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 June 30, 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 August 8, 1994, the number of shares of common stock
outstanding was 55,660,141.
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)
June 30, September 30,
1994 1993
--------- -------------
<C> <C>
<S>
ASSETS
------
Current assets:
Cash and cash equivalents $ 72 $ 1,352
Accounts receivable 138,434 74,553
Inventories 55,961 60,328
Prepaid expenses 1,475 4,632
Deferred income taxes 6,100 3,856
-------- --------
Total current assets 202,042 144,721
Property, plant and equipment, net 290,136 314,315
Other assets 75,832 80,669
-------- --------
Total assets $568,010 $539,705
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 55,996 $ 42,241
Accrued liabilities 49,148 43,513
Current portion of long-term debt 30,228 28,015
-------- --------
Total current liabilities 135,372 113,769
Long-term debt 246,104 256,845
Deferred income taxes 43,551 36,098
Deferred credits and other liabilities 72,446 62,657
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value
150,000 shares authorized,
60,327 and 60,325 shares issued
and 55,660 and 55,435 shares
outstanding, respectively 603 603
Additional paid-in capital 33,232 34,708
Retained earnings 109,754 105,871
Pension adjustment (1,297) (1,297)
Accumulated translation adjustment (20,906) (16,184)
Deferred compensation (85) (164)
-------- --------
121,301 123,537
Treasury stock at cost, 4,667
and 4,891 shares, respectively (50,764) (53,201)
-------- --------
Total stockholders' equity 70,537 70,336
-------- --------
Total liabilities and
stockholders' equity $568,010 $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 Nine Months Ended
June 30, June 30,
------------------ ----------------
1994 1993 1994 1993
-------- -------- -------- --------
<C> <C> <C> <C>
<S>
Revenues $204,668 $132,259 $489,981 $383,092
Cost of goods sold 176,807 121,177 444,343 351,611
-------- -------- -------- --------
Gross profit 27,861 11,082 45,638 31,481
Selling, general and
administrative
expenses 13,579 6,073 25,777 17,881
Interest and debt
related expenses,
net of interest
income 6,045 5,724 16,650 17,085
Other income - - 2,606 -
-------- -------- -------- --------
Income (loss) before
income taxes 8,237 (715) 5,817 (3,485)
Provision (benefit) for
income taxes 2,693 (268) 1,933 (530)
-------- -------- -------- --------
Net income (loss) $ 5,544 $ (447) $ 3,884 $ (2,955)
======== ======== ======== ========
Per share data:
Net income (loss) $ .10 $ (.01) $ .07 $ (.05)
======== ======== ======== ========
Dividends declared
per share $ - $ .02 $ - $ .06
======== ======== ======== ========
Weighted average
shares outstanding 55,657 55,278 55,588 55,207
======== ======== ======== ========
<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)
Nine Months Ended June 30,
--------------------------
1994 1993
-------- --------
<C> <C>
<S>
Cash flows from operating activities:
Cash received from customers $471,368 $406,816
Miscellaneous cash receipts 7,220 4,518
Cash paid to suppliers and
employees (452,622) (360,003)
Interest paid (15,142) (16,460)
Interest received 23 66
Income taxes paid (261) -
-------- --------
Net cash provided by operating
activities 10,586 34,937
Cash flows from investing
activities:
Capital expenditures (5,538) (9,657)
Retirement of fixed assets (717) (1,081)
Proceeds from joint venture
distribution 1,850 2,491
Proceeds from sale of assets 2,606 -
-------- --------
Net cash used in investing activities (1,799) (8,247)
Cash flows from financing activities:
Net change in revolving debt 11,138 (3,975)
Scheduled payments on long-term
debt (21,153) (19,486)
Proceeds from sale of common stock - 203
Dividends paid - (3,312)
Other (69) (119)
-------- --------
Net cash used in financing
activities (10,084) (26,689)
Effect of exchange rate on cash 17 (106)
-------- --------
Net decrease in cash
and cash equivalents (1,280) (105)
Cash and cash equivalents -
beginning of period 1,352 2,625
Cash and cash equivalents - end
of period $ 72 $ 2,520
======== ========
(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 OPERATING ACTIVITIES
- - -------------------------------------------
Nine Months Ended June 30,
--------------------------
1994 1993
-------- --------
<C> <C>
<S>
Net income (loss) $ 3,884 $(2,955)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and amortization 30,518 28,857
Loss on retirement of fixed
assets 1,107 2,489
Gain on sale of assets (2,606) -
Deferred tax expense 3,303 43
Deferred compensation 9,713 139
Treasury stock issued to ESOP 954 276
Change in:
Accounts receivable (63,391) (12,020)
Inventories 4,149 11,485
Prepaid expenses 3,839 (441)
Other assets (4,270) (5,722)
Accounts payable 14,697 13,214
Accrued liabilities 3,188 2,836
Interest payable (1,507) (929)
Taxes payable 3,866 902
Other liabilities 3,142 (3,237)
------- -------
Cash provided by operating
activities $10,586 $34,937
======= =======
<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 June 30, 1994 and the consolidated results of
their operations for the three and nine month periods ended June
30, 1994 and 1993 and consolidated cash flows for the nine months
ended June 30, 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>
June 30, September 30,
1994 1993
--------- -------------
<C> <C>
<S>
Inventories:
Finished products $22,559 $27,024
Work in process 4,865 2,794
Raw materials 17,486 16,598
------- -------
Inventories at FIFO cost 44,910 46,416
Inventories under
exchange agreements 139 2,684
Stores and supplies 10,912 11,228
------- -------
$55,961 $60,328
======= =======
</TABLE>
<PAGE>
3. Long-Term Debt:
--------------
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
June 30, September 30,
1994 1993
--------- -------------
<C> <C>
<S>
Revolving credit facilities $ 65,270 $ 53,692
Term loan 37,500 39,563
Subsidiary term facility 117,513 130,900
Subordinated note 44,268 44,268
Project loan 18,036 23,486
-------- --------
Total debt outstanding 282,587 291,909
Less:
Current maturities (30,228) (28,015)
Unamortized debt issue
costs (6,255) (7,049)
-------- --------
Total long-term debt $246,104 $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 ($50,000 outstanding
at
June 30, 1994), the availability of which is reduced by
outstanding
letters of credit ($2,307 at June 30, 1994), provides for the
outstanding project loan of $18,036 at June 30, 1994 and provides
for the outstanding term loan of $37,500 at June 30, 1994. The
Credit Agreement also allows for up to $20,000 of additional
borrowings from other lenders ($8,675 outstanding at June 30,
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 facility and the $8,675 of
additional borrowings at June 30, 1994 and September 30, 1993
(including all associated interest rate swaps) were 7.6% and
6.5%,
respectively.
The Company has a separate stand-alone credit agreement and an
unsecured $44,268 subordinated note for the pulp chemicals
business
("Sterling Canada"). The Sterling Canada credit agreement
includes
a term loan to Sterling Canada ($117,513 outstanding at June 30,
1994), and an additional Cdn. $20,000 denominated revolving
credit
facility ($1,000 outstanding at June 30, 1994), the availability
of
which is reduced by outstanding letters of credit ($2,182 at June
30, 1994) and outstanding bank overdrafts (Cdn. $5,595 at June
30,
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
agreement) of Sterling Canada and its subsidiaries.
The Sterling Canada revolving credit facility expires in August
1997, at which time any outstanding principal and interest are
due.
The interest rate on the term loan and revolving credit facility
at
June 30, 1994 and September 30, 1993 were 6.9% 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
Sterling Canada credit agreement). The interest rates on the
subordinated note at June 30, 1994 and September 30, 1993 were
7.4%
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 33.2% and 15.2% for the nine month periods ended June
30,
1994 and 1993, respectively. The effective tax rate during the
first nine months 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. In October 1993, the Company and the
Internal Revenue Service ("IRS") agreed upon a basis for
settlement
of the adjustments proposed as a result of the IRS's examination
of
the Company's federal income tax returns for fiscal years 1987
through 1990. This settlement will result in a tax refund of
approximately $3,800 plus interest. The settlement also requires
adjustments
to
the fiscal year 1991 and 1992 federal income tax returns which
will
result in additional taxes owed of approximately $1,400 plus
interest. In addition, the Company's deferred tax liability for
future years will increase by approximately $4,000. During
fiscal
year 1992, the Company accrued $2,000 in anticipation of this
settlement. These adjustments resulted in a reduction of $429 in
tax expense during fiscal 1994.
ACETIC ACID PATENT INFRINGEMENT. In January 1993, Hoechst
Celanese
Corporation ("HCC") filed suit against BP Chemicals Limited
("BP")
and the Company alleging patent infringement in connection with
the
use of an ion exchange resin in a guard bed installed in the
Company's acetic acid production facility in Texas City. The
suit
sought unspecified damages and issuance of an injunction against
BP
and the Company to enjoin further infringement. The trial
commenced on January 10, 1994 and on January 19, 1994, the jury
rendered its verdict that BP and the Company had willfully
infringed HCC's patent and were liable to HCC for a reasonable
royalty of .6 cents per pound ($.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 outcome, the
Company does not anticipate that final resolution of this matter
will have a material adverse 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 while a reactor in the
acrylonitrile unit was being restarted after a shutdown for
routine
maintenance. The Company estimates that approximately three
thousand pounds of ammonia were emitted into the atmosphere.
Approximately 7,500 individuals have filed claims directly with
the
Company alleging personal injury and/or property damage as a
result
of exposure to the ammonia. The Company is in the process of
determining the merit of these claims. As of July 29, 1994, 48%
of
these claims have either been settled or rejected by the Company.
To date, two lawsuits involving approximately 221 plaintiffs have
been filed against the Company seeking unspecified damages for
personal injuries and property damage as a result of the release.
The Company anticipates that there is a substantial likelihood
that
additional litigation against the Company asserting similar
claims
will ensue. The Company believes that its general liability
insurance coverage is sufficient to cover anticipated claims and
has accrued its deductible under this coverage. Accordingly, 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 June 30, 1994 and the
condensed consolidated statement of operations for the three and
nine month periods ended June 30, 1994 and 1993 and the condensed
consolidated statement of cash flows for the nine months ended
June
30, 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
July 28, 1994
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
RESULTS OF OPERATIONS
Revenues for the third quarter of fiscal 1994 were $205 million
compared to revenues of $132 million for the third quarter of
fiscal 1993, an increase of 55%. Revenues for the nine month
period ended June 30, 1994 were $490 million compared to revenues
of $383 million for the same period a year ago, an increase of
28%.
Net income for the third quarter of fiscal 1994 was $5.5 million
($.10 per share) versus a net loss of $.4 million ($.01 per
share)
for the third quarter of fiscal 1993. Net income for the first
nine months of fiscal 1994 was $3.9 million ($.07 per share)
compared to a net loss of $2.9 million ($.05 per share) for the
corresponding period in fiscal 1993.
For the third quarter of fiscal 1994, the Company's revenues from
its petrochemical operations increased 69% to $171 million when
compared to the third quarter of fiscal 1993. This increase in
revenue was primarily due to an increase in direct sales of
styrene
resulting from 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 and the Company replaced the lost conversion sales
volumes
with direct sales. The revenue recognized from a conversion sale
is lower than the revenue from an equivalent direct sale by the
value of the raw materials supplied by the conversion partner.
Also, increased acrylonitrile export sales volumes in the third
quarter of fiscal 1994 compared to the same period a year ago
contributed to the increased revenues from petrochemical
operations. Pulp chemicals revenues for the third quarter of
fiscal 1994 increased 9% to $34 million compared to the third
quarter of fiscal 1993. This increase in revenue was due
primarily
to higher sodium chlorate sales volumes resulting from contracts
entered into during the first half of fiscal 1994.
In fiscal 1993, the Company granted stock appreciation rights
("SAR's") to certain key employees and directors. The expense
recognized for the SAR's is determined based on the number of
SAR's
granted (3.7 million), the vesting period (five years beginning
September 1992) and the appreciation of the Company's stock price
above $4 per share, which was the fair market value of the
Company's common stock on the date of grant of the SAR's. On
June
30, 1994, the Company's stock price was $9-3/8 per share, which
resulted in an expense for the vested portion of the SAR's of
$7.1
million for the third quarter of fiscal 1994 and $9.6 million for
the first nine months of fiscal 1994. The expense for the SAR's
is
included in selling, general and administrative expenses in the
Company's income statement and will continue to impact earnings
during the vesting period. Each $1 change in the price of the
Company's common stock will result in approximately $1.8 million
(before tax) or $.02 per share impact based on the vested status
at
June 30, 1994. There was no expense related to SAR's in fiscal
1993.
STYRENE: Styrene revenues in the third quarter of fiscal 1994
increased by 110% to $87 million compared to the third quarter of
fiscal 1993. This increase was primarily due to an increase in
direct sales of over 140% resulting from the change in sales mix
as
discussed above. Higher sales prices also contributed to the
increase in revenues.
Styrene's performance improved during the third quarter of fiscal
1994 compared to the same period in fiscal 1993 due to higher
sales
volumes resulting from increased demand and higher sales margins
resulting from price increases and higher operating rates.
Demand
for styrene increased due to growing worldwide demand for
styrenic
polymers. The Company's styrene unit operated at more than 95%
of
its rated capacity for the first nine months of fiscal 1994
compared to about 70% during the first nine months of fiscal
1993.
The price of styrene's two major raw materials, benzene and
ethylene, were relatively stable in the third quarter of fiscal
1994 compared to the same period in fiscal 1993. However, the
Company anticipates the prices for these raw materials will
increase in the fourth quarter of fiscal 1994.
Overall, styrene sales margins improved 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 styrene earnings to continue
improving in the fourth quarter of fiscal 1994.
ACRYLONITRILE: Acrylonitrile revenues in the third quarter of
fiscal 1994 increased approximately 58% compared to the third
quarter of fiscal 1993. This increase was a result of an
approximate 110% increase in export sales volumes, partially
offset
by a decrease in export sales price during the third quarter of
fiscal 1994 compared to the third quarter of fiscal 1993. The
Company's acrylonitrile unit operated at approximately 85% of its
rated capacity during the first nine months of fiscal 1994
compared
to approximately 70% of its rated capacity during the same period
a year ago.
The increase in acrylonitrile demand is primarily due to
strengthening in the synthetic 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.
Acrylonitrile's performance during the third quarter of fiscal
1994
was comparable to the same period in fiscal 1993. Although
export
sales volumes and operating rates were higher during the third
quarter of fiscal 1994 compared to the same period in fiscal
1993,
export sales margins declined primarily due to lower export sales
prices. Costs associated with the ammonia release on May 8, 1994
(See Part II, Item 1, "Legal Proceedings") also negatively
impacted
acrylonitrile's performance. Currently, export sales margins
have
firmed and are expected to improve in the fourth quarter of
fiscal
1994.
ACETIC ACID: Acetic acid revenues for the third quarter of
fiscal
1994 increased 28% 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.
On August 8, 1994, the Company and BP Chemicals, Inc. ("BP")
signed
an Amended and Restated Lease and Production Agreement (the
"Agreement"). The Agreement extends BP's exclusive right to
purchase acetic acid produced by the Company through July 31,
2016
and contains terms and conditions which are similar to the
previous
agreement.
PULP CHEMICALS: Pulp chemicals revenues for the third quarter of
fiscal 1994 increased 9% to $34 million compared to the
corresponding period a year ago. The revenue increase was due
primarily due to higher sodium chlorate sales volumes resulting
from contracts for additional volumes entered into with new and
existing customers during the first half of fiscal 1994. Higher
royalty income from the generator technology business also
contributed to the increase in revenues. The increase in sales
volumes was partially offset by lower sodium chlorate sales
margins
due in part to lower sales prices. The Company anticipates that
sodium chlorate margins will improve during the fourth quarter of
fiscal 1994 due to a price increase effective July 1st in North
America.
The Company's sodium chlorate plants operated at approximately
82%
of their rated capacity during the first nine months of fiscal
1994
compared to 75% of their rated capacity for the same period in
fiscal 1993.
OTHER PRODUCTS: Performance of the Company's other products
improved during the third quarter of fiscal 1994 compared to the
third quarter of fiscal 1993 primarily because of plasticizers'
performance. Demand has improved for plasticizers resulting in
higher operating rates and increased profit sharing under the
Company's long-term sales contract with BASF Corporation.
Revenues
during the third quarter of fiscal 1994 from plasticizers, lactic
acid, tertiary butylamine and sodium cyanide increased
approximately 17% compared to the third quarter of fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
Working capital increased to $67 million at June 30, 1994 from
$31
million at September 30, 1993. Net cash provided by operating
activities was $11 million during the first nine months of fiscal
1994 compared to $35 million for the corresponding period in
fiscal
1993. The increase in working capital was primarily attributable
to a $63 million increase in accounts receivable which also
negatively affected cash provided by operations. This increase
in
accounts receivable was due to significantly higher styrene and
acrylonitrile sales volumes during the third quarter of fiscal
1994
compared to the fourth quarter of fiscal 1993. The increase in
working capital was partially offset by the increase in accounts
payable at June 30, 1994 from September 30, 1993. The increase
in
accounts payable resulted primarily from increased raw material
purchases during the third quarter of fiscal 1994 as the
Company's
operating rates for its products improved.
The current deferred income tax asset increased, with a
corresponding increase in the deferred income tax liability, 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 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 ($50 million
outstanding at June 30, 1994), the availability of which is
reduced
by outstanding letters of credit ($2.3 million at June 30, 1994),
provides for the outstanding project loan of $18.0 million at
June
30, 1994 and provides for the outstanding term loan of $37.5
million at June 30, 1994. The Credit Agreement also allows for
up
to $20 million of additional borrowings from other lenders ($8.7
million outstanding at June 30, 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 facility and the $8.7 million of additional borrowings at
June 30, 1994 and September 30, 1993 (including all associated
interest rate swaps) were 7.6% and 6.5%, respectively.
The Company has a separate stand-alone credit agreement and an
unsecured $44.3 million subordinated note for the pulp chemicals
business ("Sterling Canada"). The Sterling Canada credit
agreement
includes a term loan to Sterling Canada ($117.5 million
outstanding
at June 30, 1994), and an additional Cdn. $20 million revolving
credit facility ($1.0 million outstanding at June 30, 1994), the
availability of which is reduced by outstanding letters of credit
($2.2 million at June 30, 1994) and outstanding bank overdrafts
(Cdn.$5.6 million at June 30,1994). 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 agreement) of Sterling Canada and its
subsidiaries.
The Sterling Canada revolving credit facility expires in August
1997, at which time any outstanding principal and interest are
due.
The interest rate on the term loan and revolving credit facility
at
June 30, 1994 and September 30, 1993 were 6.9% 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 Sterling Canada credit agreement). The interest
rates on the subordinated note at June 30, 1994 and September 30,
1993 were 7.4% and 6.7%, respectively.
Capital expenditures for the third quarter of fiscal 1994 were
$1.4
million and totaled $5.5 million for the first nine months of
fiscal 1994 and are expected to approach $16 million for fiscal
1994, approximately $5 million of which will be used for pulp
chemicals operations. The Company anticipates $5 million of
these
expenditures will be for environmental and safety matters, while
the majority of the remainder will be for a part of the Company's
contribution to a planned acetic acid expansion. In the future,
the Company may incur additional significant expenditures in
order
to comply with environmental regulations.
The Company is subject to various litigation and tax
contingencies
which in the aggregate should not have a material impact on the
Company's financial position of future results of operations.
See
"Note 5 of Notes to Condensed Consolidated Financial Statements"
and Part II, Item 1, "Legal Proceedings" incorporated herein by
reference.
<PAGE>
Part II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
ACETIC ACID PATENT INFRINGEMENT. On January 5, 1993, Hoechst
Celanese Corporation ("HCC") filed suit in U.S. District Court
for
the Southern District of Texas, Galveston Division against BP
Chemicals Limited ("BP") and the Company (Civil Action No. G-93-
001) alleging patent infringement in connection with the use of
an
ion exchange resin in a guard bed installed in the Company's
acetic
acid production facility in Texas City. The suit sought
unspecified damages and issuance of an injunction against BP and
the Company to enjoin further infringement. The trial commenced
on
January 10, 1994 and on January 19, 1994, the jury rendered its
verdict that BP and the Company had willfully infringed HCC's
patent and were liable to HCC for a reasonable royalty of .6
cents
per pound ($.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 outcome, the
Company does not anticipate that final resolution of this matter
will have a material adverse 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 while a reactor in the
acrylonitrile unit was being restarted after a shutdown for
routine
maintenance. The Company estimates that approximately three
thousand pounds of ammonia were emitted into the atmosphere.
Approximately 7,500 individuals have filed claims directly with
the
Company alleging personal injury and/or property damage as a
result
of exposure to the ammonia. The Company is in the process of
determining the merit of these claims. As of July 29, 1994, 48%
of
these claims have either been settled or rejected by the Company.
To date, two lawsuits involving approximately 221 plaintiffs have
been filed against the Company seeking unspecified damages for
personal injuries and property damage as a result of the release.
The Company anticipates that there is a substantial likelihood
that
additional litigation against the Company asserting similar
claims
will ensue. The Company believes that its general liability
insurance coverage is sufficient to cover anticipated claims and
has accrued its deductible under this coverage. Accordingly, 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 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 June 30, 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: August 15, 1994 _________________________________
J. Virgil Waggoner
President and Chief Executive
Officer (Principal Executive
Officer)
Date: August 15, 1994 __________________________________
J. David Heaney
Vice President-Finance and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
