<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER
31, 1995, 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 No.)
1200 Smith Street, Suite 1900, Houston, Texas 77002-4312
- --------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
713-650-3700
(Registrant's telephone number, including area 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 February 9, 1996, the number of shares of common stock
outstanding was 55,689,991
<PAGE> 2
Part I. - FINANCIAL INFORMATION
Item 1. - FINANCIAL STATEMENTS
<PAGE> 3
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 5,619 $ 30,882
Accounts receivable................... 139,913 112,102
Inventories........................... 59,542 67,867
Prepaid expenses...................... 3,190 3,878
Deferred income taxes................. 5,811 5,622
---------- ----------
Total current assets............... 214,075 220,351
Property, plant and equipment, net...... 318,230 309,084
Other assets............................ 78,930 80,504
---------- ----------
Total assets....................... $ 611,235 $ 609,939
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 56,536 $ 72,016
Accrued liabilities................... 76,120 55,858
Current portion of long-term debt..... 13,393 17,857
---------- ----------
Total current liabilities.......... 146,049 145,731
Long-term debt.......................... 100,214 103,581
Deferred income taxes................... 41,983 40,297
Deferred credits and other liabilities.. 72,870 81,012
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 150,000
shares authorized, 60,327 shares
issued, 55,674 shares outstanding... 603 603
Additional paid-in capital............ 33,269 33,269
Retained earnings..................... 287,839 275,052
Pension adjustment.................... (1,556) (1,556)
Accumulated translation adjustment.... (19,312) (17,307)
Deferred compensation................. (110) (129)
---------- ----------
300,733 289,932
Treasury stock, at cost, 4,653 shares. (50,614) (50,614)
---------- ----------
Total stockholders' equity......... 250,119 239,318
---------- ----------
Total liabilities and
stockholders' equity.................. $ 611,235 $ 609,939
========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
<PAGE> 4
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1995 1994
---------- ----------
<S> <C> <C>
Revenues................................ $ 191,542 $ 240,622
Cost of goods sold...................... 162,147 192,268
---------- ----------
Gross profit............................ 29,395 48,354
Selling, general and
administrative expenses............... 8,021 8,739
Interest and debt related expenses,
net of interest income................ 1,609 5,532
---------- ----------
Income before income taxes.............. 19,765 34,083
Provision for income taxes.............. 6,978 11,824
---------- ----------
Net income.............................. $ 12,787 $ 22,259
========== ==========
Net income per share.................... $ 0.23 $ 0.40
Weighted average shares outstanding..... 55,674 55,669
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
<PAGE> 5
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1995 1994
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers.......... $ 204,137 $ 238,023
Miscellaneous cash receipts........... 3,086 2,519
Cash paid to suppliers and employees.. (202,734) (217,021)
Interest paid......................... (1,741) (4,799)
Interest received..................... 374 52
Income taxes paid..................... (750) (8,573)
---------- ----------
Net cash provided by operating activities 2,372 10,201
---------- ----------
Cash flows from investing activities:
Capital expenditures................... (20,370) (7,272)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt.......... 2,000 -
Repayment of long-term debt........... (8,929) (4,261)
Other................................. (288) -
---------- ----------
Net cash used in financing activities... (7,217) (4,261)
---------- ----------
Effect of exchange rate on cash......... (48) (35)
Net decrease in cash and cash equivalents (25,263) (1,367)
Cash and cash equivalents -
beginning of period................ 30,882 2,013
---------- ----------
Cash and cash equivalents -
end of period...................... $ 5,619 $ 646
========== ==========
</TABLE>
<PAGE> 6
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
(In Thousands)
(Unaudited)
RECONCILIATION OF NET INCOME TO CASH
PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1995 1994
---------- ----------
<S> <C> <C>
Net income.............................. $ 12,787 $ 22,259
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization........... 10,712 10,378
Loss (gain) on disposal of assets....... 140 60
Deferred tax expense.................... 1,574 1,143
Accrued compensation.................... 231 1,594
Change in:
Accounts receivable................... (27,243) (17,480)
Inventories........................... 8,232 11,867
Prepaid expenses...................... 677 (1,092)
Other assets.......................... (98) (2,141)
Accounts payable...................... (17,440) (12)
Accrued liabilities................... 1,130 (16,683)
Interest payable...................... 496 (2,183)
Taxes payable......................... 4,393 1,994
Other liabilities..................... 6,781 497
---------- ----------
Net cash provided by operating activities $ 2,372 $ 10,201
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
<PAGE> 7
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
1. Basis of Presentation:
----------------------
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements
reflect all adjustments necessary to present fairly the
consolidated financial position of Sterling
Chemicals, Inc. and its subsidiaries (the "Company") as of
December 31, 1995 and its consolidated results
of operations and cash flows for the three-month periods
ended December 31, 1995 and 1994. All such
adjustments are of a normal and recurring nature. The
results of operations for the periods presented are
not necessarily indicative of the results to be expected for
the full year. The accompanying unaudited
condensed consolidated financial statements should be, and
are assumed to have been, read in conjunction
with the consolidated financial statements and notes
included in the Company's Annual Report for the
fiscal year ended September 30, 1995 (the "Annual Report").
The condensed consolidated balance sheet as
of September 30, 1995 included herein has been derived from
the consolidated balance sheet as of
September 30, 1995 included in the Annual Report. Such
balance sheet was audited by Coopers &
Lybrand L.L.P. whose report dated October 25, 1995 expressed
an unqualified opinion. Additionally, the
condensed consolidated financial statements for the three-
month period ended December 31, 1994 were
reviewed by Coopers & Lybrand L.L.P. The condensed
consolidated financial statements as of and for the
three-month period ended December 31, 1995 included herein
have been subjected to a review by Arthur
Andersen LLP, the Company's independent public accountants,
whose report is included herein.
2. Reclassification:
-----------------
Certain amounts reported in the financial statements for the
prior periods have been reclassified to
conform with the current financial statement presentation
with no effect on net income or stockholders'
equity.
<PAGE> 8
3. Inventories:
------------
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1995
------------ ------------
<S> <C> <C>
Finished products....................... $ 37,012 $ 44,802
Raw materials........................... 10,581 16,506
---------- ----------
Inventories at FIFO cost.............. 47,593 61,308
Inventories under exchange agreements... 80 (4,783)
Stores and supplies..................... 11,869 11,342
---------- ----------
$ 59,542 $ 67,867
</TABLE>
4. Long-Term Debt:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1995
------------ ------------
<S> <C> <C>
Revolving credit facilities............. $ - $ 902
Term loan...................................111,607 120,536
Loan under chlorate plant credit agreement 2,000 -
---------- ----------
Total debt outstanding................ 113,607 121,438
Less:
Current maturities.................... (13,393) (17,857)
---------- ----------
Total long-term debt.................... $ 100,214 $ 103,581
========== ==========
</TABLE>
5. Commitments and Contingencies:
------------------------------
PRODUCT CONTRACTS
The Company has certain long-term agreements which provide
for the dedication of 100% of the
Company's production of acetic acid, plasticizers, tertiary
butylamine (TBA) and sodium cyanide, each to
one customer. The Company also has various sales and
conversion agreements which dedicate significant
portions of the Company's production of styrene monomer and
acrylonitrile, the Company's major
petrochemical products, to various customers. These
agreements generally provide for cost recovery plus
an agreed margin or element of profit based upon market
price.
<PAGE> 9
ENVIRONMENTAL REGULATIONS
The Company's operations involve the handling, production,
transportation and disposal of materials
classified as hazardous or toxic and are extensively
regulated under environmental and health and safety
laws. Operating permits which are required for the Company's
operations are subject to periodic renewal
and may be revoked or modified for cause. New laws or permit
requirements and conditions may affect the
Company's operations, products or waste disposal. Past or
future operations may result in claims or
liabilities. Expenditures could be required to upgrade waste
water collection, pretreatment or disposal
systems or for other matters.
LEGAL PROCEEDINGS
Petrochemicals
HUNTSMAN LAWSUIT: On November 30, 1995, the court granted
the motion for summary judgement filed by the Company in
Sterling Chemicals, Inc. v. Huntsman Chemical
Corporation, Huntsman Styrene Corporation
and Huntsman Corporation; as discussed in
the Company's annual report on Form
10-k for the fiscal year ended September 30,
1995. The summary judgment confirms that, as a matter of
law, no enforceable contract or agreement ever
existed between the Company and the defendants. The court's
order, which includes recovery of legal fees,
also moots the defendants' counterclaim against the Company
for damages resulting from breach of the
alleged contract. The defendants have appealed this
decision.
The Company believes a loss with respect to this matter is
not probable and is unable to quantify a
reasonably possible loss estimate (as defined in Statement
of Financial Accounting Standards No. 5,
"Accounting for Contingencies") at this time.
Pulp Chemicals
PATENT LITIGATION: The Company's primary competitor in the
supply of patented technology for
generators which convert sodium chlorate into chlorine
dioxide is Akzo Nobel (formerly Eka Nobel) and
its affiliates. The Company previously disclosed that it
was engaged with Akzo Nobel in numerous patent
disputes throughout the world in which the Company and Akzo
Nobel were challenging certain patents of
the other and attempting to restrict the other's operating
range. The Company and Akzo Nobel have
reached an out-of-court settlement resolving all such
disputes. The settlement allows licensees of both the
Company's and Akzo Nobel's processes to operate their
chlorine dioxide generators within the broadest
range of operating conditions. The settlement did not have a
material adverse effect on the Company's
financial position, results of operations or cash flows.
<PAGE> 10
REPAP NEW BRUNSWICK: On January 8, 1996, Repap New
Brunswick, Inc. (formerly Miramichi
Pulp and Paper, Inc.) filed a lawsuit styled
Repap New Brunswick, Inc. v. Sterling Pulp
Chemicals, Ltd.; in the Court of Queen's Bench of New
Brunswick, Trial Division, Judicial District of Miramichi. The
plaintiff asserts property damage, business interruption and
lost profits claims resulting from the
December 17, 1992 explosion of plaintiff's chlorine dioxide
generator. The plaintiff seeks an unspecified
total amount of damages. The Company is vigorously
defending this lawsuit. Based on management's review of the
available information and advise of outside legal counsel,
the Company believes that final resolution of this matter
will not have a material adverse effect on its financial
position, results of operations or cash flows.
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. In
addition, liabilities have been accrued based on
the estimated probable loss from such litigation. These
estimates are based on management's judgments
using currently available information as well as
consultation with the Company's insurance carriers and
outside legal counsel. A number of the claims in these
litigation matters are covered by the Company's
insurance policies or by third-party indemnification of the
Company. The Company therefore has also
made estimates of its probable recoveries under insurance
policies or from third-party indemnitors based
on its understanding of its insurance policies and
indemnifications, discussions with its insurers and
indemnitors and consultation with outside legal counsel, in
addition to management's judgments. Based
on the foregoing as of December 31, 1995, the Company has
accrued approximately $16 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 $15
million. In addition, at December 31, 1995,
management estimates that the aggregate reasonably possible
range of loss for all litigation combined, in
addition to the amount accrued, is from $0 to $38 million.
The Company believes that it is insured or
indemnified for this additional reasonably possible loss,
except for a portion which is not material.
While the Company has based its estimates on its evaluation
of available information to date and the other
matters described above, much of the litigation is in its
early stages and it is impossible to predict with
certainty the ultimate outcome. The Company will adjust its
estimates as necessary as additional
information is developed and evaluated. However, the Company
believes that the final resolution of these
contingencies will not have a material adverse impact on the
financial position, results of operations or
cash flows of the Company.
The timing of probable insurance and indemnity recoveries,
and additional accruals or payment of
liabilities, if any, is not expected to have a material
adverse effect on the financial position, results of
operations or cash flows of the Company.
<PAGE> 11
6. New Accounting Standards:
-------------------------
The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed
Of". This standard establishes new accounting standards for
measuring the impairment of long-lived
assets. The Company is required to adopt this Statement by
fiscal 1997. The Company anticipates that the
adoption of this Statement will not have a material adverse
effect on the Company's financial position,
results of operations or cash flows.
7. Recent Developments:
--------------------
On January 29, 1996, the Company announced that it is
exploring all strategic alternatives to enhance
stockholder value. In this connection, the Board of
Directors has established a Special Committee which
has retained Lazard Freres & Co. LLC as its financial
advisor. The Company is in discussions with a
number of third parties with respect to the possible sale of
the Company in a single transaction or a series
of related transactions. There can be no assurance that any
transaction will be consummated.
<PAGE> 12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Sterling Chemicals, Inc.
We have reviewed the accompanying condensed consolidated
balance sheet of Sterling Chemicals, Inc. as
of December 31, 1995, and the related condensed consolidated
statements of operations and cash flows for
the three-month period then ended. 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.
ARTHUR ANDERSEN LLP
Houston, Texas
January 23, 1996
<PAGE> 13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
On January 29, 1996, the Company announced that it is
exploring all strategic alternatives to enhance
stockholder value. In this connection, the Board of
Directors has established a Special Committee which
has retained Lazard Freres & Co. LLC as its financial
advisor. The Company is in discussions with a
number of third parties with respect to the possible sale of
the Company in a single transaction or a series
of related transactions. There can be no assurance that any
transaction will be consummated.
RESULTS OF OPERATIONS
Revenues for the first three months of fiscal 1996 were $192
million compared to revenues of $241
million for the first three months of fiscal 1995, a
decrease of 20%. Net income for the first three months
of fiscal 1996 was $12.8 million ($.23 per share) compared
to $22.3 million ($0.40 per share) for the first
three months of fiscal 1995.
The decrease in revenues and earnings was primarily in the
Company's petrochemical business, while the
pulp chemical business recorded increased revenues and
earnings. Styrene and acrylonitrile, the
Company's two major petrochemical products, experienced
significantly lower sales prices and margins
during the quarter compared to the same period a year ago.
Earnings from the Company's pulp chemical
business improved primarily as a result of higher sodium
chlorate sales prices and margins.
PETROCHEMICALS:
For the first three months of fiscal 1996, the Company's
revenues from its petrochemical business
decreased 27% to $153 million when compared to the first
three months of fiscal 1995. This decrease in
revenues resulted primarily from decreases in styrene and
acrylonitrile average sales prices compared to
the year ago quarter. Net income from the Company's
petrochemical business decreased to $7.8 million
($0.14 per share) for the first three months of fiscal 1996
from $21.9 million ($0.40 per share) during the
same period in fiscal 1995. The decrease in earnings
resulted primarily from substantially lower margins
for styrene and acrylonitrile in the fiscal 1996 period.
STYRENE: Styrene revenues in the first three months of
fiscal 1996 decreased 32% to $74 million
compared to the same period of fiscal 1995. Styrene sales
prices and margins decreased substantially
from the same fiscal 1995 period because of weak market
conditions. Average sales prices for the first
quarter of fiscal 1996 decreased by approximately 60% from
the year ago quarter. Sales volumes,
however, increased by approximately 15% over the same period
last year when a shutdown for scheduled
maintenance and catalyst replacement restricted production
during the quarter.
<PAGE> 14
The Company's styrene unit operated at approximately 108% of
rated capacity for the first three months of
fiscal 1996, compared to approximately 90% for the
corresponding period in fiscal 1995. As noted above,
the styrene unit was shut down during the first quarter of
fiscal 1995 for scheduled maintenance and
catalyst replacement. The Company anticipates that the
operating rate in the second quarter of fiscal 1996
will continue to be strong in response to the anticipated
improvement in market conditions.
The price of styrene's two major raw materials, benzene and
ethylene, was substantially lower during the
first three months of fiscal 1996 compared to the same
period in fiscal 1995. Benzene prices were
approximately 35% lower while ethylene prices were nearly
30% lower. These decreases helped to offset
some of the decrease in selling prices discussed above, but
margins still decreased substantially. The
Company anticipates that benzene prices will increase
somewhat in the second fiscal quarter and that
ethylene prices will decline slightly from their first
quarter levels.
The Company anticipates that earnings for styrene will
increase in the second quarter of fiscal 1996 as a
result of expected improvement in demand.
ACRYLONITRILE: Acrylonitrile revenues in the first three
months of fiscal 1996 decreased 15% to
$146 million compared to the corresponding period in fiscal
1995. The decrease in revenues resulted from
a decrease in sales volumes of approximately 20% and a
decrease of approximately 10% in average sales
prices. Reduced imports of acrylonitrile derivatives into
the Far East market (primarily acrylic fiber and
ABS) resulted in the lower sales volumes and prices.
In response to lower demand, the Company's acrylonitrile
unit operated at approximately 81% of rated
capacity during the first three months of fiscal 1996
compared to approximately 85% for the
corresponding period of fiscal 1995. The operating rate for
the first quarter of fiscal 1995 was achieved
even though the unit was shut down for a three week period
for scheduled maintenance.
The prices of propylene and ammonia, which are the major raw
materials used to make acrylonitrile, were
lower in the first three months of fiscal 1996 than in the
corresponding period in fiscal 1995. Propylene
prices were approximately 10% lower and ammonia prices were
down by approximately 20%. These
decreases helped to offset some of the decrease in selling
prices discussed above, but margins still
decreased substantially. The Company believes that its
purchase price for propylene will decrease slightly
in the second quarter of fiscal 1996 but ammonia prices
should remain fairly stable.
The Company anticipates that earnings for acrylonitrile in
the second quarter of fiscal 1996 will be lower
than in the first quarter. Weak market conditions are
currently expected to continue for at least one more
quarter. Additionally, a shutdown of the unit is planned for
the second quarter of fiscal 1996 for additional
scheduled maintenance which will restrict production during
the period. During this shutdown, the
Company will install the first phase of a state-of-the-art
distributive control system in the acrylonitrile
unit, which should result in increased efficiencies and
stronger operating fundamentals in the future.
<PAGE> 15
OTHER PETROCHEMICAL PRODUCTS: The profitability of the
Company's other petrochemical
products (acetic acid, plasticizers, lactic acid, tertiary
butylamine and sodium cyanide) in the first three
months of fiscal 1996 increased approximately 75% over the
first three months of fiscal 1995. The
improved profitability resulted primarily from the Company's
plasticizer products, which enjoyed strong
market conditions and low raw material prices during the
quarter. Revenues during the first three months
of fiscal 1996 from the Company's other petrochemical
products decreased approximately 30% to $33
million. The decrease in revenues was due to the acetic acid
unit being shut down for most of the quarter
for expansion of the unit's capacity from 600 million pounds
to nearly 800 million pounds annual capacity. While this
expansion is substantially complete, the additional capacity
will not be fully utilized until the completion
of the partial oxidation plant under construction by
Praxair, Inc. at the Company's Texas City facility late
in the second quarter of fiscal 1996.
PULP CHEMICALS:
Revenues from the Company's pulp chemicals business for the
first three months of fiscal 1996 increased
by approximately 20% to $39 million compared to the first
three months of fiscal 1995. The increase in
revenues resulted primarily from a 20% increase in sodium
chlorate average sales prices as well as a 6%
increase in sales volume. Sodium chlorate has experienced
higher sales volumes and higher sales prices as
well as improved margins as a result of increased chlorine
dioxide utilization in pulp bleaching. Royalty
revenues from installed generator technology also increased
in the period as a result of higher customer
operating rates and increased capacity. The higher sodium
chlorate sales prices and volumes and higher
royalty revenues resulted in substantially higher net income
for the business. For the first quarter of fiscal
1996, net income was $5.0 million or $.09 per share compared
to $0.4 million or $.01 per share for the
first quarter of fiscal 1995.
The Company's sodium chlorate plants operated at
approximately 90% of rated capacity during the first
three months of fiscal 1996 compared to nearly 100% for the
same period in fiscal 1995. The Company
anticipates that operating rates will continue to be very
high in the second quarter of fiscal 1996. Margins
for sodium chlorate are expected to increase further in the
second quarter because of a price increase in
January 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling,
general and administrative
("SG&A") expenses for the first quarter of fiscal 1996 were
$8.0 million compared to $8.7 million in the
first quarter of fiscal 1995. A decrease in the expense
related to the stock appreciation rights program
accounted for the decrease in SG&A expenses.
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital was $69 million at December 31, 1995, down
slightly from $75 million at September 30,
1995. Higher sales volumes in December 1995 compared to
September 1995 resulted in a $28 million
increase in accounts receivable as well as an $8 million
decrease in inventory. Cash and cash equivalents
decreased $25 million primarily as a result of first quarter
expenditures in connection with the Company's
three-year $200 million capital program.
CASH FLOW
Net cash provided by operations was $2.4 million during the
first three months of fiscal 1996 compared to
$10.1 million for the corresponding period in fiscal 1995.
The decrease was primarily attributable to the
decreased earnings partially offset by lower payments for
interest and income taxes. The Company repaid
approximately $7.2 million of long-term debt, on a net
basis, during the first three months of fiscal 1996
(see Note 4 of the Notes to Condensed Consolidated Financial
Statements herein for more information),
and disbursed approximately $20.4 million as a result of the
capital spending program discussed below.
CAPITAL EXPENDITURES
Capital expenditures for the first three months of fiscal
1996 were $20.4 million compared to $7.3 million
in the same period last year. The capital expenditures in
the first quarter of fiscal 1996 were primarily for
the expansion of the acetic acid unit, which is
substantially complete, the ongoing construction of the
methanol plant and the Valdosta, Georgia sodium chlorate
plant. As of December 31, 1995, the Company
has spent approximately $74 million of its three-year $200
million capital plan. During the remainder of fiscal 1996, the
Company expects to spend an additional $100
million on capital expenditures. The fiscal 1996
expenditures will include the acetic acid expansion and the
methanol plant as well as further plant
instrumentation modernization and process improvement
projects and a portion of the new sodium
chlorate plant in Valdosta, Georgia, which will be completed
in fiscal 1997. The Company expects to fund
its fiscal 1996 petrochemical business capital expenditures
from operating cash flow and its $125 million
revolving credit facility, as needed. The Company will
utilize the chlorate plant credit agreement, entered
into in September 1995, to finance the construction of the
Valdosta chlorate plant.
<PAGE> 17
CERTAIN KNOWN EVENTS, TRENDS AND UNCERTAINTIES
PETROCHEMICAL RAW MATERIAL PRICES AND AVAILABILITY
For each of the Company's petrochemical products, the cost
of raw materials and utilities is far greater
than all other costs of production combined. Therefore, an
adequate supply of raw materials at reasonable
prices is critical to the success of the Company's business.
The Company does not produce any of its
major raw materials (benzene, ethylene, propylene, ammonia
and methanol), although the Company has a
methanol plant under construction at Texas City.
These materials are all commodity petrochemicals and the
price for each can fluctuate widely for a variety
of reasons, including changes in the availability of these
products because of major capacity additions or
significant plant operating problems.
The Company has several long-term arrangements with ethylene
suppliers that provide for the majority of
its anticipated requirements for purchased ethylene.
Although no assurances can be given, management
believes that the Company will continue to secure adequate
supplies of all its raw materials at acceptable
prices.
ENVIRONMENTAL AND SAFETY MATTERS
The Company's operations involve the handling, production,
transportation and disposal of materials
classified as hazardous or toxic and are extensively
regulated under environmental and health and safety
laws. Operating permits which are required for the Company's
operations are subject to periodic renewal
and may be revoked or modified for cause. New laws or permit
requirements and conditions may affect the
Company's operations, products or waste disposal. Past or
future operations may result in claims or
liabilities. Expenditures could be required to upgrade
wastewater collection, pretreatment or disposal
systems or for other matters.
The Company's prior negotiations with Monsanto with respect
to the scope of Monsanto's obligations to
the Company for pre-acquisition environmental conditions at
the Company's Texas City plant under
applicable state and federal laws and the indemnification
provisions of the Assets Purchase Agreement are
no longer ongoing. The negotiations did not produce any
change in the parties respective rights and
obligations.
For further information on environmental and safety matters,
please refer to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1995.
<PAGE> 18
LACTIC ACID
The Company is currently reviewing the operating conditions
of the lactic acid plant for long-term viability. The
results of this review are not anticipated to
have a material adverse impact on the Company's financial
position, results of operations or cash flows as the revenues
and earnings from lactic acid in the past have not been a
material portion of the Company's total revenues and earnings.
LEGAL PROCEEDINGS
The information under "Legal Proceedings" in the notes to
condensed consolidated financial statements
herein is hereby incorporated by reference.
Part II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The information under "Legal Proceedings" in the notes to
condensed consolidated financial statements
herein is hereby incorporated by reference in response to
this item.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security
holders during the three months ended December
31, 1995. However, the Company's Annual Meeting of
Stockholders was held January 24, 1996, at which
time the Company's seven nominees for directors were elected
and the appointment of Arthur Andersen
LLP as the independent auditors of the financial statements
of the Company for the fiscal year ending
September 30, 1996 was ratified.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed two reports on Form 8-K during the three
months ended December 31, 1995. On
October 31, 1995, the Company filed a report on Form 8-K to
recognize the engagement of the firm of
Arthur Andersen LLP as the Company's independent auditors
for the year ending September 30, 1996, to
replace the firm of Coopers & Lybrand L.L.P. On December
18, 1995, the Company filed a report on
Form 8-K to formally recognize the termination by the
Company of the engagement of Coopers &
Lybrand, which was effective upon the completion of the
audit for the year ended September 30, 1995,
and the filing of the Company's Annual Report on Form 10-K
for such year.
<PAGE> 19
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: February 14, 1996
_______________________________
J. Virgil Waggoner
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 14, 1996
_______________________________
Jim P. Wise
Vice President - Finance
and Chief Financial Officer
(Principal Financial Officer)
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