<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 1998
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 HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0185186
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1200 SMITH STREET, SUITE 1900 (713) 650-3700
HOUSTON, TEXAS 77002-4312 (REGISTRANT'S TELEPHONE NUMBER,
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
COMMISSION FILE NUMBER 333-04343-01
STERLING CHEMICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0502785
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1200 SMITH STREET, SUITE 1900 (713) 650-3700
HOUSTON, TEXAS 77002-4312 (REGISTRANT'S TELEPHONE NUMBER,
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Sterling Chemicals, Inc. meets the conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q, and is therefore filing this form with
the reduced disclosure format provided for by General Instruction H(2) of Form
10-Q.
----------
Indicate by check mark whether each of the registrants (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 [ ] No [ ]
As of July 31, 1998, Sterling Chemicals Holdings, Inc. had 12,617,084
shares of common stock outstanding. As of July 31, 1998, all outstanding equity
securities of Sterling Chemicals, Inc. were owned by Sterling Chemicals
Holdings, Inc.
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<PAGE> 2
This combined Form 10-Q is separately filed by Holdings and Chemicals
(each as defined herein). Information contained herein relating to Chemicals is
filed by Holdings and separately by Chemicals on its own behalf. Certain
capitalized terms used in this Form 10-Q are defined in the Notes to Condensed
Consolidated Financial Statements, included herein.
PART I.--FINANCIAL INFORMATION
ITEM 1.--FINANCIAL STATEMENTS
<PAGE> 3
STERLING CHEMICALS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 12,447 $ 7,958
Accounts receivable ............................................................ 124,003 167,248
Inventories .................................................................... 77,472 87,870
Prepaid expenses ............................................................... 13,787 10,956
Deferred income taxes .......................................................... 11,558 10,005
---------- ----------
Total current assets ...................................................... 239,267 284,037
Property, plant and equipment, net .................................................. 461,469 492,036
Other assets ........................................................................ 93,690 102,898
---------- ----------
Total assets .............................................................. $ 794,426 $ 878,971
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable ............................................................... $ 57,257 $ 80,658
Accrued liabilities ............................................................ 81,184 77,565
Current portion of long-term debt .............................................. 5,545 5,710
---------- ----------
Total current liabilities ................................................. 143,986 163,933
Long-term debt ...................................................................... 874,488 876,281
Deferred income taxes ............................................................... 20,243 36,038
Deferred credits and other liabilities .............................................. 73,689 73,336
Common stock held by ESOP ........................................................... 5,938 7,688
Less: unearned compensation ......................................................... (3,012) (5,570)
Redeemable preferred stock .......................................................... 17,616 15,793
Commitments and contingencies
Stockholders' equity (deficiency in assets):
Common stock, $.01 par value, 20,000,000 shares authorized, 12,273,000
shares issued and 12,073,000 outstanding at June 30, 1998; and 11,942,000
shares issued and 11,714,000 shares outstanding at September 30, 1997 ......... 123 120
Additional paid-in capital ..................................................... (541,937) (542,485)
Retained earnings .............................................................. 236,314 277,691
Pension adjustment ............................................................. (31) (31)
Accumulated translation adjustment ............................................. (30,464) (21,093)
Deferred compensation .......................................................... (133) --
---------- ----------
(336,128) (285,798)
Treasury stock, at cost, 200,000 shares at June 30, 1998 and 228,000 shares
at September 30, 1997 ......................................................... (2,394) (2,730)
---------- ----------
Total stockholders' equity (deficiency in assets) ......................... (338,522) (288,528)
---------- ----------
Total liabilities and stockholders' equity (deficiency in assets) .... $ 794,426 $ 878,971
========== ==========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
<PAGE> 4
STERLING CHEMICALS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues ........................................................ $ 205,414 $ 239,244 $ 640,154 $ 665,933
Cost of goods sold .............................................. 179,810 210,249 577,665 605,028
---------- ---------- ---------- ----------
Gross profit .................................................... 25,604 28,995 62,489 60,905
Selling, general, and administrative expenses ................... 13,717 10,959 37,397 24,308
Other expense .................................................. 3,022 -- 5,962 --
Interest and debt related expenses, net of interest income ...... 25,748 23,943 76,021 63,417
---------- ---------- ---------- ----------
Loss before income taxes and extraordinary item ................. (16,883) (5,907) (56,891) (26,820)
Benefit for income taxes ........................................ (3,765) (454) (17,340) (6,358)
---------- ---------- ---------- ----------
Net loss before extraordinary item .............................. (13,118) (5,453) (39,551) (20,462)
Extraordinary item, loss on early extinguishment of
debt net of tax ............................................ -- 3,924 -- 3,924
---------- ---------- ---------- ----------
Net loss ........................................................ (13,118) (9,377) (39,551) (24,386)
Preferred stock dividend and accretion .......................... 607 249 1,826 411
---------- ---------- ---------- ----------
Net loss attributable to common stockholders .................... $ (13,725) $ (9,626) $ (41,377) $ (24,797)
========== ========== ========== ==========
Net loss per common share ....................................... $ (1.13) $ (0.84) $ (3.40) $ (2.24)
========== ========== ========== ==========
Weighted average shares outstanding ............................. 12,185 11,420 12,007 11,047
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
<PAGE> 5
STERLING CHEMICALS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers ..................... $ 728,698 $ 670,962
Miscellaneous cash receipts ...................... 2,531 18,718
Cash paid to suppliers and employees ............. (642,006) (645,888)
Interest paid .................................... (58,534) (35,556)
Income tax refunds received ..................... 6,833 3,288
---------- ----------
Net cash provided by operating activities ............. 37,522 11,524
---------- ----------
Cash flows from investing activities:
Capital expenditures ............................. (18,861) (32,640)
Purchase of assets-acrylic fibers business ....... -- (88,200)
Proceeds-sale of assets .......................... -- 16
---------- ----------
Net cash used in investing activities ................. (18,861) (120,824)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt ..................... 48,562 321,334
Repayment of long-term debt ...................... (62,448) (216,895)
Issuance of common stock ......................... 3 12,339
Purchase of treasury stock ....................... (101) (653)
Other ............................................ 202 (7,648)
---------- ----------
Net cash provided by (used in) financing activities ... (13,782) 108,477
---------- ----------
Effect of exchange rate on cash ....................... (390) (205)
---------- ----------
Net change in cash and cash equivalents ............... 4,489 (1,028)
Cash and cash equivalents--beginning of period ........ 7,958 5,609
---------- ----------
Cash and cash equivalents--end of period .............. $ 12,447 $ 4,581
========== ==========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
<PAGE> 6
STERLING CHEMICALS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Net loss ...................................................................... $(39,551) $(24,386)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization ............................................ 42,205 36,192
Debt fee amortization .................................................... 2,830 3,072
Loss on disposal of assets ............................................... 324 36
Deferred tax (benefits) expense .......................................... (14,557) 4,205
Unearned compensation .................................................... 1,566 1,592
Discount note amortization ............................................... 12,898 11,486
Extraordinary item, net of taxes ......................................... -- 3,924
Change in:
Accounts receivable ...................................................... 36,246 (23,604)
Inventories .............................................................. 9,810 4,537
Prepaid expenses ......................................................... (1,672) (8,917)
Other assets ............................................................. 1,055 (4,171)
Accounts payable ......................................................... (19,247) (15,292)
Accrued liabilities ...................................................... (2,221) 6,514
Interest payable ......................................................... 4,718 12,147
Taxes payable ............................................................ (2,711) (3,367)
Other liabilities ........................................................ 5,829 7,556
-------- --------
Net cash provided by operating activities ..................................... $ 37,522 $ 11,524
======== ========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
6
<PAGE> 7
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................................... $ 12,445 $ 7,958
Accounts receivable ................................................................. 125,662 167,898
Inventories ......................................................................... 77,472 87,870
Prepaid expenses .................................................................... 12,849 10,031
Deferred income taxes ............................................................... 11,558 10,005
------------ ------------
Total current assets ........................................................... 239,986 283,762
Property, plant and equipment, net ....................................................... 461,469 492,036
Other assets ............................................................................. 90,252 99,519
------------ ------------
Total assets ................................................................... $ 791,707 $ 875,317
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable .................................................................... $ 57,257 $ 80,658
Accrued liabilities ................................................................. 81,176 77,565
Current portion of long-term debt ................................................... 5,545 5,710
------------ ------------
Total current liabilities ...................................................... 143,978 163,933
Long-term debt ........................................................................... 754,182 768,870
Deferred income taxes .................................................................... 30,957 42,646
Deferred credits and other liabilities ................................................... 73,689 73,337
Common stock held by ESOP ................................................................ 5,938 7,688
Less: unearned compensation .............................................................. (3,012) (5,570)
Commitments and contingencies
Stockholder's equity (deficiency in assets):
Common stock, $.01 par value ........................................................ -- --
Additional paid-in capital .......................................................... (139,230) (139,786)
Retained earnings (deficit) ......................................................... (44,167) (14,677)
Pension adjustment .................................................................. (31) (31)
Deferred compensation ............................................................... (133) --
Accumulated translation adjustment .................................................. (30,464) (21,093)
------------ ------------
Total stockholder's equity (deficiency in assets) .............................. (214,025) (175,587)
------------ ------------
Total liabilities and stockholder's equity (deficiency in assets) ...... $ 791,707 $ 875,317
============ ============
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
7
<PAGE> 8
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues .................................................................. $ 205,414 $ 239,244 $ 640,154 $ 665,933
Cost of goods sold ........................................................ 179,810 210,249 577,665 605,028
--------- --------- --------- ---------
Gross profit .............................................................. 25,604 28,995 62,489 60,905
Selling, general and administrative expenses .............................. 13,469 10,931 36,369 23,714
Other expense ............................................................. 3,022 -- 5,962 --
Interest and debt related expenses ........................................ 21,188 19,882 62,867 51,694
Interest income from parent ............................................... -- -- -- (1,788)
--------- --------- --------- ---------
Loss before income taxes and extraordinary item ........................... (12,075) (1,818) (42,709) (12,715)
Provision (Benefit) for income taxes ...................................... (3,027) 62 (13,219) (3,014)
--------- --------- --------- ---------
Net loss before extraordinary item ........................................ (9,048) (1,880) (29,490) (9,701)
Extraordinary item, loss on early extinguishment of debt, net of tax ...... -- 3,924 -- 3,924
--------- --------- --------- ---------
Net loss .................................................................. $ (9,048) $ (5,804) $ (29,490) $ (13,625)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
8
<PAGE> 9
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Cash received from customers ....................... $ 728,698 $ 670,962
Miscellaneous cash receipts ........................ 2,438 18,837
Cash paid to suppliers and employees ............... (641,915) (646,624)
Interest paid ...................................... (58,534) (35,556)
Income tax refund received ......................... 6,833 3,288
--------- ---------
Net cash provided by operating activities ............... 37,520 10,907
--------- ---------
Cash flows from existing activities:
Capital expenditures ............................... (18,861) (32,640)
Purchase of assets-acrylic fibers business ......... -- (88,200)
Proceeds from sale of assets ....................... -- 16
--------- ---------
Net cash used in investing activities ................... (18,861) (120,824)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt ....................... 48,562 321,334
Repayment of long-term debt ........................ (62,448) (216,895)
Intercompany financing ............................. -- 3,000
Contributions from parent .......................... -- 8,604
Other .............................................. 104 (8,155)
--------- ---------
Net provided by (used in) financing activities ......... (13,782) 107,888
Effect of exchange rate on cash ......................... (390) (205)
--------- ---------
Net change in cash and cash equivalents ................. 4,487 (2,234)
Cash and cash equivalents - beginning of period ......... 7,958 5,581
--------- ---------
Cash and cash equivalents - end of period ............... $ 12,445 $ 3,347
========= =========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
9
<PAGE> 10
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Net loss ...................................................................... $(29,490) $(13,625)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization ............................................ 42,205 36,192
Debt fee amortization .................................................... 2,362 2,825
Loss on disposal of assets ............................................... 324 36
Deferred tax (benefit) expense ........................................... (10,451) 8,261
Unearned compensation .................................................... 1,566 1,592
Extraordinary item, net of taxes ......................................... -- 3,924
Change in:
Accounts receivable ...................................................... 36,208 (28,129)
Inventories .............................................................. 9,810 4,537
Prepaid expenses ......................................................... (1,658) (7,788)
Other assets ............................................................. 1,017 (4,698)
Accounts payable ......................................................... (20,182) (14,930)
Accrued liabilities ...................................................... (2,221) 6,427
Interest payable ......................................................... 4,718 13,935
Taxes payable ............................................................ (2,711) (5,209)
Other liabilities ........................................................ 6,023 7,557
-------- --------
Net cash provided by operating activities ..................................... $ 37,520 $ 10,907
======== ========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
10
<PAGE> 11
STERLING CHEMICALS HOLDINGS, INC.
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 Holdings, Inc.
("Holdings") and its subsidiaries (Holdings and its subsidiaries collectively,
the "Company") and Sterling Chemicals, Inc. and its subsidiaries (collectively,
"Chemicals") as of June 30, 1998 and their consolidated results of operations
and cash flows for the applicable three month and nine month periods ended June
30, 1998 and 1997. 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 Holdings' and Chemicals' combined Annual Report on Form 10-K
for the fiscal year ended September 30, 1997 (the "Annual Report"). The
accompanying condensed consolidated balance sheets as of September 30, 1997,
have been derived from the audited consolidated balance sheets as of September
30, 1997, included in the Annual Report. The accompanying condensed consolidated
financial statements as of and for the three month and nine month periods ended
June 30, 1998, have been subjected to a review by Deloitte & Touche LLP, the
Company's independent public accountants, whose reports are included herein.
Certain amounts reported in the financial statements for the prior periods
have been reclassified to conform with the current financial statement
presentation with no effect on net loss or stockholders' equity (deficiency in
assets).
2. INVENTORIES:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
Inventories consisted of the following (in thousands):
Finished products ........................................ $ 45,553 $ 47,572
Raw materials ............................................ 10,109 17,800
Inventories under exchange agreements .................... 1,873 2,179
Stores and supplies ...................................... 19,937 20,319
------------ ------------
$ 77,472 $ 87,870
============ ============
</TABLE>
3. LONG-TERM DEBT:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
Long-term debt consisted of the following (in thousands):
Revolving credit facility ............................... $ -- $ 9,400
Term loans .............................................. 274,333 275,334
Saskatoon term loans .................................... 50,837 53,822
ESOP term loan .......................................... 3,656 4,875
11 1/4% Notes ........................................... 152,899 153,148
11 3/4% Notes ........................................... 275,000 275,000
13 1/2% Notes .......................................... 123,308 110,412
------------ ------------
Total debt outstanding ............................. 880,033 881,991
Less:
Current maturities ................................. (5,545) (5,710)
------------ ------------
Total long-term debt .................................... $ 874,488 $ 876,281
============ ============
</TABLE>
11
<PAGE> 12
During April 1998, the Company obtained certain amendments to the financial
covenants contained in its $404.5 million senior secured credit agreement (the
"Credit Agreement"). The Company requested the changes in order to reduce the
covenant thresholds based on its revised financial projections for fiscal years
1998 and 1999. The amendments span a seven-quarter period, through September 30,
1999.
The Company's ability to comply with the covenants and other terms of its
various debt agreements, meet its debt service obligations, and repay principal
when due will depend on the future performance of the Company. The future
performance of the Company is subject to a number of uncertainties. The Company
was in compliance with the financial covenants in effect as of June 30, 1998.
However, if weak market conditions (particularly in various countries in Asia)
continue to negatively impact the sales prices, margins, and volumes of the
Company's products (particularly styrene, acrylonitrile, methanol, sodium
chlorate, and acrylic fibers), the Company may have difficulty remaining in
compliance with the financial covenants under certain of its debt agreements. If
the Company fails to remain in compliance with any financial covenants, the
Company believes it could obtain curative amendments or waivers; however, no
assurances can be given that these amendments or waivers could be obtained. In
the event the Company ceases to be in compliance with any financial covenants
and appropriate amendments or waivers are not obtained, debt holders could
pursue remedies available to them under the relevant debt agreements.
4. COMMITMENTS AND CONTINGENCIES:
Product Contracts
The Company has certain long-term agreements that provide for the
dedication of 100% of the Company's production of acetic acid, plasticizers,
tertiary butylamine, and sodium cyanide, each to one customer. The Company also
has various sales and conversion agreements that dedicate a portion of the
Company's production of styrene monomer, acrylonitrile, and methanol, the
Company's major petrochemical products, to various customers. These agreements
generally provide for cost recovery plus, in certain contracts, an agreed margin
or element of profit based upon market price.
Environmental Regulations
The Company's operations involve the handling, production, transportation,
and disposal of materials classified as hazardous or toxic and are extensively
regulated under environmental and health and safety laws. Operating permits
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 related to handling, production, transportation, and disposal of
materials classified as hazardous or toxic. No assurances can be given that the
Company will not incur material environmental expenditures associated with its
facilities, operations, or products.
Legal Proceedings
Ammonia Release Lawsuits. A description of the ammonia release lawsuits is
found under "Legal Proceedings" in Note 7 of the "Notes to Consolidated
Financial Statements" of the Annual Report and is incorporated herein by
reference. As discussed therein, the Company continues to vigorously defend
against the claims of the approximately 1,500 remaining plaintiffs. The Company
has settled the claims of a majority of the original plaintiffs and is engaged
in on-going settlement discussions with the remaining plaintiffs. The Company
believes all or substantially all of its future out-of-pocket costs and expenses
(including settlement payments) relating to these lawsuits will be covered by
the Company's liability insurance policies.
Nickel Carbonyl Lawsuit. A description of the nickel carbonyl lawsuit is
found under "Legal Proceedings" in Note 7 of the "Notes to Consolidated
Financial Statements" of the Annual Report and is incorporated herein by
reference. A total of fifteen contractor employees allegedly exposed to nickel
carbonyl have filed a lawsuit against Chemicals seeking unspecified damages for
personal injuries. Additional litigation against Chemicals asserting similar
claims may ensue. The Company believes all or substantially all of its
out-of-pocket costs and expenses relating to such lawsuits will be covered by
the Company's liability insurance policies and/or indemnification from third
parties.
Ethylbenzene Release. On April 1, 1998, a chemical leak occurred when a
line failed in the ethylbenzene unit at the Company's Texas City petrochemical
plant. The released chemicals included ethylbenzene, benzene, polyethylbenzene,
and hydrochloric acid. The Company does not believe any serious injuries were
sustained, although a number of citizens sought medical examinations at local
hospitals after a precautionary alert was given to neighboring communities. The
Company
12
<PAGE> 13
anticipates that claims and litigation against Chemicals will ensue as a result
of the release. The Company believes that its general liability insurance
coverage is sufficient to cover all costs and expenses in excess of the
deductible.
Other Lawsuits. The Company is subject to various other claims and legal
actions that arise in the ordinary course of its business.
Litigation Contingency
The Company has made estimates of the reasonably possible range of its
liability with regard to 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 and accruals 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
these insurance policies or third-party indemnitors based on its understanding
of its insurance policies and indemnifications, discussions with its insurers
and indemnitors, and consultation with outside legal counsel, in addition to the
Company's judgments. Based on the foregoing, as of June 30, 1998, the Company
has accrued approximately $8.3 million as its estimate of aggregate contingent
liability for these matters, and has also recorded aggregate receivables from
its insurers and third-party indemnitors of approximately $6.6 million. At June
30, 1998, management estimates that the aggregate reasonably possible range of
loss for all litigation combined, in addition to the amount accrued, is from
zero to $13 million. The Company believes that this additional reasonably
possible loss is substantially covered by insurance.
While the Company has based its estimates on its evaluation of available
information to date and the other matters described above, much of the
litigation is in its early stages and it is impossible to predict with certainty
the ultimate outcome. The Company will adjust its estimates as necessary if and
when 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 recoveries and
additional accruals or payment of liabilities, if any, are not expected to have
a material adverse effect on the financial position, results of operations, or
cash flows of the Company.
5. NEW ACCOUNTING STANDARDS:
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," establishes standards for computing and presenting earnings per share
("EPS") and replaces the presentation of primary EPS previously prescribed with
a presentation of basic EPS, which is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. The statement also requires presentation of diluted EPS. Diluted
EPS is computed similarly to fully diluted EPS pursuant to Accounting Principles
Board Opinion No. 15. The Company adopted SFAS No. 128 for fiscal 1998 and has
restated prior year amounts to reflect adoption of the new standard. As losses
were incurred for each of the three month and nine month periods ended June 30,
1998 and 1997, basic and diluted EPS are the same amount for these periods.
13
<PAGE> 14
For purposes of computing net loss per common share, net loss has been
reduced by an amount equal to the fair market value of Released Shares (as
hereinafter defined) at the end of the period, minus the sum of the amount
previously recognized as compensation expense with respect to Released Shares
and the amount of depreciation/appreciation in value of Released Shares in prior
periods. This reduction results from the Company being required, under certain
circumstances, to purchase for cash common stock distributed to participants by
the Employee Stock Ownership Plan (the "ESOP"). "Released Shares" are shares
held by the ESOP but allocated to employees. The weighted average number of
outstanding shares and computation of the net loss per common share is as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders ............... $ (13,725) $ (9,626) $ (41,377) $ (24,797)
Less depreciation in value of Released Shares .............. -- -- 505 --
---------- ---------- ---------- ----------
Net loss for purpose of computing net loss per share ....... $ (13,725) $ (9,626) $ (40,872) $ (24,797)
========== ========== ========== ----------
Net loss per common share .................................. $ (1.13) $ (0.84) $ (3.40) $ (2.24)
========== ========== ========== ==========
Weighted average shares outstanding ........................ 12,185 11,420 12,007 11,047
========== ========== ========== ==========
</TABLE>
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
reporting and displaying of comprehensive income and its components. SFAS No.
131, "Disclosure About Segments of an Enterprise and Related Information",
establishes standards for the way that public business enterprises report
information about operating segments in interim and annual financial statements.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits", establishes revisions to employers' disclosures about pension and
other post retirement benefit plans. Management is currently evaluating the
disclosures required when these three statements are adopted in the first
quarter of fiscal 1999.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Management is currently evaluating the
disclosures required when this statement is adopted in the first quarter of
fiscal 2000.
6. BUSINESS ACQUISITIONS:
On January 31, 1997, the Company acquired the acrylic fibers business of
Cytec Industries Inc. (the "AFB Acquisition"). The acrylic fibers business, now
owned by two wholly owned subsidiaries of Chemicals (collectively "Sterling
Fibers"), consists of an acrylic fibers plant located near Pensacola, Florida,
and several associated marketing and research offices. The Company used the
purchase method to account for the AFB Acquisition and operating results of
Sterling Fibers beginning February 1, 1997 are included with those of the
Company.
On July 10, 1997, Sterling Pulp Chemicals (Sask) Ltd. ("Sterling Sask"), an
indirect wholly owned subsidiary of Holdings and Chemicals, acquired
substantially all of the assets of Saskatoon Chemicals Ltd., a subsidiary of
Weyerhaeuser Canada Ltd. (the "Saskatoon Acquisition"). The acquired assets
include a manufacturing plant near Saskatoon, Saskatchewan, and are used by
Sterling Sask to manufacture sodium chlorate, caustic soda, calcium
hypochlorite, chlorine, and hydrochloric acid. The Company used the purchase
method to account for the acquisition, and operating results of Sterling Sask
beginning July 10, 1997 are included with those of the Company.
14
<PAGE> 15
The following table presents the unaudited pro forma results of operations
of the Company as if the AFB Acquisition and the Saskatoon Acquisition had
occurred on October 1, 1996. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what would have
occurred had the AFB Acquisition and the Saskatoon Acquisition been made at the
beginning of fiscal year 1997 or of results which may occur in the future (in
thousands, except per share amounts).
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
THREE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1997
------------ ------------
<S> <C> <C>
Revenues ........................................... $ 250,700 $ 744,800
Net loss before extraordinary items ................ (5,400) (22,700)
Net loss attributable to common stockholders ....... (10,400) (27,700)
Net loss per common share .......................... $ (0.80) $ (2.23)
</TABLE>
15
<PAGE> 16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Sterling Chemicals Holdings, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Sterling Chemicals Holdings, Inc. and subsidiaries (the "Company") as of June
30, 1998, and the related condensed consolidated statements of operations and
cash flows for the three month and nine month periods ended June 30, 1998 and
1997. 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 of the Company as of September 30,
1997, and the related consolidated statements of operations, stockholders'
equity (deficiency in assets), and cash flows for the year then ended (not
presented herein); and in our report dated December 3, 1997, 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, 1997 is fairly stated in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Houston, Texas
August 5, 1998
16
<PAGE> 17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Sterling Chemicals, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Sterling Chemicals, Inc. and subsidiaries ("Chemicals") as of June 30, 1998, and
the related condensed consolidated statements of operations and cash flows for
the three month and nine month periods ended June 30, 1998 and 1997. These
financial statements are the responsibility of Chemicals' 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 of Chemicals as of September 30, 1997,
and the related consolidated statement of operations, stockholder's equity
(deficiency in assets), and cash flows for the year then ended (not presented
herein); and in our report dated December 3, 1997, 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, 1997 is fairly stated in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Houston, Texas
August 5, 1998
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain capitalized terms used herein but not defined have the meanings assigned
to them in the Notes To Condensed Consolidated Financial Statements or in the
Notes to the Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K.
OVERVIEW
Holdings is a holding company whose only material asset is its investment
in Chemicals. Holdings' only material liabilities are its obligation to repay
the 13 1/2% Senior Secured Discount Notes due 2008 (the "13 1/2% Notes"), redeem
its outstanding preferred stock, and certain other contingent obligations.
Chemicals owns substantially all of the consolidated operating assets and is
obligated for substantially all remaining liabilities of the Company. Other than
the additional interest expense associated with the 13 1/2% Notes, the results
of operations for the Company are essentially the same as those for Chemicals.
Accordingly, the discussion that follows is applicable to both entities, except
as specifically noted. A separate discussion of the results of operations for
Chemicals would not, in the opinion of the Company, provide any additional
meaningful information.
RECENT DEVELOPMENTS
On April 1, 1998, a chemical leak occurred when a line failed in the
ethylbenzene unit at the Company's Texas City petrochemical plant (the "Texas
City Plant"). The released chemicals included ethylbenzene, benzene,
polyethylbenzene, and hydrochloric acid. The Company does not believe any
serious injuries were sustained, although a number of citizens sought medical
examinations at local hospitals after a precautionary alert was given to
neighboring communities.
During April 1998, the Company obtained certain amendments to the financial
covenants contained in the Credit Agreement. The Company requested the changes
in order to reduce the covenant thresholds based on its revised financial
projections for fiscal years 1998 and 1999. The amendments span a seven-quarter
period, through September 30, 1999.
During April 1998, 47 salaried Company employees took early retirement
under a voluntary severance program established by the Company at the Texas City
Plant. The Company recorded a pre-tax charge of $3.0 million in the third
quarter of fiscal 1998 for costs associated with the April workforce reduction.
The Company anticipates annual savings from such workforce reduction of
approximately $3.0 million.
Due to a significant disparity between domestic and foreign natural gas
prices and the resulting costing disadvantage to domestic methanol producers,
the Company and its partner decided on July 29, 1998 to temporarily shut down
its methanol facilities. The Company has contracted with an outside vendor to
supply methanol during the shutdown period for both its internal needs and to
satisfy its delivery requirements under existing contractual commitments.
RESULTS OF OPERATIONS
Revenues for the third quarter of fiscal 1998 were $205 million compared to
revenues of $239 million for the third quarter of fiscal 1997, a decrease of
14%. The decrease in revenues was primarily due to: (i) reduced styrene,
acrylonitrile, sodium chlorate, and methanol sales prices, (ii) decreased
styrene and methanol sales volumes, and (iii) lower acrylic fibers revenues.
These decreases were partially offset by the favorable impact of revenues from
the Saskatoon Acquisition in the current quarter. Revenues for the nine month
period ended June 30, 1998 were $640 million compared to $666 million in the
prior year period, a decrease of 4%. The decrease in revenues was the result of
lower styrene and acrylonitrile selling prices and reduced styrene sales
volumes, mostly offset by the positive impact of the AFB Acquisition and the
Saskatoon Acquisition. Revenues excluding the impact of the AFB Acquisition and
the Saskatoon Acquisition would have been $168 million and $205 million for the
third quarters of fiscal 1998 and 1997, respectively, and $529 million and $608
million for the nine month periods ended June 30, 1998 and 1997, respectively. A
net loss of $13.7 million, or $1.13 per share, was recorded for the third
quarter of fiscal 1998 compared to a net loss of $9.6 million, or $0.84 per
share, for the third quarter of fiscal 1997. A net loss of $41.4 million, or
$3.40 per share, was recorded for the nine month period ended June 30, 1998,
compared to a net loss of $24.8 million, or $2.24 per share, for the same period
of fiscal 1997. Increased losses for the three months ended June 30, 1998, as
compared to the prior year period, were primarily due to: (i) reduced
acrylonitrile, sodium chlorate, and methanol margins, (ii) weak markets in
acrylic fibers, (iii) increased interest expense resulting from financings
related to the Saskatoon acquisition, (iv) increased selling, general, and
administrative ("SG&A") expense, and (v) costs associated with the workforce
reductions. Increased losses for the nine months ended June 30, 1998, as
compared to the prior year period, were primarily due to: (i) reduced styrene,
acrylonitrile, sodium
18
<PAGE> 19
chlorate, and methanol margins, (ii) weak markets in acrylic fibers, (iii)
increased interest expense resulting from financings related to the AFB
Acquisition and the Saskatoon Acquisition, and the issuance of $150,000,000 of
11 1/4% Senior Subordinated Notes due 2007 (the "11 1/4% Notes"), which proceeds
were used to prepay outstanding indebtedness under the Term Loans, (iv)
increased SG&A expense, and (v) costs associated with the workforce reductions,
all partially offset by the results of the Saskatoon operations.
Petrochemicals and Fibers
For the third quarter of fiscal 1998, revenues from the petrochemical and
fibers businesses decreased 22% to $155 million as compared to $198 million in
the prior year period. The decrease in revenues was primarily due to: (i)
reduced styrene, acrylonitrile, and methanol sales prices, (ii) decreased
styrene and methanol sales volumes, and (iii) decreased acrylic fibers revenues.
For the nine months ending June 30, 1998, revenues were $486 million as compared
to $540 million in the same period of fiscal 1997. The 10% decrease in revenues
was primarily due to lower styrene and acrylonitrile sales prices and reduced
styrene sales volumes. These decreases were partially offset by increased
revenues from the AFB Acquisition. The economic conditions in Asia negatively
impacted market conditions in the fiscal 1998 periods, particularly for the
Company's styrene, acrylonitrile, and acrylic fibers products. The Company's
petrochemical and fibers businesses recorded operating losses of $0.5 million
and $9.8 million for the three and nine month periods of fiscal 1998,
respectively, compared to operating income of $7.2 million and $1.4 million for
the same periods of fiscal 1997. The decrease in operating results in the third
quarter of fiscal 1998, as compared to the same period of fiscal 1997, was due
to weaker pricing in methanol, partially offset by increased profitability in
acetic acid. The decrease in operating results for the nine month period ended
June 30, 1998, as compared to the same period of fiscal 1997, was primarily due
to weaker operational performance in styrene, acrylonitrile, and methanol,
partially offset by stronger performance in acetic acid.
Styrene. Styrene revenues decreased 23% to $61 million in the third quarter
of fiscal 1998 and 25% to $184 million for the nine months ended June 30, 1998,
compared to the same periods in fiscal 1997. Styrene sales prices decreased 12%
and 11% for the third quarter and first nine months of fiscal 1998,
respectively, as compared to the prior year periods. In addition, styrene sales
volumes decreased 13% and 16% for the third quarter and first nine months of
fiscal 1998, respectively, as compared to the prior year periods. These
decreases in sales prices and volumes were primarily due to weaker market
conditions, particularly in Asia. The prices of styrene's major raw materials,
benzene and ethylene, were approximately 24% and 32% lower, respectively, during
the third quarter of fiscal 1998 and approximately 13% and 19% lower,
respectively, during the first nine months of fiscal 1998 as compared to the
same periods in fiscal 1997. Styrene results were approximately the same in the
third quarter of fiscal 1998, as compared to the third quarter of fiscal 1997,
as the lower raw material prices were offset by reduced sales volumes and sales
prices. Styrene margins decreased in the first nine months of fiscal 1998
compared to the same periods in fiscal 1997 as significantly lower sales prices
more than offset the lower raw materials costs.
Acrylonitrile. Acrylonitrile revenues decreased 26% to $27 million in the
third quarter of fiscal 1998 and 16% to $88 million in the first nine months of
fiscal 1998 compared to the same periods in fiscal 1997. Acrylonitrile sales
prices decreased 31% and 18% for the third quarter and first nine months of
fiscal 1998, respectively, as compared to the prior year periods. The lower
sales prices in both periods were primarily due to weaker market conditions,
primarily in Asia. Acrylonitrile sales volumes increased 8% and 3% in the third
quarter and first nine months of fiscal 1998, respectively, as compared to the
prior year periods. Decreased revenues for the third quarter and first nine
months of fiscal 1998 were primarily the result of the decline in selling
prices. The prices of acrylonitrile's major raw materials, propylene and
ammonia, were approximately 37% and 23% lower, respectively, in the third
quarter of fiscal 1998 and approximately 23% and 26% lower, respectively, during
the first nine months of fiscal 1998, as compared to the comparable periods in
fiscal 1997. Acrylonitrile results improved slightly in the third quarter of
fiscal 1998 as compared to the prior year period, as lower raw materials prices
and increased volumes more than offset the decrease in sales prices.
Acrylonitrile margins decreased for the first nine months of fiscal 1998
compared to the same periods of fiscal 1997, as significantly lower sales prices
more than offset the lower raw material costs.
Fibers. Revenues from the Company's acrylic fibers business for the third
quarter and first nine months of fiscal 1998 were $25 million and $76 million,
respectively. The Company consummated the AFB Acquisition on January 31, 1997,
and, therefore recorded revenues of $34 million and $58 million, respectively,
for the comparable periods of fiscal 1997. Sterling Fibers performance in fiscal
1998 was negatively impacted by weak market conditions, particularly in Asia and
to a lesser extent the loss of a domestic customer.
Other Petrochemical Products. Revenues from the Company's other
petrochemical products (including methanol, acetic acid, plasticizers, tertiary
butylamine, and sodium cyanide) in the third quarter of fiscal 1998 decreased
14% to $42 million and increased 3% to $138 million in the first nine months of
fiscal 1998, as compared to the same periods last fiscal year. In addition, the
Company's other petrochemical products reported reduced operating earnings in
the third quarter of fiscal 1998 and increased operating earnings in the first
nine months of fiscal 1998, as compared to the same periods in the prior fiscal
year. The decrease in
19
<PAGE> 20
revenues and operating earnings in the third quarter of fiscal 1998 was
primarily due to a 32% decrease in methanol sales prices as a result of
overcapacity in the global methanol market, partially offset by better operating
performance in acetic acid and plasticizers. The increase in revenues and
operating earnings in the first nine months of fiscal 1998 was primarily due to
better operating performance in acetic acid and plasticizers, partially offset
by the aforementioned weaker pricing in methanol.
Pulp Chemicals
Revenues from the Company's pulp chemical business increased 24% to $51
million and 23% to $154 million for the third quarter and first nine months of
fiscal 1998, respectively, when compared to the same periods in the prior fiscal
year. The increase in revenues was primarily due to an increase in sales volumes
of sodium chlorate of 10% and 22% for the third quarter and first nine months of
fiscal 1998, respectively, when compared to the corresponding periods of fiscal
1997. The increases in sales volumes were primarily due to the additional
volumes from the Saskatoon Acquisition in July 1997 and the startup of the
Valdosta, Georgia sodium chlorate plant (the "Valdosta Plant") in December 1996.
Average sales prices for sodium chlorate declined 8% and 9% in the third quarter
and first nine months of fiscal 1998, respectively, compared to the
corresponding periods in fiscal 1997. The decline in chlorate sales prices was
primarily due to lower pulp mill operating rates partially due to the economic
environment in various countries in Asia. The Company's pulp chemicals business
recorded operating earnings of $9 million and $29 million for the three and nine
months ended June 30, 1998, respectively, compared to operating earnings of $11
million and $35 million for the same periods of fiscal 1997. The reduced
operating earnings in the fiscal 1998 periods, compared to the fiscal 1997
periods, is primarily due to reduced sodium chlorate sales prices and higher
energy costs in the current periods, partially offset by increased sodium
chlorate sales volumes.
Selling, General, and Administrative Expenses
SG&A expenses increased to $14 million and $37 million during the third
quarter and first nine months of fiscal 1998, respectively, as compared to $11
million and $24 million in the third quarter and first nine months of fiscal
1997, respectively. The increase was primarily due to SG&A expense related to
the new fibers business, the new Saskatoon chemical business, increased
corporate development activities, and costs associated with upgrades of certain
of the Company's information technology systems, which includes Year 2000
compliance.
Other Expense
Other expense of $3 million and $6 million in the three and nine month
periods ended June 30, 1998, respectively, are related to the voluntary
severance programs offered by the Company in January and April of 1998 at the
Texas City Plant.
Interest and Debt Related Expense
Interest and debt related expenses for the three and nine months ended June
30, 1998, were $26 million and $76 million, respectively, compared to $24
million and $63 million, respectively, for the corresponding periods in fiscal
1997. This increase is primarily due to the additional debt incurred in
connection with the AFB and Saskatoon Acquisitions and the issuance of the
11 1/4% Notes. The proceeds of the 11 1/4% Notes were used to prepay
outstanding indebtedness under the Term Loans.
Extraordinary Item
The $4 million after-tax ($6 million pre-tax) extraordinary item relates to
unamoritized debt issue costs which were expensed in April 1997 as a result of
the partial prepayment of the term loans due March 31, 2003 and September 30,
2004 (the "Term Loans").
20
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
Debt Structure
As of June 30, 1998, the Company's debt structure consisted of: (i) the
Term Loans; (ii) Saskatoon Term Loans due June 30, 2002 and June 30, 2005; (iii)
the 11 1/4% Notes; (iv) 11 3/4% Senior Subordinated Notes due 2006 (the "11 3/4%
Notes"); (v) the 13 1/2% Notes; (vi) an ESOP Term Loan due September 30, 2000;
and (vii) a revolving credit facility providing up to $125 million (subject to a
monthly borrowing base calculation) in revolving loans (the "Revolver") (see
Note 3 to the Notes to Condensed Financial Statements). At June 30, 1998, the
Company's long-term debt (including current maturities) totaled $880.0 million.
The Company intends to meet its liquidity needs for operating activities
and capital expenditures (other than acquisitions) through internally generated
funds and, to the extent necessary, borrowings under the Revolver. As of June
30, 1998, the Company had no amounts drawn and approximately $2.4 million in
letters of credit outstanding under the Revolver. Available credit under the
Revolver for loans and letters of credit is subject to a monthly borrowing base
consisting of 85% of eligible accounts receivable and 65% of eligible inventory
with an inventory cap of 50% of the borrowing base. At June 30, 1998, the
borrowing base limited the total credit available under the Revolver to a
maximum of $117.6 million. Accordingly and after giving effect to the $2.4
million of outstanding letters of credit, as of June 30, 1998, the unused credit
available under the Revolver was $115.2 million, up from $113 million at
September 30, 1997. The Revolver matures on March 31, 2003. The Company believes
its internally generated funds and the undrawn amount of the Revolver will be
sufficient to meet its liquidity needs the reasonably foreseeable future.
The Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, and general corporate
purposes, should it need to do so, will be affected by the covenants in its
various debt agreements and by cash requirements for debt service. The Credit
Agreement and the indentures governing the 11 1/4% Notes, 11 3/4% Notes, and 13
1/2% Notes (the "Indentures") contain numerous financial and operational
covenants, including, without limitation, restrictions on the Company's ability
to incur indebtedness, pay dividends, create liens, sell assets, engage in
mergers and acquisitions, and refinance existing indebtedness, as well as the
obligation of the Company to maintain certain financial ratios. Based on the
Company's pro forma results of operations for the four quarters ended June 30,
1998, these restrictions currently operate to prevent the Company from incurring
any additional debt other than debt incurred under the Revolver or pursuant to
certain limited "baskets" and other exceptions. Under limited circumstances, the
Company may, however, consummate additional acquisitions under the Credit
Agreement and the Indentures (i) through the incurrence of debt in Unrestricted
Subsidiaries (as defined in the Indentures and the Credit Agreement) or (ii) if
the pro forma effect of such acquisition has a sufficient positive impact on
certain financial ratios. The Company generally will not have access to the cash
flows of Unrestricted Subsidiaries, as in the case of Sterling Sask. The Credit
Agreement also requires that certain amounts of Excess Cash Flow (as defined
therein) be used to prepay amounts outstanding under the Term Loans. No such
mandatory prepayment is required in fiscal 1998.
During April 1998, the Company obtained certain amendments to the financial
covenants in the Credit Agreement. The Company requested the changes in order to
reduce the covenant thresholds based on its revised financial projections for
fiscal years 1998 and 1999. The amendments span a seven-quarter period, through
September 30, 1999.
The Company's ability to comply with the covenants and other terms of its
various debt agreements, meet its debt service obligations, and repay principal
when due will depend on the future performance of the Company. The future
performance of the Company is subject to a number of uncertainties. The Company
was in compliance with the financial covenants in effect as of June 30, 1998.
However, if weak market conditions (particularly in various countries in Asia)
continue to negatively impact the sales prices, margins, and volumes of the
Company's products (particularly styrene, acrylonitrile, methanol, sodium
chlorate, and acrylic fibers), the Company may have difficulty remaining in
compliance with the financial covenants under certain of its debt agreements. If
the Company fails to remain in compliance with any financial covenants, the
Company believes it could obtain curative amendments or waivers; however, no
assurances can be given that these amendments or waivers would be obtained. In
the event the Company ceases to be in compliance with any financial covenants
and appropriate amendments or waivers are not obtained, debt holders could
pursue remedies available to them under the relevant debt agreements. In
addition, the Company would not be entitled to borrow additional funds under the
Revolver without an appropriate amendment or waiver from the debt holders.
The Company's loan documents contain provisions which restrict the payment
of advances, loans, and dividends from its subsidiaries (including Chemicals) to
Holdings. The most restrictive of those covenants limits such payments during
fiscal 1998 to approximately $2 million plus any amounts due to Holdings from
Chemicals under the intercompany tax sharing agreement. Such restriction is not
expected to limit Holdings' ability to meet its obligations in fiscal 1998.
21
<PAGE> 22
Working Capital
Working capital of the Company was $95 million at June 30, 1998, down from
$120 million at September 30, 1997. The $25 million decrease in working capital
was primarily due to lower working capital requirements as a result of lower raw
material and product sales prices, along with improved working capital
management.
Cash Flow
Net cash provided by operations was $38 million for the nine months ended
June 30, 1998 and $12 million for the nine months ended June 30, 1997. The
increase in cash provided by operations is primarily due to lower working
capital requirements as a result of lower raw material prices, lower
receivables, and improved working capital management.
Capital Expenditures
The Company's capital expenditures for the first nine months of fiscal 1998
were $19 million compared to $33 million in the same period in fiscal 1997. The
capital expenditures in the first nine months of fiscal 1998 were primarily
related to routine safety, environmental, and replacement capital. The capital
expenditures in the first nine months of fiscal 1997 were primarily related to
the construction of the Valdosta Plant, along with a distributive control system
installation at the Company's acrylonitrile unit. During the remainder of fiscal
1998, the Company expects to spend approximately $8 million to $11 million on
process modernization, routine safety, environmental, and replacement capital.
The Company expects to fund its remaining fiscal 1998 capital expenditures from
operating cash flow, plus borrowings under the Revolver, if needed.
Year 2000 Issue
The Year 2000 issue is the result of potential problems with computer
systems or any equipment with computer chips that use dates where the date has
been stored as just two digits (e.g. 97 for 1997). On January 1, 2000, any clock
or date recording mechanism (including date sensitive software) which uses only
two digits to represent the year may recognize a date using 00 as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar activities.
As is the case with most companies using computers in their operations, the
Company is in the process of addressing the Year 2000 issue. The Company is
currently engaged in a comprehensive project to upgrade its information,
technology, manufacturing, and facilities computer software to systems that will
consistently and properly recognize the Year 2000 and subsequent years. The
estimated expense for this project is approximately $7 to $10 million, of which
the Company has incurred approximately $2.0 million through June 30, 1998.
The Company is utilizing both internal and external resources to replace
critical business systems that may not be Year 2000 complaint with new business
systems that are intended to be Year 2000 compliant, and the Company expects to
complete the project by mid 1999. However, no assurances can be given that total
Year 2000 compliance can be achieved because of the significant degree of
interdependence with third party suppliers, service providers, and customers.
Failure by the Company to complete Year 2000 compliance work in a timely manner
could have a material adverse effect on the Company's financial condition and
results of operations.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements (other than
statements of historical facts) included in this Form 10-Q, including without
limitation the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" regarding the cyclicality of the
Company's industry, current and future industry conditions and the potential
effects of such matters on the Company's business strategy, results of
operations, and financial position, are forward-looking statements. Although the
Company believes that the expectations reflected in the forward-looking
statements contained herein are reasonable, no assurance can be given that such
expectations will prove to have been correct. Certain important factors that
could cause actual results to differ materially from expectations ("Cautionary
Statements") are stated herein in conjunction with the forward-looking
statements or are included elsewhere in this Form 10-Q. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the Cautionary
Statements.
22
<PAGE> 23
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.
See also "Item 3. Legal Proceedings" in the Company's Annual Report on Form
10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Pursuant to the Company's Amended and Restated Bylaws, stockholder
proposals submitted for consideration at the Company's 1999 Annual Meeting of
Stockholders must be delivered to the Corporate Secretary, Sterling Chemicals
Holdings, Inc., Houston, Texas 77002, not less than 120 days nor more than 150
days prior to the first anniversary of the 1998 Annual Meeting of Stockholders,
which was held January 28, 1998. If such timely notice of a stockholder proposal
is not given, the proposal may not be brought before the Annual Meeting. If
timely notice is given but is not accompanied by a written statement to the
extent required by applicable securities laws, the Company may exercise
discretionary voting authority over proxies with respect to such proposal if
presented at the Company's 1999 Annual Meeting of Stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are filed as part of this Form 10-Q.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
Inc.
11.1 --Earnings Per Share Calculation.
15.1 --Letter of Deloitte & Touche LLP regarding unaudited interim financial
information.
27.1 --Financial Data Schedule of Sterling Chemicals Holdings, Inc.
27.2 --Financial Data Schedule of Sterling Chemicals, Inc.
(b) Reports on Form 8-K.
On May 13, 1998, the Company filed a Current Report on Form 8-K/A,
reporting under Item 7.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrants have duly caused this report to be signed on their
behalf by the undersigned thereunto duly authorized.
STERLING CHEMICALS HOLDINGS, INC.
STERLING CHEMICALS, INC.
(Registrants)
Date: August 12, 1998 /s/ PETER W. DE LEEUW
----------------------------------------
Peter W. De Leeuw
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 1998 /s/ GARY M. SPITZ
----------------------------------------
Gary M. Spitz
Vice President-Finance and Chief
Financial Officer
(Principal Financial Officer)
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
Inc.
11.1 --Earnings Per Share Calculation.
15.1 --Letter of Deloitte & Touche LLP regarding unaudited interim financial
information.
27.1 --Financial Data Schedule of Sterling Chemicals Holdings, Inc.
27.2 --Financial Data Schedule of Sterling Chemicals, Inc.
</TABLE>
<PAGE> 1
STERLING CHEMICALS HOLDINGS, INC.
EXHIBIT 11.1
EARNINGS PER SHARE COMPUTATION
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
6/30/98 6/30/97 6/30/98 6/30/97
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Weighted average of common stock outstanding ............... 12,185 11,420 12,007 11,047
Net Loss ................................................... $ (13,118) $ (9,377) $ (39,551) $ (24,386)
Less: Preferred dividend requirements and accretion ........ (607) (249) (1,826) (411)
Add: ESOP fair market value adjustment (1) ................. -- -- 505 --
---------- ---------- ---------- ----------
Net loss used in basic loss per share ...................... $ (13,725) $ (9,626) $ (40,872) $ (24,797)
========== ========== ========== ==========
BASIC LOSS PER SHARE .................................. $ (1.13) $ (0.84) $ (3.40) $ (2.24)
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE
Weighted average of common stock outstanding ............... 12,185 11,420 12,007 11,047
Total weighted average shares outstanding used in
diluted loss per share computation (2) ................ 12,185 11,420 12,007 11,047
Net loss ................................................... $ (13,118) $ (9,377) $ (39,551) $ (24,386)
Less: Preferred dividend requirements and accretion ........ (607) (249) (1,826) (411)
Add: ESOP fair market value adjustment (1) ................. -- -- 505 --
---------- ---------- ---------- ----------
Net loss used in diluted earning per share ................. $ (13,725) $ (9,626) $ (40,872) $ (24,797)
========== ========== ========== ==========
DILUTED LOSS PER SHARE (2) ............................ $ (1.13) $ (0.84) $ (3.40) $ (2.24)
========== ========== ========== ==========
</TABLE>
(1) This amount reflects the impact of the changes in the estimated fair
market value of the Company's Employee Stock Ownership Plan ("ESOP")
shares that have been released to plan participants.
(2) Due to losses resulting in anti-dilution, same as amount used in basic
computation.
<PAGE> 1
Exhibit 15.1
Deloitte & Touche LLP
333 Clay Street
Suite 2300
Houston, Texas 77002
August 14, 1998
Sterling Chemicals Holdings, Inc.
1200 Smith Street, Suite 1900
Houston, Texas 77094
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Sterling Chemicals Holdings, Inc. and subsidiaries for the
three-month and nine-month periods ended June 30, 1998 and 1997 as indicated in
our report dated August 5, 1998; because we did not perform an audit, we
expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is
incorporated by reference in Registration Statement No. 333-30917 for Sterling
Chemicals Holdings, Inc. on Form S-3 and in Registration Statement No. 333-52795
for Sterling Chemicals Holdings, Inc. on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statements prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000795662
<NAME> STERLING CHEMICALS HOLDINGS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 12,447
<SECURITIES> 0
<RECEIVABLES> 125,304
<ALLOWANCES> (1,301)
<INVENTORY> 77,472
<CURRENT-ASSETS> 239,267
<PP&E> 747,821
<DEPRECIATION> (286,352)
<TOTAL-ASSETS> 794,426
<CURRENT-LIABILITIES> 143,986
<BONDS> 874,488
17,616
0
<COMMON> 123
<OTHER-SE> (338,645)
<TOTAL-LIABILITY-AND-EQUITY> 794,426
<SALES> 640,154
<TOTAL-REVENUES> 640,154
<CGS> 577,665
<TOTAL-COSTS> 577,665
<OTHER-EXPENSES> 43,359
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,021
<INCOME-PRETAX> (56,891)
<INCOME-TAX> (17,340)
<INCOME-CONTINUING> (39,551)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,551)
<EPS-PRIMARY> (3.40)
<EPS-DILUTED> (3.40)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001014669
<NAME> STERLING CHEMICALS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 12,445
<SECURITIES> 0
<RECEIVABLES> 126,963
<ALLOWANCES> (1,301)
<INVENTORY> 77,472
<CURRENT-ASSETS> 239,986
<PP&E> 747,821
<DEPRECIATION> (286,352)
<TOTAL-ASSETS> 791,707
<CURRENT-LIABILITIES> 143,978
<BONDS> 754,182
0
0
<COMMON> 0
<OTHER-SE> (214,025)
<TOTAL-LIABILITY-AND-EQUITY> 791,707
<SALES> 640,154
<TOTAL-REVENUES> 640,154
<CGS> 577,665
<TOTAL-COSTS> 577,665
<OTHER-EXPENSES> 42,331
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,867
<INCOME-PRETAX> (42,709)
<INCOME-TAX> (13,219)
<INCOME-CONTINUING> (29,490)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,490)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
