<PAGE> 1
================================================================================
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 December 31, 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)
<TABLE>
<S> <C>
DELAWARE 76-0185186
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1200 SMITH STREET, SUITE 1900
HOUSTON, TEXAS 77002-4312 (713) 650-3700
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER, 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
</TABLE>
STERLING CHEMICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 76-0502785
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1200 SMITH STREET, SUITE 1900
HOUSTON, TEXAS 77002-4312 (713) 650-3700
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
</TABLE>
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 x No
--- ---
As of January 31, 1999, Sterling Chemicals Holdings, Inc. had 12,726,725
shares of common stock outstanding. As of January 31, 1999, all outstanding
equity securities of Sterling Chemicals, Inc. were owned by Sterling Chemicals
Holdings, Inc.
================================================================================
<PAGE> 2
IMPORTANT INFORMATION REGARDING THIS FORM 10-Q
Readers should consider the following information as they review this Form 10-Q.
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. The forward-looking statements
include all statements contained in this Form 10-Q (other than statements of
historical facts), including without limitation the statements under "Business"
and "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, the cost of remediating Year 2000 issues and the
effect of any unremediated or undiscovered Year 2000 issues on the Company's
operations, 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 or the
Company's Form 10-K for the fiscal year ended September 30, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Known Events, Trends, Uncertainties and Risk Factors"
contained in the Company's Form 10-K for the fiscal year ended September 30,
1998. 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.
SUBSEQUENT EVENTS, ETC.
All statements contained in this Form 10-Q, including the forward-looking
statements discussed above, are made as of February 12, 1999, except for those
statements that are expressly made as of another date. The Company disclaims any
responsibility for the correctness of any information contained in this Form
10-Q to the extent such information is affected or impacted by events,
circumstances, or developments occurring after February 12, 1999, or by the
passage of time after such date and, except as required by applicable securities
laws, the Company does not intend to update such information.
2
<PAGE> 3
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 Consolidated Financial
Statements, included herein.
Part I.--FINANCIAL INFORMATION
Item 1.--FINANCIAL STATEMENTS
3
<PAGE> 4
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 8,172 $ 11,168
Accounts receivable ......................................................... 103,757 114,571
Inventories ................................................................. 79,189 73,225
Prepaid expenses ............................................................ 14,467 15,571
Deferred income tax benefit ................................................. 6,791 5,140
---------- ----------
Total current assets ...................................................... 212,376 219,675
Property, plant and equipment, net ............................................. 442,712 450,315
Other assets ................................................................... 99,705 95,966
---------- ----------
Total assets .............................................................. $ 754,793 $ 765,956
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable ............................................................ $ 47,689 $ 46,983
Accrued liabilities ......................................................... 77,175 71,873
Current portion of long-term debt ........................................... 5,501 8,909
---------- ----------
Total current liabilities ................................................. 130,365 127,765
Long-term debt ................................................................. 876,814 873,616
Deferred income tax liability .................................................. 5,428 11,123
Deferred credits and other liabilities ......................................... 81,862 80,289
Common stock held by ESOP ...................................................... 5,938 5,938
Less: unearned compensation ................................................... (2,666) (2,845)
Redeemable preferred stock ..................................................... 18,894 18,249
Commitments and contingencies (Note 4) ......................................... -- --
Stockholders' equity (deficiency in assets):
Common stock, $.01 par value, 20,000,000 shares authorized, 12,273,000 shares
issued and 12,072,000 outstanding at December 31, 1998, and 12,273,000
shares issued and 12,073,000 outstanding at September 30, 1998 ............ 123 123
Additional paid-in capital .................................................. (542,710) (542,701)
Retained earnings ........................................................... 215,845 229,590
Pension adjustment .......................................................... (121) (121)
Accumulated translation adjustment .......................................... (32,480) (32,559)
Deferred compensation ....................................................... (93) (111)
---------- ----------
(359,436) (345,779)
Treasury stock, at cost, 201,000 and 200,000 shares at December 31, 1998 and
September 30, 1998, respectively .......................................... (2,406) (2,400)
---------- ----------
Total stockholders' equity (deficiency in assets) ....................... (361,842) (348,179)
---------- ----------
Total liabilities and stockholders' equity (deficiency in assets) ..... $ 754,793 $ 765,956
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE> 5
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues .................................................... $ 171,929 $ 230,236
Cost of goods sold .......................................... 155,212 210,937
---------- ----------
Gross profit ................................................ 16,717 19,299
Selling, general and administrative expenses ................ 9,656 8,518
Other expense ............................................... 2,294 --
Interest and debt related expenses, net of interest income... 25,459 25,303
---------- ----------
Loss before income taxes .................................... (20,692) (14,522)
Benefit for income taxes .................................... (7,592) (4,377)
---------- ----------
Net loss .................................................... (13,100) (10,145)
Preferred stock dividends ................................... 645 628
---------- ----------
Net loss attributable to common stockholders ................ $ (13,745) $ (10,773)
========== ==========
Net loss per common share ................................... $ (1.11) $ (0.91)
========== ==========
Weighted average shares outstanding ......................... 12,427 11,877
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5
<PAGE> 6
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (13,100) $ (10,145)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ...................... 14,030 14,006
Interest amortization .............................. 1,082 1,094
Loss on disposal/write off of assets ............... 30 242
Deferred tax benefit ............................... (5,709) (3,482)
Discount notes amortization ........................ 4,563 4,169
Other .............................................. 197 280
Change in assets/liabilities:
Accounts receivable ................................ 9,081 16,625
Inventories ........................................ (5,954) (19,463)
Prepaid expenses ................................... (546) 343
Other assets ....................................... (3,433) 1,776
Accounts payable ................................... (982) 10,153
Accrued liabilities ................................ 7,125 (6,862)
Other liabilities .................................. 1,419 4,286
---------- ----------
Net cash provided by operating activities ............... 7,803 13,022
---------- ----------
Cash flows from investing activities:
Capital expenditures ............................... (5,931) (5,027)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt ....................... 68,100 9,495
Repayment of long-term debt ........................ (72,957) (20,740)
Other .............................................. (5) 35
---------- ----------
Net cash used in financing activities ................... (4,862) (11,210)
---------- ----------
Effect of United States /Canadian exchange rate on cash . (6) (150)
---------- ----------
Net decrease in cash and cash equivalents ............... (2,996) (3,365)
Cash and cash equivalents - beginning of year ........... 11,168 7,958
---------- ----------
Cash and cash equivalents - end of period ............... $ 8,172 $ 4,593
========== ==========
Supplement disclosures of cash flow information:
Interest paid, net of interest income received ..... $ (16,025) $ (16,104)
Income taxes received (paid) ....................... (103) (108)
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
6
<PAGE> 7
STERLING CHEMICALS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 8,160 $ 11,159
Accounts receivable ............................................. 105,702 116,398
Inventories ..................................................... 79,189 73,225
Prepaid expenses ................................................ 12,220 13,632
Deferred income tax benefit ..................................... 6,791 5,140
---------- ----------
Total current assets .......................................... 212,062 219,554
Property, plant and equipment, net ................................. 442,712 450,315
Other assets ....................................................... 96,481 92,634
---------- ----------
Total assets .................................................. $ 751,255 $ 762,503
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable ................................................ $ 47,689 $ 46,764
Accrued liabilities ............................................. 77,176 71,873
Current portion of long-term debt ............................... 5,501 8,909
---------- ----------
Total current liabilities ....................................... 130,366 127,546
Long-term debt ..................................................... 744,199 745,720
Deferred income tax liability ...................................... 19,107 23,301
Deferred credits and other liabilities ............................. 84,633 83,288
Common stock held by ESOP .......................................... 5,938 5,938
Less: unearned compensation ....................................... (2,666) (2,845)
Commitments and contingencies (Note 4) ............................. -- --
Stockholder's equity (deficiency in assets):
Common stock, $.01 par value .................................... -- --
Additional paid-in capital ...................................... (139,786) (139,786)
Accumulated deficit ............................................. (57,842) (47,868)
Pension adjustment .............................................. (121) (121)
Accumulated translation adjustment .............................. (32,480) (32,559)
Deferred compensation ........................................... (93) (111)
---------- ----------
Total stockholder's equity (deficiency in assets) ............... (230,322) (220,445)
---------- ----------
Total liabilities and stockholder's equity (deficiency in assets) $ 751,255 $ 762,503
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
7
<PAGE> 8
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues ................................................. $ 171,929 $ 230,236
Cost of goods sold ....................................... 155,212 210,937
--------- ---------
Gross profit ............................................. 16,717 19,299
Selling, general and administrative expenses ............. 9,538 8,237
Other expense ............................................ 2,294 --
Interest and debt related expenses, net of interest income 20,640 20,897
--------- ---------
Loss before income taxes ................................. (15,755) (9,835)
Benefit for income taxes ................................. (5,781) (2,964)
--------- ---------
Net loss ................................................. $ (9,974) $ (6,871)
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
8
<PAGE> 9
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss .............................................. $ (9,974) $ (6,871)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization ...................... 14,030 14,006
Debt fee amortization .............................. 916 848
Deferred tax benefit ............................... (4,599) (2,105)
Other .............................................. 134 522
Change in assets/liabilities:
Accounts receivable ................................ 8,980 16,589
Inventories ........................................ (5,954) (19,463)
Prepaid expenses ................................... 156 379
Other assets ....................................... (3,433) 1,776
Accounts payable ................................... (982) 9,871
Accrued liabilities ................................ 7,133 (6,861)
Other liabilities .................................. 1,393 4,287
-------- --------
Net cash provided by operating activities ............. 7,800 12,978
-------- --------
Cash flows from investing activities:
Capital expenditures ............................... (5,931) (5,027)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt ....................... 68,100 9,495
Repayment of long-term debt ........................ (72,957) (19,635)
Repayments of amounts due parent ................... -- (1,105)
Other .............................................. (5) 35
-------- --------
Net cash used in financing activities ................. (4,862) (11,210)
-------- --------
Effect of United States /Canadian exchange rate on cash (6) (150)
-------- --------
Net decrease in cash and cash equivalents ............. (2,999) (3,409)
Cash and cash equivalents - beginning of year ......... 11,159 7,958
-------- --------
Cash and cash equivalents - end of period ............. $ 8,160 $ 4,549
======== ========
Supplement disclosures of cash flow information:
Interest paid, net of interest income received ..... $(16,033) $(16,112)
Income taxes received (paid) ....................... (103) (108)
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
9
<PAGE> 10
STERLING CHEMICALS HOLDINGS, INC.
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments necessary to present fairly the
consolidated financial position of Sterling Chemicals Holdings, Inc.
("Holdings") and its subsidiaries (Holdings and its subsidiaries collectively,
the "Company") and Sterling Chemicals, Inc. and its subsidiaries (Chemicals and
its subsidiaries collectively, "Chemicals") as of December 31, 1998 and their
consolidated results of operations and cash flows for the applicable three month
periods ended December 31, 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 consolidated financial statements should be, and are
assumed to have been, read in conjunction with the consolidated financial
statements and notes included in Holdings' and Chemicals' combined Annual Report
on Form 10-K for the fiscal year ended September 30, 1998 (the "Annual Report").
The accompanying consolidated balance sheets as of September 30, 1998, have been
derived from the audited consolidated balance sheets as of September 30, 1998,
included in the Annual Report. The accompanying consolidated financial
statements as of and for the three month period ended December 31, 1998, have
been reviewed 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>
DECEMBER 31, SEPTEMBER 30,
1998 1998
---------- -----------
<S> <C> <C>
Inventories consisted of the following (in thousands):
Finished products..................................................................... $ 44,200 $ 42,436
Raw materials......................................................................... 9,275 8,089
Inventories under exchange agreements................................................. 8,235 3,031
Stores and supplies................................................................... 17,479 19,669
---------- -----------
$ 79,189 $ 73,225
========== ===========
</TABLE>
3. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
---------- ----------
<S> <C> <C>
Long-term debt consisted of the following (in thousands):
Revolving credit facility............................................................. $ -- $ --
Term loans............................................................................ 273,667 274,000
Saskatoon term loans.................................................................. 45,445 49,552
ESOP term loan........................................................................ 2,844 3,250
11 1/4% Notes......................................................................... 152,733 152,816
11 3/4% Notes......................................................................... 275,000 275,000
13 1/2% Notes........................................................................ 132,626 127,907
---------- ----------
Total debt outstanding........................................................... 882,315 882,525
Less:
Current maturities............................................................... (5,501) (8,909)
---------- ----------
Total long-term debt.................................................................. $ 876,814 $ 873,616
========== ==========
</TABLE>
10
<PAGE> 11
In December 1998, the Company obtained certain amendments to the financial
covenants in the Company's Amended and Restated Credit Agreement. At no time was
the Company not in compliance with the covenants. The Company requested the
amendments based on its revised financial projections, and the amendments made
the financial covenants less restrictive through December 31, 1999.
4. 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, sodium cyanide, and calcium hypochlorite, each to one
customer. The Company also has various sales and conversion agreements which
dedicate significant portions of the Company's production of styrene,
acrylonitrile, and methanol to various customers. Some of these agreement
generally provide for cost recovery plus an agreed margin or element of profit
based upon market price.
Environmental Regulations
The Company's operations involve the handling, production, transportation,
treatment, and disposal of materials that are classified as hazardous or toxic
waste and that are extensively regulated by environmental and health and safety
laws and regulations. Environmental permits required for the Company's
operations are subject to periodic renewal and can be revoked or modified for
cause or when new or revised environmental laws or permit requirements are
implemented. Changing and increasingly strict environmental laws, regulations,
and permit requirements can affect the manufacturing, handling, processing,
distribution, and use of the Company's chemical products and, if so, the
Company's business and operations may be materially and adversely affected. In
addition, changes in the laws, regulations, and permit requirements can cause
the Company to incur substantial costs in upgrading or redesigning its
facilities and processes, including waste treatment, storage, disposal, and
other waste handling practices and equipment.
While the Company believes that its business operations and facilities
generally are operated in compliance with all material aspects of applicable
environmental and health and safety laws, regulations, and disclosure
requirements, there can be no assurance that past practices and future
operations will not result in material claims or regulatory action, require
material environmental expenditures, or result in exposure or injury claims by
employees and the public. Some risk of environmental costs and liabilities is
inherent in the operations and products of the Company, as it is with other
companies engaged in similar businesses. In addition, a catastrophic event at
any of the Company's facilities could result in liabilities to the Company
substantially in excess of its insurance coverages.
Legal Proceedings
Ammonia Release. A description of the ammonia release lawsuits is found
under "Legal Proceedings" in Note 7 of the "Notes to Consolidated Financial
Statements" of the Annual Report and is incorporated herein by reference. As
discussed therein, the Company continues to vigorously defend against the claims
of the approximately 200 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 Release. A description of the nickel carbonyl lawsuit is
found under "Legal Proceedings" in Note 7 of the "Notes to Consolidated
Financial Statements" of the Annual Report and is incorporated herein by
reference. As discussed therein, a total of eighteen contractor employees
allegedly exposed to nickel carbonyl have filed a lawsuit against Chemicals
seeking unspecified damages for personal injuries. 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. A description of this release is found under "Legal
Proceedings" in Note 7 of the "Notes to Consolidated Financial Statements" of
the Annual Report and is incorporated herein by reference. There is no lawsuit
pending against the Company based on this release, but the Company has received,
and in some instances resolved, claims from individuals for personal injury from
this incident. The Company believes that its liability insurance coverage is
sufficient to cover all costs and expenses stemming from this incident in excess
of the $1 million deductible.
11
<PAGE> 12
Other Lawsuits. The Company is subject to various other claims and legal
actions that arise in the ordinary course of its business.
Litigation Contingency
The Company has made estimates of the reasonably possible range of
liability with regard to its outstanding litigation for which it may incur
liability. These estimates are based on the Company's judgments using currently
available information as well as consultation with the Company's insurance
carriers and outside legal counsel. A number of the claims in these litigation
matters are covered by the Company's insurance policies or by third-party
indemnification of the Company. The Company, therefore, has also made estimates
of its probable recoveries under insurance policies or from third-party
indemnitors based on its understanding of its insurance policies and
indemnifications, discussions with its insurers and indemnitors, and
consultation with outside legal counsel, in addition to the Company's judgments.
Based on the foregoing, as of December 31, 1998, the Company has accrued
approximately $9.9 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 $8.8 million. At December 31, 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 $12
million. The Company believes that this additional reasonably possible loss is
substantially covered by insurance.
While the Company has based its estimates on its evaluation of available
information to date and the other matters described above, much of the
litigation remains in the discovery stage and it is impossible to predict with
certainty the ultimate outcome. The Company will adjust its estimates as
necessary as additional information is developed and evaluated. However, the
Company believes that the final resolution of these contingencies will not have
a material adverse impact on the financial position, results of operations, or
cash flows of the Company.
The timing of probable insurance and indemnity recoveries, and payment of
liabilities, if any, are not expected to have a material adverse effect on the
financial position, results of operations, or cash flows of the Company.
5. LOSS PER SHARE CALCULATION
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
DECEMBER 31,
-------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net loss attributable to common stockholders $ (13,745) $ (10,773)
========== ==========
Net loss per common share $ (1.11) $ (0.91)
========== ==========
Weighted average shares outstanding 12,427 11,877
========== ==========
</TABLE>
12
<PAGE> 13
6. CAPITAL STOCK
In December 1998, the Company entered into separate Standby Purchase
Agreements (collectively, the "Purchase Agreements") with each of Gordon A.
Cain, William A. McMinn, James Crane, Frank P. Diassi, Frank J. Hevrdejs and
Koch Capital Services, Inc. (collectively, the "Purchasers"). Pursuant to the
terms of the Purchase Agreements, the Purchasers committed to purchase up to 2.5
million shares of the common stock, par value $0.01 per share, of Holdings
("Common Stock"), at a price of $6.00 per share, if, as, and when requested by
the Company at any time or from time to time prior to December 15, 2001. Under
each of the Purchase Agreements, the Company may only require the Purchasers to
purchase such shares if it believes that such capital is necessary to maintain,
reestablish, or enhance its borrowing ability under the Company's revolving
credit facilities or to satisfy any requirement thereunder to raise additional
equity. To induce the Purchasers to enter into the Purchase Agreements, the
Company issued them warrants to purchase an aggregate of 300,000 shares of
Common Stock at an exercise price of $6.00 per share. Pursuant to the Purchase
Agreements, the Company is obligated to issue to the Purchasers additional
warrants to purchase up to 300,000 additional shares of Common Stock if, as, and
when they purchase shares of Common Stock under the Purchase Agreements. Any
shares of Common Stock purchased under the Purchase Agreements, any warrants
issued pursuant to the Purchase Agreements and any shares of Common Stock issued
pursuant to such warrants will be subject to the terms of the Amended and
Restated Voting Agreement dated as of December 15, 1998, the Sterling Chemicals
Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, as
amended, the Tag-Along Agreement dated as of August 21, 1996, and the
Registration Rights Agreement dated as of August 21, 1996.
7. NEW ACCOUNTING STANDARDS:
As of October 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for the reporting and displaying of comprehensive
net income and its components.
The components of comprehensive net income, net of tax, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Net loss attributable to common stockholders $(13,745) $(10,773)
Change in cumulative translation adjustment 79 (5,291)
-------- --------
Comprehensive net loss $(13,666) $(16,064)
======== ========
</TABLE>
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information", establishes standards for the way that public business enterprises
report information about operating segments in interim and annual financial
statements. SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", establishes revisions to employers' disclosures about
pension and other post retirement benefit plans. The Company adopted these
statements as of October 1, 1998, and the disclosures required thereby will be
included in the Company's Annual Report on Form 10-K for the fiscal year ending
September 30, 1999.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Management is currently evaluating the
accounting and disclosures required when this statement is adopted in the first
quarter of fiscal 2000.
13
<PAGE> 14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Sterling Chemicals Holdings, Inc.
We have reviewed the accompanying consolidated balance sheet of Sterling
Chemicals Holdings, Inc. and subsidiaries (the "Company") as of December 31,
1998, and the related consolidated statements of operations and cash flows for
the three month periods ended December 31, 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 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,
1998, 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 4, 1998 (December 17, 1998
as to Notes 4, 11, and 12), we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of September 30, 1998 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
February 11, 1999
14
<PAGE> 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Sterling Chemicals, Inc.
We have reviewed the accompanying consolidated balance sheet of Sterling
Chemicals, Inc. and subsidiaries ("Chemicals") as of December 31, 1998, and the
related consolidated statements of operations and cash flows for the three month
periods ended December 31, 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 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, 1998,
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 4, 1998 (December 17, 1998 as to Notes
4, 11, and 12), we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of September 30, 1998 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
February 11, 1999
15
<PAGE> 16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain capitalized terms used but not defined herein have the meanings assigned
to them in the Notes To Consolidated Financial Statements included herein 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
its outstanding 13 1/2% Senior Secured Discount Notes due 2008 (the "13 1/2%
Notes"), redeem its outstanding shares of preferred stock, and certain other
contingent obligations. Chemicals directly or indirectly 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, 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
In November 1998, the Company announced a reduction to its workforce at its
Texas City, Texas plant (the "Texas City Plant") and its Houston, Texas
corporate office by approximately 60 employees and contractors. In addition, in
December 1998, the Company announced a workforce reduction of 24 employees at
its Saskatoon, Saskatchewan, Canada plant (the "Saskatoon Plant"). The Company
recorded a pre-tax cost of approximately $2 million associated with these
workforce reductions in the first quarter of fiscal 1999 with expected annual
savings of approximately $5 to $6 million, although no assurances can be given
as to the level of savings that will actually be achieved.
On December 28, 1998, the Company announced it had negotiated a new labor
contract with unionized employees at its Texas City Plant. The Company expects
to realize additional annual savings of approximately $5 to $6 million,
primarily due to reduced staffing levels and improved work practices, although
no assurances can be given as to the actual level of savings that will actually
be achieved. The Company also announced an early retirement program, in
connection with which the Company expects to take a one-time, non-cash charge of
approximately $5 to $7 million in the second quarter of fiscal 1999. The Company
does not expect this charge to affect cash flow during fiscal 1999.
In December 1998, the Company obtained certain amendments to the financial
covenants contained in the Credit Agreement (defined below). At no time was the
Company not in compliance with the covenants. The Company requested the
amendments based on its revised financial projections, and the amendments made
the financial covenants less restrictive through December 31, 1999.
In December 1998, the Company entered into separate Standby Purchase
Agreements (collectively, the "Purchase Agreements") with each of Gordon A.
Cain, William A. McMinn, James Crane, Frank P. Diassi, Frank J. Hevrdejs and
Koch Capital Services, Inc. (collectively, the "Purchasers"). Pursuant to the
terms of the Purchase Agreements, the Purchasers committed to purchase up to 2.5
million shares of the common stock, par value $0.01 per share, of Holdings
("Common Stock"), at a price of $6.00 per share, if, as, and when requested by
the Company at any time or from time to time prior to December 15, 2001. Under
each of the Purchase Agreements, the Company may only require the Purchasers to
purchase such shares if it believes that such capital is necessary to maintain,
reestablish, or enhance its borrowing ability under the Company's revolving
credit facilities or to satisfy any requirement thereunder to raise additional
equity. To induce the Purchasers to enter into the Purchase Agreements, the
Company issued them warrants to purchase an aggregate of 300,000 shares of
Common Stock at an exercise price of $6.00 per share. Pursuant to the Purchase
Agreements, the Company is obligated to issue to the Purchasers additional
warrants to purchase up to 300,000 additional shares of Common Stock if, as, and
when they purchase shares of Common Stock under the Purchase Agreements. Any
shares of Common Stock purchased under the Purchase Agreements, any warrants
issued pursuant to the Purchase Agreements and any shares of Common Stock issued
pursuant to such warrants will be subject to the terms of the Amended and
Restated Voting Agreement dated as of December 15, 1998, the Sterling Chemicals
Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, as
amended, the Tag-Along Agreement dated as of August 21, 1996, and the
Registration Rights Agreement dated as of August 21, 1996.
16
<PAGE> 17
RESULTS OF OPERATIONS
Revenues for the first quarter of fiscal 1999 were $172 million compared to
revenues of $230 million for the first quarter of fiscal 1998, a decrease of
25%. The decrease in revenues resulted primarily from lower styrene,
acrylonitrile, sodium chlorate, and methanol sales prices and reduced
acrylonitrile, methanol, and acrylic fibers sales volumes. A net loss
attributable to common stockholders of $13.7 million, or $1.11 per share, was
recorded for the first quarter of fiscal 1999 compared to a net loss
attributable to common stockholders of $10.8 million, or $0.91 per share, for
the first quarter of fiscal 1998. The increase in net loss is primarily due to:
(i) reduced sodium chlorate and methanol margins, (ii) weak markets in acrylic
fibers, and (iii) costs associated with the aforementioned workforce reductions.
Revenues, Cost of Goods, and Gross Profit
Petrochemicals and Fibers
For the first quarter of fiscal 1999, the Company's revenues from its
petrochemical and fibers businesses decreased to $125 million, compared to $177
million for the same period of fiscal 1998. This 29% decrease in revenues was
primarily due to reduced styrene, acrylonitrile, and methanol sales prices and
decreased acrylonitrile, methanol, and acrylic fibers sales volumes. The
economic conditions in Asia continued to negatively impact market conditions in
the first quarter of fiscal 1999, particularly for the Company's styrene,
acrylonitrile, and acrylic fibers products. The Company's petrochemicals and
fibers businesses recorded an operating loss of $3 million for the first quarter
of fiscal 1999, compared to an operating loss of $2 million for the first
quarter of fiscal 1998. This 50% increase in operating loss was primarily due to
weaker operational performance in methanol and acrylic fibers and the
aforementioned workforce reduction, partially offset by stronger performance in
styrene.
Styrene revenues decreased 19% to $55 million in the first quarter of
fiscal 1999 compared to the first quarter of fiscal 1998. Styrene sales prices
decreased 15% for the first quarter of fiscal 1999 compared to the prior year
period. In addition, styrene sales volumes decreased 4% for first quarter of
fiscal 1999 compared to the prior year period. 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 23% and 36% lower, respectively, during the first quarter of
fiscal 1999 compared to the same period for fiscal 1998. Styrene margins
increased in the first quarter of fiscal 1999, compared to the first quarter of
fiscal 1998, as significantly lower raw materials costs and lower fixed
manufacturing costs more than offset the lower sales prices.
Acrylonitrile revenues decreased 42% to $19 million in the first quarter of
fiscal 1999 compared to the first quarter of fiscal 1998. Acrylonitrile sales
prices decreased 31% in the first quarter of fiscal 1999 compared to the first
quarter of fiscal 1998. The lower sales price was primarily due to weaker market
conditions, primarily in Asia. Acrylonitrile sales volumes decreased 16% in the
first quarter of fiscal 1999 compared to the first quarter of fiscal 1998. The
prices of acrylonitrile's major raw materials, propylene and ammonia, were
approximately 36% and 18% lower, respectively, in the first quarter of fiscal
1999 compared to the comparable period in fiscal 1998. Acrylonitrile margins
were approximately equivalent in the first quarter of fiscal 1999, compared to
the first quarter of fiscal 1998, as significantly lower sales prices offset the
lower raw materials costs.
Revenues from the Company's acrylic fibers business decreased 43% to $15
million in the first quarter of fiscal 1999 compared to the first quarter of
fiscal 1998. Acrylic fibers sales volumes decreased 44% in the first quarter of
fiscal 1999 compared to the same period of fiscal 1998. The performance of the
Company's acrylic fibers business in the first quarter of fiscal 1999 was
negatively impacted by weak market conditions, particularly in Asia, and imports
from European suppliers.
Revenues from the Company's other petrochemicals products (including
methanol, acetic acid, and plasticizers) in the first quarter of fiscal 1999
decreased 28% to $37 million compared to the first quarter of fiscal 1998. This
decrease in revenues was primarily due to a 46% decrease in methanol sales
prices and a 21% decrease in methanol sales volumes as a result of overcapacity
in the global methanol market. The Company's other petrochemicals products
reported a decrease in operating earnings in the first quarter of fiscal 1999
compared to the first quarter of fiscal 1998. This decrease in operating
earnings was primarily due to the aforementioned weak methanol market
conditions.
The Company's methanol production facility at the Texas City Plant was shut
down in August 1998. This action was taken solely for economic reasons related
to a significant disparity between domestic and foreign natural gas prices and
the resulting costing disadvantage to domestic methanol producers. The Company
is currently purchasing methanol on the spot market for both its internal needs
and its contractual commitments to third parties and will continue to do so
until either the Company restarts its methanol production facility or enters
into a long-term supply contract with another methanol producer. In the absence
of such a methanol supply contract, the Company currently expects to restart its
methanol production facility during April 1999.
17
<PAGE> 18
Pulp Chemicals
Revenues from the Company's pulp chemicals business for the first quarter
of fiscal 1999 decreased by approximately 13% to $47 million, compared to the
first quarter of fiscal 1998. This decrease in revenues was primarily due to a
decrease in sodium chlorate sales volumes of 9% and lower average sodium
chlorate sales prices compared to the first quarter of fiscal 1998. The decline
in sodium chlorate sales prices and volumes was primarily due to decreased
demand as a result of lower pulp mill operating rates. The Company's pulp
chemicals business recorded operating earnings of $7 million in the first
quarter of fiscal 1999, compared to operating earnings of $11 million in the
first quarter of fiscal 1998. This reduction in operating earnings was primarily
due to reduced sodium chlorate sales prices and volumes.
Selling, General, and Administrative Expenses ("SG&A")
SG&A expenses for the first quarter of fiscal 1999 totaled $10 million,
compared to $9 million in the first quarter of fiscal 1998. This increase was
primarily due to costs associated with upgrades of certain of the Company's
information technology systems, which include Year 2000 compliance activities.
Other Expense
Other expense of $2 million in the first quarter of fiscal 1999 is related
to the aforementioned workforce reductions at the Company's Texas City Plant and
Saskatoon Plant.
Interest and Debt Related Expenses
Interest and debt related expense for the first quarters of fiscal 1999 and
1998 were $25 million each.
Benefit for Income Taxes
Benefit for income taxes for the first quarter of fiscal 1999 was $8
million, with an effective tax rate of 37%, compared to $4 million, with an
effective tax rate of 30%, for the first quarter of fiscal 1998. The increase in
the benefit was primarily the result of the Company's pre-tax loss of
approximately $21 million for the first quarter of fiscal 1999, compared to a
pre-tax loss of $15 million in the first quarter of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Debt Structure
As of December 31, 1998, the Company's long-term debt (including current
maturities) totaled $882.3 million and consisted of: (i) three term loans under
the Credit Agreement (defined below); (ii) one or more letter of credit loans
under the Revolver (defined below); (iii) two term loans under the Sask Credit
Agreement (defined below); (iv) Chemicals' 11 1/4% Senior Subordinated Notes due
2007 (the "11 1/4% Notes"); (v) Chemicals' 11 3/4% Senior Subordinated Notes due
2006 (the "11 3/4% Notes"); and (vi) the 13 1/2% Notes.
In July 1997, Chemicals entered into an Amended and Restated Credit
Agreement (as amended, the "Credit Agreement") with Chase Bank of Texas,
National Association (formerly named Texas Commerce Bank National Association),
individually and as administrative agent, Credit Suisse First Boston,
individually and as documentation agent, and certain other financial
institutions. The Credit Agreement establishes a revolving credit facility (the
"Revolver"), under which Chemicals may borrow, repay, and reborrow funds for
general corporate purposes. The Revolver matures on March 31, 2003. As of
December 31, 1998, the Company had no amounts drawn and approximately $4 million
in letters of credit outstanding under the Revolver. Availability of credit
under the Revolver is subject to a monthly borrowing base consisting of 85% of
eligible accounts receivable and 65% of eligible inventory with an inventory cap
of 50% of the borrowing base. At December 31, 1998, and after deducting
approximately $4 million on account of outstanding letters of credit, the
borrowing base limited the total credit available under the Revolver to a
maximum of $108 million, down from $118 million at September 30, 1998. Although
no assurances can be given, the Company does not believe the borrowing base will
operate to prevent the Company from obtaining any credit that it may require
under the Revolver in the reasonably foreseeable future. Availability of credit
under the Revolver is also subject to the Company being in compliance with
numerous financial and operational covenants contained in the Credit Agreement.
18
<PAGE> 19
The Company's ability to obtain additional financing in the future
(including amounts available under the Revolver) 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 (including,
without limitation, covenants that restrict 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 covenants that
obligate the Company to maintain certain financial ratios) and by cash
requirements for debt service. Based on the Company's results of operations for
the four quarters ended December 31, 1998, these covenants operate to limit the
amount of additional debt (including amounts available under the Revolver) that
may be incurred by the Company. Notwithstanding these limitations, and although
no assurances can be given, the Company believes the credit available to it
under the Revolver, when added to its internally generated funds and other
sources of capital, will be sufficient to meet its liquidity needs in the
reasonably foreseeable future. Moreover, under limited circumstances, additional
indebtedness may be incurred by the Company to finance future acquisitions (i)
if the debt is incurred in Unrestricted Subsidiaries (as defined in the Credit
Agreement and the Company's indentures) or (ii) if the pro forma effect of such
acquisition has a sufficient positive impact on certain financial ratios. If the
Company makes an acquisition through an Unrestricted Subsidiary, however, the
Company's access to the cash flow of that entity is likely to be limited.
In December 1998, the Company obtained certain amendments to the financial
covenants contained in the Credit Agreement which made the financial covenants
less restrictive through December 31, 1999. At no time was the Company not in
compliance with the covenants. The Company requested the amendments based on its
revised financial projections. Beginning March 31, 2000, certain of these
financial covenants become more restrictive, and therefore the Company will be
required to have significantly increased cash flows and operating results (or
obtain further amendments or waivers) in order to maintain compliance.
In December 1998, the Company entered into the Purchase Agreements with the
Purchasers. Pursuant to the terms of the Purchase Agreements, the Purchasers
committed to purchase up to 2.5 million shares of Common Stock, at a price of
$6.00 per share, if, as, and when requested by the Company at any time or from
time to time prior to December 15, 2001. Under each of the Purchase Agreements,
the Company may only require the Purchasers to purchase such shares if it
believes that such capital is necessary to maintain, reestablish, or enhance its
borrowing ability under the Company's revolving credit facilities or to satisfy
any requirement thereunder to raise additional equity. To induce the Purchasers
to enter into the Purchase Agreements, the Company issued to them warrants to
purchase an aggregate of 300,000 shares of Common Stock at an exercise price of
$6.00 per share. Pursuant to the Purchase Agreements, the Company is obligated
to issue to the Purchasers additional warrants to purchase up to 300,000
additional shares of Common Stock if, as, and when they purchase shares of
Common Stock under the Purchase Agreements.
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, which is subject
to a number of risks and uncertainties. At December 31, 1998, the Company was in
compliance with its financial covenants and, based on its financial projections,
the Company believes that it will remain in compliance for the reasonably
foreseeable future, although no assurances can be given to that effect. However,
if weak market conditions 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 in certain
of its debt agreements. If the Company fails to remain in compliance with any
financial covenants contained in any of its debt agreements and if appropriate
amendments or waivers are not obtained, debt holders could pursue remedies
available to them under the relevant debt agreements.
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 1999 to approximately $2 million plus any amounts due to Holdings from
Chemicals under the intercompany tax sharing agreement. Such restrictions are
not expected to limit Holdings' ability to meet its obligations in fiscal 1999.
In July 1997, Sterling Sask entered into a Credit Agreement (the "Sask
Credit Agreement") with The Chase Manhattan Bank of Canada, individually and as
administrative agent, and certain other financial institutions. The Sask Credit
Agreement requires that certain amounts of Excess Cash Flow (as defined therein)
be used to prepay amounts outstanding under the Sask Term Loans. A mandatory
prepayment in the amount of approximately Cdn. $5 million was made in the first
quarter of fiscal 1999 pursuant to such obligation.
The Sask Credit Agreement provides for a revolving credit facility of Cdn.
$8 million to be used by Sterling Sask solely for its general corporate purposes
(the "Saskatoon Revolver"). No borrowings were outstanding under the Sask
Revolver as of December 31, 1998. Although no assurances can be given, the
Company believes the credit available to Sterling Sask under the Saskatoon
Revolver, when added to its internally generated funds and other sources of
capital, will be sufficient to meet Sterling Sask's liquidity needs in the
reasonably foreseeable future.
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<PAGE> 20
Because of restrictions in the Sask Credit Agreement, the Company will
generally not have access to the cash flows of Sterling Sask. In addition,
because of its designation as an Unrestricted Subsidiary under the Credit
Agreement and the indentures governing the 13 1/2% Notes, the 11 3/4% Notes, and
the 11 1/4% Notes, Sterling Sask's results are not considered in determining the
Company's compliance with the covenants contained therein.
The Saskatoon Credit Agreement contains provisions which restrict the
payment of advances, loans and dividends from Sterling Sask to Chemicals. The
most restrictive of the covenants limits such payments during fiscal 1999 to
less than $1 million, plus any amounts due to Chemicals or Holdings from
Sterling Sask under the intercompany tax sharing agreement.
Working Capital
Working capital of the Company was $82 million at December 31, 1998, down
from $92 million at September 30, 1998. This $10 million decrease in working
capital was primarily due to a decrease in accounts receivable as a result of
lower sales prices and volumes.
Cash Flow
Net cash provided by operations was $8 million for the three months ended
December 31, 1998 and $13 million for the three months ended December 31, 1997.
This $5 million decrease in net cash provided by operations was primarily due to
the increase in net loss.
Capital Expenditures
The Company's capital expenditures for the first quarter of fiscal 1999
were $6 million compared to $5 million in the same period in fiscal 1998. The
capital expenditures in the first quarter of fiscal 1999 were primarily related
to routine safety, environmental, and replacement capital. During the remainder
of fiscal 1999, the Company expects to spend approximately $25 million to $30
million on process enhancement for styrene, expansion of acetic acid, and
routine safety, environmental, and replacement capital. The Company expects to
fund its remaining fiscal 1999 capital expenditures from operating cash flow,
plus borrowings under the Revolver, if needed.
Year 2000 Issue
Certain computer systems and other equipment with computer chips store
dates as two digits rather than four to define the applicable year (e.g. 97 for
1997). Any clock or date recording mechanism (including date sensitive software)
which uses only two digits to represent the year may interpret the digits "00"
as the Year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing serious disruption of operations. As is the
case with most companies, the Company is in the process, using both internal and
external resources, of addressing the Year 2000 issue. The Company is currently
engaged in a comprehensive project intended to upgrade its information
technology (IT) systems (such as computer systems and software) and non-IT
systems (such as process control systems and other equipment that utilize
embedded chips to control various functions) to systems that will consistently
and properly recognize the Year 2000 and subsequent years.
The Company has conducted an inventory of its hardware and software and
made a preliminary assessment of the Year 2000 compliance of its business and
process control systems. This preliminary assessment determined which of the
Company's business and process control systems are critical to its business.
Those systems deemed to be critical were assigned a higher priority in the Year
2000 remediation effort as compared to other non-critical systems. In this phase
of the project, the Company discovered certain Year 2000 deficiencies in its
business systems and initiated plans to rectify such issues in the remediation
and replacement phase of the project. The preliminary assessment of the
Company's process control systems did not detect any material Year 2000
difficulties. The Company then engaged a nationally recognized independent
consultant to perform a more detailed survey of all of its business and process
control systems (both critical and non-critical) to confirm the absence of any
additional material Year 2000 deficiencies. This survey has been completed and
did not reveal any additional material Year 2000 deficiencies.
In the second phase of the Company's Year 2000 project, the Company
believes it is taking the necessary steps to rectify all material Year 2000
deficiencies. A major component of this effort involves the replacement of all
critical business systems which may not be Year 2000 compliant with new business
systems intended to be Year 2000 compliant. All of such projects are scheduled
to be completed by mid-year 1999. If the Company's consultant determines that
any additional systems under review have material Year 2000 deficiencies, the
Company plans to take appropriate remedial action.
The final phase of the Company's Year 2000 project involves testing all
critical systems to confirm that such systems will react properly to the advent
of the Year 2000. The Company is in the process of conducting tests on all of
its current IT and non-
20
<PAGE> 21
IT systems that were not identified as having Year 2000 deficiencies and
anticipates that all such testing will be completed by April 1, 1999. Once the
remediation and replacement phase is completed, the Company will conduct tests
on all newly installed and updated systems to determine if they are Year 2000
compliant. Such testing is expected to be completed by mid-year 1999.
The total estimated expense for the Company's Year 2000 compliance projects
is approximately $10 to $12 million, of which the Company has incurred
approximately $4 million through December 31, 1998. Such expense has been and
will continue to be funded by the Company out of its operating cash flow and/or
borrowings under its credit facilities.
Irrespective of the efforts of the Company, certain Year 2000 problems,
such as processing failures, error messages, or incorrect data may still occur
in some of its computer systems if the Company receives programs and/or data
from third parties who are not Year 2000 compliant. Moreover, the Company's
business may be disrupted in other ways by Year 2000 problems of third parties,
which may affect, for example, the Company's ability to obtain needed materials
or deliver its products. The Company is in the process of determining whether
vendors, customers, and others with whom it deals are Year 2000 compliant and
has requested that such persons (other than those that the Company believes do
not have a material impact on the business of the Company or its operations)
complete and return surveys with respect to their Year 2000 issues. The Company
has not received any survey response which indicates that any of such persons
has any specific Year 2000 problems. However, no assurances can be given that a
Year 2000 problem will not occur for the Company as a result of a Year 2000
problem of a vendor or customer of the Company or some other person with whom
the Company deals.
While the Company's Year 2000 projects are expected to be successfully
completed around mid-year 1999, it is possible that one or more of such projects
may not be completed or that compliance efforts may be ineffective. A failure to
properly and timely correct any Year 2000 deficiencies would affect the Company
on several levels. If the Company's Year 2000 remediation efforts were to prove
unsuccessful, the Company might be unable to take orders, sell products, or
otherwise generally conduct its business. Since the Company's business is
characterized by large volume sales to a relatively limited number of customers,
the Company believes that, with the engagement of additional personnel, orders
could be processed and deliveries completed through manual means. In preparation
for such a scenario, the Company has outlined a contingency plan to guide the
hiring and training of additional personnel and the processing of paperwork by
manual means.
Although the Company believes that it is taking the appropriate courses of
action to ensure that it is Year 2000 compliant, there can be no assurance that
the actions discussed herein will have the anticipated results or that Year 2000
problems will not have a material adverse effect on the Company's financial
condition or results of operations. Specific factors which might affect the
success of the Company's Year 2000 efforts and the occurrence of Year 2000
disruption or expense include failure of the Company or its consultant to
properly identify deficient systems, the failure of the selected remedial action
to adequately address the deficiencies, the failure of the Company's consultant
to complete the remediation in a timely manner (due to shortages of qualified
labor or other factors), unforeseen expenses related to the remediation of
existing systems or the transition to replacement systems, and the failure of
third parties to become compliant or to adequately notify the Company of
potential noncompliance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures set forth in the Company's Annual
Report on Form 10-K for the year ended September 30, 1998 have not changed
significantly through the fiscal quarter ended December 31, 1998.
21
<PAGE> 22
Part II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information under "Legal Proceedings" in Note 4 of the Notes to
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
for the year ended September 30, 1998.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In December 1998, the Company issued warrants to purchase 300,000
shares of Common Sock at an exercise price of $6.00 per share to the Purchasers
in reliance on the exemption contained in Section 4(2) of the Securities Act of
1933. The description of this transaction set forth under Part I, Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Developments" is incorporated herein by reference.
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, 1998. However, the Holdings' Annual Meeting
of Stockholders was held on January 27, 1999, at which time Holding's nine
incumbent directors were re-elected and the appointment of Deloitte & Touche LLP
as the Company's independent accountants for the fiscal year ending September
30, 1999 was ratified.
The voting results for the re-election of the nine incumbent directors
are as set forth below:
<TABLE>
<CAPTION>
FOR WITHHELD
--------- --------
<S> <C> <C>
Frank P. Diassi ........... 9,807,863 33,843
Peter W. De Leeuw ......... 9,807,887 33,819
Robert W. Roten ........... 9,828,969 12,737
Allan R. Dragone .......... 9,828,460 13,246
John L. Garcia ............ 9,829,099 12,607
Frank J. Hevrdejs ......... 9,827,683 14,023
Hunter Nelson ............. 9,827,514 14,192
George J. Damiris ......... 9,829,099 12,607
Rolf H. Towe .............. 9,829,099 12,607
</TABLE>
The voting results for the appointment of Deloitte & Touche LLP as the
independent accountants of the Company for the fiscal year ending September 30,
1999 are as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
- ---------------- ------------------ ----------------
<S> <C> <C>
9,809,908 14,010 17,788
</TABLE>
There were no broker non-votes for the election of directors or
for the ratification and approval of the appointment of Deloitte & Touche LLP as
the independent accountants for the Company for the fiscal year ending September
30, 1999.
22
<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are filed as part of this Form 10-Q.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<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>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
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: February 12, 1999 /s/ PETER W. DE LEEUW
----------------------------------------
Peter W. De Leeuw
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 12, 1999 /s/ GARY M. SPITZ
----------------------------------------
Gary M. Spitz
Vice President-Finance and Chief Financial
Officer
(Principal Financial Officer)
24
<PAGE> 25
INDEX TO EXHIBITS
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.
<PAGE> 1
STERLING CHEMICALS HOLDINGS, INC.
EXHIBIT 11.1
EARNINGS PER SHARE COMPUTATION
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS
ENDED ENDED
12/31/98 12/31/97
-------- --------
<S> <C> <C>
BASIC EARNINGS PER SHARE
Weighted average of common stock outstanding 12,427 11,420
Net Loss $(13,100) $ (9,377)
Less: Preferred dividend requirements and accretion (645) (249)
-------- --------
Net loss used in basic loss per share $(13,745) $ (9,626)
======== ========
BASIC LOSS PER SHARE $ (1.11) $ (0.84)
======== ========
DILUTED EARNINGS PER SHARE
Weighted average of common stock outstanding 12,427 11,420
Total weighted average shares outstanding used in
diluted loss per share computation (1) 12,427 11,420
Net loss $(13,100) $ (9,377)
Less: Preferred dividend requirements and accretion (645) (249)
-------- --------
Net loss used in diluted earning per share $(13,745) $ (9,626)
======== ========
DILUTED LOSS PER SHARE (1) $ (1.11) $ (0.84)
======== ========
</TABLE>
(1) Due to losses resulting in anti-dilution, same as amount used in basic
computation.
25
<PAGE> 1
Exhibit 15.1
Deloitte & Touche LLP
333 Clay Street
Suite 2300
Houston, Texas 77002
February 11, 1999
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 periods ended December 31, 1998 and 1997 as indicated in our report
dated February 11, 1999; 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 December 31, 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
26
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000795662
<NAME> STERLING CHEMICALS HOLDINGS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,172
<SECURITIES> 0
<RECEIVABLES> 104,904
<ALLOWANCES> (1,147)
<INVENTORY> 79,189
<CURRENT-ASSETS> 212,376
<PP&E> 753,137
<DEPRECIATION> (310,425)
<TOTAL-ASSETS> 754,793
<CURRENT-LIABILITIES> 130,365
<BONDS> 876,814
18,894
0
<COMMON> 123
<OTHER-SE> (361,965)
<TOTAL-LIABILITY-AND-EQUITY> 754,793
<SALES> 171,929
<TOTAL-REVENUES> 171,929
<CGS> 155,212
<TOTAL-COSTS> 155,212
<OTHER-EXPENSES> 11,950
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,459
<INCOME-PRETAX> (20,692)
<INCOME-TAX> (7,592)
<INCOME-CONTINUING> (13,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,100)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001014669
<NAME> STERLING CHEMICALS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,160
<SECURITIES> 0
<RECEIVABLES> 106,849
<ALLOWANCES> (1,147)
<INVENTORY> 79,189
<CURRENT-ASSETS> 212,062
<PP&E> 753,137
<DEPRECIATION> (310,425)
<TOTAL-ASSETS> 751,255
<CURRENT-LIABILITIES> 130,366
<BONDS> 744,199
0
0
<COMMON> 0
<OTHER-SE> (230,322)
<TOTAL-LIABILITY-AND-EQUITY> 751,255
<SALES> 171,929
<TOTAL-REVENUES> 171,929
<CGS> 155,212
<TOTAL-COSTS> 155,212
<OTHER-EXPENSES> 11,832
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,640
<INCOME-PRETAX> (15,755)
<INCOME-TAX> (5,781)
<INCOME-CONTINUING> (9,974)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,974)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
