FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________
Commission File Number 1-10059
STERLING CHEMICALS, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0185186
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number
1200 Smith Street, Suite 1900, Houston, Texas 77002-4312
- --------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes /x/ No / /
As of May 3, 1994, the number of shares of common stock
outstanding was 55,659,958.
Page 1 of __<PAGE>
Part I. - FINANCIAL INFORMATION
Item 1. - FINANCIAL STATEMENTS
--------------------
<TABLE>
<CAPTION>
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands Except Per Share Data)
(Unaudited)
March 31, September 30,
1994 1993
--------- -------------
<C> <C>
<S>
ASSETS
------
Current assets:
Cash and cash equivalents $ 108 $ 1,352
Accounts receivable 111,999 74,553
Inventories 58,960 60,328
Prepaid expenses 3,392 4,632
Deferred income taxes 4,152 3,856
-------- --------
Total current assets 178,611 144,721
Property, plant and equipment, net 297,457 314,315
Other assets 77,333 80,669
-------- --------
Total assets $553,401 $539,705
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 59,707 $ 42,241
Accrued liabilities 41,055 43,513
Current portion of long-term debt 29,300 28,015
-------- --------
Total current liabilities 130,062 113,769
Long-term debt 250,845 256,845
Deferred income taxes 43,673 36,098
Deferred credits and other liabilities 63,942 62,657
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value
150,000 shares authorized,
60,327 and 60,325 shares issued
and 55,637 and 55,435 shares
outstanding, respectively 603 603
Additional paid-in capital 33,355 34,708
Retained earnings 104,211 105,871
Pension adjustment (1,297) (1,297)
Accumulated translation adjustment (20,872) (16,184)
Deferred compensation (102) (164)
-------- --------
115,898 123,537
Treasury stock at cost, 4,690
and 4,891 shares, respectively (51,019) (53,201)
-------- --------
Total stockholders' equity 64,879 70,336
-------- --------
Total liabilities and
stockholders' equity $553,401 $539,705
======== ========
<FN>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
1994 1993 1994 1993
-------- -------- -------- --------
<C> <C> <C> <C>
<S>
Revenues $154,754 $113,045 $285,313 $250,834
Cost of goods sold 139,948 104,426 267,537 229,090
-------- -------- -------- --------
Gross profit 14,806 8,619 17,776 21,744
Selling, general and
administrative
expenses 6,996 6,955 12,197 13,153
Interest and debt
related expenses,
net of interest
income 5,394 5,725 10,605 11,361
Other income - - 2,606 -
-------- -------- -------- --------
Income (loss) before
income taxes 2,416 (4,061) (2,420) (2,770)
Provision (benefit) for
income taxes 587 (1,475) (760) (263)
-------- -------- -------- --------
Net income (loss) $ 1,829 $ (2,586) $ (1,660) $ (2,507)
======== ======== ======== ========
Per share data:
Net income (loss) $ .03 $ (.05) $ (.03) $ (.05)
======== ======== ======== ========
Dividends declared
per share $ - $ .02 $ - $ .04
======== ======== ======== ========
Weighted average
shares outstanding 55,605 55,248 55,553 55,170
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended March 31,
--------------------------
1994 1993
-------- --------
<C> <C>
<S>
Cash flows from operating activities:
Cash received from customers $281,936 $269,839
Miscellaneous cash receipts 4,542 3,162
Cash paid to suppliers and
employees (279,183) (252,869)
Interest paid (9,310) (10,752)
Interest received 12 45
Income taxes paid (147) -
-------- --------
Net cash provided by (used in)
operating activities (2,150) 9,425
Cash flows from investing
activities:
Capital expenditures (4,124) (7,868)
Retirement of fixed assets (363) (1,050)
Proceeds from joint venture
distribution 1,350 1,545
Proceeds from sale of assets 2,606 -
-------- --------
Net cash used in investing activities (531) (7,373)
Cash flows from financing activities:
Net change in revolving debt 16,152 8,793
Scheduled payments on long-term
debt (14,831) (8,302)
Proceeds from sale of common stock - 203
Dividends paid - (2,207)
Other 106 (119)
-------- --------
Net cash provided by (used in)
financing activities 1,427 (1,632)
Effect of exchange rate on cash 10 (55)
-------- --------
Net increase (decrease) in cash
and cash equivalents (1,244) 365
Cash and cash equivalents -
beginning of period 1,352 2,625
Cash and cash equivalents - end
of period $ 108 $ 2,990
======== ========
(continued)
<FN>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
(In Thousands)
(Unaudited)
RECONCILIATION OF NET INCOME (LOSS) TO CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
- -------------------------------------------
Six Months Ended March 31,
--------------------------
1994 1993
-------- --------
<C> <C>
<S>
Net income (loss) $(1,660) $(2,507)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization 20,161 19,131
Loss on retirement of fixed
assets 576 2,370
Gain on sale of assets (2,606) -
Deferred tax expense 5,373 630
Deferred compensation 62 115
Treasury stock issued to ESOP 823 -
Change in:
Accounts receivable (37,911) (7,272)
Inventories 1,152 1,752
Prepaid expenses 385 (1,026)
Other assets (2,977) (3,176)
Accounts payable 10,957 5,019
Accrued liabilities (2,724) (2,594)
Interest payable 209 (394)
Taxes payable 833 761
Other liabilities 5,197 (3,384)
------- -------
Cash provided by (used in)
operating activities $(2,150) $ 9,425
======= =======
<FN>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands Except Per Share Data)
1. Basis of Presentation:
---------------------
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all normal
and recurring adjustments necessary to present fairly the
consolidated financial position of Sterling Chemicals, Inc. and
its subsidiaries (the "Company") as of March 31, 1994 and the
consolidated results of their operations and their cash flows for
the periods ended March 31, 1994 and 1993. The results of
operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. The
accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated
financial statements and notes included in the Company's Annual
Report for the fiscal year ended September 30, 1993. The
condensed consolidated financial statements included herein have
been subjected to a review by Coopers & Lybrand, the Company's
independent accountants, whose report is included herein.
2. Inventories:
-----------
Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1994 1993
--------- -------------
<C> <C>
<S>
Inventories:
Finished products $33,275 $27,024
Work in process 3,350 2,794
Raw materials 13,756 16,598
------- -------
Inventories at
FIFO cost 50,381 46,416
Inventories under
exchange agreements (2,425) 2,684
Stores and supplies 11,004 11,228
------- -------
$58,960 $60,328
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
(In Thousands Except Per Share Data)
3. Long-Term Debt:
--------------
Long-term debt consisted of the following:
March 31, September 30,
1994 1993
--------- -------------
<C> <C>
<S>
Revolving credit facilities $ 62,100 $ 53,692
Term loan 38,250 39,563
Subsidiary term facility 121,975 130,900
Subordinated note 44,268 44,268
Project loan 19,895 23,486
-------- --------
Total debt outstanding 286,488 291,909
Less:
Current maturities (29,300) (28,015)
Unamortized debt issue
costs (6,343) (7,049)
-------- --------
Total long-term debt $250,845 $256,845
======== ========
</TABLE>
The Company has a credit agreement with a syndicate of banks
("Credit Agreement"). The Credit Agreement provides for a
revolving credit facility of up to $80,000 ($58,000 outstanding
at March 31, 1994), the availability of which is reduced by
outstanding letters of credit ($2,307 at March 31, 1994),
provides for the outstanding project loan of $19,895 at March
31, 1994 and provides for the outstanding term loan of $38,250 at
March 31, 1994. The Credit Agreement also allows for up to
$20,000 of additional borrowings from other lenders ($4,100
outstanding at March 31, 1994). The revolving credit facility
matures in August 1996, at which time any outstanding principal
and interest are due. The term loan matures in August 1999 and
provides for scheduled quarterly payments and for mandatory
prepayments of certain percentages of the Company's Excess Cash
Flow (as defined in the Credit Agreement). The project loan
provides for monthly principal payments and matures in July 1996.
The average interest rates on the term loan, the revolving credit
line and the $4,100 of additional borrowings at March 31, 1994
and September 30, 1993 (including all associated interest rate
swaps) were 5.5% and 5.1%, respectively.
<PAGE>
[CAPTION]
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT, Continued
(Unaudited)
(In Thousands Except Per Share Data)
The Credit Agreement contains a number of financial and other
covenants which were based upon estimates of the Company's future
financial performance provided by the Company at the time the
Credit Agreement was negotiated in August 1992. Starting in late
calendar year 1992, the styrene market became more depressed than
the Company had anticipated in August 1992, and that market is
just beginning to return to the levels projected by the Company
at the time the Credit Agreement was entered into. Further, the
disruption in the acrylonitrile market caused by the relatively
unstable nature of the Chinese market in recent years was not
foreseen by the Company in 1992. As a result primarily of these
events, the Company's results of operations for fiscal 1993 and
the first quarter of fiscal 1994 were significantly lower than it
anticipated when the Credit Agreement was negotiated in 1992.
Consequently, the Company would have failed to meet several of
the financial covenants in the Credit Agreement at the end of the
second quarter of fiscal 1994. Accordingly, in anticipation of
such failure, the Company obtained waivers of these covenants
through April 30, 1994, while a longer term solution to the
financial covenant issue was being negotiated. The Company
recently finalized an amendment to the Credit Agreement modifying
the financial covenants in a manner that is expected to allow the
Company to remain in compliance through the term of the Credit
Agreement.
The acquisition of the pulp chemicals business ("Sterling
Canada") during the fourth quarter of fiscal 1992 was financed
through additional debt, and in connection therewith, the Company
obtained a separate stand-alone credit facility for Sterling
Canada, which also issued an unsecured $44,268 subordinated note
to the seller. The Sterling Canada credit facility includes a
term loan to Sterling Canada ($121,975 outstanding at March 31,
1994), and an additional Cdn. $20,000 denominated revolving
credit line ($0 outstanding at March 31, 1994), the availability
of which is reduced by outstanding letters of credit ($2,180 at
March 31, 1994) and outstanding bank overdrafts (Cdn. $9,366 at
March 31, 1994). The Sterling Canada term loan, which matures in
August 1999, provides for scheduled quarterly payments and
additionally provides for mandatory prepayments of certain
percentages of the Excess Cash Flow (as defined in the Sterling
Canada Credit Facility) of Sterling Canada and its subsidiaries.
The Sterling Canada revolving credit line expires in August 1997,
at which time any outstanding principal and interest are due.
The interest rate on the term loan and revolving credit line at
March 31, 1994 and September 30, 1993 were 6.2% and 5.7%,
respectively. The unsecured $44,268 subordinated note matures in
December 1999 and provides for mandatory prepayments of a certain
percentage of Sterling Canada's Excess Cash Flow (as defined in
the credit facility). The interest rates on the subordinated
note at March 31, 1994 and September 30, 1993 were 6.9% and 6.7%,
respectively.
4. Income Taxes:
------------
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"), effective October 1, 1993. Under SFAS 109,
deferred income taxes are provided for temporary differences in
recognition of income and expenses for tax and financial
reporting purposes. The temporary differences which give rise to
significant portions of the Company's deferred tax assets and
liabilities are the excess of tax depreciation, amortization and
pension expenses over such book expenses. The adoption of this
statement did not have an effect on the Company's results of
operations. Upon adoption of SFAS 109, the Company's current
deferred tax asset and deferred tax liability each increased
$1,609.
The provision for income taxes was computed using effective tax
rates of 31.4% and 9.5% for the six month periods ended March 31,
1994 and 1993, respectively. The effective tax rate during the
first half of fiscal 1993 was affected by the accrual of the
earned surplus portion of the Texas Franchise Tax in addition to
an adjustment for certain foreign taxes payable.
5. Commitments and Contingencies:
-----------------------------
FEDERAL INCOME TAXES. During 1991, the Internal Revenue Service
("IRS") completed its examination of the Company's federal income
tax returns for fiscal years 1987, 1988, 1989 and 1990. The IRS
issued a notice of deficiency in June 1992 with respect to fiscal
year 1987, in which it proposed various adjustments, resulting in
a tax deficiency of $16,570, plus interest. The Company filed a
petition for redetermination of this deficiency with the United
States Tax Court. The IRS also has issued notices of proposed
deficiency with respect to fiscal years 1988, 1989 and 1990,
proposing primarily the same adjustments as for fiscal year 1987,
with a proposed tax deficiency for the three-year period of
$19,378, plus interest. The Company filed protests with the IRS
contesting these proposed adjustments.
In October 1993, the Company and the IRS agreed upon a basis for
settlement of the adjustments proposed for fiscal years 1987
through 1990. This settlement will result in a tax refund of
$3,407 plus interest. Resulting adjustments to its fiscal year
1991 and 1992 federal income returns will result in additional
taxes owed of approximately $1,525 plus interest. In addition,
the Company's deferred tax liability for future years will
increase by approximately $3,965. During fiscal year 1992, the
Company accrued $2,000 in anticipation of this settlement. These
adjustments resulted in an additional $83 in tax expense during
the first quarter of fiscal 1994.
ACETIC ACID PATENT INFRINGEMENT. In January 1993, Hoeschst
Celanese Corporation ("HCC") filed suit against BP Chemicals
Limited ("BP") and the Company alleging patent infringement in
connection with the use of an ion exchange resin in a guard bed
installed in the Company's acetic acid production facility in
Texas City. The suit sought unspecified damages and issuance of
an injunction against BP and the Company to enjoin further
infringement. The trial commenced on January 10, 1994 and on
January 19, 1994, the jury rendered its verdict that BP and the
Company had willfully infringed HCC's patent and were liable to
HCC for a reasonable royalty of .6 cents per pound ($.006/lb) for
the acetic acid produced by the Company during the infringing
period. On March 8, 1994, the court entered a final judgment
upholding the jury verdict and awarding the following sums to
HCC: $5,592 as lost royalties; $5,592 as enhancement damages;
$186 as prejudgment interest through March 8, 1994; and $25 as
HCC's costs. In addition, the court entered a permanent
injunction against BP and the Company prohibiting any activities
that constitute infringement or inducement of infringement of
HCC's patent. On March 22, 1994, the court entered an order
staying the final judgment pending a final decision of any appeal
to the Court of Appeals for the Federal Circuit affirming the
validity and infringement of HCC's patent and the award of
damages. The order was based upon a stipulation of the parties
waiving the condition of a supersedeas bond. Subject to the
expected denial of a motion for new trial, BP and the Company
intend to prosecute an appeal.
Under the terms of the Lease and Production Agreement between the
Company and BP Chemicals, Inc. ("BPC"), a U.S. subsidiary of
British Petroleum Company plc, BPC has undertaken the defense of
the Company and will indemnify the Company against all damages
incurred as a result of the suit. Regardless of the final
outcome, the Company does not anticipate final resolution of this
matter to have a material impact on the Company's financial
position or results of operations. In addition, future
operations of the acetic acid production facility are not
expected to be materially impacted by the final resolution of
this matter.
AMMONIA RELEASE. On May 8, 1994, an ammonia release occurred at
the Company's Texas City facility when a reactor in the
acrylonitrile unit was being restarted after a shutdown for
routine maintenance. The Company estimates that approximately
3,000 pounds of ammonia were emitted into the atmosphere. Over
one thousand residents of the Texas City area were examined at
local hospitals as a result of alleged exposure to the ammonia.
Fewer than 10 individuals were admitted for further observation
and it appears that there are no serious injuries. Nevertheless,
the Company anticipates that there is a substantial likelihood
that litigation against the Company involving personal injury and
property damage claims will ensue. On May 10, 1994, the Company
presented the results of its preliminary investigation into the
cause of the incident to the Occupational Safety and Health
Administration and production from the affected reactor was
resumed. The Company believes that final resolution of these
matters will not have a material adverse effect on the financial
position, liquidity or results of operations of the Company.
CHLORINE DIOXIDE GENERATOR PATENT ISSUES. The Company's primary
competitor in the supply of patented technology for generators
which convert sodium chlorate into chlorine dioxide is Akzo Nobel
AB (formerly Eka Nobel AB) and its affiliates ("Akzo Nobel").
The Company is engaged with Akzo Nobel in numerous patent
disputes throughout the world in which the Company and Akzo Nobel
are challenging certain patents of the other and attempting to
restrict the other's operating range. If either party is
successful in these disputes, the other party may have to make
adjustments and modifications in its commercial operations or
obtain a license from the prevailing party. The Company's
management believes that any potential costs for such adjustments
or modifications would be immaterial. The Company believes it is
entitled to certain indemnities from Tenneco Canada with respect
to the acquired technology.
ENVIRONMENTAL REGULATIONS. The Company's Texas City plant and
Canadian operations are subject to extensive federal, state,
provincial and local environmental regulations. The Company may
incur significant expenditures in order to comply with
environmental regulations.
<PAGE>
Report of Independent Accountants'
Review of Interim Financial Information
To the Board of Directors and Stockholders
Sterling Chemicals, Inc.
We have reviewed the accompanying condensed consolidated balance
sheet of Sterling Chemicals, Inc. as of March 31, 1994 and the
condensed consolidated statement of operations for the three and
six month periods ended March 31, 1994 and 1993 and the condensed
consolidated statement of cash flows for the six months ended
March 31, 1994 and 1993. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the condensed consolidated
financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of
September 30, 1993, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for
the year then ended (not presented herein); and in our report
dated November 19, 1993, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated
balance sheet as of September 30, 1993 is fairly stated, in all
material respects, in relation to the consolidated balance sheet
from which it has been derived.
As more fully discussed in Note 4 to the condensed consolidated
financial statements, effective October 1, 1993 the Company
changed its method of accounting for income taxes.
COOPERS & LYBRAND
Houston, Texas
April 22, 1994
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
RESULTS OF OPERATIONS
Revenues for the second quarter of fiscal 1994 were $154.8
million compared to revenues of $113.0 million for the second
quarter of fiscal 1993, an increase of 37%. Revenues for the six
month period ended March 31, 1994 were $285.3 million compared to
revenues of $250.8 million for the same period a year ago, an
increase of 14%. Net income for the three month period ended
March 31, 1994 was $1.8 million ($.03 per share) versus a net
loss of $2.6 million ($.05 per share) for the second quarter of
fiscal 1993. Net loss for the first six months of fiscal 1994
was $1.7 million ($.03 per share) compared to a net loss of $2.5
million ($.05 per share) for the corresponding period in fiscal
1993.
For the second quarter of fiscal 1994, the Company's revenues
from its petrochemical operations increased 46% to $123.5 million
when compared to the second quarter of fiscal 1993. This
increase in revenues was primarily due to an increase in direct
sales which was largely the result of a change in styrene product
sales mix compared to a year ago. Near the end of fiscal 1993,
the Company's styrene conversion agreement with Novacor Chemicals
Inc. ("Novacor") expired, which caused the Company to replace all
of the lost conversion sales volumes with various direct sales
arrangements. Acrylonitrile export sales volumes also increased
in the second quarter of fiscal 1994 compared to the same period
a year ago. Pulp chemicals revenues for the second quarter of
fiscal 1994 increased $2.6 million to $31.3 million compared to
the second quarter of fiscal 1993. This increase in revenue was
due primarily to higher sodium chlorate sales volumes resulting
from recently negotiated contracts.
In fiscal 1993, the Company granted stock appreciation rights
("SARs") to certain key employees and directors. Total expense
for the second quarter of fiscal 1994 ($2.5 million before tax)
was determined based on the number of SARs granted (3.7 million),
vesting period (five years beginning September 1992) and the
price of the Company's stock at March 31, 1994 ($5-5/8 per
share). There was no expense related to SARs in fiscal 1993.
STYRENE: Styrene revenues in the second quarter of fiscal 1994
increased over 60% to $57 million compared to the second quarter
of fiscal 1993. This increase was primarily due to an
approximate 100% increase in direct sales due to the change in
sales mix as mentioned above.
Styrene's performance improved during the second quarter of
fiscal 1994 compared to the same period in fiscal 1993 due to
higher production rates and improved sales margins resulting from
price increases. Demand for styrene increased due to higher
worldwide demand for styrenic polymers, particularly from the Far
East. The Company's styrene unit operated at almost 90% of its
rated capacity for the first six months of fiscal 1994 compared
to about 65% during the first six months of fiscal 1993.
Styrene's performance during the second quarter of fiscal 1994
also benefited from an approximate 12% decrease in the price of
each of its two major raw materials, benzene and ethylene,
compared to the corresponding quarter of fiscal 1993. Overall,
styrene sales margins are improving as a strengthening in the
styrene market seems to be occurring much earlier than the
Company anticipated. While it is difficult at this point in the
styrene cycle to predict the duration of this improvement in
market conditions, the Company expects significantly improved
styrene earnings in the third quarter of fiscal 1994.
ACRYLONITRILE: Acrylonitrile revenues in the second quarter of
fiscal 1994 increased approximately 75% compared to the second
quarter of fiscal 1993. This increase was a result of an
approximate 150% increase in export sales volumes, partially
offset by a decrease in sales price during the second quarter of
fiscal 1994 compared to the second quarter of fiscal 1993. The
increase in acrylonitrile demand is primarily due to
strengthening in the acrylic fiber market, in part due to the
current stabilization of the Chinese economy. Demand for
acrylonitrile is heavily influenced by demand from export
customers, particularly those supplying acrylic fiber to the
People's Republic of China. In recent years, the acrylic fiber
market, the largest market for acrylonitrile, has been subject to
volatility due to the relatively unstable nature of the Chinese
market. Currently, export sales margins have firmed and are
expected to continue to gradually improve.
Acrylonitrile's performance during the second quarter of fiscal
1994 also improved due to an approximate 10% decrease in the
price of propylene, a major raw material, compared to the same
period of fiscal 1993. The Company's acrylonitrile unit operated
at approximately 75% of its rated capacity during the first six
months of fiscal 1994 compared to almost 85% of its rated
capacity during the same period a year ago.
ACETIC ACID: Acetic acid revenues for the second quarter of
fiscal 1994 increased 14% when compared to the corresponding
period in fiscal 1993. The increase in revenues was due to
increased profit sharing from the Company's contract partner.
PULP CHEMICALS: Pulp chemicals revenues for the second quarter
of fiscal 1994 increased 9% to $31.3 million compared to the
corresponding period a year ago. The revenue increase was due
primarily to higher sodium chlorate sales volumes resulting from
recently negotiated contracts for additional volumes entered into
with new and existing customers. The increase in sales volumes
was partially offset by lower sales prices due to the continued
sluggish pulp and paper markets. The Company anticipates that
sales prices and margins will begin to improve during the last
half of fiscal 1994.
The sodium chlorate plants operated at approximately 80% of their
rated capacity during both the first six months of fiscal 1994
and 1993.
OTHER PRODUCTS: Performance of the Company's other products
remained consistent during the second quarter of fiscal 1994
compared to the second quarter of fiscal 1993. Revenues during
the second quarter of fiscal 1994 from plasticizers, lactic acid,
tertiary butylamine and sodium cyanide increased approximately 7%
compared to the second quarter of fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital increased to $48.5 million at March 31, 1994 from
$31.0 million at September 30, 1993. Net cash used in operations
was $2.2 million during the first six months of fiscal 1994
compared to $9.4 million net cash provided by operations for the
corresponding period in fiscal 1993. The increase in working
capital was primarily attributable to a $32.4 million increase in
accounts receivable which also negatively affected cash provided
by operations. This increase in accounts receivable was due to
greater acrylonitrile and styrene sales volumes during the second
quarter of fiscal 1994 compared to the fourth quarter of fiscal
1993 along with the recognition of the agreed-to income tax
settlement (as discussed in Note 5 of "Notes to Condensed
Consolidated Financial Statements"). The recognition of the
agreed-to income tax settlement also had the effect of increasing
deferred income taxes.
In addition, current deferred income taxes were also increased,
with a corresponding increase in deferred income taxes, due to
the Company's adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"),
effective October 1, 1993. The adoption of SFAS 109 had no
impact on the results of operations.
The increase in working capital due to the increase in accounts
receivable was partially offset by the increase in accounts
payable at March 31, 1994 from September 30, 1993. The increase
in accounts payable resulted primarily from increased raw
material purchases during the second quarter of fiscal 1994 as
the Company's operating rates for its products improved.
The Company has a credit agreement with a syndicate of banks
("Credit Agreement"). The Credit Agreement provides for a
revolving credit facility of up to $80 million ($58.0 million
outstanding at March 31, 1994), the availability of which is
reduced by outstanding letters of credit ($2.3 million at March
31, 1994), provides for the outstanding project loan of $19.9
million at March 31, 1994 and provides for the outstanding term
loan of $38.3 million at March 31, 1994. The Credit Agreement
also allows for up to $20 million of additional borrowings from
other lenders ($4.1 million outstanding at March 31, 1994). The
revolving credit facility matures in August 1996, at which time
any outstanding principal and interest are due. The term loan
matures in August 1999 and provides for scheduled quarterly
payments and for mandatory prepayments of certain percentages of
the Company's Excess Cash Flow (as defined in the Credit
Agreement). The project loan provides for monthly principal
payments and matures in July 1996. The average interest rates on
the term loan, the revolving credit line and the $4.1 million of
additional borrowings at March 31, 1994 and September 30, 1993
(including all associated interest rate swaps) were 5.5% and
5.1%, respectively.
The Credit Agreement contains a number of financial and other
covenants which were based upon estimates of the Company's future
financial performance provided by the Company at the time the
Credit Agreement was negotiated in August 1992. Starting in late
calendar year 1992, the styrene market became more depressed than
the Company had anticipated in August 1992, and that market is
just beginning to return to the levels projected by the Company
at the time the Credit Agreement was entered into. Further, the
disruption in the acrylonitrile market caused by the relatively
unstable nature of the Chinese market in recent years was not
foreseen by the Company in 1992. As a result primarily of these
events, the Company's results of operations for fiscal 1993 and
the first quarter of fiscal 1994 were significantly lower than it
anticipated when the Credit Agreement was negotiated in 1992.
Consequently, the Company would have failed to meet several of
the financial covenants in the Credit Agreement at the end of the
second quarter of fiscal 1994. Accordingly, in anticipation of
such failure, the Company obtained waivers of these covenants
through April 30, 1994, while a longer term solution to the
financial covenant issue was being negotiated. The Company
recently finalized an amendment to the Credit Agreement modifying
the financial covenants in a manner that is expected to allow the
Company to remain in compliance through the term of the Credit
Agreement.
The Company's acquisition of the pulp chemicals business
("Sterling Canada") during the fourth quarter of fiscal 1992 was
financed through additional debt, and in connection therewith,
the Company obtained a separate stand-alone credit facility for
Sterling Canada, which also issued an unsecured $44.3 million
subordinated note to the seller. The Sterling Canada credit
facility includes a term loan to Sterling Canada ($122.0 million
outstanding at March 31, 1994), and an additional Cdn. $20
million revolving credit line ($0 million outstanding at March
31, 1994), the availability of which is reduced by outstanding
letters of credit ($2.2 million at March 31, 1994) and
outstanding bank overdrafts (Cdn.$9.4 million at March 31,1994).
The Sterling Canada term loan, which matures in August 1999,
provides for scheduled quarterly payments and additionally
provides for mandatory prepayments of certain percentages of the
Excess Cash Flow (as defined in the Sterling Canada Credit
Facility) of Sterling Canada and its subsidiaries.
The Sterling Canada revolving credit line expires in August 1997,
at which time any outstanding principal and interest are due.
The interest rate on the term loan and revolving credit line at
March 31, 1994 and September 30, 1993 were 6.2% and 5.7%,
respectively. The unsecured $44.3 million subordinated note
matures in December 1999 and provides for mandatory prepayments
of a certain percentage of Sterling Canada's Excess Cash Flow (as
defined in the credit facility). The interest rates on the
subordinated note at March 31, 1994 and September 30, 1993 were
6.9% and 6.7%, respectively.
Capital expenditures for the second quarter of fiscal 1994 were
$1.3 million and totalled $4.1 million for the first six months
of fiscal 1994 and are expected to approach $19 million for
fiscal 1994, approximately $6 million of which will be used for
pulp chemicals operations. The Company anticipates $8 million of
these expenditures will be for environmental and safety matters,
while the majority of the remainder will be for a part of the
Company's contribution to a planned acetic acid expansion. In
the future, the Company may incur additional significant
expenditures in order to comply with environmental regulations.
Information contained in "Note 5 of Notes to Condensed
Consolidated Financial Statements" is incorporated herein by
reference.
<PAGE>
Part II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
ACETIC ACID PATENT INFRINGEMENT. On January 5, 1993, Hoeschst
Celanese Corporation ("HCC") filed suit in U.S. District Court
for the Southern District of Texas, Galveston Division against BP
Chemicals Limited ("BP") and the Company (Civil Action No. G-93-
001) alleging patent infringement in connection with the use of
an ion exchange resin in a guard bed installed in the Company's
acetic acid production facility in Texas City. The suit sought
unspecified damages and issuance of an injunction against BP and
the Company to enjoin further infringement. The trial commenced
on January 10, 1994 and on January 19, 1994, the jury rendered
its verdict that BP and the Company had willfully infringed HCC's
patent and were liable to HCC for a reasonable royalty of .6
cents per pound ($.006/lb) for the acetic acid produced by the
Company during the infringing period. On March 8, 1994, the
court entered a final judgment upholding the jury verdict and
awarding the following sums to HCC: $5,592,000 as lost
royalties; $5,592,000 as enhancement damages; $186,000 as
prejudgment interest through March 8, 1994; and $25,000 as HCC's
costs. In addition, the court entered a permanent injunction
against BP and the Company prohibiting any activities that
constitute infringement or inducement of infringement of HCC's
patent. On March 22, 1994, the court entered an order staying
the final judgment pending a final decision of any appeal to the
Court of Appeals for the Federal Circuit affirming the validity
and infringement of HCC's patent and the award of damages. The
order was based upon a stipulation of the parties waiving the
condition of a supersedeas bond. Subject to the expected denial
of a motion for new trial, BP and the Company intend to prosecute
an appeal.
Under the terms of the Lease and Production Agreement between the
Company and BP Chemicals, Inc. ("BPC"), a U.S. subsidiary of
British Petroleum Company plc, BPC has undertaken the defense of
the Company and will indemnify the Company against all damages
incurred as a result of the suit. Regardless of the final
outcome, the Company does not anticipate final resolution of this
matter to have a material impact on the Company's financial
position or results of operations. In addition, future
operations of the acetic acid production facility are not
expected to be materially impacted by the final resolution of
this matter.
AMMONIA RELEASE. On May 8, 1994, an ammonia release occurred at
the Company's Texas City facility when a reactor in the
acrylonitrile unit was being restarted after a shutdown for
routine maintenance. The Company estimates that approximately
3,000 pounds of ammonia were emitted into the atmosphere. Over
one thousand residents of the Texas City area were examined at
local hospitals as a result of alleged exposure to the ammonia.
Fewer than 10 individuals were admitted for further observation
and it appears that there are no serious injuries. Nevertheless,
the Company anticipates that there is a substantial likelihood
that litigation against the Company involving personal injury and
property damage claims will ensue. On May 10, 1994, the Company
presented the results of its preliminary investigation into the
cause of the incident to the Occupational Safety and Health
Administration and production from the affected reactor was
resumed. The Company believes that final resolution of these
matters will not have a material adverse effect on the financial
position, liquidity or results of operations of the Company.
CHLORINE DIOXIDE GENERATOR PATENT ISSUES. The Company's primary
competitor in the supply of patented technology for generators
which convert sodium chlorate into chlorine dioxide is Akzo Nobel
AB (formerly Eka Nobel AB) and its affiliates ("Akzo Nobel").
The Company is engaged with Akzo Nobel in numerous patent
disputes throughout the world in which the Company and Akzo Nobel
are challenging certain patents of the other and attempting to
restrict the other's operating range. If either party is
successful in these disputes, the other party may have to make
adjustments and modifications in its commercial operations or
obtain a license from the prevailing party. The Company's
management believes that any potential costs for such adjustments
or modifications would be immaterial. At the time of the
acquisition of the patented technology from Tenneco Canada, the
Company received certain assurances in respect to the acquired
technology.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
At the annual meeting of stockholders held on January 26, 1994,
the Company's nominees for directors were elected and Coopers &
Lybrand was appointed as independent auditor for the Company for
the fiscal year ended September 30, 1994. The results of the
voting were as follows:
(a) Board of Directors:
<TABLE>
<CAPTION>
VOTES
NAME VOTES FOR WITHHELD
------------------ ---------- --------
<C> <C> <C>
<S>
Gordon A. Cain 44,747,835 245,574
J. Virgil Waggoner 44,748,605 244,804
William A. McMinn 44,786,786 206,623
James J. Kerley 44,772,200 221,209
Gilbert M.A. Portal 44,711,861 281,548
Frank J. Pizzitola 44,722,725 270,684
Ray R. Knowland 44,780,076 213,333
</TABLE>
(b) Ratification of Independent Accountants:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
<C> <C> <C> <C>
<S>
Coopers &
Lybrand 44,317,732 88,353 587,324
</TABLE>
There were no broker nonvotes with respect to either of
these matters.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits: None
(b) Reports on Form 8-K: No reports on Form 8-K were filed
during the three months ended March 31, 1994.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
STERLING CHEMICALS, INC.
(Registrant)
Date: May 12, 1994 _________________________________
J. Virgil Waggoner
President and Chief Executive
Officer (Principal Executive
Officer)
Date: May 12, 1994 __________________________________
J. David Heaney
Vice President-Finance and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
