLE>
<CAPTION>
Common Stock Additional Accumulated
------------- Paid-In Accumulated Pension Deferred Translation
Shares Amount Capital Deficit Adjustment Compensation Adjustment
------ ------ ---------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, May 14,1996.... $-- $-- $ -- $ -- $ -- $ -- $ --
Common stock issued..... 1 -- 1 -- -- -- --
Capital transfer, net... -- -- (165,353) -- (1,556) -- (20,194)
Net income.............. -- -- -- 174 -- -- --
Pension adjustment...... -- -- -- -- 1,556 -- --
Translation adjustment.. -- -- -- -- -- -- 1,070
---- ---- --------- -------- ------- ----- --------
Balance, September 30,
1996................... 1 -- (165,352) 174 -- -- (19,124)
Contribution from
parent................. -- -- 27,684 -- -- -- --
Net loss................ -- -- -- (14,851) -- -- --
Pension adjustment...... -- -- -- -- (31) -- --
Earned ESOP shares...... -- -- (2,118) -- -- -- --
Translation adjustment.. -- -- -- -- -- -- (1,969)
---- ---- --------- -------- ------- ----- --------
Balance, September 30,
1997................... 1 -- (139,786) (14,677) (31) -- (21,093)
Net loss................ -- -- (33,669) -- -- --
Pension adjustment...... -- -- -- (90) -- --
Establishment of
restricted stock....... -- -- -- -- -- (222) --
Revaluation of ESOP
shares to independently
appraised market
value.................. -- -- -- 478 -- -- --
Amortization of deferred
compensation........... -- -- -- -- -- 111 --
Translation adjustment.. -- -- -- -- -- (11,466)
---- ---- --------- -------- ------- ----- --------
Balance, September 30,
1998................... 1 $-- $(139,786) $(47,868) $ (121) $(111) $(32,559)
==== ==== ========= ======== ======= ===== ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-34
<PAGE>

STERLING CHEMICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)

<TABLE>
<CAPTION>
Year Ended May 14, 1996
September 30, (Date of Inception)
------------------- to September 30,
1998 1997 1996 (1)
-------- --------- -------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................... $(33,669) $ (14,851) $ 174
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization..... 59,151 53,680 4,801
Deferred tax expense (benefit).... (10,771) 7,847 1,457
Extraordinary item................ -- 3,924 --
Other............................. 2,020 2,173 (511)
Change in assets/liabilities:
Accounts receivable............... 45,484 (13,510) 164
Inventories....................... 13,675 (6,674) (468)
Prepaid expenses.................. (1,838) (5,733) (2,428)
Other assets...................... 2,078 (2,271) 784
Accounts payable.................. (35,102) (1,288) 7,025
Accrued liabilities............... (3,441) 27,218 (4,460)
Other liabilities................. 8,288 (3,941) (2,294)
-------- --------- ---------
Net cash provided by operating
activities........................... 45,875 46,574 4,244
-------- --------- ---------
Cash flows from investing activities:
Capital expenditures................ (26,623) (43,428) (6,398)
Business acquisitions............... -- (152,923) --
-------- --------- ---------
Net cash used in investing
activities........................... (26,623) (196,351) (6,398)
-------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt........ 59,862 375,260 637,900
Repayment of long-term debt......... (75,153) (236,104) (6,400)
Debt issuance costs................. -- (9,684) (27,939)
Intercompany financing.............. 1 3,000 --
Distribution to parent.............. -- -- (609,961)
Contribution from parent............ -- 22,286 14,165
Other............................... 54 (2,380) --
-------- --------- ---------
Net cash provided by (used in)
financing activities................. (15,236) 152,378 7,765
Effect of United States /Canadian
exchange rate on cash................ (815) (224) (30)
-------- --------- ---------
Net increase in cash and cash
equivalents.......................... 3,201 2,377 5,581
Cash and cash equivalents--beginning
of period............................ 7,958 5,581 --
-------- --------- ---------
Cash and cash equivalents--end of
year................................. $ 11,159 $ 7,958 $ 5,581
======== ========= =========
Supplement disclosures of cash flow
information:
Interest paid, net of interest
income received.................... $(80,251) $ (60,402) $ (2,655)
Income taxes received (paid)........ 6,653 3,116 (4,950)
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for a discussion
of merger activities and related financing. Prior to August 21, 1996,
Chemicals had no operating activities, other than those related to merger
activities.

The accompanying notes are an integral part of the consolidated financial
statements.

F-35
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. MERGER ACTIVITIES

Sterling Chemicals, Inc. (prior to the Merger, "Sterling") and STX
Acquisition Corp. ("STX Acquisition"), 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"), entered into an Amended and Restated
Agreement and Plan of Merger dated April 24, 1996 (the "Merger Agreement"). On
August 20, 1996, the Merger Agreement was approved by a majority of the shares
outstanding, and on August 21, 1996, STX Acquisition merged with and into
Sterling, changing its name to Sterling Chemicals Holdings, Inc. ("Holdings"),
and continuing as the surviving corporation (the "Merger"). In connection with
the Merger, Holdings transferred all of its operating assets and liabilities,
excluding its 13 1/2% Senior Discount Notes due 2008 (the "13 1/2% Notes"), to
a wholly owned subsidiary, STX Chemicals Corp., which at the time of the Merger
changed its name to Sterling Chemicals, Inc. (after the Merger, "Chemicals").
Holdings has no direct subsidiaries other than Chemicals. As used in these
notes, the term "Company" refers to Sterling and its subsidiaries prior to the
consummation of the Merger and, following the Merger, to Holdings and its
subsidiaries, including Chemicals.

Each share of the Company's common stock outstanding immediately prior to
the Merger was converted (at the election of the holder thereof) into either
$12.00 cash or the right to retain such shares ("Rollover Shares"), with the
aggregate number of Rollover Shares limited to 5.0 million. As a result of the
Merger, on August 21, 1996, the former STX Acquisition stockholders held
approximately 5.3 million shares (49%), stockholders with Rollover Shares held
approximately 5.0 million shares (46%), and the Company's newly formed Employee
Stock Ownership Plan (the "ESOP") held approximately 542,000 shares (5%) of the
outstanding common shares of Holdings' common stock, par value $0.01 per share
("Holdings Common Stock").

The Merger was financed by the proceeds of (i) bank term loans of $356.5
million, including an ESOP term loan of $6.5 million, amounts drawn against a
revolving credit facility of $6.4 million, each pursuant to a new credit
agreement (the "Original Credit Agreement"), (ii) an offering by Chemicals of
$275.0 million of Chemicals' 11 3/4% Senior Subordinated Notes Due 2006 (the
"11 3/4% Notes"), (iii) an offering of $191.8 million (initial proceeds of $100
million) representing 191,751 Units, with each unit consisting of one 13 1/2%
Note and one warrant to purchase three shares of Holdings Common Stock for
$0.01 per share beginning in August 1997, (iv) equity raised by STX Acquisition
of approximately $70.7 million, and (v) cash on hand of $10.3 million. These
proceeds were used to redeem Sterling's common stock other than Rollover Shares
($608.3 million), purchase other equity interests (primarily stock appreciation
rights ("SARs")) ($14.6 million), repay debt outstanding prior to the Merger
($142.7 million), loan monies to the new ESOP ($6.5 million), and pay fees and
expenses ($46.8 million).

The Company has accounted for the Merger and related financing (collectively
the "1996 Recapitalization") as a series of debt and equity transactions
representing a recapitalization. Accordingly, the historical basis of the
Company's assets and liabilities have not been impacted by the 1996
Recapitalization.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company manufactures seven commodity petrochemicals at its Texas City,
Texas plant (the "Texas City Plant"). Additionally, the Company manufactures
chemicals for use primarily in the pulp and paper industry at five plants in
Canada and one plant in Valdosta, Georgia (the "Valdosta Plant"), and
manufactures acrylic fibers in a plant near Pensacola, Florida (the "Santa Rosa
Plant"). At its Texas City Plant, the Company produces styrene, acrylonitrile,
acetic acid, plasticizers, methanol, tertiary butylamine ("TBA"), and sodium
cyanide. The Company generally sells its petrochemical products to customers
for use in the manufacture of other chemicals and products, which in turn are
used in the production of a wide array of consumer goods and industrial
products. The Company produces regular textiles, specialty textiles, and

F-36
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

technical fibers at the Santa Rosa Plant, as well as licensing the acrylic
fibers manufacturing technology to producers worldwide. Sodium chlorate is
produced at the five plants in Canada and the Valdosta Plant. Sodium chlorite
is produced at one of the Canadian locations. In addition, chlor-alkali and
calcium hypochlorite are produced at one of the Canadian locations. The Company
licenses, engineers, and overseas construction of large-scale chlorine dioxide
generators for the pulp and paper industry as part of the pulp chemical
business. These generators convert sodium chlorate into chlorine dioxide at
pulp mills.

The significant accounting policies of the Company are described below.

Principles of Consolidation

The consolidated financial statements include the accounts of all wholly
owned and majority-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated. The Company's investment in a
cogeneration joint venture of a 50% equity interest and a 50/50 acrylonitrile
marketing joint venture are accounted for under the equity method with the
Company's share of the operating results of the joint ventures recorded in its
Statement of Operations.

Cash Equivalents

The Company considers all investments purchased with a remaining 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 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 1998, 1997, and 1996
was $0.8 million, $3.8 million, and $4.1 million, respectively.

Impairment of Long-Lived Assets

Impairment tests of long lived assets are made when conditions indicate
their carrying cost may not be recoverable. Such impairment tests are based on
a comparison of undiscounted future cash flows or the market value of similar
assets to the carrying cost of the asset. If an impairment is indicated, the
asset value is written down to its estimated fair value.

F-37
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 fiscal 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
effective interest method and are included in other assets.

Income Taxes

Deferred income taxes are recorded to reflect the tax effect of the
temporary differences between the financial reporting basis and the tax basis
of the Company's assets and liabilities at enacted rates.

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. Deferred credits are amortized over the life of
the contract which gave rise to them. The Company also generates revenues from
the construction and sale of chlorine dioxide generators, which are recognized
using the percentage of completion method. The Company also receives prepaid
royalties, which are recognized over a period, which is typically ten years. In
addition, the Company generates revenues from the sale of acrylic fibers
manufacturing technology to producers worldwide, which are recognized as
earned.

Foreign Exchange

Assets and liabilities denominated in Canadian dollars are translated into
United States 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.

Hedging

The Company periodically enters into contracts to hedge against the
volatility in natural gas prices, which is used in the production of styrene
and methanol. These transactions generally take the form of price collars, and
are placed with major financial institutions and industrial companies. The
results of the hedging transactions are included in Cost of Goods Sold as the
related production of styrene and methanol occurs.

F-38
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Earnings Per Share

Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", establishes standards for computing and presenting earnings per share
("EPS") and replaces the presentation of primary EPS previously prescribed with
a presentation of basic EPS, which is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. The statement also requires presentation of diluted EPS.
Diluted EPS is computed similarly to fully diluted EPS pursuant to Accounting
Principles Board Opinion No. 15. The Company adopted SFAS No. 128 for fiscal
1998 and has restated prior year amounts to reflect adoption of the new
standard. As losses were incurred in fiscal 1998 and 1997 and there were an
insignificant number of options outstanding during fiscal 1996, basic and
diluted EPS are the same amount for these periods.

For purposes of computing net income (loss) per common share, net income
(loss) has been reduced by an amount equal to the fair market value of Released
Shares (as hereinafter defined) at the end of the period, minus the sum of the
amount previously recognized as compensation expense with respect to Released
Shares and the amount of depreciation/appreciation in value of Released Shares
in prior periods. This reduction results from the Company being required, under
certain circumstances, to purchase for cash common stock distributed to
participants by the ESOP. "Released Shares" are shares held by the ESOP but
allocated to employees. The weighted average number of outstanding shares and
computation of the net income (loss) per common share is as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Net income (loss) attributable to common
stockholders............................... $(48,579) $(28,965) $31,604
Plus depreciation in value of Released
Shares..................................... 298 -- --
-------- -------- -------
Net income (loss) for purpose of computing
net income (loss) per share................ $(48,281) $(28,965) $31,604
======== ======== =======
Net income (loss) per common share.......... $ (3.99) $ (2.58) $ 0.62
======== ======== =======
Weighted average shares outstanding......... 12,104 11,237 50,700
======== ======== =======
</TABLE>

Cash Flow Statement

During the fourth quarter of fiscal 1998, the Company elected to change from
the direct method of reporting net cash flows from operating activities to the
indirect method. Accordingly, the prior years statements of cash flows have
been conformed to the current year presentation.

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.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable, and the cost can be reasonably estimated.

Disclosures About Fair Value of Financial Instruments

F-39
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

values of long-term debt instruments are estimated based upon quoted market
values (if applicable) or on the current interest rates available to the
Company for debt with similar terms and remaining maturities. Considerable
judgment is required in developing these estimates and, accordingly, no
assurance can be given that the estimated values presented herein are
indicative of the amounts that would be realized in a free market exchange.

Accounting Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported periods. Significant estimates include environmental reserves,
litigation contingencies, maintenance costs related to shut downs, taxes, and
revenues. Actual results could differ from these estimates.

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
(deficiency in assets).

3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

<TABLE>
<CAPTION>
September 30,
--------------------
1998 1997
--------- ---------
(Dollars in
Thousands)
<S> <C> <C>
Inventories:
Finished products....................................... $ 42,436 $ 47,572
Raw materials........................................... 8,089 17,800
--------- ---------
Inventories at FIFO cost.................................. 50,525 65,372
--------- ---------
Inventories under exchange agreements................... 3,031 2,179
Stores and supplies..................................... 19,669 20,319
--------- ---------
$ 73,225 $ 87,870
========= =========
Property, plant and equipment:
Land.................................................... $ 12,897 $ 12,766
Buildings............................................... 51,362 51,032
Plant and equipment..................................... 652,872 634,772
Construction in progress................................ 30,506 43,856
Less: accumulated depreciation.......................... (297,322) (250,390)
--------- ---------
$ 450,315 $ 492,036
========= =========
Other assets:
Patents and technology, net............................. $ 26,821 $ 32,918
Debt issue costs........................................ 28,248 32,472
Other................................................... 40,897 37,508
--------- ---------
$ 95,966 $ 102,898
========= =========
</TABLE>

F-40
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
September 30,
---------------
1998 1997
------- -------
(Dollars in
Thousands)
<S> <C> <C>
Accrued liabilities:
Repairs...................................................... $16,890 $19,205
Interest..................................................... 14,433 14,661
Property taxes............................................... 7,754 8,255
Other........................................................ 32,796 35,444
------- -------
$71,873 $77,565
======= =======
Deferred credits and other liabilities:
Deferred revenue............................................. $15,168 $19,963
Accrued postretirement benefits.............................. 37,663 33,448
Other........................................................ 27,458 19,925
------- -------
$80,289 $73,336
======= =======
</TABLE>

4. LONG-TERM DEBT:

Long-term debt consisted of the following:

<TABLE>
<CAPTION>
September 30,
------------------
1998 1997
-------- --------
(Dollars in
Thousands)
<S> <C> <C>
Revolving credit facilities........................... $ -- $ 9,400
Term loans............................................ 274,000 275,334
Saskatoon term loans.................................. 49,552 53,822
ESOP term loan........................................ 3,250 4,875
11 1/4% notes......................................... 152,816 153,148
11 3/4% notes......................................... 275,000 275,000
13 1/2% notes......................................... 127,907 110,412
-------- --------
Total debt outstanding............................ 882,525 881,991
======== ========
Less:
Current maturities.................................. (8,909) (5,710)
-------- --------
Total long-term debt.............................. $873,616 $876,281
======== ========
</TABLE>

Term Loans, Revolver and ESOP Loans

As part of the 1996 Recapitalization, Chemicals entered into the Original
Credit Agreement with Texas Commerce Bank National Association (now Chase Bank
of Texas, N.A., "Chase"), as agent bank for a syndicate of lenders. Funding
under the Original Credit Agreement occurred August 21, 1996, upon the
consummation of the Merger. The Original Credit Agreement provided for
facilities consisting of a six and one-half year revolving credit facility
providing for up to $100 million (subject to a monthly borrowing base
calculation) in revolving loans (the "Revolver"), a term loan facility
consisting of a six and one-half year $200 million Tranche A term loan and an
eight-year $150 million Tranche B term loan (the "Original Term Loans"), and a
four-year $6.5 million ESOP Term Loan (the "ESOP Loan").

On January 31, 1997, the Company acquired (the "AFB Acquisition") the
acrylic fibers business (the "AFB") of Cytec Industries Inc. ("Cytec") (see
Note 8). In connection with the AFB Acquisition, Chemicals

F-41
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

entered into a credit agreement (the "Fibers Credit Agreement") with Chase, as
agent bank for a syndicate of lenders. Funding under the Fibers Credit
Agreement occurred January 31, 1997, upon consummation of the AFB Acquisition.
The Fibers Credit Agreement provided for a term loan facility consisting of a
$31 million Tranche A term loan due June 30, 2003 and a $50 million Tranche B
term loan due September 30, 2004 (the "Fibers Term Loans").

On April 7, 1997, Chemicals completed a private offering (the "11 1/4% Notes
Offering") of $150,000,000 of 11 1/4% Senior Subordinated Notes Due 2007 (the
"11 1/4% Notes"). The 11 1/4% Notes are unsecured senior subordinated
obligations of Chemicals, ranking subordinate in right of payment to all
existing and future senior debt of Chemicals, but pari passu with the 11 3/4%
Notes and all future senior subordinated indebtedness. On July 7, 1997,
Chemicals completed a registered exchange offer, pursuant to which all of the
11 1/4% Notes were exchanged for publicly registered 11 1/4% Notes with
substantially similar terms.

The proceeds of the 11 1/4% Notes Offering were used to prepay outstanding
indebtedness under the Original Term Loans. In connection with such
prepayments, Chemicals and the requisite lenders under the Original Credit
Agreement and the Fibers Credit Agreement effected amendments to such
agreements (the "Amendments"). Among other things, the Amendments: (i)
permitted and provided for the issuance of the 11 1/4% Notes, (ii) adjusted the
method of the application of voluntary prepayments to allow the proceeds of the
11 1/4% Notes Offering to be applied in a manner that significantly reduced
required principal payments, particularly over the next three years, (iii)
amended certain financial covenants to make them somewhat less restrictive,
(iv) increased the commitment under the Revolver by $25 million to $125
million, and (v) included a new financial covenant with respect to the
maintenance of a specified Senior Debt Leverage Ratio (as defined in the
Amendments). Unamortized debt issue costs related to the Original Term Loans of
approximately $6.0 million pre-tax, $3.9 million after-tax, were expensed in
April 1997, and recorded as an extraordinary loss from early extinguishment of
debt.

In connection with the acquisition of substantially all of the assets of
Saskatoon Chemicals Ltd., a subsidiary of Weyerhauser Canada Ltd., the Company
consolidated and combined the Original Credit Agreement and the Fibers Credit
Agreement (as consolidated, the "Credit Agreement"), as well as the Original
Term Loans and the Fibers Term Loans (as consolidated, the "Term Loans").

The Term Loans, the ESOP Loan, and the Revolver borrowings bear interest, at
Chemicals' option, at an annual rate of either the Eurodollar Rate or the Base
Rate plus an Applicable Margin ranging from 0.5% to 3.5% depending upon the
Company's Leverage Ratio (as defined in the Credit Agreement). The "Base Rate"
is equal to the greater of the Prime Rate as announced from time to time by the
agent bank, the "Federal Funds Effective Rate" plus 1/2% or the "Base CD Rate"
plus 1% (as such terms are defined in the Credit Agreement). At September 30,
1998, the interest rates in effect for the Tranche A term loan, the Tranche B
term loan, and the ESOP Loan were 7.8%, 8.3%, and 7.8%, respectively. The
Credit Agreement also requires Chemicals to pay a commitment fee in the amounts
of 3/8% or 1/2% of the unused commitment under the Revolver depending on the
Company's Leverage Ratio.

The Credit Agreement requires the principal amount of the Term Loans to be
amortized in quarterly installments of $333,333 beginning with the fiscal
quarter ending September 30, 1997, increasing in March 2000. The ESOP Loan will
be amortized in 12 equal quarterly installments of $406,250, with the last
payment in September 2000.

Chemicals' obligations under the Credit Agreement are 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 and its subsidiaries, including without
limitation, accounts receivable,

F-42
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

inventory, intangibles and fixed assets, and assignments of certain material
leases, licenses, and contracts. In addition, the Credit Agreement is secured
by a pledge by Holdings of all of the capital stock of Chemicals.

The Credit Agreement contains numerous financial and operating covenants,
including, but not limited to, restrictions on Chemicals' ability to incur
indebtedness (including future borrowings under the Revolver), pay dividends,
create liens, sell assets, engage in mergers and acquisitions, and refinance
existing indebtedness. The Credit Agreement also requires Chemicals to satisfy
certain financial covenants and tests. In addition, the Credit Agreement
includes various circumstances that will constitute, upon occurrence and
subject in certain cases to notice and grace periods, an event of default
thereunder.

During April and December 1998, the Company obtained certain amendments to
the financial covenants in the Credit Agreement. At no time was the Company not
in compliance with the covenants. The Company requested the amendments based on
its revised financial projections, and the amendments made the financial
covenants less restrictive through December 31, 1999. Under certain
circumstances, the amendments require the Company to raise up to $15 million in
additional stockholders' equity. As discussed in Note 12, the Company has made
provisions for such equity.

On July 10, 1997, Sterling Pulp Chemicals (Sask) Ltd. ("Sterling Sask"), an
indirect wholly owned subsidiary of Holdings and Chemicals, acquired
substantially all of the assets of Saskatoon Chemicals Ltd. ("Saskatoon
Chemicals"), a subsidiary of Weyerhauser Canada Ltd. (the "Saskatoon
Acquisition"). In connection with the Saskatoon Acquisition, Sterling Sask
entered into a credit agreement (the "Saskatoon Credit Agreement") with The
Chase Manhattan Bank of Canada, individually and as administrative agent.
Funding under the Saskatoon Credit Agreement occurred July 10, 1997, upon
consummation of the Saskatoon Acquisition. The Saskatoon Credit Agreement
provides for a revolving credit facility of Cdn. $8.0 million (the "Saskatoon
Revolver"), and a term loan facility consisting of Cdn. $21.2 million Tranche A
term loan due June 30, 2003, and $36.4 million Tranche B term loan due June 30,
2005 (the "Saskatoon Term Loans"). Advances under the Saskatoon Revolver are
subject to a borrowing base consisting of 85% of eligible accounts receivable
and 65% of eligible inventory with an inventory cap of 50% of the borrowing
base. At September 30, 1998, the borrowing base did not limit such available
credit and there were no borrowings outstanding under the Saskatoon Revolver.
Sterling Sasks' obligations under the Saskatoon Credit Agreement are secured by
substantially all of the assets of Sterling Sask. The Saskatoon Credit
Agreement requires Sterling Sask to satisfy certain financial covenants and
tests. In addition, the Saskatoon Credit Agreement requires that certain
amounts of Excess Cash Flow (as defined therein) be used to prepay amounts
outstanding under the Saskatoon Term Loans. A mandatory prepayment of Cdn. $5.3
million will be required in fiscal 1999.

The Sterling Sask Tranche A term loan and the Saskatoon Revolver borrowings
bear interest, at the Company's option, at an annual rate of either the Bankers
Acceptance Rate or the Base Rate plus an Applicable Margin ranging from 1% to
2.5% depending upon the Company's Leverage Ratio (as defined in the Saskatoon
Credit Agreement). The Tranche B term loan bears interest, at the Company's
option, at an annual rate of either the Eurodollar Rate or the Base Rate plus
an Applicable Margin ranging from 0% to 2.5% depending upon the Company's
Leverage Ratio (as defined in the Saskatoon Credit Agreement). The "Base Rate"
for the Tranche A term loan and the Saskatoon Revolver is equal to the greater
of the Prime Rate for Canadian Dollar commercial loans made in Canada, as
announced from time to time by the agent bank, or the rate for Canadian Dollar
Bankers Acceptances accepted by the agent with a term to maturity of 30 days
plus 1% (as such terms are defined in the Saskatoon Credit Agreement). The
"Base Rate" for the Tranche B term loan is equal to the greater of the Prime
Rate as announced from time to time by the agent bank, the "Federal Funds
Effective Rate" plus 1/2% or the "Base CD Rate" plus 1% (as such terms are
defined in the Saskatoon Credit Agreement). At September 30, 1998, the interest
rates in effect for the Tranche A and Tranche B term loans were 8.12% and 8.4%,
respectively. The Saskatoon Credit Agreement also requires Sterling Sask to pay
a commitment fee in the amount of 1/2% of the unused commitment under the
Saskatoon Revolver.

F-43
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

At September 30, 1998, Chemicals had indebtedness of $274.0 million under
the Term Loans, $49.6 million under the Saskatoon Term Loans, and $3.3 million
under the ESOP Loan. The Revolver has a total commitment of $125 million. The
Revolver matures at March 31, 2003. As of September 30, 1998, the Company had
no amounts drawn and approximately $2.7 million in letters of credit
outstanding under the Revolver. Available credit under the Revolver for loans
and letters of credit is subject to a monthly borrowing base consisting of 85%
of eligible accounts receivable and 65% of eligible inventory with an inventory
cap of 50% of the borrowing base. At September 30, 1998, the borrowing base
limited the total credit available under the Revolver to a maximum of $120.9
million. Accordingly and after giving effect to the $2.7 million of outstanding
letters of credit, as of September 30, 1998, the unused credit available under
the Revolver was $118.2 million, up from $113 million at September 30, 1997.
Availability of credit under the Revolver is subject to Chemicals being in
compliance with numerous financial and operational covenants contained in the
Credit Agreement. At September 30, 1998, Chemicals was in compliance with such
covenants. The failure of Chemicals to comply with these covenants would permit
the lenders to accelerate the maturity of the indebtedness under the Credit
Agreement and exercise other remedies, in each case without the approval of
Chemicals. In addition, based on the Company's results of operations for the
four quarters ended September 30, 1998, these covenants operate to limit the
amount of additional debt (including amounts available under the Revolver) that
may be incurred by the Company.

Discount Notes and Subordinated Notes

As part of the 1996 Recapitalization, Chemicals also issued the 11 3/4%
Notes and Holdings issued $191.8 million ($100 million initial proceeds)
representing 191,751 Units, with each Unit consisting of one 13 1/2% Note and
one warrant to purchase three shares of Holdings Common Stock for $.01 per
share.

The 11 3/4% Notes bear interest at the annual rate of 11 3/4%, payable semi-
annually on February 15 and August 15 of each year commencing February 15,
1997. The 13 1/2% Notes will accrete interest until August 15, 2001, with no
interest payable in cash until February 15, 2002, at an annual rate of 13 1/2%,
compounded semi-annually. Commencing in 2002, interest will be payable semi-
annually on February 15 and August 15 of each year until maturity.

Except as otherwise provided below, the 11 3/4% Notes may not be redeemed by
Chemicals prior to August 15, 2001. From that date through August 15, 2004, the
11 3/4% Notes may be redeemed at a premium of the principal amount thereof at
maturity varying between 105.875% and 101.958%. Subsequent to August 15, 2004,
Chemicals may redeem the 11 3/4% Notes at their face value plus accrued and
unpaid interest. Prior to August 15, 1999, Chemicals may redeem in the
aggregate up to 35% of the original principal amount of the 11 3/4% Notes with
the proceeds of one or more public equity offerings, as defined. Such
redemptions may be made at a redemption price of 111.75% of the face value plus
accrued and unpaid interest to the redemption date. After such redemption, at
least $178.8 million aggregate principal amount of the 11 3/4% Notes must
remain outstanding.

Except as otherwise provided below, the 13 1/2% Notes may not be redeemed by
Holdings prior to August 15, 2001. From that date through August 15, 2006, the
13 1/2% Notes may be redeemed at a premium of the principal amount thereof at
maturity varying between 106.75% and 101.35%. Subsequent to August 15, 2006,
the Company may redeem the 13 1/2% Notes at their principal amount plus accrued
interest. Prior to August 15, 1999, Holdings may redeem in the aggregate up to
35% of the Accreted Value (as defined in the Indenture) of the 13 1/2% Notes
with the proceeds of one or more public equity offerings, as defined. Such
redemptions may be made at a redemption price of 113.5% of the Accreted Value
plus accrued and unpaid interest to the redemption date. After such redemption,
at least $124.6 million aggregate principal amount of the 13 1/2% Notes must
remain outstanding.

F-44
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The 11 1/4% Notes bear interest at the annual rate of 11 1/4%, payable semi-
annually on April 1 and October 1 of each year commencing October 1, 1997.
Except as otherwise provided below, the 11 1/4% Notes may not be redeemed by
Chemicals prior to April 1, 2002. From that date through April 1, 2005, the
11 1/4% Notes may be redeemed at a premium of the principal amount thereof at
maturity varying between 105.625% and 101.875%. Subsequent to April 1, 2005,
Chemicals may redeem the 11 1/4% Notes at their face value plus accrued and
unpaid interest. Prior to April 1, 2000, Chemicals may redeem in the aggregate
up to 35% of the original principal amount of the 11 1/4% Notes with the
proceeds of one or more public equity offerings, as defined. Such redemptions
may be made at a redemption price of 111.25% of the face value plus accrued and
unpaid interest to the redemption date. After such redemption, at least $97.5
million aggregate principal amount of the 11 1/4% Notes must remain
outstanding.

The indentures governing the 11 1/4% Notes, 11 3/4% Notes, and 13 1/2% Notes
(the "Indentures") contain numerous financial and operating covenants,
including, but not limited to, restrictions on Chemicals' or Holdings' ability
to incur indebtedness, pay dividends, create liens, sell assets, engage in
mergers and acquisitions, and refinance existing indebtedness. In addition, the
Indentures include various circumstances that will constitute, upon occurrence
and subject in certain cases to notice and grace periods, an event of default
thereunder.

The Saskatoon Credit Agreement contains provisions, which restrict the
payment of advances, loans and dividends from Sterling Sask to Chemicals. The
most restrictive of the covenants limits such payments during fiscal 1999 to
approximately $0.5 million, plus any amounts due to Chemicals or Holdings from
Sterling Sask under the intercompany tax sharing agreement.

The Credit Agreement and the indenture for the 11 1/4% Notes and the 11 3/4%
Notes contain provisions which restrict the payment of advances, loans, and
dividends from Chemicals to Holdings. The most restrictive of the covenants
limits such payments during fiscal 1999 to approximately $2.0 million, plus any
amounts due to Holdings from Chemicals under the intercompany tax sharing
agreement.

Debt Maturities

The estimated remaining principal payments on the outstanding Term Loans,
Saskatoon Term Loans, Revolver, and ESOP Loan are as follows:

<TABLE>
<CAPTION>
Year ending Principal
September 30, Payments
------------- ----------
(Dollars
in
Thousands)
<S> <C>
1999.......................... $ 8,909
2000.......................... 15,140
2001.......................... 26,600
2002.......................... 34,477
2003.......................... 88,420
Thereafter.................... 153,256
--------
Total Term Loans,
Saskatoon Term Loans,
Revolver and ESOP Loan... $326,802
========
</TABLE>

F-45
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. 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,
---------------------------
1998 1997 1996
-------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Provision (benefit) for federal income tax
at the statutory rate.................... $(26,968) $(11,001) $17,641
Foreign sales corporation................. -- -- (700)
State and foreign income taxes............ 1,422 3,782 1,529
Other..................................... -- (77) (1,572)
-------- -------- -------
Effective tax provision (benefit)......... $(25,546) $ (7,296) $16,898
======== ======== =======
</TABLE>

The provision (benefit) for income taxes is composed of the following:

<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------
1998 1997 1996
-------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
From operations:
Current federal............................. $ (5,900) $(6,131) $12,084
Deferred federal............................ (21,854) (9,211) (3,249)
Deferred foreign............................ 2,132 6,104 7,421
Current state............................... 76 1,942 642
Deferred state.............................. -- -- --
-------- ------- -------
Total tax provision (benefit)............... $(25,546) $(7,296) $16,898
======== ======= =======
</TABLE>

The components of the Company's deferred income tax assets and liabilities
are summarized below:

<TABLE>
<CAPTION>
Year Ended
September 30,
---------------
1998 1997
------- -------
(Dollars in
Thousands)
<S> <C> <C>
Deferred tax assets:
Accrued liabilities.................................... $23,177 $ 6,461
Accrued postretirement cost............................ 10,010 12,350
Tax loss and credit carryforward....................... 24,783 12,723
Foreign dividends...................................... 15,490 11,764
Other.................................................. 2,490 1,166
------- -------
Total deferred tax assets............................ 75,950 44,464
------- -------
Less: current deferred income tax assets................. 5,140 10,005
------- -------
Noncurrent deferred tax assets....................... $70,810 $34,459
======= =======
Deferred tax liabilities:
Property, plant and equipment.......................... $78,113 $67,996
Accrued pension cost................................... 2,211 1,665
Other.................................................. 1,609 836
------- -------
Total deferred tax liabilities....................... 81,933 70,497
------- -------
Net deferred tax liability........................... $11,123 $36,038
======= =======
</TABLE>

F-46
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In fiscal 1998, the Company generated approximately $65 million in United
States net operating losses, of which $18 million will be carried back and
utilized in a prior fiscal year and $47 million will be carried forward and if
not utilized in future years, will expire in fiscal 2013. The Company also has
approximately Cdn. $12.9 million in Canadian tax credit carryforwards which
will expire from 1999 through 2004.

6. 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.

For those Company employees as of January 31, 1997, who: (i) were previously
employed by Cytec and (ii) elect to retire from the Company on or before
January 31, 1999, the Company supplements the standard pension payable such
that the employee's total combined pension from the Company and from the Cytec
Nonbargaining Employees' Retirement Plan equals the amount the employee would
have received had he or she remained an employee of Cytec until retirement. The
estimated liability for such supplements as of September 30, 1998 and 1997 is
immaterial.

In accordance with generally accepted accounting principles, the Company has
recorded its additional minimum liability. In recognizing the additional
pension liability at September 30, 1998 and 1997, the Company recorded a net
reduction to stockholders' equity of $121,000 and $31,000, respectively.

The components of pension expense for the years ended September 30, 1998,
1997, and 1996 were as follows:

<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Service cost (for benefits earned during
the period)............................... $ 5,093 $ 4,857 $ 3,664
Interest cost on projected benefit
obligation................................ 6,153 5,941 5,044
Actual return on plan assets and
contributions............................. (75) (16,116) (6,001)
Deferral of asset gain (loss).............. (7,336) 10,107 1,050
Net amortization of unrecognized amounts... 906 831 926
------- -------- -------
Pension expense............................ $ 4,741 $ 5,620 $ 4,683
======= ======== =======
</TABLE>

Assumptions used in determining the projected benefit obligation and pension
cost for the periods were as follows:

<TABLE>
<CAPTION>
Fiscal Year
-----------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Discount rates.......................................... 7.0% 7.75% 7.75%
Rates of increase in salary compensation level.......... 4.75% 5.25% 5.5%
Expected long-term rate of return on assets............. 8.0% 8.5% 9.0%
</TABLE>

F-47
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The funded status of the Company's pension plans as of the actuarial
valuation dates of August 31, 1998 and 1997 were as follows:

<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Actuarial present value of
benefits based on service
to date and present pay
levels:
Vested benefit
obligation............. $70,634 $ 2,258 $62,396 $ 771
Non-vested benefit
obligation............. 3,750 95 1,685 5
Accumulated benefit
obligation........... 74,384 2,353 64,081 776
Plan assets at fair
value.................... 85,073 1,115 84,598 --
Plan assets in excess of
(less than) accumulated
benefit obligation....... 10,689 (1,238) 20,517 (776)
Additional amounts related
to projected salary
increases................ 19,419 172 18,017 98
Plan assets more (less)
than total projected
benefit obligation....... (8,730) (1,410) 2,500 (874)
Unrecognized net (gain)
loss resulting from plan
experience and changes in
actuarial assumptions.... 7,880 266 (6,913) 40
Unrecognized prior service
cost..................... 5,689 177 6,370 3
Unrecognized transition
obligation............... 1,734 4 2,110 5
------- ------- ------- -----
Total prepaid
(accrued) pension
obligation........... $ 6,573 $ (963) $ 4,067 $(826)
======= ======= ======= =====
</TABLE>

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 covered by
collective bargaining agreements. All of the Company's employees are eligible
for postretirement life insurance. Postretirement health care benefits for
United States plans are non-contributory. Benefit provisions for most hourly
and some salaried employees are subject to collective bargaining. In general,
the plans stipulate that retiree health care benefits are paid as covered
expenses are incurred. For United States employees, postretirement medical plan
deductibles are assumed to increase at the rate of the long-term consumer price
index. The components of postretirement benefits cost other than pensions for
the years ended September 30, 1998, 1997, and 1996 were as follows:

<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(Dollars in
Thousands)
<S> <C> <C> <C>
Service cost (for benefits earned during the
period).......................................... $1,466 $1,343 $1,155
Interest cost on projected benefit obligation..... 2,818 2,494 1,985
Amortization of plan amendments................... 26 29 243
------ ------ ------
$4,310 $3,866 $3,383
====== ====== ======
</TABLE>

F-48
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Actuarial assumptions used to determine 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 average assumed composite rate of future increases in per capita cost
of health care benefits (health care cost trend rate) was 8.8% for fiscal 1998,
exclusive of demographic changes, decreasing gradually to 5.5% by the year
2027. These trend rates reflect current cost performance and the Company'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 $1.7 million and would increase annual
aggregate service and interest costs by $226,000.

The following sets forth the plans funded status reconciled with amounts
reported in the Company's consolidated balance sheet at September 30, 1998 and
1997.

Accumulated postretirement benefit obligation (APBO):

<TABLE>
<CAPTION>
1998 1997
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Retirees........................................ $ 13,530 $ 10,723
Fully eligible active plan participants......... 11,865 11,421
Other active plan participants.................. 17,736 16,473
----------- -----------
Total APBO.................................. 43,131 38,617
Plan assets at fair value....................... -- --
Unrecognized loss............................... (5,303) (4,975)
Unrecognized prior service cost................. (165) (194)
----------- -----------
Accrued postretirement benefit liability........ $ 37,663 $ 33,448
=========== ===========
</TABLE>

Employee Stock Purchase Plan

In fiscal 1996, the Company established the 1996 Employee Stock Purchase
Plan. This plan authorized up to 250,000 shares of common stock to be issued to
key employees and management at an issue price of $12 per share. This plan
became effective as of September 19, 1996, and terminated on September 30,
1996. All authorized shares were issued by the end of fiscal 1996.

Employee Stock Ownership Trust

The original Employee Stock Ownership Trust (the "old ESOT") was formed to
invest primarily in the Company's common stock and included only participants
contributing to the Company's Savings and Investment Plan (the "Savings Plan").
The Company's contribution to the old ESOT was 60% of the participant's Savings
Plan contributions to the extent that such participant's contributions did not
exceed 7.5% of the employee's eligible earnings. The Company's contributions
were subject to a 20% per year vesting schedule commencing after one year of
service. The Company's contributions to the old ESOT for the year ended
September 30, 1996 was $1.7 million.

An application for determination was filed with the Internal Revenue Service
terminating the old ESOT and assets were distributed to participants during
fiscal 1997.

In connection with the Merger, a new Employee Stock Ownership Trust (the
"new ESOT") was established which covers substantially all United States
employees. Allocations of shares of common stock will be made annually to
participants. The new ESOT primarily invests in shares of Holdings Common Stock
and borrowed $6.5 million from Chemicals pursuant to the ESOP Loan to purchase
approximately 542,000 shares

F-49
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of Holdings Common Stock. As more fully described in Note 4, the ESOP Loan is
payable in 16 quarterly installments during the period beginning December 31,
1996, and ending September 30, 2000. The shares of Holdings Common Stock
purchased by the new ESOT have been pledged as security for the ESOP Loan and
such shares will be released and allocated to the new ESOT participants'
account as the ESOP Loan is discharged. Until the ESOP Loan is paid in full,
contributions to the new ESOT will be used to pay the outstanding principal
and interest on the ESOP Loan. In addition, during fiscal 1998 and 1997, the
new ESOT purchased 14,000 and 99,000, respectively, shares of Holdings Common
Stock. In fiscal 1998 and 1997, 172,000 and 49,000, respectively, new ESOT
shares had been allocated to employees. The Company recorded $1.4 million and
$1.6 million of expense related to the new ESOT in fiscal 1998 and 1997,
respectively.

Savings and Investment Plan

The Savings Plan covers substantially all United States employees,
including executive officers. The Savings Plan is qualified under Section
401(k) of the Internal Revenue Code (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 "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. The Company does not make any contribution to the Savings
Plan.

Profit Sharing and Bonus Plans

In January 1997, the Board of Directors, upon recommendation of the
Compensation Committee, approved the establishment of a Profit Sharing Plan
that is designed to benefit all qualified employees, and a Bonus Plan that
will provide for bonuses to exempt salaried employees based on the Company's
annual financial performance.

Under the Company's previous profit sharing plans, expense for the year
ended September 30, 1996, was $2.8 million. No expenses for profit sharing or
bonuses were incurred in fiscal 1998 and 1997.

Omnibus Stock and Incentive Plan

Prior to the Merger, the Company had an Omnibus Stock and Incentive Plan
(the "Original Omnibus Plan"), under which the Company could grant to key
employees incentive and nonincentive stock options, SARs, restricted stock,
performance units, and performance shares. The terms and amounts of all awards
were determined by the Compensation Committee of the Board of Directors. Upon
a change of control of the Company, all awards granted under the plan were to
become fully vested and all performance based awards were to be paid at the
higher of performance goals or actual performance to date.

In fiscal 1993, the Company granted SARs to certain key employees and
directors. Total expense (benefit) was determined based on 3.6 million SARs
granted, the vesting period (five years beginning September 1992) and the
appreciation of the Company's stock price above 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
for the year ended September 30, 1996 of $8.5 million and paid $13.8 million
in August 1996, pursuant to the SARs, as amended. The expense for the SARs is
included in selling, general, and administrative expenses in the Company's
income statement.

All existing stock options and the Original Omnibus Plan were terminated in
connection with the Merger.

F-50
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Omnibus Stock Awards and Incentive Plan

In April 1997, the Board of Directors approved the establishment of the
Omnibus Stock Awards and Incentive Plan (as amended, the "Omnibus Plan"). Under
the Omnibus Plan, the Company may grant to key employees incentive and
nonqualified stock options, SARs, restricted stock awards, performance awards,
and phantom stock awards. One million shares of the Company's stock are
reserved for issuance under the Omnibus Plan. The terms and amounts of the
awards (including vesting schedule) are determined by the Compensation
Committee of the Board of Directors. Substantially all of the outstanding stock
options become exercisable (vest) in equal annual installments beginning a year
from date of grant and ending in fiscal 2002. In the event of a change of
control of the Company or a qualified public offering of Holdings Common Stock,
all awards will immediately vest and become exercisable.

During fiscal 1998, the Company issued 23,000 restricted stock awards to
certain employees. The restricted stock awards vest 25% immediately and 25% per
year over the next three years.

Nonqualified Stock Option Plan for Non-Employee Directors

Also in April 1997, the Board of Directors approved the establishment of the
Nonqualified Stock Option Plan for Non-Employee Directors (the "Nonqualified
Plan"). Each non-employee director of the Company is eligible to participate in
the Nonqualified Plan. Each eligible director on the date of adoption of the
Nonqualified Plan was granted an option to acquire 2,000 shares of Holdings
Common Stock (4,000 shares for the Vice-Chairman), and each eligible director
who is serving on the Board of Directors on each subsequent October 1st is
automatically granted an option to acquire 1,000 shares of Holdings Common
Stock (2,000 shares for the Vice-Chairman). All options expire ten years from
date of grant. All options are granted at the fair market value on the date of
grant (as determined by the Board of Directors) which vest and are exercisable
immediately. A total of 160,000 shares of Holdings Common Stock are reserved
for issuance under the Nonqualified Plan.

Outstanding Stock Options

A summary of the status of the Company's outstanding stock options as of
September 30, 1998 and 1997, and changes during the years then ended is
presented below:

<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
-------------- --------- -------------- ---------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Outstanding at beginning
of year................ 241 $12.00 -- --
Granted............... 489 $11.62 274 $12.00
Exercised............. -- -- --
Forfeited............. (38) $11.94 (33) $12.00
--- ------ --- ------
Outstanding at end of
year................... 692 $11.74 241 $12.00
=== ====== === ======
Options exercisable at
end of year............ 86 14
=== ===
</TABLE>

The range of exercise prices for options outstanding at September 30, 1998,
was $9.50-$12.00, with all exercisable options having an exercise price of
$12.00.

In addition, during fiscal 1998, the Company granted certain employees
rights to purchase an aggregate of 230,000 shares of Common Stock, at then
current market prices. These rights expired without being exercised.

F-51
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In the first quarter of fiscal 1998, the Company elected to continue to
apply the intrinsic value method of accounting for stock-based compensation and
increase its footnote disclosure, as permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation."

All stock options are granted at or above fair market value of the Holdings
Common Stock at the grant date. The weighted average fair value of the stock
options granted during fiscal 1998 and 1997 was $1.9 million and $0.5 million,
respectively. The fair value of each such stock option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for the grants in fiscal 1998: risk
free interest rate of 4.4%; expected dividend yield of 0.0%; expected life of
ten years; and expected volatility of 29%. Stock options generally expire ten
years from the date of grant and fully vest after five years. The outstanding
stock options at September 30, 1998, have a weighted average contractual life
of approximately 9 years.

In accordance with the intrinsic value method of stock-based compensation,
no compensation costs have been recognized for stock option awards described
above. Had compensation cost for all option issuances been determined
consistent with SFAS No. 123, it would not have had a material impact on the
Company's pro forma net loss and loss per share for fiscal 1998.

On December 14, 1998, the Company issued to all of its employees who held
stock options on that date new options with an exercise price of $6.00 per
share. The new options were issued in exchange for and cancellation of stock
options previously issued to those employees for the same number of shares, and
with the same vesting schedules, as the new stock options.

7. 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, sodium cyanide, and calcium hypochlorite each to one customer. The Company
also has various sales and conversion agreements, which dedicate significant
portions of the Company's production of styrene, acrylonitrile, and methanol to
various customers. Some of 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, 1998, are as follows:
fiscal 1999--$4.9 million; fiscal 2000--$4.2 million; fiscal 2001--$4.0
million; fiscal 2002--$3.9 million; fiscal 2003--$3.3 million; and $8.1 million
thereafter.

Environmental and Safety Matters

The Company's operations involve the handling, production, transportation,
treatment, and disposal of materials that are classified as hazardous or toxic
waste and that are extensively regulated by environmental and health and safety
laws and regulations. Environmental permits required for the Company's
operations are subject to periodic renewal and can be revoked or modified for
cause or when new or revised environmental laws or permit requirements are
implemented. Changing and increasingly strict environmental laws, regulations,
and permit requirements can affect the manufacture, handling, processing,
distribution, and use of the Company's chemical products and, if so, the
Company's business and operations may be materially and adversely affected. In
addition, changes in the law, regulations, and permit requirements can cause
the Company to incur substantial costs in upgrading or redesigning its
facilities and processes, including waste treatment, storage, disposal, and
other waste handling practices and equipment.

F-52
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

While the Company believes that its business operations and facilities
generally are operated in compliance with all material aspects of applicable
environmental and health and safety laws, regulations, and disclosure
requirements, there can be no assurance that past practices and future
operations will not result in material claims or regulatory action, require
material environmental expenditures, or result in exposure or injury claims by
employees and the public. Some risk of environmental costs and liabilities is
inherent in the operations and products of the Company, as it is with other
companies engaged in similar businesses. In addition, a catastrophic event at
any of the Company's facilities could result in liabilities to the Company
substantially in excess of its insurance coverages.

The Company's operating expenditures for environmental matters, mostly waste
management and compliance, were approximately $52 million, $50 million, and $47
million for fiscal 1998, 1997, and 1996, respectively. The Company also spent
approximately $2 million and $3 million for environmentally related capital
projects in fiscal 1998 and 1997 respectively.

Any significant ban on all chlorine containing compounds could have a
materially adverse effect on the Company's financial condition and results of
operations. British Columbia has a regulation in place requiring elimination of
the use of all chlorine products, including chlorine dioxide, in the bleaching
process by the year 2002. Chlorine dioxide is produced from sodium chlorate,
which is one of the Company's pulp chemical products. The pulp and paper
industry believes that a ban of chlorine dioxide in the bleaching process will
yield no measurable environmental or public health benefit and is working to
change this regulation but there can be no assurance that the regulation will
be changed. In the event such a regulation is implemented, the Company would
seek to sell the products it manufactures at its British Columbia facility to
customers in other markets. The Company is not aware of any other laws or
regulations in place in North America, which would restrict the use of such
products for other purposes.

Legal Proceedings

Ammonia Release

On May 8, 1994, an ammonia release occurred at the Texas City Plant while a
reactor in the acrylonitrile unit was being restarted after a shutdown for
routine maintenance. Approximately 52 lawsuits and interventions involving
approximately 6,000 plaintiffs were filed against the Company seeking an
unspecified amount of money for alleged damages from the ammonia release.

Approximately 2,600 of the plaintiffs agreed to submit their damage claims
to binding arbitration. A two week evidentiary hearing was conducted in July
1996 before a three judge panel to determine the amount of damages. On May 1,
1997, the three judge panel awarded the plaintiffs an amount of damages which
was well within the limits of the Company's insurance coverage.

Approximately 5,500 of the claims in litigation have now been resolved or
are pending final resolution and the Company continues to vigorously defend
against the claims of the approximately 500 remaining plaintiffs.

Nickel Carbonyl Release

On July 30, 1997, as the Company's methanol unit at the Texas City Plant was
being shut down for repair, nickel carbonyl was formed when carbon monoxide
reacted with nickel catalyst in the unit's reformer. After

F-53
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

isolating the nickel carbonyl within the methanol unit, the Company worked with
the permission and guidance of the Texas Natural Resources Conservation
Commission to destroy the nickel carbonyl by incineration on-site.

Prior to its incineration, several Company employees and contractor
employees may have been exposed to nickel carbonyl in the methanol unit.
Sixteen contractor employees allegedly exposed to nickel carbonyl are
plaintiffs in a lawsuit against the Company seeking unspecified damages for
personal injuries. Additional claims and litigation against the Company
relating to this incident may ensue.

Ethylbenzene Release

On April 1, 1998, a chemical leak occurred when a line failed in the
ethylbenzene unit at the Texas City Plant. The released chemicals included
ethylbenzene, benzene, polyethylbenzene, and hydrochloric acid. The Company
does not believe any serious injuries were sustained, although a number of
citizens sought medical examinations at local hospitals after a precautionary
alert was given to neighboring communities. There is no lawsuit pending against
the Company based on this release, but the Company has received, and in some
instances resolved, claims from individuals for alleged damage from this
incident.

Other Claims

The Company is subject to various other claims and legal actions that arise
in the ordinary course of its business.

Litigation Contingency

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 the Company'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 the Company's judgments. Based on the foregoing, as of September
30, 1998, the Company has accrued approximately $8.3 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
approximately $6.6 million. At September 30, 1998, management estimates that
the aggregate reasonably possible range of loss for all litigation combined, in
addition to the amount accrued, is from $0 to $9 million. The Company believes
that this additional reasonably possible loss is substantially covered by
insurance.

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 remains in the discovery stage 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 adverse effect on the
financial position, results of operations, or cash flows of the Company.

F-54
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

8. BUSINESS ACQUISITIONS

On January 31, 1997, the Company acquired the AFB from Cytec. The AFB, now
owned by two wholly owned subsidiaries of the Company (collectively "Sterling
Fibers"), recorded sales of approximately $92 million during the eight months
of operations in fiscal 1997 and consists of an acrylic fibers plant located
near Pensacola, Florida, and several associated marketing and research offices.
Sterling Fibers is one of two acrylic fibers manufacturers in the United
States. Cytec supplies acrylonitrile to Sterling Fibers through a five-year
supply agreement ending in 2002. The acquisition was financed through the
incurrence of $81 million of term debt under the Fibers Credit Agreement with
substantially the same lenders as those under the Original Credit Agreement,
the issuance of $10 million (liquidation value) of Series A "pay in kind"
mandatory redeemable preferred stock ("Series A Preferred") to Cytec, and the
sale of $10 million of Holdings Common Stock in a private placement. The
Company used the purchase method to account for the acquisition, and operating
results of Sterling Fibers beginning February 1, 1997, are included with those
of the Company.

On July 10, 1997, Sterling Sask acquired substantially all of the assets of
Saskatoon Chemicals. The acquired assets include a manufacturing plant near
Saskatoon, Saskatchewan, which manufactures sodium chlorate, caustic soda,
calcium hypochlorite, chlorine, and hydrochloric acid. Total consideration of
$69.2 million was financed with: (i) approximately $54.6 million under a new
credit facility established by Sterling Sask with a group of lenders, (ii)
approximately $7.3 million pursuant to a private placement of Holdings Common
Stock, and (iii) approximately $7.3 million pursuant to a private placement of
Units, each Unit consisting of shares of Holdings' Series B "pay in kind"
mandatory Cumulative Redeemable Preferred Stock ("Series B Preferred") and
warrants to purchase shares of Holdings Common Stock. The Saskatoon Acquisition
was accounted for under the purchase method and operating results of Sterling
Sask beginning July 10, 1997, are included with those of the Company.

The following table presents the unaudited pro forma results of operations
of the Company as if the AFB Acquisition and the Saskatoon Acquisition had
occurred on October 1, 1995. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what would
have occurred had the AFB Acquisition and the Saskatoon Acquisition been made
at the beginning of the fiscal year 1996 or of results which may occur in the
future (in thousands, except per share amounts).

<TABLE>
<CAPTION>
Pro Forma Pro Forma
Twelve Months Twelve Months
Ended Ended
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Revenues.................................... $988,000 $975,600
Income (loss) before extraordinary items.... $(27,300) $ 39,400
Net income (loss) attributable to common
stockholders............................... $(34,200) $ 34,400
Net income (loss) per common share.......... $ (2.85) $ 0.66
</TABLE>

F-55
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. SEGMENT AND GEOGRAPHIC INFORMATION:

Sales to individual customers constituting 10% or more of total revenues and
sales by segment were as follows (there were no sales to individual customers
constituting 10% or more of total revenues in fiscal 1997 and 1996):
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Major Customers:
British Petroleum plc and subsidiaries.. $100,610 * *
Export Sales:
Export revenues......................... $233,165 $274,139 $267,153
Percentage of total revenues............ 28% 30% 34%
Export revenues (as a percent of total
exports) by geographical area:
Asia.................................... 65% 56% 66%
Europe.................................. 16% 41% 34%
Other................................... 19% 3% --
</TABLE>
- --------
* Does not comprise 10% of total revenue for 1997 and 1996, therefore not
reported.

<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Segment Information (1)
Revenues:
Petrochemical and Fibers................... $621,605 $728,215 $633,754
Pulp....................................... 200,985 180,572 156,711
-------- -------- --------
Total.................................... $822,590 $908,787 $790,465
======== ======== ========
Operating income (loss):
Petrochemical and Fibers................... $ (3,442) $ 11,524 $ 31,891
Pulp....................................... 36,232 45,945 35,597
-------- -------- --------
Total.................................... $ 32,790 $ 57,469 $ 67,488
======== ======== ========
Depreciation and amortization expenses:
Petrochemical and Fibers................... $ 31,894 $ 32,762 $ 28,125
Pulp....................................... 24,069 21,250 14,577
-------- -------- --------
Total.................................... $ 55,963 $ 54,012 $ 42,702
======== ======== ========
Capital expenditures:
Petrochemical and Fibers................... $ 16,768 $ 22,664 $ 50,033
Pulp....................................... 9,854 20,764 45,924
-------- -------- --------
Total.................................... $ 26,622 $ 43,428 $ 95,957
======== ======== ========
Identifiable assets:
Petrochemical and Fibers................... $474,426 $554,474 $457,273
Pulp....................................... 300,576 324,497 232,411
-------- -------- --------
Total.................................... $775,002 $878,971 $689,684
======== ======== ========
</TABLE>
- --------
(1) The petrochemical and fibers segment is based in the United States. The
pulp segment is primarily based in Canada.

F-56
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

10. 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
United States dollars for Canadian dollars at rates agreed to at inception of
the contracts.

The Company enters into forward foreign exchange contracts to reduce risk
due to Canadian dollar exchange rate movements. The Company does not engage in
currency speculation. The Company had a notional amount of approximately $54
million and $20 million of forward foreign exchange contracts outstanding to
buy Canadian dollars at September 30, 1998 and 1997, respectively. The deferred
loss on these forward foreign exchange contracts at September 30, 1998 and 1997
was $4.7 million and $0.3 million, respectively.

Gas Hedge

The Company hedged a portion of its natural gas to be used in the production
of styrene and methanol during fiscal 1998 and 1999. At September 30, 1998, the
Company had primarily natural gas collar contracts on 900,000 MMbtu's of
natural gas per month for October 1998 through March 1999 with an average
"floor" price of $2.23 per MMbtu and an average "cap" price of $2.51 per MMbtu.
The Company's hedging agreements are settled on a monthly basis. All of the
Company's contracts specify the third-party index to be the inside FERC Houston
Ship Channel First of the Month Index Price. The Company had a net loss of $1.0
million and $0.1 million due to natural gas hedging contracts in fiscal 1998
and 1997, respectively, and an unrealized gain of $0.2 million at September 30,
1998.

Interest Rate Swaps

The Company has entered into a declining balance interest rate swap contract
to hedge a portion of its interest rate risk that expires in January 2002. At
September 30, 1998, the Company had a contractual notional amount of $62.5
million outstanding with a fixed rate of 6.66% and a floating rate based on
LIBOR. The Company's interest rate swap is settled on a quarterly basis, with
the interest rate differential received or paid by the Company recognized as
adjustments to interest expense.

Concentration of Risk

The Company sells its products primarily to companies involved in the
petrochemical, fiber, and pulp and paper manufacturing industries. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral for accounts receivable. However, letters of credit are
required by the Company on many of its export sales. The Company's credit
losses have been minimal.

The Company maintains cash deposits with major banks, which from time to
time may exceed federally insured limits. The Company periodically assesses the
financial condition of the institutions and believes that any possible loss is
minimal.

Approximately 40% of the Company's employees are covered by union
agreements. Approximately 27% of the Company's employees are covered by union
agreements, which could expire within one year.

F-57
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 United States
corporations with ratings of A1 by Standard & Poor's Ratings Group or P1 by
Moody's Investor Services, Inc., loan participations of major United States
corporations with a short term credit rating of A1/P1 and direct obligations
of the United States Government or its agencies. In addition, not more than $5
million will be invested by the Company with any single bank, financial
institution, or United States corporation.

Fair Value of Financial Instruments

The carrying amounts reflected in the consolidated balance sheet for cash,
cash equivalents, and receivables approximate fair value as reported in the
balance sheet due to the short maturities. The following table presents the
carrying values and fair values of the Company's long-term debt at September
30, 1998.

<TABLE>
<CAPTION>
Carrying Value Fair Value
-------------- ----------
(Dollars in Thousands)
<S> <C> <C>
Revolving credit facilities..................... $ -- $ --
Term loans...................................... 274,000 274,000
Saskatoon term loans............................ 49,552 49,552
ESOP term loans................................. 3,250 3,250
11 1/4% Notes................................... 152,816 126,645
11 3/4% Notes................................... 275,000 238,453
13 1/2% Notes................................... 127,907 88,838
</TABLE>

The fair values of the 13 1/2% Notes, 11 1/4% Notes, and 11 3/4% Notes are
based on quoted market prices.

At September 30, 1998, the outstanding natural gas hedging contracts had a
fair value of approximately $0.2 million gain and the foreign exchange
contracts had a fair value of $4.7 million loss. In addition, the interest
rate swaps had a fair market value of $2.3 million loss, based on the
Company's estimate of what it would have to pay to terminate the swap at
September 30, 1998.

11. RELATED PARTY TRANSACTIONS

In connection with the 1996 Recapitalization, the Company paid TSG and
Unicorn one-time transaction fees of approximately $8.4 million and $4.4
million, respectively. T. Hunter Nelson and Frank J. Hevrdejs, members of the
Board of Directors of the Company, are principals of TSG and Frank P. Diassi,
Chairman of the Board of Directors of the Company, is a principal of Unicorn.
In addition, the Company paid TSG a one-time transaction fee of approximately
$1.1 million in connection with the AFB Acquisition, and a fee of
approximately $0.7 million in connection with the Saskatoon Acquisition.

Investment banking fees of approximately $3.3 million were paid as part of
the 1996 Recapitalization to Lazard Freres & Company ("Lazard"). A member of
the former Board of Directors is a Limited Managing Director of Lazard.
However, the Board member agreed not to receive any compensation from Lazard
related to the Merger.

Also in connection with the 1996 Recapitalization, Credit Suisse First
Boston Corporation ("CFSB") served as managing underwriter for the public
offering of the 13 1/2% Notes and 11 3/4% Notes and provided certain financial
advisory services to STX Acquisition and Chemicals, for which such firm
received

F-58
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

underwriting discounts and commissions and financial advisory fees totaling
approximately $17 million. In addition, CSFB received net compensation of
approximately $1.0 million related to the 11 1/4% Notes Offering. John L.
Garcia, a director and stockholder of the Company, is a Managing Director of
CSFB.

Since October 1, 1991, the Company and certain affiliates of Koch Industries
have had ongoing commercial relationships in the ordinary course of business,
including, from time to time, supply of raw materials or sales of
petrochemicals and transportation of natural gas. For the fiscal year ended
September 30, 1998, 1997, and 1996 (i) product sales to and raw material
purchases from Koch Chemical, an indirect wholly-owned subsidiary of Koch
Industries, (ii) payments to John Zink Company, an indirect wholly-owned
subsidiary of Koch Industries, in consideration for certain contracting and
construction services performed at the Texas City Plant, and (iii) services for
the transportation of natural gas by Koch Gateway Pipeline Company to the Santa
Rosa Plant, each represented less than 5% of the Company's revenues.

In connection with the Saskatoon Acquisition, the Company paid a fee to
Clipper Capital Associates, Inc. ("Clipper") and Olympus Partners ("Olympus")
of $0.1 million to act as placement agents for the Series B Preferred Stock.
Robert Calhoun, a former director of the Company, is President of Clipper.
Affiliates of Clipper and Olympus are significant stockholders of the Company.

As of December 15, 1998, the Company entered into the Standby Purchase
Agreements with, and issued warrants to, Frank P. Diassi, Frank J. Hevrdejs,
and Koch Capital Services, Inc. as describe below in Footnote 12.

12. CAPITAL STOCK

The authorized shares of Holdings Common Stock at September 30, 1998 and
1997 was 20,000,000.

On January 31, 1997, the Company issued 778,232 additional shares of
Holdings Common Stock in connection with the AFB Acquisition. In addition, on
July 10, 1997, the Company issued 608,334 shares of Holdings Common Stock in
connection with the Saskatoon Acquisition.

In connection with the issuance of the 13 1/2% Notes (see Note 4), Holdings
issued 191,751 warrants to purchase three shares of Holdings Common Stock for
$0.01, exercisable beginning in August 1998 until August 2008. During fiscal
1998, 345,123 shares of Common Stock were issued as a result of 115,041 of
these warrants being exercised. In connection with the Saskatoon Acquisition,
Holdings also issued to holders of the Series B Preferred Stock warrants to
purchase 201,048 shares of Holdings Common Stock for $0.01, exercisable
beginning in July 1997 until December 2007. At September 30, 1998, warrants to
purchase an aggregate of 431,178 shares Holdings Common Stock were outstanding.

In December 1998, the Company entered into separate Standby Purchase
Agreements (collectively, the "Purchase Agreements") with each of Gordon A.
Cain, William A. McMinn, James Crane, Mr. Diassi, Mr. Hevrdejs and Koch Capital
(collectively, the "Purchasers"). Pursuant to the terms of the Purchase
Agreements, the Purchasers committed to purchase up to 2.5 million shares of
Common Stock, at a price of $6.00 per share, if, as and when requested by the
Company at any time or from time to time prior to December 15, 2001. Under each
of the Purchasers Agreements, the Company may only require the Purchasers to
purchase such shares if it believes that such capital is necessary to maintain,
reestablish, or enhance its borrowing ability under the Company's revolving
credit facilities or to satisfy any requirement thereunder to raise additional
equity. To induce the Purchasers to enter into the Purchase Agreements, the
Company issued to them warrants to purchase an aggregate of 300,000 shares of
Common Stock at an exercise price of $6.00 per share. Pursuant to the Purchase
Agreements, the Company agreed to issue to the Purchasers additional warrants
to purchase up to 300,000 additional shares of Common Stock if, as and when
they purchase shares of Common Stock under the

F-59
<PAGE>

STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Purchase Agreements. Any shares of Common Stock purchased under the Purchase
Agreement and the warrants issued to the Purchasers as contemplated by the
Purchase Agreements will be subject to the terms of the Amended and Restated
Voting Agreement dated as of December 15, 1998, the Sterling Chemicals
Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, as
amended, and the Tag-Along Agreement dated as of August 21, 1996, each of which
is filed as an Exhibit to this Form 10-K.

13. MANDATORY REDEEMABLE PREFERRED STOCK

In connection with the AFB Acquisition, the Company authorized 350,000
shares and issued 104,110 shares of non-voting Series A Preferred Stock with a
fair value and carrying value of $10.0 million. The Series A Preferred Stock
has a cumulative dividend rate of 10%, payable in kind semi-annually on January
1 and July 1 of each year commencing July 1, 1997. The Company may redeem all
or any number of shares of Series A Preferred Stock at any time with proper
written notice at a price of $100 per share plus accrued dividends. The holders
of Series A Preferred Stock may elect to have the Company redeem shares on any
dividend payment date after June 30, 2009 with proper written notice at a price
of $100 per share plus accrued dividends. The carrying value of the Series A
Preferred Stock at September 30, 1998 and 1997, was $11.8 million and $10.7
million, respectively (liquidation value of $100 per share).

In connection with the Saskatoon Acquisition, the Company authorized 58,000
shares and issued approximately 7,532 shares of non-voting Series B Preferred
Stock with a fair value of $4.9 million. The Series B Preferred Stock has a 14%
dividend rate through July 10, 2002, and thereafter a variable rate between 14%
and 18% depending on payment terms (as defined) until redeemed. The dividend is
payable in kind on January 1, April 1, July 1, and October 1 of each year
commencing October 1, 1997. The Company may redeem all or any number of shares
of Series B Preferred Stock at any time with proper written notice at a price
of $1,000 per share plus a premium ranging from 5% to 1% depending on the date
of redemption plus accrued dividends. The holders of Series B Preferred Stock
may elect to have the Company redeem shares on any dividend payment date after
June 30, 2009, with proper written notice at a price of $1,000 per share plus
accrued dividends. The carrying value of the Series B Preferred Stock at
September 30, 1998 and 1997, was $6.5 million and $5.1 million, respectively
(liquidation value of $1,000 per share). The difference in the carrying value
and the redemption amount will be accreted as a charge to retained earnings
over the holding period using the effective interest rate method.

14. NEW ACCOUNTING STANDARDS

SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and displaying of comprehensive income and its components. SFAS No.
131, "Disclosure About Segments of an Enterprise and Related Information,"
establishes standards for the way that public business enterprises report
information about operating segments in interim and annual financial
statements. SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," establishes revisions to employers' disclosure about
pension and other post retirement benefit plans. Management is currently
evaluating the disclosures required when these three statements are adopted in
the first quarter of fiscal 1999. Adoption of these three statements will have
no effect on net income (loss).

F-60
<PAGE>

STERLING CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Except as modified below, the Notes to the Company's Consolidated Financial
Statements are incorporated herein by reference insofar as they relate to
Chemicals.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Flows

On August 21, 1996, Holdings transferred all of its operating assets and
liabilities (net $422.8 million) to Chemicals. At the same time, Chemicals
transferred $610 million in cash to Holdings.

Income Taxes

Chemicals is included in the consolidated federal tax return filed by its
parent, Holdings. A tax sharing agreement between Holdings and Chemicals
defines the computation of Chemicals' obligations to Holdings. Chemicals'
provision for income taxes is computed as if Chemicals and its subsidiaries
file their annual tax return on a separate company basis. Deferred income taxes
are recorded to reflect the tax effect of the temporary differences between the
financial reporting basis and the tax basis of Chemicals' assets and
liabilities at enacted rates.

Earnings per Share

All issued and outstanding shares of Chemicals are held by Holdings, and
accordingly, earnings per share are not presented.

2. INCOME TAXES

A reconciliation of federal statutory income taxes to Chemicals' effective
tax provision (benefit) before extraordinary item follows:

<TABLE>
<CAPTION>
Year Ended May 14, 1996
September 30, to
----------------- September 30,
1998 1997 1996
-------- ------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
Provision (benefit) for federal income
tax at the statutory rate............ $(20,385) $(4,576) $ 195
Foreign sales corporation............. -- -- (116)
State and foreign income taxes........ 1,422 3,782 115
Tax settlements and other............. -- (1,354) 190
-------- ------- -----
Effective tax provision (benefit)..... $(18,963) $(2,148) $ 384
======== ======= =====
</TABLE>

The provision (benefit) for income taxes is composed of the following:

<TABLE>
<CAPTION>
Year Ended May 14, 1996
September 30, to
----------------- September 30,
1998 1997 1996
-------- ------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
From operations:
Current federal........................ $ (5,900) $(5,959) $(1,001)
Deferred federal....................... (15,271) (4,235) 1,457
Deferred foreign....................... 2,132 6,104 90
Current state.......................... 76 1,942 (162)
-------- ------- -------
Total tax provision (benefit)........ $(18,963) $(2,148) $ 384
======== ======= =======
</TABLE>

F-61
<PAGE>

STERLING CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The components of Chemicals' deferred income tax assets and liabilities are
summarized below:

<TABLE>
<CAPTION>
September 30,
-----------------------
1998 1997
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Deferred tax assets:
Accrued liabilities............................ $ 12,074 $ 5,367
Accrued postretirement cost.................... 10,010 12,350
Tax loss and credit carryforward and other..... 24,783 7,209
Foreign dividends.............................. 15,490 11,764
Other.......................................... 2,490 1,166
----------- -----------
Total deferred tax assets.................... 64,847 37,856
----------- -----------
Less: current deferred income tax asset.......... 5,140 10,005
----------- -----------
Noncurrent deferred tax assets............... $ 59,707 $ 27,851
=========== ===========
Deferred tax liabilities:
Property, plant and equipment.................. $ 78,113 $ 67,996
Accrued pension cost........................... 2,211 1,665
Other.......................................... 2,684 836
----------- -----------
Total deferred tax liabilities............... 83,008 70,497
----------- -----------
Net deferred tax liability................... $ 23,301 $ 42,646
=========== ===========
</TABLE>

In fiscal 1998, Chemicals generated approximately $48 million in United
States net operating losses, of which $18 million will be carried back and
utilized in a prior fiscal year and $30 million will be carried forward and if
not utilized in future years, will expire in fiscal 2013. Chemicals also has
approximately Cdn. $12.9 million in Canadian tax credit carry forwards which
will expire from 1999 through 2004.

F-62
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Stockholder of
Sterling Canada, Inc.
Sterling Fibers, Inc.
Sterling Chemicals International, Inc.

We have audited the accompanying combined balance sheets of Sterling Chemicals
U.S. Subsidiaries (as defined in Note 1--the "Company") as of September 30,
1998 and 1997, and the related combined statements of operations and cash flows
for each of the three years in the period ended September 30, 1998. 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 audits 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, such financial statements present fairly, in all material
respects, the combined financial position of the Company as of September 30,
1998 and 1997, and the combined results of its operations and its cash flows
for each of the three years in the period ended September 30, 1998 in
conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

September 17, 1999
Houston, Texas

F-63
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

COMBINED STATEMENTS OF OPERATIONS

(Dollars In Thousands)

<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues........................................... $261,990 $262,256 $156,711
Cost of goods sold................................. 209,883 197,555 108,218
-------- -------- --------
Gross profit....................................... 52,107 64,701 48,493
Selling, general and administrative expenses....... 22,098 15,637 13,896
Interest and debt related expenses................. 36,366 35,165 14,437
-------- -------- --------
Net income (loss) before income taxes.............. (6,357) 13,899 20,160
Provision (benefit) for income taxes............... (2,217) 6,290 7,012
-------- -------- --------
Net income (loss).................................. $ (4,140) $ 7,609 $ 13,148
======== ======== ========
</TABLE>

The accompanying notes are an integral part of the combined financial
statements.

F-64
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

COMBINED BALANCE SHEETS

(Amounts In Thousands)

<TABLE>
<CAPTION>
September 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 4,093 $ 6,215
Accounts receivable........................................ 38,562 52,893
Inventories................................................ 32,532 32,455
Prepaid expenses........................................... 6,090 2,799
-------- --------
Total current assets...................................... 81,277 94,362

Property, plant and equipment, net.......................... 207,177 222,997
Due from affiliates......................................... 131,771 140,869
Other assets................................................ 51,635 48,154
-------- --------
Total assets.............................................. $471,860 $506,382
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable........................................... $ 20,432 $ 19,768
Accrued liabilities........................................ 16,277 16,808
-------- --------
Total current liabilities................................. 36,709 36,576

Long-term debt due to parent................................ 323,303 343,714
Deferred income taxes....................................... 6,509 6,870
Deferred credits and other liabilities...................... 12,019 11,721
Commitments and contingencies (Note 7) -- --
Stockholder's equity:
Common stock............................................... -- --
Additional paid-in capital................................. 92,734 92,734
Retained earnings.......................................... 31,399 35,539
Accumulated translation adjustment......................... (30,813) (20,772)
-------- --------
Total stockholder's equity................................ 93,320 107,501
-------- --------
Total liabilities and stockholder's equity............... $471,860 $506,382
======== ========
</TABLE>

The accompanying notes are an integral part of the combined financial
statements.

F-65
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

COMBINED STATEMENTS OF

CHANGES IN STOCKHOLDER'S EQUITY

(Amounts In Thousands)

<TABLE>
<CAPTION>
Additional Accumulated
Common Paid-In Retained Translation
Stock Capital Earnings Adjustment
------ ---------- -------- -----------
<S> <C> <C> <C> <C>
Balance, September 30, 1995........... $-- $83,395 $14,782 $(17,307)

Net income............................ -- -- 13,148 --
Translation adjustment................ -- -- -- (1,817)
--- ------- ------- --------
Balance, September 30, 1996........... -- 83,395 27,930 (19,124)

Net income............................ -- -- 7,609 --
Acquisition of acrylic fibers
business............................. -- 9,339 -- --
Translation adjustment................ -- -- -- (1,648)
--- ------- ------- --------
Balance, September 30, 1997........... -- 92,734 35,539 (20,772)

Net loss.............................. -- -- (4,140) --
Translation adjustment................ -- -- -- (10,041)
--- ------- ------- --------
Balance, September 30, 1998........... $-- $92,734 $31,399 $(30,813)
=== ======= ======= ========
</TABLE>

The accompanying notes are an integral part of the combined financial
statements.

F-66
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

COMBINED STATEMENTS OF CASH FLOWS

(Dollars In Thousands)

<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $(4,140) $ 7,609 $ 13,148
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 23,502 20,537 14,627
Deferred tax expense (benefit)................... (2,479) 5,894 7,421
Other............................................ 447 74 (992)
Change in assets/liabilities:
Accounts receivable.............................. 14,331 10,824 (1,717)
Inventories...................................... (77) (24,897) 63
Prepaid expenses................................. (3,291) 570 (2,694)
Due from affiliates.............................. 1,174 66,042 (169,944)
Other assets..................................... (613) (11,909) 11,671
Accounts payable................................. 665 6,509 4,800
Accrued liabilities.............................. (531) 4,266 (4,421)
Other liabilities................................ 298 (2,221) (1,611)
------- ------- --------

Net cash flows from operating activities.......... 29,286 83,298 (129,649)
------- ------- --------
Cash flows from investing activities:
Capital expenditures............................. (10,550) (24,065) (45,924)
------- ------- --------
Net cash used in investing activities............. (10,550) (24,065) (45,924)
------- ------- --------
Cash flows from financing activities:
Net change in long-term debt due to Parent....... (20,411) (57,156) 179,868
------- ------- --------
Net change in financing activities................ (20,411) (57,156) 179,868

Effect of United States/Canadian exchange rate on
cash............................................. (447) (205) (107)
------- ------- --------
Net increase (decrease) in cash and cash
equivalents...................................... (2,122) 1,872 4,188
Cash and cash equivalents--beginning of year...... 6,215 4,343 155
------- ------- --------
Cash and cash equivalents--end of year............ $ 4,093 $ 6,215 $ 4,343
======= ======= ========
Supplemental disclosures of cash flow information:
Income taxes paid................................ $(3,290) $(1,983) $ (407)
</TABLE>

The accompanying notes are an integral part of the combined financial
statements.

F-67
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

On July 23, 1999, Sterling Chemicals, Inc. ("Chemicals") completed a private
offering of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006 (the
"12 3/8% Notes"). The 12 3/8% Notes are guaranteed by all of Chemicals' existing
direct and indirect United States ("U.S.") subsidiaries (other than Sterling
Chemicals Acquisitions, Inc.) on a joint and several basis and are secured by,
among other things, a second priority pledge of 100% of the stock of these same
U.S. subsidiaries. These U.S. subsidiary companies consist of Sterling Canada,
Inc. and its U.S. subsidiaries, Sterling Chemicals Energy, Inc., Sterling
Chemicals International, Inc., and Sterling Fibers, Inc. The financial
statements of these companies (except for Sterling Chemicals Energy, Inc.,
whose securities do not constitute a substantial portion of the collateral)
have been combined to present the accompanying financial statements of the
Company. Sterling Canada, Inc. (including its U.S. and Canadian subsidiaries),
Sterling Chemicals International, Inc., and Sterling Fibers, Inc. are
hereinafter collectively referred to as "Sterling Chemicals U.S. Subsidiaries"
or the "Company".

The Company manufactures chemicals for use primarily in the pulp and paper
industry at four plants in Canada and one plant in Valdosta, Georgia (the
"Valdosta Plant"), and manufactures acrylic fibers in a plant near Pensacola,
Florida (the "Santa Rosa Plant"). Sodium chlorate is produced at the four
plants in Canada and the Valdosta Plant. Sodium chlorite is produced at one of
the Canadian locations. The Company licenses, engineers, and overseas
construction of large-scale chlorine dioxide generators for the pulp and paper
industry as part of the pulp chemical business. These generators convert sodium
chlorate into chlorine dioxide at pulp mills. The Company produces regular
textiles, specialty textiles, and technical fibers at the Santa Rosa Plant, as
well as licensing the acrylic fibers manufacturing technology to producers
worldwide (collectively the acrylic fibers business or "AFB").

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies of the Company are described below.

Principles of Combination

The combined financial statements include the accounts of all wholly owned
and majority-owned subsidiaries of the combined entities. All significant
intercompany accounts and transactions among entities included in the combined
financial statements have been eliminated.

Cash Equivalents

The Company considers all investments purchased with a remaining 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 basis except for stores and supplies, which are valued
at average cost.

Property, Plant, and Equipment

F-68
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Impairment of Long-Lived Assets

Patents and Royalties

Income Taxes

The Company is included in the consolidated U.S. federal income tax return
filed by Chemicals' parent. The Company's provision (benefit) for U.S. income
taxes has been allocated by Chemicals as if the Company filed their annual tax
returns on a separate return basis. The Company's Canadian subsidiaries file
separate federal Canadian tax returns as well as returns in the provinces in
which they operate. For these Canadian subsidiaries, deferred income taxes are
recorded to reflect the tax effect of the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities.

Revenue Recognition

The Company generates revenues through sales in the open market and long-
term supply contracts and recognizes these revenues as the products are
shipped. Deferred credits are amortized over the life of the contract which
gave rise to them. The Company also generates revenues from the construction
and sale of chlorine dioxide generators, which are recognized using the
percentage of completion method. The Company also receives prepaid royalties,
which are typically recognized over a period of ten years. In addition, the
Company generates revenues from the sale of acrylic fibers manufacturing
technology to producers worldwide, which are recognized as earned.

Foreign Exchange

Earnings Per Share

All issued and outstanding shares of the entities included in the Company's
financial statements are held directly or indirectly by Chemicals, and
accordingly, earnings per share information is not presented.

F-69
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Environmental Costs

Disclosures About Fair Value of Financial Instruments

In preparing disclosures about the fair value of financial instruments, the
Company has assumed that the carrying amount approximates fair value for cash
and cash equivalents, receivables, short-term borrowings, accounts payable and
certain accrued expenses because of the short maturities of those instruments.
The fair values of long-term debt instruments are estimated based upon quoted
market values (if applicable) or on the current interest rates available for
debt with similar terms and remaining maturities. Considerable judgment is
required in developing these estimates and, accordingly, no assurance can be
given that the estimated values presented herein are indicative of the amounts
that would be realized in a free market exchange.

Accounting Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported periods. Significant estimates include environmental reserves,
litigation contingencies, maintenance costs related to shut downs, and taxes.
Actual results could differ from these estimates.

Allocations

The Company is wholly owned by Chemicals, which incurs certain direct and
indirect expenses for the benefit and support of the Company. These services
include, among others, tax planning, treasury, legal, risk management and the
maintenance of insurance coverage for the Company. Chemicals allocated $4.1
million, $2.7 million, $1.9 million of such expenses to the Company in fiscal
years 1998, 1997, and 1996, respectively, which are included in selling,
general, and administrative expenses. Allocations are based on the Company's
proportionate share of the respective amount and are determined using various
criteria including headcount, payroll, number of vehicles and revenue. In
addition, the Company is dependent on Chemicals for financing.

New Accounting Standards

SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and displaying of comprehensive income and its components. SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits,"
establishes revisions to employers' disclosure about pension and other post
retirement benefit plans. Management is currently evaluating the disclosures
required when these statements are adopted in the first quarter of fiscal 1999.
Adoption of these statements will have no effect on net income (loss).

F-70
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

<TABLE>
<CAPTION>
September 30,
------------------
1998 1997
-------- --------
(Dollars in
Thousands)
<S> <C> <C>
Inventories:
Finished products......................................... $ 20,198 $ 19,179
Raw materials............................................. 2,784 4,440
-------- --------
Inventories at FIFO cost.................................... 22,982 23,619
-------- --------
Inventories under exchange agreements..................... 34 (184)
Stores and supplies....................................... 9,516 9,020
-------- --------
$ 32,532 $ 32,455
======== ========
Property, plant and equipment:
Land...................................................... $ 5,440 $ 5,267
Buildings................................................. 30,822 30,553
Plant and equipment....................................... 215,739 218,159
Construction in progress.................................. 13,342 14,046
-------- --------
Property, plant and equipment at cost..................... 265,343 268,025
Less: accumulated depreciation............................ (58,166) (45,028)
-------- --------
$207,177 $222,997
======== ========
Other assets:
Patents and technology, net............................... $ 27,017 $ 32,918
Other..................................................... 24,618 15,236
-------- --------
$ 51,635 $ 48,154
======== ========
Accrued liabilities:
Accrued compensation...................................... $ 927 $ 1,956
Billings in excess of costs incurred...................... 2,593 472
Other..................................................... 12,757 14,380
-------- --------
$ 16,277 $ 16,808
======== ========
</TABLE>

4. LONG-TERM DEBT

In August 1996 in connection with a recapitalization transaction, Chemicals
allocated $276.8 million of debt to the Company. In addition, debt of $81
million incurred at the time Chemicals acquired the acrylic fibers business
(see Note 8) was allocated to the Company. Principal payments are allocated to
the Company by Chemicals as scheduled principal payments are made on a basis
consistent with the original allocation. In addition, the Company makes
principal payments, from time to time, out of available cash. Interest expense
is allocated based on the terms of Chemicals' debt agreements. At September 30,
1998, interest rates ranged from 7.8% to 11.75%.

Debt issue costs relating to long-term debt have been allocated to the
Company by Chemicals on a basis consistent with long-term debt and are included
in other assets.

On July 23, 1999, Chemicals completed a private offering of the 12 3/8%
Notes. The 12 3/8% Notes are guaranteed by all of Chemicals' existing direct
and indirect U.S. subsidiaries (other than Sterling Chemicals Acquisitions,
Inc.) on a joint and several basis. Each subsidiary's guarantee ranks equally
in right of payment

F-71
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

with all of such subsidiary's existing and future senior indebtedness and
senior in right of payment to all existing and future subordinated indebtedness
of such subsidiary. However, the 12 3/8% Notes and each subsidiary's guarantee,
is subordinated to the extent of the collateral securing Chemicals' new secured
revolving credit facilities. The 12 3/8% Notes and the subsidiary guarantees
are secured by (i) a second priority lien on all of Chemicals' U.S. chemical
production facilities and related assets, (ii) a second priority pledge of all
of the capital stock of each subsidiary guarantor, and (iii) a first priority
pledge of 65% of the stock of certain of the Chemicals' subsidiaries
incorporated outside of the United States. The proceeds of the offering of the
12 3/8% Notes were used to fully repay and terminate Chemicals' three
outstanding term loans. Upon consummation of the offering of the 12-3/8% Notes,
the debt allocated to the Company by Chemicals increased to $325.4 million.

5. INCOME TAXES

The Company and its U.S. subsidiaries are included in the consolidated
federal U.S. tax return filed by Chemicals' parent. The Company's provision
(benefit) for U.S. income taxes has been allocated as if the Company filed
their annual federal U.S. tax returns on a separate return basis. As of
September 30, 1998 and 1997, $10.5 million and $6.5 million, respectively, of
income tax assets were included in Due from Affiliates. For the years ended
September 30, 1998, 1997, and 1996 the Company recorded $4.0 million, $1.8
million, and $0.4 million, respectively, of U.S. income tax benefit in the
provision (benefit) for income taxes.

Canadian 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 (the liability method).

A reconciliation of the Canadian income taxes to the Canadian effective tax
provision follows:

<TABLE>
<CAPTION>
Year Ended September
30,
----------------------
1998 1997 1996
------ ------ ------
(Dollars in
Thousands)
<S> <C> <C> <C>
Provision for federal income tax at the statutory
rate................................................. $1,367 $5,798 $6,241
Provincial income taxes at the statutory rate......... 563 2,672 2,786
Federal and provincial manufacturing and processing
tax credits.......................................... (286) (889) (1,061)
Other:
Non-taxable intercorporate dividends................. -- -- (449)
Other non-deductible (non-taxable) items............. 156 600 (96)
------ ------ ------
Total Canadian tax provision.......................... $1,800 $8,181 $7,421
====== ====== ======
</TABLE>

The provision for Canadian income taxes is composed of the following:

<TABLE>
<CAPTION>
Year Ended September
30,
---------------------
1998 1997 1996
------ ------ ------
(Dollars in
Thousands)
<S> <C> <C> <C>
Current federal......................................... $2,852 $1,489 $ --
Deferred federal........................................ (1,611) 3,717 4,788
Current provincial...................................... 1,427 798 --
Deferred provincial..................................... (868) 2,177 2,633
------ ------ ------
Total Canadian tax provision............................. $1,800 $8,181 $7,421
====== ====== ======
</TABLE>

F-72
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

The components of the Company's deferred income tax assets and liabilities are
summarized below:

<TABLE>
<CAPTION>
September 30,
---------------
1998 1997
------- -------
(Dollars in
Thousands)
<S> <C> <C>
Deferred tax assets:
Accrued liabilities........................................... $ 299 $ 337
Accrued postretirement cost................................... 966 980
Investment tax credits........................................ 6,806 10,457
------- -------
8,071 11,774
------- -------
Deferred tax liabilities:
Property, plant, and equipment................................ 14,459 18,436
Other......................................................... 121 208
------- -------
14,580 18,644
------- -------
Net deferred tax liabilities................................... $ 6,509 $ 6,870
======= =======
</TABLE>

6. EMPLOYEE BENEFITS

The Company's U.S. employees participate in various employee benefit plans
of Chemicals. Costs, assets, and liabilities associated with U.S. employees
participating in these various plans are allocated to the Company by Chemicals
based on the number of employees. In addition, the Company sponsors various
employee benefit plans in Canada.

Retirement Benefit Plans

Chemicals has non-contributory pension plans in the U.S. which cover all
salaried and wage employees. The benefits under these plans are based primarily
on years of service and employees' pay near retirement. Chemicals' 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 liability relating to U.S. employees allocated to
the Company by Chemicals for the retirement benefit plans and included in Due
from Affiliates was $2.5 million and $1.4 million at September 30, 1998 and
1997, respectively. The total pension expense relating to U.S. employees
allocated to the Company was $1.1 million, $0.9 million, and $0 for the years
ended September 30, 1998, 1997, and 1996, respectively.

The Company has employer and employee contributor plans in Canada which
cover all salaried and wage employees. The components of pension expense for
Canadian employees for the years ended September 30, 1998, 1997, and 1996 were
as follows:

<TABLE>
<CAPTION>
Fiscal Year
-----------------------
1998 1997 1996
------- ------- -----
(Dollars in
Thousands)
<S> <C> <C> <C>
Service cost........................................... $ 790 $ 435 $ 367
Interest cost on projected benefit obligation.......... 1,074 1,012 878
Actual return on plan assets and contributions......... (1,154) (1,010) (855)
Net amortization of unrecognized amounts............... (122) (57) 26
------- ------- -----
$ 588 $ 380 $ 416
======= ======= =====
</TABLE>

F-73
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Assumptions used in determining the projected benefit obligation and pension
cost for Canadian employees for the periods were as follows:

<TABLE>
<CAPTION>
Fiscal Year
----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rates................................................... 8% 8% 8%
Rates of increase in salary compensation level................... 5% 5% 5%
Expected long-term rate of return on assets...................... 8% 8% 8%
</TABLE>

The funded status of the Canadian pension plans as of the actuarial
valuation dates of August 31, 1998 and 1997 were as follows:

<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Actuarial present value of
benefits based on service
to date and present pay
levels:
Vested benefit obligation...... $(7,062) $(1,355) $(8,225) $--
Accumulated benefit
obligation.................... (7,434) (1,426) (8,225) --
Plan assets at fair value...... 11,947 1,115 14,978 --
------- ------- ------- ---
Plan assets in excess of (less
than) accumulated benefit
obligation.................... 4,513 (311) 6,753 --
Additional amounts related to
projected salary increases.... 5,626 91 5,231 --
------- ------- ------- ---
Plan assets more (less) than
total projected benefit
obligation.................... (1,113) (402) 1,522 --
Unrecognized net (gain) loss
resulting from plan experience
and changes in actuarial
assumptions................... 852 111 (2,121) --
Unrecognized prior service
cost.......................... 173 174 212 --
------- ------- ------- ---
Total accrued pension
obligation.................... $ (88) $ (117) $ (387) $--
======= ======= ======= ===
</TABLE>

Postretirement Benefits Other Than Pensions

Chemicals and the Company provide certain health care benefits and life
insurance benefits for retired employees. Substantially all employees become
eligible for these benefits at normal retirement age. The cost of these
benefits are accrued during the period in which the employee renders the
necessary service.

Health care benefits are provided to employees who retire with ten or more
years of service except for Canadian employees covered by collective bargaining
agreements. All employees are eligible for postretirement life insurance.
Postretirement health care benefits for U. S. plans are non-contributory.
Benefit provisions for most hourly and some salaried employees are subject to
collective bargaining. In general, the plans stipulate that retiree health care
benefits are paid as covered expenses are incurred. The liability relating to
U.S. employees allocated to the Company by Chemicals for the postretirement
benefits other than pensions and included in Due from Affiliates was $7.2
million and $6.4 million at September 30, 1998 and 1997, respectively. The
total postretirement benefits other than pensions expense for U.S. employees
allocated to the Company was $0.8 million, $0.8 million, and $0 for the years
ended September 30, 1998, 1997, and 1996, respectively.

F-74
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

The components of the Canadian postretirement benefits other than pension
expense for the years ended September 30, 1998, 1997, and 1996 were as follows:

<TABLE>
<CAPTION>
Fiscal Year
--------------
1998 1997 1996
---- ---- ----
(Dollars in
Thousands)
<S> <C> <C> <C>
Service cost.................................................... $264 $208 $209
Interest cost on projected benefit obligation................... 286 202 168
---- ---- ----
$550 $410 $377
==== ==== ====
</TABLE>

Actuarial assumptions used to determine costs and benefit obligations for
Canadian 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 11% for
fiscal 1998, exclusive of demographic changes, decreasing to 6% by the year
2003. These trend rates reflect current cost performance and the Company'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 $231,000 and would increase annual
aggregate service and interest costs by $34,000.

The following sets forth the Canadian plans' funded status reconciled with
amounts reported in the Company's consolidated balance sheet at September 30,
1998 and 1997.

Accumulated postretirement benefit obligation ("APBO"):

<TABLE>
<CAPTION>
1998 1997
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Retirees.............................................. $ 504 $ 176
Fully eligible active plan participants............... 885 725
Other active plan participants........................ 2,969 2,094
----------- -----------
Total APBO........................................... 4,358 2,995
Unrecognized loss..................................... (1,599) (348)
----------- -----------
Accrued postretirement benefit liability.............. $ 2,759 $ 2,647
=========== ===========
</TABLE>

Savings and Investment Plan

The Savings Plan covers substantially all United States employees, including
executive officers. The Savings Plan is qualified under Section 401(k) of the
Internal Revenue Code (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 "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. The Company does not make any contributions to the Savings Plan.

Profit Sharing and Bonus Plans

In January 1997, the Board of Directors of Chemicals' parent, upon
recommendation of the Compensation Committee, approved the establishment of a
Profit Sharing Plan that is designed to benefit all qualified employees, and a
Bonus Plan that will provide for bonuses to exempt salaried employees based on
the annual financial performance of Chemicals' parent.

F-75
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Under previous profit sharing plans, expense allocated to the Company for
the year ended September 30, 1996, was $0.5 million. No expenses for profit
sharing or bonuses were incurred by Chemicals or allocated to the Company in
fiscal 1998 and 1997.

Phantom Stock Plan

The Company introduced a phantom stock option plan to all eligible full-time
Canadian employees. The effective date of the plan was August 21, 1996. At the
end of each plan year, the plan administrator establishes a "determined
percentage" for the preceding plan year. This percentage is then multiplied be
each participant's compensation for the plan year to determine the award
amount. The award amount is then divided be the fair market value of one share
of the common stock of Chemicals' parent, as of December 31 of that plan year,
to determine the number of rights to be credited to participants. Upon
termination of employment, the benefit amount becomes payable to the
participant. The benefit amount will be the number of vested rights in the
participant's account, multiplied by the fair market value of one share of
common stock of Chemicals' parent as of the most recent valuation date.

The Company has recorded an expense of $238,000, $346,000,and $0 related to
the phantom stock plan for the years ended September 30, 1998, 1997,and 1996.

7. COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company has entered into various long-term noncancellable operating
leases. Future minimum lease commitments at September 30, 1998, are as follows:
fiscal 1999 -- $3.8 million; fiscal 2000 -- $3.4 million; fiscal 2001 -- $3.2
million; fiscal 2002 -- $3.2 million; fiscal 2003 -- $3.0 million; and $7.8
million thereafter.

Environmental and Safety Matters

The Company's operations involve the handling, production, transportation,
treatment, and disposal of materials that are classified as hazardous or toxic
waste and that are extensively regulated by environmental and health and safety
laws and regulations. Environmental permits required for the Company's
operations are subject to periodic renewal and can be revoked or modified for
cause or when new or revised environmental laws or permit requirements are
implemented. Changing and increasingly strict environmental laws, regulations,
and permit requirements can affect the manufacturing, handling, processing,
distribution, and use of the Company's products and, if so, the Company's
business and operations may be materially and adversely affected. In addition,
changes in the law, regulations, and permit requirements can cause the Company
to incur substantial costs in upgrading or redesigning its facilities and
processes, including waste treatment, storage, disposal, and other waste
handling practices and equipment.

While the Company believes that its business operations and facilities
generally are operated in compliance with all material aspects of applicable
environmental and health and safety laws, regulations, and disclosure
requirements, there can be no assurance that past practices and future
operations will not result in material claims or regulatory action, require
material environmental expenditures, or result in exposure or injury claims by
employees and the public. Some risk of environmental costs and liabilities is
inherent in the operations and products of the Company, as it is with other
companies engaged in similar businesses. In addition, a catastrophic event at
any of the Company's facilities could result in liabilities to the Company
substantially in excess of its insurance coverages.

F-76
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Any significant ban on all chlorine containing compounds could have a
materially adverse effect on the Company's financial condition and results of
operations. British Columbia has a regulation in place requiring elimination of
the use of all chlorine products, including chlorine dioxide, in the bleaching
process by the year 2002. Chlorine dioxide is produced from sodium chlorate,
which is one of the Company's pulp chemical products. The pulp and paper
industry believes that a ban of chlorine dioxide in the bleaching process will
yield no measurable environmental or public health benefit and is working to
change this regulation but there can be no assurance that the regulation will
be changed. In the event such a regulation is implemented, the Company would
seek to sell the products it manufactures at its British Columbia facility to
customers in other markets. The Company is not aware of any other laws or
regulations in place in North America, which would restrict the use of such
products for other purposes.

Legal Proceedings

Pledge of Common Stock

In connection with the issuance of the 12 3/8% Notes, the U.S. entities
included in these financial statements have given the noteholders a second
priority pledge of 100% of their common stock. In addition, the Company's non-
U.S. entities have given the noteholders a first priority pledge of 65% of
their common stock.

8. BUSINESS ACQUISITIONS

On January 31, 1997, the Company acquired the AFB from Cytec. The AFB, or
Sterling Fibers, recorded sales of approximately $92 million during the eight
months of operations in fiscal 1997 and consists of an acrylic fibers plant
located near Pensacola, Florida, and several associated marketing and research
offices. Sterling Fibers is one of two acrylic fibers manufacturers in the
United States. Cytec supplies acrylonitrile to Sterling Fibers through a five-
year supply agreement ending in 2002. The acquisition was financed through the
issuance of $81 million of debt by Chemicals, the issuance of $10 million
(liquidation value) of Series A "pay in kind" mandatory redeemable preferred
stock of Chemicals' parent ("Series A Preferred") to Cytec, and the sale of $10
million of Chemicals' parent common stock in a private placement. At the
acquisition date, the debt and amounts related to the Series A Preferred Stock
were allocated to the Company as long-term debt due to Parent and amounts
related to Chemicals' parent common stock were recorded as contributed capital.
The Company used the purchase method to account for the acquisition, and
operating results of Sterling Fibers beginning February 1, 1997, are included
with those of the Company.

The following table presents the unaudited pro forma results of operations
of the Company as if the AFB acquisition had occurred on October 1, 1995. The
pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the AFB Acquisition
been made at the beginning of the fiscal year 1996 or of results which may
occur in the future (in thousands).

<TABLE>
<CAPTION>
Pro Forma Pro Forma
Twelve Months Twelve Months
Ended Ended
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Revenues............................................ $306,756 $293,611
Net income.......................................... $ 5,408 $ 17,248
</TABLE>

F-77
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

9. GEOGRAPHIC INFORMATION

<TABLE>
<CAPTION>
Year Ended September
30,
------------------------
1998 1997 1996
------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C>
Export Sales:
Export revenues.................................... $26,426 $37,612 $6,924
Percentage of total revenues....................... 10% 14% 4%
Export revenues (as a percent of total exports) by
geographical area:
Asia............................................... 34% 64% 70%
Europe............................................. 22% 18% 30%
Other.............................................. 44% 18% --
</TABLE>

10. FINANCIAL INSTRUMENTS

Foreign Exchange

Concentration of Risk

The Company sells its products primarily to companies involved in the fiber
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. Historically, the Company's credit losses have
been minimal.

Approximately 16% of the Company's employees are covered by union
agreements. None of the Company's employees are covered by union agreements,
which could expire within one year.

F-78
<PAGE>

STERLING CHEMICALS U.S. SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

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 United States corporations with
ratings of A1 by Standard & Poor's Ratings Group or P1 by Moody's Investor
Services, Inc., loan participations of major United States corporations with a
short term credit rating of A1/P1 and direct obligations of the United States
Government or its agencies. In addition, not more than $5 million will be
invested by the Company with any single bank, financial institution, or United
States corporation.

Fair Value of Financial Instruments

The carrying amounts reflected in the consolidated balance sheet for cash,
cash equivalents, and receivables approximate fair value as reported in the
balance sheet due to the short maturities. Based on the Company's allocation of
Chemicals' debt at September 30, 1998, the carrying value is $323.3 million,
and the fair value is $295.5 million.

F-79
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholder of
Sterling Pulp Chemicals, Ltd.

We have audited the accompanying balance sheets of Sterling Pulp Chemicals,
Ltd. (an indirect wholly-owned subsidiary of Sterling Chemicals, Inc.) as at
September 30, 1998 and 1997 and the related statements of income, changes in
stockholder's equity and cash flows for each of the years ended September 30,
1998, 1997 and 1996. 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 in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance 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 accompanying financial statements present fairly, in all
material respects, the financial positions of Sterling Pulp Chemicals, Ltd. as
at September 30, 1998, 1997 and 1996, the results of its operations and its
cash flows for each of the three years ended September 30, 1998, 1997 and 1996,
in conformity with accounting principles generally accepted in the United
States of America.

DELOITTE & TOUCHE LLP

Chartered Accountants

Mississauga, Canada
September 17, 1999

F-80
<PAGE>

STERLING PULP CHEMICALS, LTD.

STATEMENTS OF OPERATIONS
(U.S. dollars in thousands)

<TABLE>
<CAPTION>
Year ended September 30,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenue............................................. $112,750 $130,114 $137,398
Cost of goods sold.................................. 86,403 91,752 95,379
-------- -------- --------
Gross profit........................................ 26,347 38,362 42,019
Selling, general and administrative expenses........ 16,650 14,468 14,882
Interest and debt related expenses.................. 4,997 4,122 5,716
-------- -------- --------
4,700 19,772 21,421
Provision for income taxes (Note 5)................. 1,800 8,181 7,421
-------- -------- --------
Net income.......................................... $ 2,900 $ 11,591 $ 14,000
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-81
<PAGE>

STERLING PULP CHEMICALS, LTD.

BALANCE SHEETS
(U.S. dollars in thousands)

<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents........................ $ 3,426 $ 5,180
Accounts receivable (net of allowance for
doubtful accounts of $153; 1997--$594).......... 14,015 20,051
Due from related parties (Note 8)................ 954 3,170
Other receivables................................ 1,744 5,880
Inventories (Note 2)............................. 6,660 5,547
Prepaid expenses................................. 592 710
-------- --------
27,391 40,538
Property, plant and equipment, net (Note 3)........ 80,038 92,287
Other assets....................................... 4,878 123
-------- --------
$112,307 $132,948
======== ========
LIABILITIES
Current
Accounts payable................................. $ 13,400 $ 7,904
Accrued generator construction costs............. 1,175 5,590
Other accrued liabilities........................ 5,213 6,465
Due to related parties (Note 8).................. 7,400 3,698
Current portion of long-term debt................ 5,500 --
-------- --------
32,688 23,657
Note payable (Note 4).............................. 53,122 65,043
Deferred income taxes.............................. 6,509 6,870
Deferred credits and other liabilities............. 3,681 2,969
-------- --------
96,000 98,539
-------- --------
Commitments and contingencies (Note 7)
Stockholder's equity
Common stock..................................... 1 1
Additional paid-in capital....................... -- 7,338
Retained earnings................................ 25,296 33,062
Accumulated currency translation adjustment...... (8,990) (5,992)
-------- --------
16,307 34,409
-------- --------
$112,307 $132,948
======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-82
<PAGE>

STERLING PULP CHEMICALS, LTD.

STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(U.S. dollars in thousands)

<TABLE>
<CAPTION>
Common Stock Additional Accumulated
------------- Paid-In Retained Translation
Shares Amount Capital Earnings Adjustment
------ ------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1995..... -- $-- $ 36,170 $ 7,471 $(4,726)
Common stock issued............. 1 1 -- -- --
Net capital contributions....... -- -- 798 -- --
Net income...................... -- -- -- 14,000 --
Translation adjustment.......... -- -- -- -- (551)
--- ---- -------- -------- -------
Balance, September 30, 1996..... 1 1 36,968 21,471 (5,277)
Net capital distributions....... -- -- (29,630) -- --
Net income...................... -- -- -- 11,591 --
Translation adjustment.......... -- -- -- -- (715)
--- ---- -------- -------- -------
Balance, September 30, 1997..... 1 1 7,338 33,062 (5,992)
Net capital distributions....... -- -- (7,338) -- --
Dividends....................... -- -- -- (10,666) --
Net income...................... -- -- -- 2,900 --
Translation adjustment.......... -- -- -- -- (2,998)
--- ---- -------- -------- -------
Balance, September 30, 1998..... 1 $ 1 $ -- $ 25,296 $(8,990)
=== ==== ======== ======== =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-83
<PAGE>

STERLING PULP CHEMICALS, LTD.

STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)

<TABLE>
<CAPTION>
Year ended September 30,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 2,900 $ 11,591 $ 14,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 7,700 8,359 8,052
Loss on disposal/write off of assets......... 70 -- 236
Write-off of debt fees....................... -- -- 1,043
Deferred tax expense/(benefit)............... (2,479) 5,894 7,421
Accrued compensation and other............... 505 (170) 562
Changes in assets/liabilities:
Accounts receivable.......................... 6,036 3,803 (4,447)
Due from related parties..................... 2,216 1,482 (4,652)
Other receivables............................ 4,136 1,504 55
Inventories.................................. (1,113) 434 63
Prepaid expenses............................. 117 (1) (34)
Other assets--net............................ 846 1,339 (410)
Accounts payables............................ 5,496 (1,336) 1,479
Accrued generator construction costs......... (4,414) 1,298 --
Other accrued liabilities.................... (1,252) 869 557
Due to related parties....................... 3,702 2,133 1,565
Other liabilities............................ (4,240) (814) (1,991)
-------- -------- --------
Net cash provided by operating activities........ 20,226 36,385 23,499
-------- -------- --------
Cash flows from investing activities:
Capital expenditures........................... (4,381) (3,336) (4,397)
-------- -------- --------
Cash flows from financing activities:
Repayment of long term debt.................... -- -- (16,119)
Contribution from parent....................... -- -- 798
Distribution to parent......................... (7,338) (29,630) --
Dividends...................................... (10,666) -- --
-------- -------- --------
(18,004) (29,630) (15,321)
-------- -------- --------
Effect of exchange rate on cash.................. 405 (1,469) (551)
-------- -------- --------
Net (Decrease) increase in cash and cash
equivalents..................................... (1,754) 1,950 3,230
Cash and cash equivalents, beginning of year..... 5,180 3,230 --
-------- -------- --------
Cash and cash equivalents, end of year........... $ 3,426 $ 5,180 $ 3,230
======== ======== ========
Supplement disclosures of cash flow information:
Interest paid, net of interest income
received...................................... $ (92) $ (1,076) $ (663)
Income taxes paid.............................. $ (3,290) $ (1,983) $ (407)
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-84
<PAGE>

STERLING PULP CHEMICALS, LTD.

NOTES TO THE FINANCIAL STATEMENTS

(U.S. dollars in thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and operations

Sterling Pulp Chemicals, Ltd. (the "Company") is a Canadian company which
operates four pulp chemical facilities in Canada. These plants primarily
produce sodium chlorate, a chemical used primarily to make chlorine dioxide,
which in turn is used by pulp mills in the pulp bleaching process. The Company
sells sodium chlorate to customers in Canada and the United States. The
Company also oversees construction of large scale chlorine dioxide generators
for the pulp and paper industry. The Company is a wholly-owned subsidiary of
Sterling Canada, Inc. ("Parent"), which is a wholly-owned subsidiary of
Sterling Chemicals, Inc. ("Chemicals").

The financial statements of the Company are presented in accordance with
generally accepted accounting principles in the United States of America
("US") and have been translated from Canadian dollars, the Company's
functional currency to U.S. dollars, the reporting currency of the Parent,
following the guidelines established by SFAS No. 52 "Foreign Currency
Translation".

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 and market; cost is determined
on the first-in, first-out ("FIFO") basis except for raw materials and 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.

Impairment of long-lived assets

Impairment tests of long-lived assets are made when conditions indicate
their carrying costs may not be recoverable. Such impairment tests are based
on a comparison of undiscounted future cash flows or the market value of
similar assets to the carrying cost of the asset. If an impairment is
indicated, the asset value is written down to its estimated fair value.

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,
while repair and maintenance expenses are charged to operations as incurred.
Disposals are removed at carrying costs 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.

Income taxes

The Company files a federal Canadian tax return as well as returns in the
provinces in which it operates.

F-85
<PAGE>

STERLING PULP CHEMICALS, LTD.

NOTES TO THE FINANCIAL STATEMENTS--(Continued)

Deferred income taxes are recorded to reflect the tax consequences in future
years of differences between the tax bases of assets and liabilities and the
financial reporting amounts at each year-end (the liability method).

Revenue recognition

The Company generates revenues through sales in the open market pursuant to
short-term and long-term contracts with its customers. The Company recognizes
revenue from sales as the products are shipped. Revenues associated with the
constructing of chlorine dioxide generators are recognized using the percentage
of completion method based on cost incurred compared to total estimated cost.

Foreign currency translation

The Company's functional currency is the Canadian dollar; the Parent's
reporting currency is the U.S. dollar. For financial reporting purposes, assets
and liabilities denominated in Canadian dollars are translated into U.S.
dollars at year-end rates of exchange and revenues and expenses are translated
at the average monthly exchange rates. Translation adjustments are reported as
a separate component of stockholder's equity while transaction gains and losses
are included in operations.

Environmental costs

Disclosures about fair value of financial instruments

In preparing disclosures about the fair value of financial instruments, the
Company has assumed that the carrying amount approximates fair value for cash
and cash equivalents, receivables, short-term borrowings, accounts payable and
certain accrued expenses because of the short maturities of those instruments.
The fair values of long-term debt instruments are estimated based upon quoted
market values (if applicable) or on the current interest rates available to the
Company for debt with similar terms and remaining maturities. Considerable
judgement is required in developing these estimates and, accordingly, no
assurances can be given that the estimated values presented herein are
indicative of the amounts that would be realized in a free market exchange.

Accounting estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.

Earnings per share

All issued and outstanding shares of the Company are held by the Parent.
Accordingly, earnings per share information is not presented.

F-86
<PAGE>

STERLING PULP CHEMICALS, LTD.

NOTES TO THE FINANCIAL STATEMENTS--(Continued)

New accounting standards

SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and displaying of comprehensive income and its components. SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits,"
establishes revisions to employers' disclosure about pension and other post
retirement benefit plans. Adoption of these statements in fiscal 1999 will have
no effect on net income (loss).

2. INVENTORIES

<TABLE>
<CAPTION>
September 30,
-------------
1998 1997
------ ------
<S> <C> <C>
Inventories
Finished products........................................... $3,455 $2,253
Raw materials............................................... 253 370
------ ------
Inventories at FIFO cost...................................... 3,708 2,623
Inventories under exchange agreements......................... 78 (184)
Stores and supplies........................................... 2,874 3,108
------ ------
$6,660 $5,547
====== ======
</TABLE>

3. PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
September 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
Property, plant and equipment
Land................................................... $ 4,079 $ 4,526
Buildings.............................................. 11,864 13,053
Plant and equipment.................................... 106,408 113,652
-------- --------
122,351 131,231
Less accumulated depreciation............................ (42,313) (38,944)
-------- --------
$ 80,038 $ 92,287
======== ========
</TABLE>

4. NOTE PAYABLE

On August 20, 1992, the Company entered into an agreement for a $109,087
demand note facility with Sterling NRO, Ltd (Sterling NRO). Sterling NRO is
also owned by the Parent and is therefore related by virtue of common control.
The note has no scheduled terms of repayment and interest is calculated and
payable monthly in arrears at 1 and 1/2% above the Bank of Nova Scotia prime
rate. All but $5,500 of the note is classified as long-term because Chemicals
has represented that no other repayments will be made in fiscal 1999. Interest
expensed for the year ended September 30, 1998, 1997 and 1996 were $4,860,
$4,199 and $6,257 respectively. Principal repayments for the year ended
September 30, 1998, 1997 and 1996 were nil, nil and $16,119 respectively.

F-87
<PAGE>

STERLING PULP CHEMICALS, LTD.

NOTES TO THE FINANCIAL STATEMENTS--(Continued)

5. INCOME TAXES

A reconciliation of federal statutory income taxes to the Company's
effective tax provision follows:

<TABLE>
<CAPTION>
Year ended September
30,
-----------------------
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Provision for federal income tax at the statutory
rate............................................. $1,367 $5,798 $ 6,241
Provincial income taxes at the statutory rate..... 563 2,672 2,786
Federal and provincial manufacturing and
processing tax credits........................... (286) (889) (1,061)
Other:
Non-taxable intercorporate dividends............ -- -- (449)
Other non-deductible (non-taxable) items........ 156 600 (96)
------ ------ -------
$1,800 $8,181 $ 7,421
====== ====== =======
</TABLE>

The provisions for income taxes is composed of the following:

<TABLE>
<CAPTION>
Year ended September
30,
----------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Current federal....................................... $ 2,852 $1,489 $ --
Deferred federal...................................... (1,611) 3,717 4,788
Current provincial.................................... 1,427 798 --
Deferred provincial................................... (868) 2,177 2,633
------- ------ ------
Total tax provision................................. $ 1,800 $8,181 $7,421
======= ====== ======
</TABLE>

The components of the Company's deferred income tax assets and liabilities
are summarized below:

<TABLE>
<CAPTION>
September 30,
---------------
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets
Accrued liabilities....................................... $ 299 $ 337
Accrued postretirement cost............................... 966 980
Investment tax credits.................................... 6,806 10,457
------- -------
8,071 11,774
------- -------
Deferred tax liabilities
Property, plant and equipment............................. 14,459 18,436
Other..................................................... 121 208
------- -------
14,580 18,644
------- -------
Net deferred tax liabilities................................ $ 6,509 $ 6,870
======= =======
</TABLE>

6. EMPLOYEE BENEFITS

The Company has established the following benefit plans:

Retirement benefit plans

The Company has employer and employee contributory plans which cover all
salaried and wage employees. The benefits under these plans are based primarily
on years of service and/or employee's pay near

F-88
<PAGE>

STERLING PULP CHEMICALS, LTD.

NOTES TO THE FINANCIAL STATEMENTS--(Continued)

retirement. The Company's funding policy is consistent with the funding
requirements of Canadian federal and provincial laws and regulations. Plan
assets consist principally of common stocks and government and corporate
securities.

The components of pension expense for the years ended September 30, 1998,
1997, and 1996 were as follows:

<TABLE>
<CAPTION>
Year ended September 30,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Service cost............ $ 790 $ 435 $ 367
Interest cost on
projected benefit
obligation............. 1,074 1,012 878
Actual return on plan
assets and
contributions.......... (1,154) (1,010) (855)
Net amortization of
unrecognized amounts... (122) (57) 26
-------- -------- ------
$ 588 $ 380 $ 416
======== ======== ======
</TABLE>

Assumptions used in determining the projected benefit obligation and pension
cost for the years were as follows:

<TABLE>
<CAPTION>
Year ended
September 30,
----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rates............................................. 8.00% 8.00% 8.00%
Rates of increase in salary compensation level............. 5.00% 5.00% 5.00%
Expected long-term rates of return on assets............... 8.00% 8.00% 8.00%
</TABLE>

The funded status of the Company's pension plan as of the actuarial
valuation dates of August 31, 1998 and 1997 were as follows:

<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
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 level
Vested benefit obligation.... $(7,062) $(1,355) $(8,225) $--
Accumulated benefit
obligation.................. (7,434) (1,426) (8,225) --
Plan assets at fair value.... 11,947 1,115 14,978 --
Plan assets in excess of
(less than) accumulated
benefit obligation.......... 4,513 (311) 6,753 --
Additional amounts related to
projected salary increases.. 5,626 91 5,231 --
Plan assets more (less) than
total projected benefit
obligation.................. (1,113) (402) 1,522 --
Unrecognized net (gain) loss
resulting from plan
experience and changes in
actuarial assumptions....... 852 111 (2,121) --
Unrecognized prior service
cost........................ 173 174 212 --
------- ------- ------- ----
Total accrued pension
obligation.................... $ (88) $ (117) $ (387) $--
======= ======= ======= ====
</TABLE>

F-89
<PAGE>

STERLING PULP CHEMICALS, LTD.

NOTES TO THE FINANCIAL STATEMENTS--(Continued)

Postretirement Benefits Other than Pensions

The Company provides certain health care and life insurance benefits for
retired employees. Employees become eligible for these benefits at normal
retirement age.

Retiree insurance plans provide health and life insurance benefits to
employees who retire from the Company with ten or more years of service. All of
the Company's employees are eligible for postretirement life insurance and,
except for collectively bargained employees, are eligible for postretirement
medical insurance. Postretirement medical insurance is a non-contributory plan.
Benefit provisions for most hourly and some salaried employees are subject to
collective bargaining.

The components of postretirements benefits cost other than pensions for the
years ended September 30, 1998, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
Year ended
September 30,
--------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost................................................. $264 $208 $209
Interest cost on projected benefit obligation................ 286 202 168
---- ---- ----
$550 $410 $377
==== ==== ====
</TABLE>

Actuarial assumptions used to determine 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 11% for fiscal 1998,
exclusive of demographic changes, decreasing to 6% by the year 2003. These
trend rates reflect current cost performance and the Company'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 $231 and would increase annual aggregate service and interest
cost by $34.

The following sets forth the plans funded status reconciled with amounts
reported in the Company's consolidated balance sheet at September 30, 1998 and
1997.

<TABLE>
<CAPTION>
September 30,
----------------
1998 1997
------- -------
<S> <C> <C>
Retirees................................................... $ 504 $ 176
Fully eligible active plan participants.................... 885 725
Other active plan participants............................. 2,969 2,094
------- -------
Total accrued postretirement benefit liability............. 4,358 2,995
Unrecognized loss.......................................... (2,759) (2,647)
------- -------
Accrued postretirement benefit liability................... $ 1,599 $ 348
======= =======
</TABLE>

Profit Sharing Plans

The Company established profit sharing plans for the benefit of salaried and
hourly employees meeting certain eligibility requirements. The Company
distributes a specified percentage of its earnings before interest, taxes,
depreciation and amortization above a specified level to eligible employees on
a quarterly basis. The amount of each eligible employee's quarterly
distribution is related to a specified percentage of each such employee's base
salary or wages, with the percentage determined by the employee's position in
the Company. The profit sharing for each of the fiscal year ended September 30,
1998, 1997 and 1996 was nil.

F-90
<PAGE>

STERLING PULP CHEMICALS, LTD.

NOTES TO THE FINANCIAL STATEMENTS--(Continued)

Phantom Stock Plan

The Company introduced a phantom stock option plan to all eligible full-time
Canadian employees. The effective date of the plan was August 21, 1996. At the
end of each plan year, the plan administrator establishes a "determined
percentage" for the preceding plan year. This percentage is then multiplied by
each participant's compensation for the plan year to determine the award
amount. The award amount is then divided by the fair market value of one share
of the common stock of Sterling Chemicals Holdings, Inc. ("Holdings"), as of
December 31 of that plan year, to determine the number of rights to be credited
to participants. Upon termination of employment, the benefit amount becomes
payable to the participant. The benefit amount will be the number of vested
rights in the participant's account, multiplied by the fair market value of one
share of common stock of Holdings as of the most recent valuation date.

The Company has recorded an expense of $238, $346, and $nil related to the
phantom stock plan for the years ended September 30, 1998, 1997 and 1996.

7. COMMITMENTS AND CONTINGENCIES

Lease commitments

The Company has entered into various long-term noncancellable rail car
operating leases. Future minimum lease commitments are as follows: fiscal
1999--$3,777, fiscal 2000--$3,385, fiscal 2001--$3,211, fiscal 2002--$3,211,
fiscal 2003--$3,175 and thereafter--$5,344.

Environmental and safety matters

While the Company believes that its business operations and facilities
generally are operated in compliance with all material aspects of applicable
environmental and health and safety laws, regulations, and disclosure
requirements, there can be no assurance that past practices and future
operations will not result in material claims or regulatory action, require
material environmental expenditures, or result in exposure or injury claims by
employees and the public. Some risk of environmental costs and liabilities is
inherent in the operations and products of the Company, as it is with other
companies engaged in similar businesses. In addition, a catastrophic event at
any of the Company's facilities could result in liabilities to the Company
substantially in excess of its insurance coverages.

Any significant ban on all chlorine containing compounds could have a
materially adverse effect on the Company's financial condition and results of
operations. British Columbia has a regulation in place requiring elimination of
the use of all chlorine products, including chlorine dioxide, in the bleaching
process by the year 2002. Chlorine dioxide is produced from sodium chlorate,
which is the Company's primary pulp chemical product. The pulp and paper
industry believes that a ban of chlorine dioxide in the bleaching process will
yield no measurable environmental or public health benefit and is working to
change this regulation but there can be no assurance that the regulation will
be changed. In the event such a regulation is implemented, the Company would
seek to sell the products it manufactures at its British Columbia facility to
customers in other markets. The Company is not aware of any other laws or
regulations in place in North America, which would restrict the use of such
products for other purposes.

F-91
<PAGE>

STERLING PULP CHEMICALS, LTD.

NOTES TO THE FINANCIAL STATEMENTS--(Continued)

Legal proceedings

Pledge of common stock

In connection with a 1999 issuance of senior secured notes by Chemicals,
Chemicals has given the noteholders a first priority pledge of 65% of the
Company's common stock.

8. RELATED PARTY TRANSACTIONS

In the normal course of operations of the Company the following represents
significant transactions with related parties for the years ended September 30,
1998, 1997 and 1996:

<TABLE>
<CAPTION>
Year ended September
30,
--------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Chemicals
Management fees...................................... $ 795 $ 848 $ 795
Parent
Services, marketing and R&D revenue.................. $ 833 $ 617 $ 414
Commonly controlled companies
Sale of goods........................................ $4,867 $ 347 $ --
Purchase of goods.................................... $4,580 $ -- $ --
Supply agreement revenue............................. $ -- $ 585 $1,402
Administration fee revenue........................... $ 323 $ 361 $ --
Interest expense..................................... $4,860 $4,199 $6,257
</TABLE>

The amounts due from and to related parties for the years ended September
30, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
September 30,
-------------
1998 1997
------ ------
<S> <C> <C>
Due from related parties
Parent...................................................... 305 --
Commonly controlled companies............................... 649 3,170
------ ------
$ 954 $3,170
------ ------
Due to related parties
Holdings.................................................... $ 128 $ 364
Commonly controlled companies............................... 7,272 3,334
------ ------
$7,400 $3,698
====== ======
</TABLE>

9. EXPORT SALES

The Company is engaged in the sale of products for export into the United
States. These were primarily sodium chlorate sales and were 46%, 41% and 46% of
revenues for 1998, 1997 and 1996, respectively.

F-92
<PAGE>

STERLING PULP CHEMICALS, LTD.

NOTES TO THE FINANCIAL STATEMENTS--(Continued)

10. FINANCIAL INSTRUMENTS

Forward exchange contracts

The Company enters into forward exchange contracts to hedge foreign currency
transactions on a continuing basis for periods consistent with its committed
exposures. The Company does not engage in currency speculation. The effect of
this practice is to minimize on a rolling basis the impact of foreign exchange
rate movements on the Company's operating results. As of September 30, 1998,
1997 and 1996, the Company had a notional amount of approximately $54,000,
$20,200, and $21,800 respectively of forward foreign exchange contracts
outstanding to buy Canadian dollars. The Company makes net settlements of
Canadian dollars for U.S. dollars at maturity, at rates agreed to at inception
of the contracts. The deferred gain (loss) on these forward foreign exchange
contracts at September 30, 1998, 1997 and 1996 were ($4,671), ($285) and $310,
respectively.

Fair value of financial instruments

The fair value approximated the carrying value of financial instruments
included in current assets and current liabilities on the balance sheet at
September 30, 1998 due to the short maturities. The fair value of the notes
payable on the balance sheet at September 30, 1998 approximated their carrying
value, as the interest rate fluctuates with changes in market rates.

Concentrations of credit risk

The Company sells its products primarily to companies involved in the pulp
manufacturing industry. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral for accounts receivable.

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 credit
loss is minimal.

Approximately 50% of the Company's employees are covered by union
agreements. None of the Company's employees are covered by union agreements
which could expire within one year.

F-93
<PAGE>

Sterling Chemicals, Inc.

Offer to Exchange 12 3/8% Senior
Secured Notes Due 2006, Series B
For All Existing 12 3/8% Senior
Secured Notes Due 2006, Series A

----------------

PROSPECTUS

----------------

October 6, 1999

- --------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by Sterling Chemicals, Inc. This
prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any securities other than the securities to which it relates or any
offer to sell or the solicitation of an offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful. Neither the
delivery of this prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of Sterling Chemicals, Inc. since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.

- --------------------------------------------------------------------------------