<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 March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-10059
STERLING CHEMICALS HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0185186
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1200 SMITH STREET, SUITE 1900 (713) 650-3700
HOUSTON, TEXAS 77002-4312 (REGISTRANT'S TELEPHONE
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 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
COMMISSION FILE NUMBER 333-04343-01
STERLING CHEMICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0502785
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1200 SMITH STREET, SUITE 1900 (713) 650-3700
HOUSTON, TEXAS 77002-4312 (REGISTRANT'S TELEPHONE
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 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: 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 May 1, 2000 Sterling Chemicals Holdings, Inc. had 12,751,201
shares of common stock outstanding. As of May 1, 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 March 31, 2000, 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>
MARCH 31, SEPTEMBER 30,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 7,611 $ 14,921
Accounts receivable............................................................... 164,893 141,059
Inventories....................................................................... 82,512 70,464
Prepaid expenses.................................................................. 1,393 5,157
Deferred tax asset................................................................ 16,888 16,888
-------------- --------------
Total current assets............................................................ 273,297 248,489
Property, plant, and equipment, net.................................................. 397,705 402,723
Deferred tax asset................................................................... 37,156 37,237
Other assets......................................................................... 85,850 86,650
-------------- --------------
Total assets.................................................................... $ 794,008 $ 775,099
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable.................................................................. $ 87,270 $ 72,961
Accrued liabilities............................................................... 80,071 79,883
Current portion of long-term debt................................................. 2,652 4,246
-------------- --------------
Total current liabilities....................................................... 169,993 157,090
Long-term debt....................................................................... 975,470 964,555
Deferred tax liability............................................................... 8,087 8,815
Deferred credits and other liabilities............................................... 78,268 76,893
Common stock held by ESOP............................................................ 2,946 2,946
Less: unearned compensation......................................................... (290) (745)
Redeemable preferred stock........................................................... 22,390 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 March 31, 2000 and
September 30, 1999.............................................................. 123 123
Additional paid-in capital........................................................ (542,712) (542,712)
Retained earnings................................................................. 109,972 118,490
Accumulated other comprehensive income............................................ (27,736) (28,768)
Deferred compensation............................................................. (38) (58)
-------------- --------------
(460,391) (452,925)
Treasury stock, at cost, 209,000 and 208,000 shares at March 31, 2000 and
September 30, 1999, respectively................................................ (2,465) (2,462)
-------------- --------------
Total stockholders' equity (deficiency in assets)............................. (462,856) (455,387)
-------------- --------------
Total liabilities and stockholders' equity (deficiency in assets)........... $ 794,008 $ 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 MARCH 31, SIX MONTHS ENDED MARCH 31,
------------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues................................................... $ 264,827 $ 152,472 $ 511,748 $ 324,401
Cost of goods sold......................................... 220,473 148,160 436,826 303,372
------------- ------------- ------------- --------------
Gross profit............................................... 44,354 4,312 74,922 21,029
Selling, general, and administrative expenses.............. 9,596 8,801 19,466 18,457
Other expense.............................................. -- 6,782 -- 9,076
Interest and debt related expenses, net of interest income. 30,461 24,492 60,231 49,951
------------- ------------- ------------- --------------
Income (loss) before income taxes ......................... 4,297 (35,763) (4,775) (56,455)
Provision (benefit) for income taxes....................... 996 (10,943) 2,286 (18,535)
------------- ------------- ------------- --------------
Net income (loss).......................................... 3,301 (24,820) (7,061) (37,920)
Preferred stock dividends.................................. 738 658 1,457 1,303
------------- ------------- ------------- --------------
Net income (loss) attributable to common stockholders...... $ 2,563 $ (25,478) $ (8,518) $ (39,233)
============= ============= ============= ==============
Net income (loss) per common share, basic.................. $ 0.20 $ (1.96) $ (0.67) $ (3.07)
============= ============= ============= ==============
Net income (loss) per common share, diluted................ $ 0.20 $ (1.96) $ (0.67) $ (3.07)
============= ============= ============= ==============
Weighted average shares outstanding:
Basic................................................... 12,651 12,466 12,632 12,446
Diluted................................................. 13,049 12,466 12,632 12,446
</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>
SIX MONTHS ENDED MARCH 31,
-----------------------------------------
2000 1999
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................................... $ (7,061) $ (37,920)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.................................. 27,875 28,028
Interest amortization.......................................... 2,320 1,688
Deferred tax benefit........................................... (906) (14,645)
Discount notes amortization.................................... 10,439 9,197
Early retirement programs and benefit changes.................. -- 6,782
Other.......................................................... 36 721
Change in assets/liabilities:
Accounts receivable............................................ (23,537) 23,608
Inventories.................................................... (11,926) 1,755
Prepaid expenses............................................... 14,839 (2,460)
Other assets................................................... (8,581) (12,521)
Accounts payable............................................... 5,918 6,696
Accrued liabilities............................................ 6,962 (11,082)
Other liabilities.............................................. (6,804) 1,383
----------------- ----------------
Net cash provided by operating activities............................. 9,574 1,230
----------------- ----------------
Cash flows from investing activities:
Capital expenditures.............................................. (17,718) (12,186)
----------------- ----------------
Cash flows from financing activities:
Proceeds from long-term debt...................................... 430,375 139,982
Repayment of long-term debt....................................... (429,639) (135,616)
Other............................................................. (3) (45)
----------------- ----------------
Net cash provided by financing activities.............................. 733 4,321
----------------- ----------------
Effect of United States/Canadian exchange rate on cash................. 101 75
----------------- ----------------
Net decrease in cash and cash equivalents.............................. (7,310) (6,560)
Cash and cash equivalents - beginning of year.......................... 14,921 11,168
----------------- ----------------
Cash and cash equivalents - end of period.............................. $ 7,611 $ 4,608
================= ================
Supplement disclosures of cash flow information:
Interest paid, net of interest income received.................... $ (48,199) $ (39,406)
Income taxes (paid) refunded...................................... (221) 5,441
</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>
MARCH 31, SEPTEMBER 30,
2000 1999
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 7,584 $ 14,899
Accounts receivable............................................................. 167,520 143,556
Inventories..................................................................... 82,512 70,464
Prepaid expenses................................................................ 93 3,980
Deferred tax asset.............................................................. 16,888 16,888
--------------- --------------
Total current assets.......................................................... 274,597 249,787
Property, plant, and equipment, net................................................ 397,705 402,723
Deferred tax asset................................................................. 18,815 19,463
Other assets....................................................................... 80,160 80,133
--------------- --------------
Total assets.................................................................. $ 771,277 $ 752,106
=============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable................................................................ $ 86,950 $ 72,731
Accrued liabilities............................................................. 80,112 79,883
Current portion of long-term debt............................................... 2,652 4,246
--------------- --------------
Total current liabilities..................................................... 169,714 156,860
Long-term debt..................................................................... 817,094 816,927
Deferred tax liability............................................................. 8,087 8,815
Deferred credits and other liabilities............................................. 78,268 76,893
Common stock held by ESOP.......................................................... 2,946 2,946
Less: unearned compensation....................................................... (290) (745)
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............................................................. (136,982) (140,978)
Accumulated other comprehensive income ......................................... (27,736) (28,768)
Deferred compensation........................................................... (38) (58)
--------------- --------------
Total stockholder's equity (deficiency in assets)............................. (304,542) (309,590)
--------------- --------------
Total liabilities and stockholder's equity (deficiency in assets)............... $ 771,277 $ 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 MARCH 31, SIX MONTHS ENDED MARCH 31,
--------------------------------- ---------------------------------
2000 1999 2000 1999
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues................................................... $ 264,827 $ 152,472 $ 511,748 $ 324,401
Cost of goods sold......................................... 220,473 148,160 436,826 303,372
-------------- -------------- --------------- --------------
Gross profit............................................... 44,354 4,312 74,922 21,029
Selling, general, and administrative expenses.............. 9,502 8,663 19,336 18,201
Other expense.............................................. -- 6,782 -- 9,076
Interest and debt related expenses, net of interest income. 24,901 19,601 49,304 40,241
-------------- -------------- --------------- --------------
Income (loss) before income taxes ......................... 9,951 (30,734) 6,282 (46,489)
Provision (benefit) for income taxes....................... 997 (9,099) 2,286 (14,880)
-------------- -------------- --------------- --------------
Net income (loss).......................................... $ 8,954 $ (21,635) $ 3,996 $ (31,609)
============== ============== =============== ==============
</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>
SIX MONTHS ENDED MARCH 31,
-----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................. $ 3,996 $ (31,609)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization................................... 27,875 28,028
Interest amortization........................................... 2,081 1,415
Deferred tax benefit ........................................... (906) (14,645)
Early retirement programs and benefit changes................... -- 6,782
Other........................................................... (90) 474
Change in assets/liabilities:
Accounts receivable............................................. (23,667) 23,507
Inventories..................................................... (11,926) 1,755
Prepaid expenses................................................ 14,962 (1,438)
Other assets.................................................... (8,704) (9,920)
Accounts payable................................................ 5,918 6,556
Accrued liabilities............................................. 6,962 (11,074)
Other liabilities............................................... (6,932) 1,391
--------------- ---------------
Net cash provided by operating activities............................... 9,569 1,222
--------------- ---------------
Cash flows from investing activities:
Capital expenditures................................................. (17,718) (12,186)
--------------- ---------------
Cash flows from financing activities:
Proceeds from long-term debt......................................... 430,375 139,982
Repayment of long-term debt.......................................... (429,639) (135,616)
Other................................................................ (3) (45)
--------------- ---------------
Net cash provided by (used in) financing activities..................... 733 4,321
--------------- ---------------
Effect of United States/Canadian exchange rate on cash.................. 101 75
--------------- ---------------
Net decrease in cash and cash equivalents............................... (7,315) (6,568)
Cash and cash equivalents - beginning of year........................... 14,899 11,159
--------------- ---------------
Cash and cash equivalents - end of period............................... $ 7,584 $ 4,591
=============== ===============
Supplement disclosures of cash flow information:
Interest paid, net of interest income received....................... $ (48,204) $ (39,415)
Income taxes (paid) refunded......................................... (221) 5,441
</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 March 31, 2000, 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 and six month periods ended March 31, 2000
and March 31, 1999, 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 six
month period ended March 31, 2000, 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 income (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>
SIX MONTHS ENDED MARCH 31,
-----------------------------------
2000 1999
--------------- ---------------
(Dollars in Thousands)
<S> <C> <C>
Revenues:
Petrochemicals $ 408,470 $ 232,757
Pulp chemicals 103,278 91,644
--------------- ---------------
Total $ 511,748 $ 324,401
=============== ===============
Operating income (loss):
Petrochemicals $ 39,501 $ (21,400)
Pulp chemicals 15,955 14,896
--------------- ---------------
Total $ 55,456 $ (6,504)
=============== ===============
</TABLE>
9
<PAGE> 10
Our total comprehensive net income (loss) for the six month periods ended
March 31, 2000 and March 31, 1999 was $6,029,000 and $36,420,000, respectively.
The total comprehensive net income (loss) of Chemicals and its subsidiaries for
the six month periods ended March 31, 2000 and March 31, 1999 was $5,028,000 and
$(30,109,000), respectively.
2. INVENTORIES
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
---------- -------------
(Dollars in Thousands)
<S> <C> <C>
Inventories consisted of the following:
Finished products..................................................................... $ 44,234 $ 37,484
Raw materials......................................................................... 10,852 10,355
Inventories under exchange agreements................................................. 7,035 2,562
Stores and supplies................................................................... 20,391 20,063
---------- -----------
$ 82,512 $ 70,464
========== ===========
</TABLE>
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
----------- -------------
<S> <C> <C>
Long-term debt consisted of the following :
Revolving credit facilities........................................................... $ 56,186 $ 54,643
Saskatoon term loans.................................................................. 41,241 44,045
11-1/4% Notes......................................................................... 152,319 152,485
11-3/4% Notes......................................................................... 275,000 275,000
12-3/8% Notes......................................................................... 295,000 295,000
----------- ----------
Total Chemicals' debt outstanding................................................ 819,746 821,173
13-1/2% Notes......................................................................... 158,376 147,628
----------- ----------
Total Holdings' debt outstanding................................................ 978,122 968,801
Less:
Current maturities............................................................... (2,652) (4,246)
----------- ----------
Total long-term debt.................................................................. $ 975,470 $ 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, 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, 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
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. The seven lawsuits
listed below and three interventions, involving a total of approximately 1,600
plaintiffs, alleging personal injury, property damage, and nuisance claims have
been filed based on this release:
o Zabrina Alexander, et al. v. Sterling Chemicals Holdings, Inc., et
al.; Case No. 00-CV0217; In the 10th - Judicial District Court of
Galveston County, Texas
o Nettie Allen, et al. v. Sterling Chemicals, Inc., et al.; Case No.
00-CV0304; In the 10th Judicial District Court of Galveston County,
Texas
o Bobbie Adams, et al. v. Sterling Chemicals International, Inc., et
al.; Case No. 00-CV0311; In the 212th Judicial District Court of
Galveston County, Texas
o Climon Davis, et al. v. Sterling Chemicals, Inc.; Case No. 00-CV0343;
In the 212th Judicial District Court of Galveston County, Texas
o James C. Allen, et al. v. Sterling Chemicals, Inc., et al.; Case No.
2000-15823; In the 152nd Judicial District Court of Harris County,
Texas
11
<PAGE> 12
o Ida Goldman, et al. v. Sterling Chemicals, Inc. and Catalytic
Industrial Maintenance Co.; Case No. - 00-CV0338; In the 56th Judicial
District Court of Galveston County, Texas
o Olivia Ellis v. Sterling Chemicals, Inc.; Case No. JC7096; In Precinct
No. 3 Justice Court of Galveston County, Texas
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, although we cannot give any
assurances to that effect.
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 legal counsel, in addition to our own judgment. Based
on the foregoing, as of March 31, 2000, we have accrued approximately $2.5
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 $2.3 million. At March 31, 2000, 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. 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. 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.
5. NET INCOME (LOSS) PER COMMON SHARE CALCULATION
For purposes of computing net income (loss) per common share, net income
(loss) has been reduced by an amount equal to the fair market value at the end
of the period of "Released Shares", which are shares held by Chemicals' employee
stock ownership plan that have been allocated to the ESOP accounts of our
employees, minus amounts previously recognized as compensation expense with
respect to Released Shares, adjusted to reflect the amount of
depreciation/appreciation in value of Released Shares in prior periods. This
reduction in net income (loss) is made because we are obligated, under certain
circumstances, to purchase from participants under the plan any shares of
Holdings' common stock distributed by the ESOP to these participants. 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):
12
<PAGE> 13
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) attributable to common
stockholders................................... $ 2,563 $ (25,478) $ (8,518) $ (39,223)
Plus depreciation in value of Released Shares.... -- 1,048 -- 1,048
--------------- -------------- -------------- ---------------
Net income (loss) for purpose of computing basic
and diluted income (loss) per share............ $ 2,563 $ (24,430) $ (8,518) $ (38,175)
=============== ============== ============== ===============
Weighted average shares outstanding for basic.... 12,651 12,466 12,632 12,446
Effect of dilutive securities:
Warrants....................................... 398 -- -- --
--------------- -------------- -------------- ---------------
Weighted average shares outstanding for diluted.. 13,049 12,466 12,632 12,446
=============== ============== ============== ===============
</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
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 March 31, 2000,
and the related consolidated statements of operations and cash flows for the
three-month and six-month periods ended March 31, 2000 and 1999. 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 auditing standards generally accepted in the United States of America, 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 accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, 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
May 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 March 31, 2000, and the
related consolidated statements of operations and cash flows for the three-month
and six-month periods ended March 31, 2000 and 1999. 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 auditing standards generally accepted in the United States of America, 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 accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Chemicals as of September 30, 1999, and the related consolidated statements 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
May 11, 2000
15
<PAGE> 16
STERLING CHEMICALS GUARANTORS
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 702 $ 9,323
Accounts receivable................................ 45,164 45,139
Inventories........................................ 29,681 29,207
Prepaid expenses................................... 74 1,669
-------------- --------------
Total current assets............................. 75,621 85,338
Property, plant, and equipment, net................... 191,596 196,877
Due from affiliates................................... 127,150 121,506
Other assets.......................................... 46,586 51,354
-------------- --------------
Total assets..................................... $ 440,953 $ 455,075
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................... $ 25,799 $ 22,399
Accrued liabilities................................ 13,241 16,515
-------------- --------------
Total current liabilities........................ 39,040 38,914
Long-term debt due to Parent.......................... 325,405 325,402
Deferred tax liability................................ 7,312 7,272
Deferred credits and other liabilities................ 8,254 7,227
Commitments and contingencies (Note 4)................ -- --
Stockholder's equity:
Common stock....................................... -- --
Additional paid-in capital......................... 92,734 92,734
Retained earnings (accumulated deficit)............ (5,108) 11,026
Accumulated other comprehensive income............. (26,684) (27,500)
-------------- --------------
Total stockholder's equity....................... 60,942 76,260
-------------- --------------
Total liabilities and stockholder's equity.... $ 440,953 $ 455,075
============== ==============
</TABLE>
The accompanying notes are an integral part of the
combined financial statements.
16
<PAGE> 17
STERLING CHEMICALS GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues........................................ $ 62,487 $ 51,859 $ 118,832 $ 105,504
Cost of goods sold.............................. 53,957 44,534 102,978 89,778
------------- ------------- ------------- -------------
Gross profit.................................... 8,530 7,325 15,854 15,726
Selling, general, and administrative expenses... 5,756 4,232 11,093 9,800
Other income.................................... -- (818) -- (818)
Interest and debt related expenses.............. 9,968 8,787 19,987 17,275
------------- ------------- ------------- -------------
Net loss before income taxes.................... (7,194) (4,876) (15,226) (10,531)
Provision (benefit) for income taxes............ 321 (1,219) 908 (3,283)
------------- ------------- ------------- -------------
Net loss........................................ $ (7,515) $ (3,657) $ (16,134) $ (7,248)
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the
combined financial statements.
17
<PAGE> 18
STERLING CHEMICALS GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................................................... $ (16,134) $ (7,248)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization................................................. 12,289 11,932
Deferred tax expense (benefit)................................................ 40 (484)
Other......................................................................... 46 15
Change in assets/liabilities:
Accounts receivable............................................................ (25) 2,337
Inventories.................................................................... (474) 244
Prepaid expenses............................................................... 12,674 (1,982)
Due from affiliates............................................................ (4,828) 1,411
Other assets................................................................... (10,217) 4,518
Accounts payable............................................................... 3,400 (4,266)
Accrued liabilities............................................................ (3,278) (1,108)
Other liabilities.............................................................. 1,027 (512)
------------ ------------
Net cash flows provided by (used in) operating activities........................... (5,480) 4,857
------------ ------------
Cash flows used in investing activities:
Capital expenditures............................................................. (3,102) (3,170)
------------ ------------
Cash flows provided by (used in) financing activities:
Net change in long-term debt due to Parent....................................... 3 (2,815)
------------ ------------
Effect of United States/Canadian exchange rate on cash.............................. (42) (15)
------------ ------------
Net decrease in cash and cash equivalents........................................... (8,621) (1,143)
Cash and cash equivalents--beginning of year........................................ 9,323 4,093
------------ ------------
Cash and cash equivalents--end of period............................................ $ 702 $ 2,950
============ ============
</TABLE>
The accompanying notes are an integral part of the
combined financial statements.
18
<PAGE> 19
STERLING CHEMICALS GUARANTORS
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
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 12 3/8% Senior Secured Notes due 2006.
On November 5, 1999, Chemicals completed a registered exchange offer, pursuant
to which all of these 12 3/8% Notes were exchanged for publicly registered
12 3/8% Notes with substantially similar terms. The 12 3/8% 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 subsidiaries. These subsidiaries consist of Sterling Canada,
Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling
Chemicals Energy, Inc., Sterling Chemicals International, Inc., and Sterling
Fibers, Inc. and, together with two Canadian subsidiaries of Sterling Canada,
Inc., are collectively referred to as the "Guarantors". The financial statements
of the Guarantors (except for Sterling Chemicals Energy, Inc., whose securities
do not constitute a substantial portion of the collateral) have been combined to
produce the accompanying financial statements.
The Guarantors manufacture chemicals for use primarily in the pulp and
paper industry at four plants in Canada and a plant in Valdosta, Georgia, and
manufacture 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 Guarantors also
license, engineer, and oversee construction of large-scale chlorine dioxide
generators for the pulp and paper industry as part of their pulp chemicals
business. These generators convert sodium chlorate into chlorine dioxide at pulp
mills. The Guarantors produce regular textiles, specialty textiles, and
technical fibers at the Santa Rosa plant, as well as licensing their 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 Guarantors as of March 31, 2000, and its combined
results of operations and cash flows for the three month and six month periods
ended March 31, 2000 and March 31, 1999, 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 Guarantors 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 Guarantors' audited combined balance sheet as
of September 30, 1999 included in the Annual Report.
The Guarantors' total comprehensive net loss for the six month periods
ended March 31, 2000 and March 31, 1999 were $15,318,000 and $5,965,000,
respectively.
2. INVENTORIES
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
--------------- --------------
(Dollars in Thousands)
<S> <C> <C>
Inventories consisted of the following:
Finished products........................................ $ 18,258 $ 17,513
Raw materials............................................ 1,827 2,235
Inventories under exchange agreements.................... 444 170
Stores and supplies...................................... 9,152 9,289
---------- --------------
$ 29,681 $ 29,207
========== ==============
</TABLE>
19
<PAGE> 20
3. LONG-TERM DEBT
As of each of March 31, 2000 and September 30, 1999, debt allocated to the
Guarantors by Chemicals was $325.4 million. At March 31, 2000, interest rates on
this debt ranged from 11.25% to 12.375%.
4. COMMITMENTS AND CONTINGENCIES
Environmental Regulations
The Guarantors' 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,
health and safety laws, regulations, and permit requirements. Environmental
permits required for the Guarantors' 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 Guarantors' products and the raw materials used to produce such
products and, if so affected, the Guarantors' business and operations may be
materially and adversely affected. In addition, changes in environmental
requirements can cause the Guarantors to incur substantial costs in upgrading or
redesigning their facilities and processes, including waste treatment, storage,
disposal, and other waste handling practices and equipment.
While the Guarantors believe that their business operations and facilities
generally are operated in compliance in all material respects with all
applicable environmental, 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 Guarantors, as it is with other
companies engaged in similar businesses. In addition, a catastrophic event at
any of the Guarantors' facilities could result in liabilities to the Guarantors
substantially in excess of their insurance coverages.
Any significant ban on chlorine containing compounds could have a
materially adverse effect on the Guarantors' 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 Guarantors' 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 Guarantors would
seek to sell the products they manufacture at the British Columbia facility to
customers in other markets. The Guarantors are not aware of any other laws or
regulations in place in North America which would restrict the use of such
products for other purposes.
The Guarantors' pulp chemicals business is sensitive to environmental
regulations. Regulations restricting, but not altogether banning, absorbable
organic halides and other chlorine derivatives in bleach plant effluent have a
favorable effect on their pulp chemicals business. Several pending lawsuits are
challenging an important group of these regulations known as the "Cluster
Rules." Although the Guarantors believe that the Cluster Rules will ultimately
be upheld in this litigation, they cannot be sure that they will. Even if the
Cluster Rules are upheld, the existence of these actions adds uncertainty as to
the rate of implementation of the Cluster Rules, which may negatively affect the
performance of the Guarantors' pulp chemicals business.
20
<PAGE> 21
Legal Proceedings
The Guarantors are subject to various claims and legal actions that arise
in the ordinary course of business. The Guarantors believe that the ultimate
liability, if any, with respect to these claims and legal actions will not have
a material adverse impact on their financial position or results of operations.
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. The
Guarantors are 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
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
Sterling Canada, Inc.
Sterling Fibers, Inc.
Sterling Chemicals International, Inc.
Sterling Pulp Chemicals US, Inc.
Sterling Pulp Chemicals, Inc.
We have reviewed the accompanying combined balance sheet of the Guarantors (as
defined in Note 1) as of March 31, 2000, and the related combined statements of
operations and cash flows for the three month and six month periods ended March
31, 2000 and 1999. These financial statements are the responsibility of the
Guarantors' 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 auditing standards generally accepted in the United States of America, 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 combined financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the combined balance sheet of the
Guarantors as of September 30, 1999, and the related combined statements of
operations, stockholder's equity, 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 combined financial statements. In our opinion, the
information set forth in the accompanying combined balance sheet as of September
30, 1999 is fairly stated, in all material respects, in relation to the combined
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Houston, Texas
May 11, 2000
22
<PAGE> 23
STERLING PULP CHEMICALS, LTD.
BALANCE SHEETS
(AMOUNTS IN U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 269 $ 8,481
Accounts receivable............................. 16,324 16,840
Due from related parties........................ 1,208 1,369
Other receivables............................... 1,324 2,254
Inventories..................................... 5,977 5,146
Prepaid expenses................................ 469 633
--------------- ---------------
25,571 34,723
Property, plant, and equipment, net.................. 73,584 75,531
Other assets......................................... 184 440
--------------- ---------------
Total assets.................................... $ 99,339 $ 110,694
=============== ===============
LIABILITIES AND STOCKHOLDER'S EQUIITY
Current liabilities:
Accounts payable................................ $ 8,939 $ 8,978
Accrued generator construction costs............ 2,667 2,967
Accrued liabilities............................. 6,731 7,093
Due to related parties.......................... 2,565 1,241
--------------- ---------------
20,902 20,279
Note payable ........................................ 57,332 56,667
Deferred tax liability............................... 7,312 7,272
Deferred credits and other liabilities............... 4,473 3,972
Commitments and contingencies (Note 4)............... -- --
Stockholder's equity:
Common stock.................................... 1 1
Additional paid-in capital...................... 7,662 16,871
Retained earnings............................... 10,385 14,470
Accumulated other comprehensive income.......... (8,728) (8,838)
--------------- ---------------
Total stockholder's equity................... 9,320 22,504
--------------- ---------------
Total liabilities and stockholder's equity... $ 99,339 $ 110,694
=============== ===============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
23
<PAGE> 24
STERLING PULP CHEMICALS, LTD.
STATEMENTS OF OPERATIONS
(AMOUNTS IN U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- -----------------------
2000 1999 2000 1999
-------------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue......................................... $ 31,499 $ 24,903 $ 59,939 $ 51,556
Cost of goods sold.............................. 26,615 22,137 50,223 44,605
----------- ---------- ----------- ----------
Gross profit.................................... 4,884 2,766 9,716 6,951
Selling, general, and administrative expenses... 2,691 891 4,923 3,188
Interest and debt related expenses, net......... 1,194 1,422 2,297 2,786
----------- ---------- ----------- ----------
Income before income taxes...................... 999 453 2,496 977
Provision for income taxes...................... 321 212 902 415
----------- ----------- ----------- -----------
Net income...................................... $ 678 $ 241 $ 1,594 $ 562
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
24
<PAGE> 25
STERLING PULP CHEMICALS, LTD.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
------------------------
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................................... $ 1,594 $ 562
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.............................................. 4,105 3,791
Deferred benefit........................................................... (53) (484)
Other...................................................................... (6) 14
Changes in assets/liabilities:
Accounts receivable........................................................ 919 (77)
Due from related parties................................................... (75) 15
Other receivables.......................................................... 932 10
Inventories................................................................ (760) (62)
Prepaid expenses........................................................... 167 (92)
Other assets............................................................... 258 3,427
Accounts payables.......................................................... (131) 644
Accrued generator construction costs....................................... (353) (954)
Other accrued liabilities.................................................. (427) (3,884)
Due to related parties..................................................... 1,274 2,630
Other liabilities.......................................................... 467 371
------------ ------------
Net cash provided by operating activities............................................ 7,911 5,911
------------ ------------
Cash flows from investing activities:
Capital expenditures............................................................ (1,307) (1,369)
------------ ------------
Cash flows from financing activities:
Distribution to parent.......................................................... (9,209) --
Dividends....................................................................... (5,679) (5,114)
------------ ------------
Net cash used in financing activities................................................ (14,888) (5,114)
------------ ------------
Effect of exchange rate on cash...................................................... 72 69
------------ ------------
Net decrease in cash and cash equivalents............................................ (8,212) (503)
Cash and cash equivalents, beginning of period....................................... 8,481 3,426
------------ ------------
Cash and cash equivalents, end of period............................................. $ 269 $ 2,923
============ ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
25
<PAGE> 26
STERLING PULP CHEMICALS, LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Sterling Pulp Chemicals, Ltd. ("Sterling Pulp") is a Canadian company which
operates four pulp chemicals 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. Sterling Pulp
also oversees construction of large-scale chlorine dioxide generators for the
pulp and paper industry. Sterling Pulp is a wholly-owned subsidiary of Sterling
Canada, Inc. ("Sterling Canada"), which is a wholly-owned subsidiary of Sterling
Chemicals, Inc. ("Chemicals"), a wholly owned subsidiary of Sterling Chemicals
Holdings, Inc. ("Holdings").
In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments necessary to present fairly the financial
position of Sterling Pulp as of March 31, 2000, and its results of operations
and cash flows for the three month and six month periods ended March 31, 2000
and March 31, 1999, 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 Sterling Pulp'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 Sterling Pulp's
audited balance sheet as of September 30, 1999 included in the Annual Report.
Sterling Pulp's total comprehensive net income for the six month periods
ended March 31, 2000 and March 31, 1999 was $1,704,000 and $347,000,
respectively.
2. INVENTORIES
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
------------- --------------
(U.S. Dollars in Thousands)
<S> <C> <C>
Inventories consisted of the following:
Finished products.......................... $ 2,525 $ 1,872
Raw materials.............................. 220 209
Inventories under exchange agreements...... 394 77
Stores and supplies........................ 2,838 2,988
------------- --------------
$ 5,977 $ 5,146
============= ==============
</TABLE>
3. LONG-TERM DEBT
On August 20, 1992, Sterling Pulp entered into a $109,087,000 intercompany
demand note facility with Sterling NRO, Ltd. ("Sterling NRO"), of which
$57,332,000 was outstanding at March 31, 2000. Sterling NRO is also owned by
Sterling Canada and is therefore related to Sterling Pulp 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 Sterling Canada has represented that no repayments will be made before
April 1, 2001.
26
<PAGE> 27
4. COMMITMENTS AND CONTINGENCIES
Environmental and Safety Matters
Sterling Pulp'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,
health and safety laws, regulations, and permit requirements. Environmental
permits required for Sterling Pulp'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 Sterling Pulp's products and the raw materials used to produce such
products and, if so affected, Sterling Pulp's business and operations may be
materially and adversely affected. In addition, changes in environmental
requirements can cause Sterling Pulp 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 Sterling Pulp believes that its business operations and facilities
generally are operated in compliance in all material respects with all
applicable environmental, 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 Sterling Pulp, as it is with other
companies engaged in similar businesses. In addition, a catastrophic event at
any of Sterling Pulp's facilities could result in liabilities to Sterling Pulp
substantially in excess of its insurance coverages.
Any significant ban on chlorine containing compounds could have a
materially adverse effect on Sterling Pulp'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 Sterling Pulp'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, Sterling Pulp would seek
to sell the products it manufactures at its British Columbia facility to
customers in other markets. Sterling Pulp 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.
Sterling Pulp's business is sensitive to environmental regulations.
Regulations restricting, but not altogether banning, absorbable organic halides
and other chlorine derivatives in bleach plant effluent have a favorable effect
on Sterling Pulp. Several pending lawsuits are challenging an important group of
these regulations known as the "Cluster Rules." Although Sterling Pulp believes
that the Cluster Rules will ultimately be upheld in this litigation, it cannot
be sure that they will. Even if the Cluster Rules are upheld, the existence of
these actions adds uncertainty as to the rate of implementation of the Cluster
Rules, which may negatively affect the performance of Sterling Pulp.
Legal Proceedings
Sterling Pulp is subject to claims and legal actions that arise in the
ordinary course of its business. Sterling Pulp believes that the ultimate
liability, if any, with respect to these claims and legal actions will not have
a material adverse impact on its financial position or results of operations.
Pledge of Common Stock
Sterling Canada has pledged 65% of Sterling Pulp's common stock to secure
its guarantee of $295,000,000 of Chemicals' 12 3/8% Senior Secured Notes due
2006.
27
<PAGE> 28
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.
28
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
Sterling Pulp Chemicals, Ltd.
We have reviewed the accompanying balance sheet of Sterling Pulp Chemicals, Ltd.
("Sterling Pulp") as of March 31, 2000, and the related statements of operations
and cash flows for the three-month and six-month periods ended March 31, 2000
and 1999. These financial statements are the responsibility of Sterling Pulp'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 auditing standards generally accepted in the United States of America, 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 financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet of Sterling Pulp as
of September 30, 1999, and the related statements of operations, stockholder's
equity, 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
financial statements. In our opinion, the information set forth in the
accompanying balance sheet as of September 30, 1999 is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
DELOITTE & TOUCHE LLP
Chartered Accountants
Mississauga, Canada
May 11, 2000
29
<PAGE> 30
STERLING CHEMICALS ENERGY, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ -- $ --
Accounts receivable................................ 68 101
-------------- --------------
Total current assets............................. 68 101
Property, plant, and equipment, net................... 4,438 4,815
Due from affiliates................................... 25,590 24,721
Investment in joint venture........................... 3,733 3,539
--------------
--------------
Total assets..................................... $ 33,829 $ 33,176
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................... $ 3,124 $ 1,535
-------------- --------------
Total current liabilities........................ 3,124 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 ................................. 4,770 5,706
-------------- --------------
Total stockholder's equity....................... 4,771 5,707
-------------- --------------
Total liabilities and stockholder's equity.... $ 33,829 $ 33,176
============== ==============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
30
<PAGE> 31
STERLING CHEMICALS ENERGY, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues........................................ $ 548 $ 387 $ 1,075 $ 826
Cost of goods sold.............................. 548 387 1,075 826
------------- ------------- ------------- -------------
Gross profit.................................... -- -- -- --
Interest and debt related expenses.............. 787 664 1,573 1,328
------------- ------------- ------------- -------------
Net loss before income taxes.................... (787) (664) (1,573) (1,328)
Benefit for income taxes........................ -- 114 -- 300
Equity in earnings of joint venture............. 420 572 637 1,162
------------- ------------- ------------- -------------
Net income (loss)............................... $ (367) $ 22 $ (936) $ 134
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
31
<PAGE> 32
STERLING CHEMICALS ENERGY, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................... $ (936) $ 134
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization..................................................... 349 349
Undistributed earnings from joint venture......................................... (90) (85)
Change in assets/liabilities:
Accounts receivable............................................................... 33 5
Due from affiliates............................................................... (869) (598)
Other assets...................................................................... (76) (111)
Accounts payable.................................................................. 1,589 306
------------ -----------
Net cash flows from operating activities............................................... -- --
------------ -----------
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.
32
<PAGE> 33
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 12 3/8% Senior Secured Notes due 2006. On November 5, 1999, Chemicals
completed a registered exchange offer, pursuant to which all of these 12 3/8%
Notes were exchanged for publicly registered 12 3/8% Notes with substantially
similar terms (the "12 3/8% Notes"). The 12 3/8% 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 March 31, 2000, and its results of operations and cash
flows for the three month and six month periods ended March 31, 2000, and March
31, 1999, 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 six month periods
ended March 31, 2000 and March 31, 1999 were $(936,000) and $134,000,
respectively.
2. LONG-TERM DEBT
As of March 31, 2000 and September 30, 1999, debt allocated to Energy by
Chemicals was $25.9 million. As of March 31, 2000, 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.
33
<PAGE> 34
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 and six-month periods
ended March 31, 2000 and 1999. Summarized financial information reported by
S & L Cogeneration Company for such periods is (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------ ------------------------------
2000 1999 2000 1999
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues........................................ $ 11,080 $ 10,103 $ 5,393 $ 4,663
Net income...................................... 1,245 2,971 524 1,503
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
-------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total assets.................................... $ 17,070 $ 17,659
</TABLE>
5. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and No. 133, "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.
34
<PAGE> 35
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)
35
