<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO 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, 1999
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)
</TABLE>
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)
<TABLE>
<S> <C>
DELAWARE 76-0502785
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (IRS 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, 2000 Sterling Chemicals Holdings, Inc. had 12,751,201
shares of common stock outstanding. As of January 31, 2000, all outstanding
equity securities of Sterling Chemicals, Inc. were owned by Sterling Chemicals
Holdings, Inc.
================================================================================
<PAGE> 2
EXPLANATORY NOTE TO AMENDMENT NO. 1
The undersigned registrant hereby amends its Quarterly Report on Form 10-Q
for the period ended December 31, 1999, for the sole purpose of filing the
financial statements for Sterling Chemicals Energy, Inc., which are included in
Item 1 "Financial Statements".
PART I.--FINANCIAL INFORMATION
ITEM 1.--FINANCIAL STATEMENTS
2
<PAGE> 3
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 6,948 $ 14,921
Accounts receivable ......................................................... 161,089 141,059
Inventories ................................................................. 74,184 70,464
Prepaid expenses ............................................................ 14,099 16,236
Deferred tax asset .......................................................... 16,888 16,888
--------- ---------
Total current assets ...................................................... 273,208 259,568
Property, plant, and equipment, net ............................................ 398,408 402,723
Deferred tax asset ............................................................. 26,158 26,158
Other assets ................................................................... 81,747 86,650
--------- ---------
Total assets .............................................................. $ 779,521 $ 775,099
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable ............................................................ $ 65,027 $ 72,961
Accrued liabilities ......................................................... 91,233 79,883
Current portion of long-term debt ........................................... 2,662 4,246
--------- ---------
Total current liabilities ................................................. 158,922 157,090
Long-term debt ................................................................. 973,054 964,555
Deferred tax liability ......................................................... 10,119 8,815
Deferred credits and other liabilities ......................................... 78,490 76,893
Common stock held by ESOP ...................................................... 2,946 2,946
Less: unearned compensation ................................................... (643) (745)
Redeemable preferred stock ..................................................... 21,651 20,932
Commitments and contingencies (Note 4) ......................................... -- --
Stockholders' equity (deficiency in assets):
Common stock, $.01 par value, 20,000,000 shares authorized, 12,305,000 shares
issued and 12,097,000 outstanding at December 31, 1999, and 12,305,000
shares issued and 12,097,000 outstanding at September 30, 1999 ............ 123 123
Additional paid-in capital .................................................. (542,712) (542,712)
Retained earnings ........................................................... 107,409 118,490
Accumulated other comprehensive income ...................................... (27,328) (28,768)
Deferred compensation ....................................................... (46) (58)
--------- ---------
(462,554) (452,925)
Treasury stock, at cost, 209,000 and 208,000 shares at December 31, 1999 and
September 30, 1999, respectively .......................................... (2,464) (2,462)
--------- ---------
Total stockholders' equity (deficiency in assets) ....................... (465,018) (455,387)
--------- ---------
Total liabilities and stockholders' equity (deficiency in assets) ..... $ 779,521 $ 775,099
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE> 4
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues ........................................................ $ 246,921 $ 171,929
Cost of goods sold .............................................. 216,353 155,212
--------- ---------
Gross profit .................................................... 30,568 16,717
--------- ---------
Selling, general, and administrative expenses ................... 9,870 9,656
Other expense ................................................... -- 2,294
Interest and debt related expenses, net of interest income ...... 29,770 25,459
--------- ---------
Loss before income taxes ........................................ (9,072) (20,692)
Provision (benefit) for income taxes ............................ 1,290 (7,592)
--------- ---------
Net loss ........................................................ (10,362) (13,100)
Preferred stock dividends ....................................... 719 645
--------- ---------
Net loss attributable to common stockholders .................... $ (11,081) $ (13,745)
========= =========
Net loss per common share (Note 5) .............................. $ (0.88) $ (1.11)
========= =========
Weighted average shares outstanding ............................. 12,612 12,427
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE> 5
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (10,362) $(13,100)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ........................ 13,526 14,030
Interest amortization ................................ 802 1,082
Deferred tax benefit (provision) ..................... 1,057 (5,709)
Discount notes amortization .......................... 5,124 4,563
Other ................................................ (22) 227
Change in assets/liabilities:
Accounts receivable .................................. (19,597) 9,081
Inventories .......................................... (3,554) (5,954)
Prepaid expenses ..................................... 2,135 (546)
Other assets ......................................... 1,214 (3,433)
Accounts payable ..................................... (17,599) (982)
Accrued liabilities .................................. 18,748 7,125
Other liabilities .................................... 2,422 1,419
--------- --------
Net cash provided by (used in) operating activities ......... (6,106) 7,803
--------- --------
Cash flows from investing activities:
Capital expenditures .................................... (5,794) (5,931)
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt ............................ 202,340 68,100
Repayment of long-term debt ............................. (198,546) (72,957)
Other ................................................... (3) (5)
--------- --------
Net cash provided by (used in) financing activities .......... 3,791 (4,862)
--------- --------
Effect of United States /Canadian exchange rate on cash ...... 136 (6)
--------- --------
Net decrease in cash and cash equivalents .................... (7,973) (2,996)
Cash and cash equivalents - beginning of year ................ 14,921 11,168
--------- --------
Cash and cash equivalents - end of period .................... $ 6,948 $ 8,172
========= ========
Supplement disclosures of cash flow information:
Interest paid, net of interest income received .......... $ (11,397) $(16,025)
Income taxes paid ....................................... (191) (103)
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE> 6
STERLING CHEMICALS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 6,923 $ 14,899
Accounts receivable .................................................... 163,622 143,556
Inventories ............................................................ 74,184 70,464
Prepaid expenses ....................................................... 12,873 15,059
Deferred tax asset ..................................................... 16,888 16,888
--------- ---------
Total current assets ................................................. 274,490 260,866
Property, plant, and equipment, net ....................................... 398,408 402,723
Deferred income tax benefit ............................................... 8,384 8,384
Other assets .............................................................. 75,389 80,133
--------- ---------
Total assets ......................................................... $ 756,671 $ 752,106
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable ....................................................... $ 65,027 $ 72,731
Accrued liabilities .................................................... 91,246 79,883
Current portion of long-term debt ...................................... 2,662 4,246
--------- ---------
Total current liabilities ............................................ 158,935 156,860
Long-term debt ............................................................ 820,147 816,927
Deferred tax liability .................................................... 10,119 8,815
Deferred credits and other liabilities .................................... 78,488 76,893
Common stock held by ESOP ................................................. 2,946 2,946
Less: unearned compensation .............................................. (643) (745)
Commitments and contingencies (Note 4) .................................... -- --
Stockholder's equity (deficiency in assets):
Common stock, $.01 par value ........................................... -- --
Additional paid-in capital ............................................. (140,012) (139,786)
Accumulated deficit .................................................... (145,936) (140,978)
Accumulated other comprehensive income ................................. (27,327) (28,768)
Deferred compensation .................................................. (46) (58)
--------- ---------
Total stockholder's equity (deficiency in assets) .................... (313,321) (309,590)
--------- ---------
Total liabilities and stockholder's equity (deficiency in assets) ...... $ 756,671 $ 752,106
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
6
<PAGE> 7
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues ........................................................ $ 246,921 $ 171,929
Cost of goods sold .............................................. 216,353 155,212
--------- ---------
Gross profit .................................................... 30,568 16,717
Selling, general, and administrative expenses ................... 9,834 9,538
Other expense ................................................... -- 2,294
Interest and debt related expenses, net of interest income ...... 24,403 20,640
--------- ---------
Loss before income taxes ........................................ (3,669) (15,755)
Provision (benefit) for income taxes ............................ 1,289 (5,781)
--------- ---------
Net loss ........................................................ $ (4,958) $ (9,974)
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
7
<PAGE> 8
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss .............................................. $ (4,958) $ (9,974)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization ...................... 13,526 14,030
Debt fee amortization .............................. 684 916
Deferred tax benefit (provision) ................... 1,057 (4,599)
Other .............................................. (150) 134
Change in assets/liabilities:
Accounts receivable ................................ (19,633) 8,980
Inventories ........................................ (3,554) (5,954)
Prepaid expenses ................................... 2,184 156
Other assets ....................................... 1,165 (3,433)
Accounts payable ................................... (17,599) (982)
Accrued liabilities ................................ 18,748 7,133
Other liabilities .................................. 2,421 1,393
--------- --------
Net cash provided by (used in) operating activities ........ (6,109) 7,800
--------- --------
Cash flows from investing activities:
Capital expenditures .................................... (5,794) (5,931)
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt ............................ 200,081 68,100
Repayment of long-term debt ............................. (196,917) (72,957)
Other ................................................... 627 (5)
--------- --------
Net cash provided by (used in) financing activities ....... 3,791 (4,862)
--------- --------
Effect of United States /Canadian exchange rate on cash .... 136 (6)
--------- --------
Net decrease in cash and cash equivalents .................. (7,976) (2,999)
Cash and cash equivalents - beginning of year .............. 14,899 11,159
--------- --------
Cash and cash equivalents - end of period .................. $ 6,923 $ 8,160
========= ========
Supplement disclosures of cash flow information:
Interest paid, net of interest income received .......... $ (11,400) $(16,033)
Income taxes paid .......................................... (191) (103)
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
8
<PAGE> 9
STERLING CHEMICALS HOLDINGS, INC.
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In our opinion, the accompanying unaudited consolidated financial
statements reflect all adjustments necessary to present fairly:
o the consolidated financial position of Sterling Chemicals Holdings,
Inc. ("Holdings") and its subsidiaries and the consolidated financial
position of Sterling Chemicals, Inc. ("Chemicals") and its
subsidiaries as of December 31, 1999, and
o the respective consolidated results of operations and cash flows of
Holdings and its subsidiaries and Chemicals and its subsidiaries for
the applicable three month periods ended December 31, 1999 and 1998,
respectively.
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, 1999 (the "Annual Report"). The accompanying consolidated
balance sheets as of September 30, 1999 have been derived from the audited
consolidated balance sheets as of September 30, 1999, included in the Annual
Report. The accompanying consolidated financial statements as of and for the
three month period ended December 31, 1999, have been reviewed by Deloitte &
Touche LLP, our independent public accountants, whose reports are included
herein. Unless otherwise indicated, Holdings and its subsidiaries, including
Chemicals, are collectively referred to as "we", "our", "ours", and "us".
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).
Our operations are divided into two reportable segments: petrochemicals and
pulp chemicals. The petrochemicals segment manufactures commodity petrochemicals
and acrylic fibers. The pulp chemicals segment manufactures chemicals for use
primarily in the pulp and paper industry. Operating segment information is
presented below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1999 1998
-------- ---------
(Dollars in Thousands)
<S> <C> <C>
Segment Information
Revenues:
Petrochemicals $197,294 $ 125,268
Pulp chemicals 49,627 46,661
-------- ---------
Total $246,921 $ 171,929
======== =========
Operating income (loss):
Petrochemicals $ 13,256 $ (2,429)
Pulp chemicals 7,442 7,196
-------- ---------
Total $ 20,698 $ 4,767
======== =========
</TABLE>
9
<PAGE> 10
Our total comprehensive net loss for the three months ended December 31,
1999 and 1998 was $8,922,000 and $13,021,000, respectively. The total
comprehensive net loss of Chemicals and its subsidiaries for the three months
ended December 31, 1999 and 1998 was $3,517,000 and $9,895,000, respectively.
2. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
(Dollars in Thousands)
<S> <C> <C>
Inventories consisted of the following:
Finished products ........................... $42,261 $37,484
Raw materials ............................... 7,544 10,355
Inventories under exchange agreements ....... 3,670 2,562
Stores and supplies ......................... 20,709 20,063
------- -------
$74,184 $70,464
======= =======
</TABLE>
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
(Dollars in Thousands)
<S> <C> <C>
Long-term debt consisted of the following:
Revolving credit facilities ............... $ 58,491 $ 54,643
Saskatoon term loans ...................... 41,916 44,045
11-1/4% Notes ............................. 152,402 152,485
11-3/4% Notes ............................. 275,000 275,000
12-3/8% Notes ............................. 295,000 295,000
--------- ---------
Total Chemicals' debt outstanding .... 822,809 821,173
13-1/2% Notes ............................. 152,907 147,628
--------- ---------
Total Holdings' debt outstanding ..... 975,716 968,801
Less:
Current maturities ................... (2,662) (4,246)
--------- ---------
Total long-term debt ...................... $ 973,054 $ 964,555
========= =========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Product Contracts
We have certain long-term agreements that provide for the dedication of
100% of our production of acetic acid, plasticizers, tertiary butylamine, and
sodium cyanide, each to one customer. We also have various sales and conversion
agreements that dedicate significant portions of our production of styrene,
acrylonitrile, and methanol to certain customers. Some of these agreements
provide for cost recovery plus an agreed profit margin based upon market prices.
10
<PAGE> 11
Environmental Regulations
Our 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,
regulations, and permit requirements. Environmental permits required for our
operations are subject to periodic renewal and can be revoked or modified for
cause or when new or revised environmental requirements are implemented.
Changing and increasingly strict environmental requirements can affect the
manufacturing, handling, processing, distribution, and use of our chemical
products and the raw materials used to produce such products and, if so
affected, our business and operations may be materially and adversely affected.
In addition, changes in environmental requirements can cause us to incur
substantial costs in upgrading or redesigning our facilities and processes,
including our waste treatment, storage, disposal, and other waste handling
practices and equipment.
While we believe that our business operations and facilities generally are
operated in compliance in all material respects with all applicable
environmental and health and safety requirements, we cannot be sure that past
practices or future operations will not result in material claims or regulatory
action, require material environmental expenditures, or result in exposure or
injury claims by employees, contractors and their employees, or the public. Some
risk of environmental costs and liabilities is inherent in our operations and
products, as it is with other companies engaged in similar businesses. In
addition, a catastrophic event at any of our facilities could result in our
incurrence of liabilities substantially in excess of our insurance coverages.
Legal Proceedings
Ammonia Release. A description of the ammonia release lawsuits is found
under "Legal Proceedings" in Note 6 of the "Notes to Consolidated Financial
Statements" of the Annual Report and is incorporated herein by reference. All of
the lawsuits against us based on this release have been resolved within the
limits of our liability insurance policies.
Nickel Carbonyl Release. A description of the nickel carbonyl lawsuits is
found under "Legal Proceedings" in Note 6 of the "Notes to Consolidated
Financial Statements" of the Annual Report and is incorporated herein by
reference. As discussed therein, we continue to vigorously defend against the
claims of the approximately 290 remaining plaintiffs. Additional claims and
litigation against us relating to this incident may ensue. We believe that all
or substantially all of our future out-of-pocket costs and expenses, including
settlement payments and judgments, relating to these lawsuits will be covered by
our liability insurance policies or indemnification from third parties. We do
not believe that the claims and litigation arising out of this incident will
have a material adverse effect on us, although we cannot give any assurances to
that effect.
Ethylbenzene Release. A description of this release is found under "Legal
Proceedings" in Note 6 of the "Notes to Consolidated Financial Statements" of
the Annual Report and is incorporated herein by reference. As discussed therein,
there is no lawsuit pending against us based on this release, but we have
received, and in some instances resolved, claims from individuals for alleged
damage from this incident. We believe that our general liability insurance
coverage is sufficient to cover all costs and expenses, including settlement
payments and judgments, related to this incident in excess of the deductible.
Other Lawsuits. We are subject to various other claims and legal actions
that arise in the ordinary course of our business.
Litigation Contingency
We have made estimates of the reasonably possible range of liability with
regard to our outstanding litigation for which we may incur any liability. These
estimates are based on our judgment using currently available information as
well as consultation with our insurance carriers and outside legal counsel. A
number of the claims in these litigation matters are covered by our insurance
policies or by third party indemnification. Therefore, we have also made
estimates of our probable recoveries under insurance policies or from
third-party indemnitors based on our understanding of our insurance policies and
indemnification arrangements, discussions with our insurers and indemnitors, and
consultation with outside
11
<PAGE> 12
legal counsel, in addition to our own judgment. Based on the foregoing, as of
December 31, 1999, we have accrued approximately $2.8 million as our estimate of
our aggregate contingent liability for these matters and have also recorded
aggregate receivables from our insurers and third-party indemnitors of
approximately $2.2 million. At December 31, 1999, we estimate that the aggregate
reasonably possible range of loss for all litigation combined, in addition to
the amount accrued, is between zero and $3 million. We believe that this
additional reasonably possible loss would be substantially covered by insurance
or indemnification.
While we have based our estimates on our evaluation of available
information 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. We will adjust our estimates as necessary as additional
information is developed and evaluated. However, we believe that the final
resolution of these contingencies will not have a material adverse impact on our
financial position, results of operations, or cash flows, although we cannot
give any assurances to that effect.
The timing of probable insurance and indemnity recoveries and payment of
liabilities, if any, are not expected to have a material adverse effect on our
financial position, results of operations, or cash flows.
5. NET LOSS PER COMMON SHARE CALCULATION
The weighted average number of outstanding shares of the common stock of
Holdings and the computation of the net loss per common share are as follows (in
thousands, except net loss per common share):
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss attributable to common stockholders $(11,081) $(13,745)
======== ========
Net loss per common share $ (0.88) $ (1.11)
======== ========
Weighted average shares outstanding 12,612 12,427
======== ========
</TABLE>
6. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards 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. We are
12
<PAGE> 13
currently evaluating the accounting impact and disclosures required when this
statement is adopted in the first quarter of fiscal 2001.
13
<PAGE> 14
REPORT OF INDEPENDENT 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,
1999, and the related consolidated statements of operations and cash flows for
the three-month periods ended December 31, 1999 and 1998. 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 such consolidated financial statements 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,
1999, 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 9, 1999, 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, 1999 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, 2000
14
<PAGE> 15
REPORT OF INDEPENDENT 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, 1999, and the
related consolidated statements of operations and cash flows for the three-month
periods ended December 31, 1999 and 1998. 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 such consolidated financial statements 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, 1999,
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 9, 1999, 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, 1999 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, 2000
15
<PAGE> 16
STERLING CHEMICALS UNITED STATES SUBSIDIARIES
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 1,727 $ 9,323
Accounts receivable ................................ 42,393 45,139
Inventories ........................................ 28,293 29,207
Prepaid expenses ................................... 11,976 12,748
--------- ---------
Total current assets ............................. 84,389 96,417
Property, plant, and equipment, net ................... 195,147 196,877
Due from affiliates ................................... 131,064 121,506
Other assets .......................................... 35,960 40,275
--------- ---------
Total assets ..................................... $ 446,560 $ 455,075
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ................................... $ 22,888 $ 22,399
Accrued liabilities ................................ 13,806 16,515
--------- ---------
Total current liabilities ........................ 36,694 38,914
Long-term debt due to Parent .......................... 325,420 325,402
Deferred income taxes ................................. 7,905 7,272
Deferred credits and other liabilities ................ 7,760 7,227
Commitments and contingencies (Note 4) ................ -- --
Stockholder's equity:
Common stock ....................................... -- --
Additional paid-in capital ......................... 92,734 92,734
Retained earnings .................................. 2,407 11,026
Accumulated other comprehensive income ............. (26,360) (27,500)
--------- ---------
Total stockholder's equity ....................... 68,781 76,260
--------- ---------
Total liabilities and stockholder's equity .... $ 446,560 $ 455,075
========= =========
</TABLE>
The accompanying notes are an integral part of the
combined financial statements.
16
<PAGE> 17
STERLING CHEMICALS UNITED STATES SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues .............................................. $ 56,345 $ 53,645
Cost of goods sold .................................... 49,021 45,244
-------- --------
Gross profit .......................................... 7,324 8,401
Selling, general, and administrative expenses ......... 5,337 5,568
Interest and debt related expenses .................... 10,019 8,488
-------- --------
Net loss before income taxes .......................... (8,032) (5,655)
Provision (benefit) for income taxes .................. 587 (2,064)
-------- --------
Net loss .............................................. $ (8,619) $ (3,591)
======== ========
</TABLE>
The accompanying notes are an integral part of the
combined financial statements.
17
<PAGE> 18
STERLING CHEMICALS UNITED STATES SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss ......................................................................... $(8,619) $(3,591)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization .................................................. 6,132 5,938
Deferred tax benefit ........................................................... 633 9,595
Other .......................................................................... 46 777
Change in assets/liabilities:
Accounts receivable ............................................................ 2,746 2,794
Inventories .................................................................... 914 131
Prepaid expenses ............................................................... 772 (3,797)
Due from affiliates ............................................................ (8,418) (4,227)
Other assets ................................................................... 1,598 1,636
Accounts payable ............................................................... 489 (8,390)
Accrued liabilities ............................................................ (2,713) (441)
Other liabilities .............................................................. 533 144
------- -------
Net cash flows provided by (used in) operating activities ........................... (5,887) 569
------- -------
Cash flows used in investing activities:
Capital expenditures ............................................................. (1,685) (1,535)
------- -------
Cash flows provided by (used in) financing activities:
Net change in long-term debt due to Parent ....................................... 18 (83)
------- -------
Effect of United States/Canadian exchange rate on cash .............................. (42) (15)
------- -------
Net decrease in cash and cash equivalents ........................................... (7,596) (1,064)
Cash and cash equivalents--beginning of year ........................................ 9,323 4,093
------- -------
Cash and cash equivalents--end of period ............................................ $ 1,727 $ 3,029
======= =======
</TABLE>
The accompanying notes are an integral part of the
combined financial statements.
18
<PAGE> 19
STERLING CHEMICALS UNITED STATES SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On July 23, 1999, Sterling Chemicals, Inc. ("Chemicals"), a wholly-owned
subsidiary of Sterling Chemicals Holdings, Inc. ("Holdings"), completed a
private offering of $295,000,000 of its 123/8% Senior Secured Notes due 2006. On
November 5, 1999, Chemicals completed a registered exchange offer, pursuant to
which all of these 123/8% Notes were exchanged for publicly registered 123/8%
Notes with substantially similar terms. The 123/8% Notes are guaranteed by all
of Chemicals' existing direct and indirect United States subsidiaries (other
than Sterling Chemicals Acquisitions, Inc.) on a joint and several basis and are
secured by, among other things, a second priority pledge of 100% of the stock of
these same U.S. subsidiaries. These U.S. subsidiaries consist of Sterling
Canada, Inc. and its U.S. subsidiaries, Sterling Chemicals Energy, Inc.,
Sterling Chemicals International, Inc., and Sterling Fibers, Inc. The financial
statements of these companies (except for Sterling Chemicals Energy, Inc., whose
securities do not constitute a substantial portion of the collateral) have been
combined to present the accompanying financial statements. Sterling Canada, Inc.
(including its U.S. and Canadian subsidiaries), Sterling Chemicals
International, Inc., and Sterling Fibers, Inc. are collectively referred to in
these notes as the "Company".
The Company manufactures chemicals for use primarily in the pulp and paper
industry at four plants in Canada and a plant in Valdosta, Georgia, and
manufactures acrylic fibers in a plant in Santa Rosa County, Florida. Sodium
chlorate is produced at the four plants in Canada and the Valdosta plant. Sodium
chlorite is produced at one of the Canadian locations. The Company also
licenses, engineers, and oversees construction of large-scale chlorine dioxide
generators for the pulp and paper industry as part of the pulp chemicals
business. These generators convert sodium chlorate into chlorine dioxide at pulp
mills. The Company produces regular textiles, specialty textiles, and technical
fibers at the Santa Rosa plant, as well as licensing its acrylic fibers
manufacturing technology to producers worldwide.
In the opinion of management, the accompanying unaudited combined financial
statements reflect all adjustments necessary to present fairly the combined
financial position of the Company as of December 31, 1999, and its combined
results of operations and cash flows for the three-month periods ended December
31, 1999 and 1998, respectively. 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 combined financial statements should be, and are assumed
to have been, read in conjunction with the audited combined financial statements
of the Company included in Holdings' and Chemicals' combined Annual Report on
Form 10-K for the fiscal year ended September 30, 1999 (the "Annual Report").
The accompanying combined balance sheet as of September 30, 1999 has been
derived from the Company's audited combined balance sheet as of September 30,
1999 included in the Annual Report.
The Company's total comprehensive net loss for the three months ended
December 31, 1999 and 1998 was $ 7,479,000 and $3,594,000, respectively.
2. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
(Dollars in Thousands)
<S> <C> <C>
Inventories consisted of the following:
Finished products ...................... $16,726 $17,513
Raw materials .......................... 1,748 2,235
Inventories under exchange agreements .. 275 170
Stores and supplies .................... 9,544 9,289
------- -------
$28,293 $29,207
======= =======
</TABLE>
19
<PAGE> 20
3. LONG-TERM DEBT
As of December 31, 1999 and September 30, 1999, debt allocated to the
Company by Chemicals amounted to $325.4 million and $325.4 million,
respectively. At December 31, 1999, interest rates on this debt ranged from
11.25% to 12.375%.
4. COMMITMENTS AND CONTINGENCIES
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, regulations, and permit requirements. 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 requirements are
implemented. Changing and increasingly strict environmental requirements can
affect the manufacturing, handling, processing, distribution, and use of the
Company's products and the raw materials used to produce such products and, if
so affected, the Company's business and operations may be materially and
adversely affected. In addition, changes in environmental 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 in all material respects with all
applicable environmental and health and safety requirements, there can be no
assurance that past practices or future operations will not result in material
claims or regulatory action, require material environmental expenditures, or
result in exposure or injury claims by employees, contractors and their
employees, or 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.
Any significant ban on all chlorine containing compounds could have a
materially adverse effect on the Company's financial condition and results of
operations. British Columbia has a regulation in place requiring elimination of
the use of all chlorine products, including chlorine dioxide, in the bleaching
process by the year 2002. Chlorine dioxide is produced from sodium chlorate,
which is one of the Company's pulp chemicals products. The pulp and paper
industry believes that a ban of chlorine dioxide in the bleaching process will
yield no measurable environmental or public health benefit and is working to
change this regulation but there can be no assurance that the regulation will be
changed. In the event such a regulation is implemented, the Company would seek
to sell the products it manufactures at its British Columbia facility to
customers in other markets. The Company is not aware of any other laws or
regulations in place in North America which would restrict the use of such
products for other purposes.
Legal Proceedings
The Company is subject to various claims and legal actions that arise in
the ordinary course of its business. The Company believes that the ultimate
liability, if any, with respect to these claims and legal actions will not have
a material effect on the financial position or results of operations of the
Company.
5. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", establishes accounting and
reporting standards for derivative instruments, including
20
<PAGE> 21
certain derivative instruments embedded in other contracts, and for hedging
activities. The Company is currently evaluating the accounting impact and
disclosures that will be required when this statement is adopted in the first
quarter of fiscal 2001.
21
<PAGE> 22
STERLING PULP CHEMICALS, LTD.
BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents ............................. $ 1,069 $ 8,481
Accounts receivable ................................... 16,294 16,840
Due from related parties .............................. 1,672 1,369
Other receivables ..................................... 1,717 2,254
Inventories ........................................... 5,529 5,146
Prepaid expenses ...................................... 334 633
--------- ---------
26,615 34,723
Property, plant, and equipment, net ........................ 75,354 75,531
Other assets ............................................... 268 440
--------- ---------
$ 102,237 $ 110,694
========= =========
LIABILITIES
Current
Accounts payable ...................................... $ 7,321 $ 8,978
Accrued generator construction costs .................. 3,835 2,967
Accrued liabilities ................................... 5,911 7,093
Due to related parties ................................ 3,882 1,241
--------- ---------
20,949 20,279
Note payable ............................................... 57,590 56,667
Deferred income taxes ...................................... 7,905 7,272
Deferred credits and other liabilities ..................... 4,250 3,972
Commitments and contingencies (Note 4) ..................... -- --
Stockholder's equity
Common stock .......................................... 1 1
Additional paid-in capital ............................ 10,508 16,871
Retained earnings ..................................... 9,707 14,470
Accumulated other comprehensive income ................ (8,673) (8,838)
--------- ---------
Total liabilities and stockholder's equity ......... 11,543 22,504
--------- ---------
$ 102,237 $ 110,694
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 23
STERLING PULP CHEMICALS, LTD.
STATEMENTS OF OPERATIONS
(U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------
1999 1998
------- -------
<S> <C> <C>
Revenue .......................................... $28,440 $26,653
Cost of goods sold ............................... 23,607 22,469
------- -------
Gross profit ..................................... 4,833 4,184
Selling, general, and administrative expenses .... 2,235 2,297
Interest and debt related expenses, net .......... 1,103 1,364
------- -------
Income before income taxes ....................... 1,495 523
Provision for income taxes ....................... 580 203
------- -------
Net income ....................................... $ 915 $ 320
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 24
STERLING PULP CHEMICALS, LTD.
STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................ $ 915 $ 320
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ........................................ 2,027 1,870
Deferred tax expense ................................................. 348 140
Accrued compensation and other ....................................... 2 9
Changes in assets/liabilities:
Accounts receivable .................................................. 867 (839)
Due from related parties ............................................. (373) 10
Other receivables .................................................... 546 46
Inventories .......................................................... (285) 127
Prepaid expenses ..................................................... 303 301
Other assets ......................................................... 177 1,177
Accounts payables .................................................... (2,013) 1,071
Accrued generator construction costs ................................. 780 (931)
Other accrued liabilities ............................................ (1,022) (3,108)
Due to related parties ............................................... 2,580 1,879
Other liabilities .................................................... 377 265
-------- --------
Net cash provided by operating activities ...................................... 5,229 2,337
-------- --------
Cash flows from investing activities:
Capital expenditures ...................................................... (664) (769)
-------- --------
Cash flows from financing activities:
Distribution to parent .................................................... (6,377) --
Dividends ................................................................. (5,558) (3,025)
-------- --------
Net cash used in financing activities .......................................... (11,935) (3,025)
-------- --------
-------- --------
Effect of exchange rate on cash ................................................ (42) 9
-------- --------
Net (decrease) increase in cash and cash equivalents ........................... (7,412) (1,448)
Cash and cash equivalents, beginning of period ................................. 8,481 3,426
-------- --------
Cash and cash equivalents, end of period ....................................... $ 1,069 $ 1,978
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 25
STERLING PULP CHEMICALS, LTD.
NOTES TO THE FINANCIAL STATEMENTS--(UNAUDITED)
1. BASIS OF PRESENTATION
Sterling Pulp Chemicals, Ltd. (the "Company") is a Canadian company which
operates four pulp chemical facilities in Canada. These plants primarily produce
sodium chlorate, a chemical used primarily to make chlorine dioxide, which in
turn is used by pulp mills in the pulp bleaching process. The Company also
oversees construction of large-scale chlorine dioxide generators for the pulp
and paper industry. The Company is a wholly-owned subsidiary of Sterling Canada,
Inc. ("Parent"), which is a wholly-owned subsidiary of Sterling Chemicals, Inc.
("Chemicals").
In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments necessary to present fairly the financial
position of the Company as of December 31, 1999 and its results of operations
and cash flows for the three-month periods ended December 31, 1999 and 1998,
respectively. 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
financial statements should be, and are assumed to have been, read in
conjunction with the Company's annual financial statements included in Holdings'
and Chemicals' combined Annual Report on Form 10-K for the fiscal year ended
September 30, 1999 (the "Annual Report"). The accompanying balance sheet as of
September 30, 1999, has been derived from the Company's audited balance sheet as
of September 30, 1999 included in the Annual Report.
The Company's total comprehensive net income for the three months ended
December 31, 1999 and 1998 was $1,080,000 and $333,000, respectively.
2. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
(Dollars in Thousands)
<S> <C> <C>
Inventories
Finished products ...................... $2,273 $1,872
Raw materials .......................... 209 209
------ ------
Inventories at FIFO cost .................... 2,482 2,081
Inventories under exchange agreements ....... 225 77
Stores and supplies ......................... 2,822 2,988
------ ------
$5,529 $5,146
====== ======
</TABLE>
3. LONG-TERM DEBT
On August 20, 1992, the Company entered into an agreement for a
$109,087,000 demand note facility with Sterling NRO, Ltd. ("Sterling NRO").
Sterling NRO is also owned by Parent and is therefore related to the Company by
virtue of common control. The note has no scheduled terms of repayment and
interest is calculated and payable monthly in arrears at 1.5% above the Bank of
Nova Scotia prime rate. All of the indebtedness evidenced by the note is
classified as long-term debt because the Company has represented that no other
repayments will be made before January 1, 2001. Interest expense for the
three-month periods ended December 31, 1999 and 1998 were $1,125,000 and
$1,398,000, respectively.
25
<PAGE> 26
4. COMMITMENTS AND CONTINGENCIES
Environmental and Safety Matters
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, regulations, and permit requirements. 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 requirements are
implemented. Changing and increasingly strict environmental requirements can
affect the manufacturing, handling, processing, distribution, and use of the
Company's products and the raw materials used to produce such products and, if
so affected, the Company's business and operations may be materially and
adversely affected. In addition, changes in environmental 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 in all material respects with all
applicable environmental and health and safety requirements, there can be no
assurance that past practices or future operations will not result in material
claims or regulatory action, require material environmental expenditures, or
result in exposure or injury claims by employees, contractors and their
employees, or 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.
Any significant ban on all chlorine containing compounds could have a
materially adverse effect on the Company's financial condition and results of
operations. British Columbia has a regulation in place requiring elimination of
the use of all chlorine products, including chlorine dioxide, in the bleaching
process by the year 2002. Chlorine dioxide is produced from sodium chlorate,
which is one of the Company's pulp chemicals products. The pulp and paper
industry believes that a ban of chlorine dioxide in the bleaching process will
yield no measurable environmental or public health benefit and is working to
change this regulation but there can be no assurance that the regulation will be
changed. In the event such a regulation is implemented, the Company would seek
to sell the products it manufactures at its British Columbia facility to
customers in other markets. The Company is not aware of any other laws or
regulations in place in North America which would restrict the use of such
products for other purposes.
Legal Proceedings
The Company is subject to claims and legal actions that arise in the
ordinary course of its business. The Company believes that the ultimate
liability, if any, with respect to these claims and legal actions will not have
a material effect on the financial position or results of operations of the
Company.
Pledge of Common Stock
In order to secure the repayment of a 1999 issuance of $295,000,000 of
123/8% Senior Secured Notes due 2006 by Chemicals, Parent granted the note
holders a first priority pledge of 65% of the Company's common stock.
5. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards 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 impact and disclosures required when this
statement is adopted in the first quarter of fiscal 2001.
26
<PAGE> 27
STERLING CHEMICALS ENERGY, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ -- $ --
Accounts receivable ................................ 113 101
------- -------
Total current assets ............................. 113 101
Property, plant, and equipment, net ................... 4,627 4,815
Due from affiliates ................................... 26,053 24,721
Investment in joint venture ........................... 3,539 3,539
------- -------
Total assets ..................................... $34,332 $33,176
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ................................... $ 3,260 $ 1,535
------- -------
Total current liabilities ........................ 3,260 1,535
Long-term debt due to Parent .......................... 25,934 25,934
Commitments and contingencies (Note 3) ................ -- --
Stockholder's equity:
Common stock ....................................... 1 1
Retained earnings .................................. 5,137 5,706
------- -------
Total stockholder's equity ....................... 5,138 5,707
------- -------
Total liabilities and stockholder's equity .... $34,332 $33,176
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 28
STERLING CHEMICALS ENERGY, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1999 1998
------ ------
<S> <C> <C>
Revenues ............................... $ 527 $ 439
Cost of goods sold ..................... 527 439
----- -----
Gross profit ........................... -- --
Interest and debt related expenses ..... 786 664
----- -----
Loss before income taxes ............... (786) (664)
Benefit for income taxes ............... -- 186
Equity in earnings of joint venture .... 217 590
----- -----
Net income (loss) ...................... $(569) $ 112
===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 29
STERLING CHEMICALS ENERGY, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
----------------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .......................................................... $ (569) $ 112
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization ............................................ 175 175
Undistributed earnings from joint venture ................................ (115) --
Change in assets/liabilities:
Accounts receivable ...................................................... (12) (47)
Due from affiliates ...................................................... (1,332) (488)
Other assets ............................................................. 128 (223)
Accounts payable ......................................................... 1,725 335
------- -------
Net cash flows from operating activities ...................................... -- (136)
------- -------
Net cash flows from investing activities-
Distributions from joint venture in excess of earnings ................... -- 136
------- -------
Net change in cash and cash equivalents ....................................... -- --
Cash and cash equivalents--beginning of year .................................. -- --
------- -------
Cash and cash equivalents--end of period ...................................... $ -- $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 30
STERLING CHEMICALS ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Sterling Chemicals Energy, Inc. ("Energy") owns and operates a turbo
generator that produces electricity which is sold to its parent, Sterling
Chemicals, Inc. ("Chemicals"). Energy also owns a 50% general partnership
interest in a joint venture cogeneration facility ("S & L Cogeneration Company")
with Praxair Energy Resources, Inc. owning the other 50% interest. The
cogeneration facility produces electricity and steam which is sold to Chemicals.
The assets of Energy and S&L Cogeneration Company are located in Texas City,
Texas on leased property adjacent to Chemicals' production facility.
On July 23, 1999, Chemicals completed a private offering of $295,000,000 of
its 123/8% Senior Secured Notes due 2006. On November 5, 1999, Chemicals
completed a registered exchange offer, pursuant to which all of these 123/8%
Notes were exchanged for publicly registered 123/8% Notes with substantially
similar terms (the "123/8% Notes"). The 123/8% Notes are guaranteed by Energy
and all of Chemicals' other existing direct and indirect subsidiaries
incorporated in the United States (other than Sterling Chemicals Acquisitions,
Inc.) on a joint and several basis and are secured by, among other things, a
second priority pledge of 100% of the stock of these subsidiaries.
In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments necessary to present fairly the financial
position of Energy as of December 31, 1999, and its results of operations and
cash flows for the three month periods ended December 31, 1999, and December 31,
1998, respectively. 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 financial statements should be, and are assumed to have been, read in
conjunction with the audited financial statements of Energy included in
Holdings' and Chemicals' combined Annual Report on Form 10-K/A for the fiscal
year ended September 30, 1999 (the "Annual Report"). The accompanying balance
sheet as of September 30, 1999 has been derived from Energy's audited balance
sheet as of September 30, 1999 included in the Annual Report.
Energy's total comprehensive net income (loss) for the three month periods
ended December 31, 1999 and December 31, 1998 were $(569,000) and $112,000,
respectively.
2. LONG-TERM DEBT
As of December 31, 1999 and September 30, 1999, debt allocated to Energy
by Chemicals was $25.9 million. As of December 31, 1999, the weighted average
interest rate on long-term debt was 11.7%.
3. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
Energy is subject to claims and legal actions that arise in the ordinary
course of its business. Energy believes that the ultimate liability, if any,
with respect to these claims and legal actions will not have a material adverse
effect on its financial position or results of operations.
30
<PAGE> 31
4. INVESTMENT IN JOINT VENTURE
Energy accounts for its investments in S & L Cogeneration Company under
the equity method of accounting.
Amounts included in Energy's financial statements represent the amounts
reported by S & L Cogeneration Company for the three-month periods ended
December 31, 1999 and 1998. Summarized financial information reported by S & L
Cogeneration Company for such periods is (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1999 1998
------ ------
<S> <C> <C>
Revenues ...... $5,687 $5,440
Net income .... 721 1,468
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
<S> <C> <C>
Total assets ....... $17,307 $17,659
</TABLE>
5. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities", establish
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 impact and disclosures that
will be required when these statements are adopted in the first quarter of
fiscal 2001.
31
<PAGE> 32
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: November 22, 2000 /s/ FRANK P. DIASSI
------------------------------------
Frank P. Diassi
Chairman of the Board of Directors
(Principal Executive Officer)
Date: November 22, 2000 /s/ GARY M. SPITZ
------------------------------------
Gary M. Spitz
Executive Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer
32
