<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 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)
<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 July 31, 2000 Sterling Chemicals Holdings, Inc. had 12,748,757 shares
of common stock outstanding. As of July 31, 2000, all outstanding equity
securities of Sterling Chemicals, Inc. were owned by Sterling Chemicals
Holdings, Inc.
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<PAGE> 2
IMPORTANT INFORMATION REGARDING THIS FORM 10-Q
Readers should consider the following information as they review this Form 10-Q.
PRESENTATION OF FINANCIAL STATEMENTS
This Form 10-Q includes two separate sets of financial statements and
related notes:
o The first set of financial statements and related notes present both
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. Holdings directly or indirectly owns all of the other
subsidiaries whose financial results are included in this Form 10-Q
and Chemicals is the primary operating subsidiary of Holdings.
o The second set of financial statements and related notes present the
combined financial position of the Guarantors and their subsidiaries
(discussed below).
Under SEC rules, specified financial information is required to be provided with
respect to subsidiaries of an issuer of debt securities that guarantee the
repayment of those debt securities. In addition, under different provisions of
those rules, specified financial information is required to be provided with
respect to subsidiaries of an issuer of debt securities whose capital stock is
pledged to secure the repayment of those debt securities. In July of 1999,
Chemicals issued $295 million of its 123/8% Senior Secured Notes due 2006. The
obligations of Chemicals related to the 123/8% Notes were guaranteed by most of
its subsidiaries incorporated in the United States (the "Guarantors"). In
addition, all of the capital stock of each of the Guarantors was pledged to
secure the repayment of the 123/8% Notes. Finally, 65% of the capital stock of
three of Chemicals' subsidiaries incorporated outside of the United States was
pledged to secure the repayment of the 123/8% Notes, but these subsidiaries did
not guarantee the repayment of the 123/8% Notes. In order to comply with these
SEC rules, the combined financial statements and related notes of the Guarantors
and their subsidiaries described above are included with this Form 10-Q.
FORWARD-LOOKING STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this Form 10-Q, including without limitation the statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding the cyclicality of our industry, current and future
industry conditions, the potential effects of such matters on our business
strategy, results of operations, and financial position, and our market
sensitive financial instruments, are forward-looking statements. The
forward-looking statements are based upon current information and expectations.
Estimates, forecasts and other statements contained in or implied by the
forward-looking statements speak only as of the date on which they are made, are
not guarantees of future performance and involve certain risks, uncertainties
and assumptions that are difficult to evaluate and predict. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, no assurances can be given that such expectations will prove to have
been correct. Certain important factors that could cause actual results to
differ materially from our expectations or what is expressed, implied or
forecasted by or in the forward-looking statements include the timing and extent
of changes in commodity prices and global economic conditions, industry
production capacity and operating rates, the supply-demand balance for our
products, competitive products and pricing pressures, increases in raw material
costs, federal and state regulatory developments, our high financial leverage,
the availability of skilled personnel and operating hazards attendant to the
industry. Additional factors that could cause actual results to differ
materially from our expectations or what is expressed, implied, or forecasted by
or in the forward-looking statements are stated herein in cautionary statements
made in conjunction with the forward-looking statements or are included
elsewhere in this Form 10-Q or Holdings' and Chemicals' combined Annual Report
on Form 10-K for the fiscal year ended September 30, 1999 (the "Annual Report").
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Known Events, Trends, Uncertainties, and Risk Factors"
contained in the Annual Report. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by these cautionary statements.
SUBSEQUENT EVENTS, ETC.
All statements contained in this Form 10-Q, including the forward-looking
statements discussed above, are made as of August 14, 2000, unless those
statements are expressly made as of another date. We disclaim any responsibility
for the correctness of any information contained in this Form 10-Q to the extent
such information is affected or impacted by events, circumstances, or
developments occurring after August 14, 2000, or by the passage of time after
such date and, except as required by applicable securities laws, we do not
intend to update such information.
2
<PAGE> 3
DOCUMENT SUMMARIES
Statements contained in this Form 10-Q describing documents and agreements
are provided in summary form only and such summaries are qualified in their
entirety by reference to the actual documents and agreements filed as exhibits
to the Annual Report or any Form 10-Qs filed subsequent to the Annual Report.
FISCAL YEAR
We keep our books of record and accounts based on annual accounting periods
ending on September 30 of each year. Accordingly, all references in this Form
10-Q to a particular fiscal year refer to the twelve calendar month period
ending on September 30 of that year.
This combined Form 10-Q is separately filed by Holdings and Chemicals.
Information contained herein relating to Chemicals is filed by Holdings and
separately by Chemicals on its own behalf. Unless otherwise indicated, Holdings
and its subsidiaries, including Chemicals, are collectively referred to as "we",
"our", "ours", and "us."
PART I.--FINANCIAL INFORMATION
ITEM 1.--FINANCIAL STATEMENTS
3
<PAGE> 4
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
---------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................................... $ 14,603 $ 14,921
Accounts receivable ................................................................. 172,920 141,059
Inventories ......................................................................... 87,916 70,464
Prepaid expenses .................................................................... 1,288 5,157
Deferred tax asset .................................................................. 16,888 16,888
--------- ---------
Total current assets .............................................................. 293,615 248,489
Property, plant, and equipment, net .................................................... 386,692 402,723
Deferred tax asset ..................................................................... 37,631 37,237
Other assets ........................................................................... 79,396 86,650
--------- ---------
Total assets ...................................................................... $ 797,334 $ 775,099
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable .................................................................... $ 94,496 $ 72,961
Accrued liabilities ................................................................. 88,009 79,883
Current portion of long-term debt ................................................... 2,607 4,246
--------- ---------
Total current liabilities ......................................................... 185,112 157,090
Long-term debt ......................................................................... 964,549 964,555
Deferred tax liability ................................................................. 7,163 8,815
Deferred credits and other liabilities ................................................. 79,416 76,893
Common stock held by ESOP .............................................................. 3,519 2,946
Less: unearned compensation ........................................................... (244) (745)
Redeemable preferred stock ............................................................. 23,140 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 12,094,000 outstanding at June 30, 2000; 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 ................................................................... 109,365 118,490
Accumulated other comprehensive income .............................................. (29,605) (28,768)
Deferred compensation ............................................................... (16) (58)
--------- ---------
(462,845) (452,925)
Treasury stock, at cost, 211,000 and 208,000 shares at June 30, 2000 and
September 30, 1999, respectively .................................................. (2,476) (2,462)
--------- ---------
Total stockholders' equity (deficiency in assets) ............................... (465,321) (455,387)
--------- ---------
Total liabilities and stockholders' equity (deficiency in assets) ............. $ 797,334 $ 775,099
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE> 5
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues ......................................................... $ 293,048 $ 181,789 $ 804,796 $ 506,190
Cost of goods sold ............................................... 249,525 169,591 686,351 472,963
--------- --------- --------- ---------
Gross profit ..................................................... 43,523 12,198 118,445 33,227
Selling, general, and administrative expenses .................... 10,846 9,137 30,312 27,594
Other expense .................................................... -- 1,733 -- 10,809
Interest and debt related expenses, net of interest income ....... 31,297 24,760 91,528 74,711
--------- --------- --------- ---------
Income (loss) before income taxes ................................ 1,380 (23,432) (3,395) (79,887)
Provision (benefit) for income taxes ............................. 805 (7,017) 3,091 (25,552)
--------- --------- --------- ---------
Net income (loss) ................................................ 575 (16,415) (6,486) (54,335)
Preferred stock dividends ........................................ 751 672 2,208 1,975
--------- --------- --------- ---------
Net loss attributable to common stockholders ..................... $ (176) $ (17,087) $ (8,694) $ (56,310)
========= ========= ========= =========
Net loss per common share ........................................ $ (0.05) $ (1.37) $ (0.72) $ (4.43)
========= ========= ========= =========
Weighted average shares outstanding .............................. 12,690 12,516 12,651 12,469
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE> 6
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
--------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (6,486) $ (54,335)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ........................ 44,042 42,375
Interest amortization ................................ 4,364 1,781
Deferred tax benefit ................................. (1,531) (19,198)
Discount notes amortization .......................... 16,125 13,738
Early retirement programs and benefit changes ........ -- 6,782
Other ................................................ 328 1,089
Change in assets/liabilities:
Accounts receivable .................................. (32,223) (2,604)
Inventories .......................................... (17,536) (5,195)
Prepaid expenses ..................................... 3,854 (4,896)
Other assets ......................................... (8,169) (12,553)
Accounts payable ..................................... 22,894 31,747
Accrued liabilities .................................. 8,126 (16,616)
Other liabilities .................................... 5,996 6,366
--------- ---------
Net cash provided by (used in) operating activities ......... 39,784 (11,519)
--------- ---------
Cash flows from investing activities:
Capital expenditures .................................... (22,131) (17,836)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt ............................ 662,755 220,769
Repayment of long-term debt ............................. (680,695) (196,412)
Other ................................................... (14) (58)
--------- ---------
Net cash provided by (used in) financing activities .......... (17,954) 24,299
--------- ---------
Effect of United States /Canadian exchange rate on cash ...... (17) 215
--------- ---------
Net decrease in cash and cash equivalents .................... (318) (4,841)
Cash and cash equivalents - beginning of year ................ 14,921 11,168
--------- ---------
Cash and cash equivalents - end of period .................... $ 14,603 $ 6,327
========= =========
Supplement disclosures of cash flow information:
Interest paid, net of interest income received .......... $ (59,135) $ (56,534)
Income taxes (paid) refunded ............................ (1,409) 5,042
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
6
<PAGE> 7
STERLING CHEMICALS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
--------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 14,576 $ 14,899
Accounts receivable ............................................. 175,625 143,556
Inventories ..................................................... 87,916 70,464
Prepaid expenses ................................................ -- 3,980
Deferred tax asset .............................................. 16,888 16,888
--------- ---------
Total current assets .......................................... 295,005 249,787
Property, plant, and equipment, net ................................ 386,692 402,723
Deferred tax asset ................................................. 19,361 19,463
Other assets ....................................................... 73,938 80,133
--------- ---------
Total assets .................................................. $ 774,996 $ 752,106
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable ................................................ $ 94,496 $ 72,731
Accrued liabilities ............................................. 88,089 79,883
Current portion of long-term debt ............................... 2,607 4,246
--------- ---------
Total current liabilities ..................................... 185,192 156,860
Long-term debt ..................................................... 800,332 816,927
Deferred tax liability ............................................. 7,163 8,815
Deferred credits and other liabilities ............................. 79,416 76,893
Common stock held by ESOP .......................................... 3,519 2,946
Less: unearned compensation ....................................... (244) (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 ............................................. (130,975) (140,978)
Accumulated other comprehensive income .......................... (29,605) (28,768)
Deferred compensation ........................................... (16) (58)
--------- ---------
Total stockholder's equity (deficiency in assets) ............. (300,382) (309,590)
--------- ---------
Total liabilities and stockholder's equity (deficiency in assets) $ 774,996 $ 752,106
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
7
<PAGE> 8
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2000 1999 2000 1999
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Revenues .................................................. $293,048 $ 181,789 $804,796 $ 506,190
Cost of goods sold ........................................ 249,525 169,591 686,351 472,963
-------- --------- -------- ---------
Gross profit .............................................. 43,523 12,198 118,445 33,227
Selling, general, and administrative expenses ............. 10,767 9,034 30,103 27,235
Other expense ............................................. -- 1,733 -- 10,809
Interest and debt related expenses, net of interest income 25,506 19,640 74,810 59,881
-------- --------- -------- ---------
Income (loss) before income taxes ......................... 7,250 (18,209) 13,532 (64,698)
Provision (benefit) for income taxes ...................... 805 (5,814) 3,091 (20,694)
-------- --------- -------- ---------
Net income (loss) ......................................... $ 6,445 $ (12,395) $ 10,441 $ (44,004)
======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
8
<PAGE> 9
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
--------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................ $ 10,441 $ (44,004)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization ................. 44,042 42,375
Interest amortization ......................... 3,999 1,461
Deferred tax benefit .......................... (1,531) (19,198)
Early retirement programs and benefit changes . -- 6,782
Other ......................................... 223 307
Change in assets/liabilities:
Accounts receivable ........................... (32,278) 188
Inventories ................................... (17,536) (5,195)
Prepaid expenses .............................. 4,049 (4,662)
Other assets .................................. (8,364) (7,928)
Accounts payable .............................. 22,660 28,612
Accrued liabilities ........................... 8,206 (16,616)
Other liabilities ............................. 5,868 6,348
--------- ---------
Net cash provided by (used in) operating activities ... 39,779 (11,530)
--------- ---------
Cash flows from investing activities:
Capital expenditures ............................... (22,131) (17,836)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt ....................... 662,755 220,769
Repayment of long-term debt ........................ (680,695) (196,412)
Other .............................................. (14) (58)
--------- ---------
Net cash provided by (used in) financing activities .. (17,954) 24,299
--------- ---------
Effect of United States /Canadian exchange rate on cash (17) 215
--------- ---------
Net decrease in cash and cash equivalents ............. (323) (4,852)
Cash and cash equivalents - beginning of year ......... 14,899 11,159
--------- ---------
Cash and cash equivalents - end of period ............. $ 14,576 $ 6,307
========= =========
Supplement disclosures of cash flow information:
Interest paid, net of interest income received ..... $ (59,140) $ (56,545)
Income taxes (paid) refunded ....................... (1,409) 5,042
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
9
<PAGE> 10
STERLING CHEMICALS HOLDINGS, INC.
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In 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 June 30, 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 nine month periods ended June 30, 2000
and June 30, 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
nine month period ended June 30, 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).
Holdings 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 JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2000 1999 2000 1999
-------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Revenues:
Petrochemicals ....... $239,258 $ 133,478 $647,728 $ 366,235
Pulp chemicals ....... 53,790 48,311 157,068 139,955
-------- --------- -------- ---------
Total ................... $293,048 $ 181,789 $804,796 $ 506,190
======== ========= ======== =========
Operating income (loss):
Petrochemicals ....... $ 23,267 $ (4,789) $ 62,768 $ (26,189)
Pulp chemicals ....... 9,410 6,117 25,365 21,013
-------- --------- -------- ---------
Total ................... $ 32,677 $ 1,328 $ 88,133 $ (5,176)
======== ========= ======== =========
</TABLE>
Holdings' total comprehensive net income (loss) for the nine month periods
ended June 30, 2000 and June 30, 1999 were $(7,323,000) and $(49,828,000),
respectively. The total comprehensive net income (loss) of Chemicals and its
subsidiaries for the nine month periods ended June 30, 2000 and June 30, 1999
were $9,604,000 and $(39,497,000), respectively.
10
<PAGE> 11
2. INVENTORIES
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
-------- -------------
(Dollars in Thousands)
<S> <C> <C>
Inventories consisted of the following:
Finished products ............................... $50,061 $37,484
Raw materials ................................... 11,423 10,355
Inventories under exchange agreements ........... 7,062 2,562
Stores and supplies ............................. 19,370 20,063
------- -------
$87,916 $70,464
======= =======
</TABLE>
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
--------- -------------
(Dollars in Thousands)
<S> <C> <C>
Long-term debt consisted of the following :
Revolving credit facilities ..................... $ 40,298 $ 54,643
Saskatoon term loans ............................ 40,404 44,045
11-1/4% Notes ................................... 152,237 152,485
11-3/4% Notes ................................... 275,000 275,000
12-3/8% Notes ................................... 295,000 295,000
--------- ---------
Total Chemicals' debt outstanding .......... 802,939 821,173
13-1/2% Notes ................................... 164,217 147,628
--------- ---------
Total Holdings' debt outstanding ........ 967,156 968,801
Less:
Current maturities ......................... (2,607) (4,246)
--------- ---------
Total long-term debt ............................ $ 964,549 $ 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, sodium
cyanide, and methanol, each to one customer. We also have various sales and
conversion agreements that dedicate significant portions of our production of
styrene and acrylonitrile to certain customers. Some of these agreements provide
for cost recovery plus an agreed profit margin based upon market prices.
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.
11
<PAGE> 12
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 280 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 relating to
these lawsuits, including settlement payments and judgments, 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 nine lawsuits
listed below and five interventions, involving a total of approximately 1,561
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
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. JC5000305; In
Precinct No. 5 Justice Court of Galveston County, Texas
o Joe L. Kimble, et al. v. Sterling Chemicals, Inc., et al.: Case No.
00-CV0333; In the 56th Judicial District Court of Galveston County,
Texas
o Clyde Shade v. Sterling Chemicals Inc., et al,: Case No. 00-CV0328; In
the 10th Judicial District 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.
Jeffords Incident. On June 26, 2000, Mr. William Jeffords IV, an
independent contractor employed by Kellogg, Brown and Root, was fatally injured
while operating a manlift at our Texas City plant. No claims have been made
against us arising out of this incident, although we have been contacted by
several attorneys claiming to represent the Jeffords family. We do not believe
that we have any liability related to this incident, although we cannot give any
assurances to that effect. In the event that any claim is made against us by the
Jeffords family, we believe that all or substantially all out-of-pocket costs
and expenses related to that claim would be covered by indemnification from
Kellogg, Brown and Root and our liability insurance policies. We do not believe
that any claim or litigation arising out of this incident will have a material
adverse effect on us, although we cannot give any assurance 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
12
<PAGE> 13
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 judgment, our
understanding of our insurance policies and indemnification arrangements,
discussions with our insurers and indemnitors, and consultation with outside
legal counsel. Based on the foregoing, as of June 30, 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 June 30, 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, although we cannot give any assurances to that effect. 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 loss per common share, net loss has been
impacted 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 impact in net loss is made because we are
obligated, under certain circumstances, to purchase any shares of Holdings'
common stock distributed by the ESOP to participants under the plan from those
participants. The weighted average number of outstanding shares of common stock
of Holdings and the computation of the net loss per common share are as follows
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders .... $ (176) $(17,087) $ (8,694) $(56,310)
Depreciation (appreciation) in value of Released
Shares ........................................ (431) -- (431) 1,048
-------- -------- -------- --------
Net loss for purpose of computing loss per share $ (607) $(17,087) $ (9,125) $(55,262)
======== ======== ======== ========
Weighted average shares outstanding ............. 12,690 12,516 12,651 12,469
======== ======== ======== ========
Net loss per common share ....................... $ (0.05) $ (1.37) $ (0.72) $ (4.43)
======== ======== ======== ========
</TABLE>
6. NEW ACCOUNTING STANDARDS
Statements 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. We are
currently evaluating the accounting impact and disclosures required when these
statements are 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 June 30, 2000,
and the related consolidated statements of operations and cash flows for the
three-month and nine-month periods ended June 30, 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
August 10, 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 June 30, 2000, and the
related consolidated statements of operations and cash flows for the three-month
and nine-month periods ended June 30, 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
August 10, 2000
15
<PAGE> 16
STERLING CHEMICALS GUARANTORS
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
--------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 476 $ 9,323
Accounts receivable ........................... 48,625 45,240
Inventories ................................... 30,677 29,207
Prepaid expenses .............................. 429 1,669
--------- ---------
Total current assets ........................ 80,207 85,439
Property, plant, and equipment, net .............. 191,306 201,692
Due from affiliates .............................. 168,428 157,882
Other assets ..................................... 32,556 43,814
--------- ---------
Total assets ................................ $ 472,497 $ 488,827
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable .............................. $ 33,821 $ 22,695
Accrued liabilities ........................... 14,205 16,515
--------- ---------
Total current liabilities ................... 48,026 39,210
Long-term debt due to Parent ..................... 351,337 351,337
Deferred tax liability ........................... 7,326 7,272
Deferred credits and other liabilities ........... 8,461 7,227
Commitments and contingencies (Note 4) ........... -- --
Stockholder's equity:
Common stock .................................. -- --
Additional paid-in capital .................... 92,735 92,735
Retained earnings (accumulated deficit) ....... (7,263) 18,546
Accumulated other comprehensive income ........ (28,125) (27,500)
--------- ---------
Total stockholder's equity .................. 57,347 83,781
--------- ---------
Total liabilities and stockholder's equity $ 472,497 $ 488,827
========= =========
</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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -------------------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues ......................................... $ 63,248 $ 47,166 $ 183,155 $ 153,147
Cost of goods sold ............................... 54,477 37,488 158,530 127,743
-------- -------- --------- ---------
Gross profit ..................................... 8,771 9,678 24,625 25,404
Selling, general, and administrative expenses .... 5,969 4,529 17,062 14,329
Other expense .................................... -- 1,500 -- 682
Interest and debt related expenses ............... 10,824 9,525 32,384 28,128
-------- -------- --------- ---------
Net loss before income taxes ..................... (8,022) (5,876) (24,821) (17,735)
Provision (benefit) for income taxes ............. 801 (1,895) 1,709 (5,603)
Equity in (earnings) losses of joint venture ..... (84) (714) (721) (1,811)
-------- -------- --------- ---------
Net loss ......................................... $ (8,739) $ (3,267) $ (25,809) $ (10,321)
======== ======== ========= =========
</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>
NINE MONTHS ENDED
JUNE 30,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................................... $(25,809) $(10,321)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization ............................................... 19,105 18,526
Deferred tax expense ........................................................ 54 320
Other ....................................................................... 54 (151)
Change in assets/liabilities:
Accounts receivable ......................................................... (3,385) (296)
Inventories ................................................................. (1,470) 1,000
Prepaid expenses ............................................................ 1,240 (3,921)
Due from affiliates ......................................................... (11,171) 8,766
Other assets ................................................................ 7,471 1,878
Accounts payable ............................................................ 11,126 (2,467)
Accrued liabilities ......................................................... (2,316) (3,497)
Other liabilities ........................................................... 1,234 (19)
-------- --------
Net cash flows used in operating activities ...................................... (3,867) 9,818
-------- --------
Cash flows used in investing activities:
Capital expenditures .......................................................... (4,932) (5,111)
-------- --------
Cash flows used in financing activities:
Net change in long-term debt due to Parent .................................... -- (6,548)
-------- --------
Effect of United States/Canadian exchange rate on cash ........................... (48) 152
-------- --------
Net decrease in cash and cash equivalents ........................................ (8,847) (1,689)
Cash and cash equivalents--beginning of year ..................................... 9,323 4,093
-------- --------
Cash and cash equivalents--end of period ......................................... $ 476 $ 2,404
======== ========
</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 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 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 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, which convert sodium chlorate into chlorine dioxide, for the pulp
and paper industry. 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 June 30, 2000, and its combined
results of operations and cash flows for the three month and nine month periods
ended June 30, 2000 and June 30, 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 nine month periods
ended June 30, 2000 and June 30, 1999 were $26,434,000 and $6,509,000,
respectively.
2. INVENTORIES
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
-------- -------------
(Dollars in Thousands)
<S> <C> <C>
Inventories consisted of the following:
Finished products ............................... $ 20,069 $17,513
Raw materials ................................... 1,805 2,235
Inventories under exchange agreements ........... (113) 170
Stores and supplies ............................. 8,916 9,289
-------- -------
$ 30,677 $29,207
======== =======
</TABLE>
3. LONG-TERM DEBT
As of each of June 30, 2000 and September 30, 1999, debt allocated to the
Guarantors by Chemicals was $351.3 million. At June 30, 2000, interest rates on
this debt ranged from 11.25% to 12.375%.
19
<PAGE> 20
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.
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
Statements 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," 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 these statements are adopted in the first quarter of
fiscal 2001.
20
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Sterling Canada, Inc.
Sterling Chemicals Energy, Inc.
Sterling Chemicals International, Inc.
Sterling Fibers, Inc.
Sterling Pulp Chemicals, Inc.
Sterling Pulp Chemicals US, Inc.
We have reviewed the accompanying combined balance sheet of the Guarantors (as
defined in Note 1) as of June 30, 2000, and the related combined statements of
operations and cash flows for the three-month and nine-month periods ended June
30, 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
August 10, 2000
21
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a holding company whose only material asset is our investment in
Chemicals, our primary operating subsidiary. Chemicals owns substantially all of
our consolidated operating assets. Other than additional interest expense
associated with our 13 1/2% Senior Secured Discount Notes due 2008, our results
of operations are essentially the same as Chemicals. Accordingly, the following
discussion applies to both entities, unless otherwise specifically noted. A
separate discussion of the results of operations for Chemicals would not, in our
opinion, provide any additional meaningful information.
RECENT DEVELOPMENTS
On April 6, 2000, we announced our intention to evaluate strategic
alternatives with respect to our acrylic fibers business, Sterling Fibers,
located in Santa Rosa County, Florida. This decision reflects the continuing
consolidation within the worldwide fibers industry, as producers pursue synergy
benefits through economies of scale, cost savings, and business improvements. We
have engaged Schnitzius & Vaughn, an investment banking firm, to help us
identify and evaluate a variety of options ranging from an outright sale of our
acrylic fibers business to a joint venture or alliance arrangement. We do not
know whether this process will result in a transaction. In addition, even
if an acceptable purchaser or joint venture partner is identified, we may elect
to forgo that transaction.
On May 1, 2000, we announced that Peter W. De Leeuw, our President and
Chief Executive Officer, was retiring effective May 8, 2000. Our Board of
Directors has formed a search committee and has begun an external search for a
new CEO. Frank P. Diassi, our executive Chairman of the Board, has assumed the
additional duties of CEO until a new CEO is hired, after which time Mr. Diassi
will serve as our non-executive Chairman of the Board. We also announced that
Richard K. Crump has been promoted to Executive Vice President - Operations,
Gary M. Spitz (CFO) has been promoted to Executive Vice President - Finance, and
David G. Elkins has been promoted to Executive Vice President - Administration
and Law. In addition, in an unrelated development, George J. Damiris resigned
from our Board of Directors, effective April 19, 2000. Koch Capital Services,
Inc., who has the right under our 1996 Voting Agreement to designate a
replacement for Mr. Damiris, subsequently waived that right.
In May of 2000, we entered into a new 3-1/2 year ammonia supply agreement
with Koch Nitrogen Company, an affiliate of one of our significant stockholders.
The new ammonia supply agreement replaced our prior ammonia supply agreement
with Koch which was not scheduled to terminate until 2002. The new ammonia
supply agreement requires us to purchase the same annual quantity of ammonia
from Koch but at a revised pricing formula. In connection with the execution of
the new ammonia supply agreement, we made a payment to Koch of $1.2 million to
settle a dispute under the old ammonia supply agreement, and we also made a
one-time payment to Koch of $1.8 million in exchange for the revised pricing
formula. The impact of this settlement was reflected in our financial statements
during the first nine months of fiscal 2000.
On June 29, 2000, we, in conjunction with BP Chemicals, announced a
multi-year contract with Methanex Corporation for the purchase of our respective
methanol requirements from Methanex. At the same time, we granted Methanex
exclusive rights to acquire the output of our methanol plant, which we continue
to own. In conjunction with this agreement, Methanex chose to shutdown our
methanol plant July 1, 2000 and provide our methanol requirements with imports.
On July 15, 2000, Praxair Hydrogen Supply, Inc., a supplier of raw
materials to our acetic acid and plasticizers facilities, experienced a
mechanical failure at its Texas City facility. As a result, we were forced to
temporarily shut down our acetic acid facilities and a portion of our
plasticizers facilities. In an effort to mitigate the negative impact on our
acetic acid and plasticizers operations, we performed maintenance activities at
these facilities that were originally scheduled to be performed at a later date.
This event is not expected to have a material adverse affect on our financial
condition or results of operations in the fourth fiscal quarter.
Spot prices for styrene peaked early in the third fiscal quarter at
approximately $0.50 per pound. However, the completion of several industry
turnarounds early in the quarter, combined with decreased styrene purchases by
customers in Asia and lower polystyrene operating rates, caused spot prices to
decline to approximately $0.30 per pound by the end of the quarter. Spot prices
have continued to be in the $0.30-$0.35 per pound range for the first part of
our fiscal fourth quarter. This decline in sales prices together with higher raw
materials and energy costs, has resulted in a significant decrease in styrene
margins.
22
<PAGE> 23
RESULTS OF OPERATIONS
Our revenues were approximately $293 million in the third quarter of fiscal
2000, an increase of approximately 61% from the approximately $182 million in
revenues we received in the third quarter of fiscal 1999. Our revenues were
approximately $805 million in the first nine months of fiscal 2000, an increase
of approximately 59% from the approximately $506 million in revenues we received
in the first nine months of fiscal 1999. These increases in our revenues
resulted primarily from higher styrene sales prices and sales volumes
attributable to improved conditions in the styrene market. Our revenues were
also favorably impacted by increased acrylonitrile sales prices and volumes. We
recorded a net loss attributable to common stockholders of approximately $0.2
million, or $0.05 per share, for the third quarter of fiscal 2000, compared to
the net loss attributable to common stockholders of approximately $17.1 million,
or $1.37 per share, we recorded for the third quarter of fiscal 1999. We
recorded a net loss attributable to common stockholders of approximately $8.7
million, or $0.72 per share, for the first nine months of fiscal 2000, compared
to the net loss attributable to common stockholders of approximately $56.3
million, or $4.43 per share, we recorded for the first nine months of fiscal
1999. Our improved performance was primarily due to increased styrene margins
and sales volumes and, to a lesser extent, increased acrylonitrile sales prices
and volumes, partially offset by increased interest expense. In addition, our
performance during the first nine months of fiscal 1999 was negatively impacted
by a one-time non-cash charge related to early retirement programs and benefit
changes and workforce reductions in our petrochemicals business and our pulp
chemicals business.
Revenues, Cost of Goods Sold, and Gross Profit
Petrochemicals. Revenues from our petrochemicals operations were
approximately $239 million in the third quarter of fiscal 2000, an increase of
approximately 78% from the approximately $134 million in revenues we received
from these operations during the third quarter of fiscal 1999. Revenues from our
petrochemicals operations were approximately $648 million for the first nine
months of fiscal 2000, an increase of approximately 77% from the approximately
$366 million in revenues we received from these operations during the first nine
months of fiscal 1999. These increases in revenues resulted primarily from
increased styrene sales prices and volumes, and to a lesser extent, increased
acrylonitrile sales prices and volumes. In addition, the first nine months of
fiscal 1999 were negatively impacted by our styrene unit's scheduled shutdown
during the second quarter of fiscal 1999. Our petrochemicals operations recorded
operating income of approximately $23 million for the third quarter of fiscal
2000, whereas these operations recorded operating losses of approximately $12
million for the third quarter of fiscal 1999. Our petrochemicals operations
recorded operating income of approximately $63 million for the first nine months
of fiscal 2000, whereas these operations recorded operating losses of
approximately $26 million for the first nine months of fiscal 1999. The improved
performance of our petrochemicals operations resulted primarily from increased
styrene margins and sales volumes and, to a lesser extent, increased
acrylonitrile sales prices and volumes. In addition, our results of operations
during the first nine months of fiscal 1999 were negatively impacted by a
scheduled shutdown of our styrene unit during the second quarter of fiscal 1999
and a one-time non-cash charge related to early retirement programs and benefit
changes.
Revenues from our styrene operations were approximately $131 million in the
third quarter of fiscal 2000, an increase of approximately 111% from the
approximately $62 million in revenues we received from these operations in the
third quarter of fiscal 1999. Revenues from our styrene operations were
approximately $374 million in the first nine months of fiscal 2000, an increase
of approximately 129% from the approximately $163 million in revenues we
received from these operations in the first nine months of fiscal 1999. Sales
prices for our styrene in the third quarter and first nine months of fiscal 2000
increased approximately 101% and 86%, respectively, from those realized during
the third quarter and first nine months of fiscal 1999. In addition, sales
volumes of our styrene in the third quarter and first nine months of fiscal 2000
increased approximately 13% and 28%, respectively, from those realized during
the third quarter and first nine months of fiscal 1999. These increases in
revenues, sales prices, and volumes for our styrene resulted primarily from the
combination of stronger market demand, previous operating problems experienced
at several of our competitors, and generally low inventory levels worldwide. In
addition, during the second quarter of fiscal 1999, our styrene unit was
shutdown for approximately one month for routine maintenance. During the third
quarter and first nine months of fiscal 2000, prices for benzene, one of the
primary raw materials for styrene, were approximately 68% and 53% higher,
respectively, than the prices we paid for benzene in the third quarter and first
nine months of fiscal 1999, and prices for ethylene, the other primary raw
material for styrene, were approximately 98% and 67% higher, respectively, than
the prices we paid for ethylene in the third quarter and first nine months of
fiscal 1999. Margins on our styrene sales in the third quarter and first nine
months of fiscal 2000 increased from the margins we received in the third
quarter and first nine months of fiscal 1999, primarily as a result of the
significant increase in sales prices, which more than offset our higher raw
materials and energy costs.
Revenues from our acrylonitrile operations were approximately $42 million
in the third quarter of fiscal 2000, an increase of approximately 147% from the
approximately $17 million in revenues we received from these operations in the
third quarter of fiscal 1999. Revenues from our acrylonitrile operations were
approximately $98 million in the first nine months of fiscal 2000, an increase
of approximately 85% from the approximately $53 million in revenues we received
from these operations in the first nine months of fiscal 1999. Sales prices for
our acrylonitrile in the third quarter and first nine months of fiscal 2000
increased
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<PAGE> 24
approximately 178% and 127%, respectively, from those realized during the third
quarter and first nine months of fiscal 1999. These increases in revenues and
sales prices from our acrylonitrile resulted primarily from the combination of
stronger market demand, previous operating problems experienced at several of
our competitors, and generally low inventory levels worldwide. Sales volumes of
our acrylonitrile increased approximately 32% in the third quarter and first
nine months of fiscal 2000 from those realized during the third quarter and
first nine months of fiscal 1999. This increase in sales volumes of our
acrylonitrile was primarily the result of our acrylonitrile facilities being
operated at increased rates following the completion of work related to the
DSIDA project and improved market conditions. During the third quarter and first
nine months of fiscal 2000, prices for propylene, one of the primary raw
materials for acrylonitrile, were approximately 73% and 106% higher,
respectively, than the prices we paid for propylene in the third quarter and
first nine months of fiscal 1999, and prices for ammonia, the other primary raw
material for acrylonitrile, were approximately 16% and 12% higher, respectively,
than the prices we paid for ammonia in the third quarter and first nine months
of fiscal 1999. Margins on our acrylonitrile sales in the third quarter and
first nine months of fiscal 2000 increased from the margins we received in the
third quarter and first nine months of fiscal 1999, primarily as a result of
higher sales prices, which more than offset our higher raw materials prices.
Revenues from our acrylic fibers operations were approximately $19 million
in the third quarter of fiscal 2000, an increase of approximately 12% from the
approximately $17 million in revenues we received from these operations in the
third quarter of fiscal 1999. Revenues from our acrylic fibers operations were
approximately $53 million in the first nine months of fiscal 2000, an increase
of approximately 10% from the approximately $48 million in revenues we received
from these operations in the first nine months of fiscal 1999. Sales volumes of
our acrylic fibers in the third quarter and first nine months of fiscal 2000
increased approximately 1% and 15%, respectively, from those realized during the
third quarter and first nine months of fiscal 1999. Sales prices for our acrylic
fibers in the third quarter and first nine months of fiscal 2000 increased
approximately 9% and decreased approximately 3%, respectively, from those
realized during the third quarter and first nine months of fiscal 1999. The
performance of our acrylic fibers operations in the third quarter and first nine
months of fiscal 2000 was negatively impacted by weak market conditions, imports
from foreign suppliers, and higher raw materials and energy costs.
Revenues from our other petrochemicals operations, including acetic acid,
plasticizers, and methanol, were approximately $47 million in the third quarter
of fiscal 2000, an increase of approximately 27% from the approximately $37
million in revenues we received from these operations in the third quarter of
fiscal 1999. Revenues from our other petrochemicals were approximately $122
million in the first nine months of fiscal 2000, an increase of approximately
18% from the approximately $103 million in revenues we received from these
operations in the first nine months of fiscal 1999. These increases in revenues
resulted primarily from increased methanol sales volumes. Our other
petrochemicals operations reported a decrease in operating earnings in the third
quarter and first nine months of fiscal 2000 compared to that realized in the
third quarter and first nine months of fiscal 1999. This decrease in operating
earnings resulted primarily from a reduction in margins for our plasticizers
caused by higher raw materials costs.
Pulp Chemicals. Revenues from our pulp chemicals operations were
approximately $54 million in the third quarter of fiscal 2000, an increase of
approximately 13% from the approximately $48 million in revenues we received
from these operations in the third quarter of fiscal 1999. Revenues from our
pulp chemicals operations were approximately $157 million in the first nine
months of fiscal 2000, an increase of approximately 12% from the approximately
$140 million in revenues we received from these operations in the first nine
months of fiscal 1999. Sales volumes of our sodium chlorate business in the
third quarter and first nine months of fiscal 2000 increased approximately 6%
and 8%, respectively, from those realized in the third quarter and first nine
months of fiscal 1999. Sales prices of our sodium chlorate in the third quarter
and first nine months of fiscal 2000 increased approximately 4% and 2%,
respectively, from those realized in the third quarter and first nine months of
fiscal 1999. Our pulp chemicals operations recorded operating earnings of
approximately $9 million in the third quarter of fiscal 2000 compared to
operating earnings of approximately $6 million the third quarter of fiscal 1999.
Our pulp chemicals operations recorded operating earnings of approximately $25
million in the first nine months of fiscal 2000 compared to operating earnings
of approximately $21 million the first nine months of fiscal 1999. These
increases in revenues, sales volumes, sales prices, and operating earnings
resulted primarily from increased operating rates at pulp mills and the
continued conversion to elemental chlorine free bleaching at pulp mills.
Selling, General, and Administrative ("SG&A") Expenses
Our SG&A expenses in the third quarter and first nine months of fiscal 2000
were approximately $11 million and $30 million, respectively, compared to
approximately $9 million and $28 million for the same periods of fiscal 1999.
These increases are primarily the result of the increase in variable
compensation costs as a result of improved business performance.
Other Expense
We had other expense of approximately $2 million and $11 million for the
third quarter and first nine months of fiscal 1999,
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<PAGE> 25
respectively. These amounts relate to a one-time non-cash charge related to
early retirement programs and benefit changes and additional amounts related to
workforce reductions in our petrochemicals business and our pulp
chemicals business.
Interest and Debt Related Expenses
Our interest and debt related expense was approximately $31 million and $92
million for the third quarter and first nine months of fiscal 2000,
respectively, compared to approximately $25 million and $75 million for the same
periods of fiscal 1999, respectively. These increases resulted primarily from
the higher interest rates we paid on some of our indebtedness after we
refinanced that indebtedness in July of 1999 and the payment of interest on the
additional indebtedness we incurred at that time.
Provision (Benefit) for Income Taxes
Our provision for income taxes for the third quarter and first nine months
of fiscal 2000 was approximately $1 million and $3 million, respectively,
reflecting the foreign tax provision on the income of our Canadian subsidiaries.
Due to the recurring losses of our United States subsidiaries, in fiscal 2000 we
recorded a valuation allowance in an amount equal to the benefit for income
taxes generated by losses from our United States subsidiaries. Our benefit for
income taxes for the third quarter and first nine months of fiscal 1999 was
approximately $7 million and $26 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, our long-term debt, including current maturities,
totaled approximately $967 million and consisted of:
o Chemicals' two secured revolving credit facilities;
o two secured term loans under a credit facility at our Saskatoon
subsidiary;
o Chemicals' 11 1/4% Senior Subordinated Notes due 2007, 11 3/4% Senior
Subordinated Notes due 2006, and 123/8% Senior Secured Notes due 2006;
and
o Holdings' 13 1/2% Senior Secured Discount Notes due 2008.
On July 23, 1999, Chemicals completed a refinancing of all senior debt
outstanding under its old senior credit facility by issuing its 123/8% Notes,
establishing a revolving credit facility secured by its and some of its
subsidiaries' fixed assets and certain other assets and establishing an
additional revolving credit facility secured by its and some of its
subsidiaries' working capital. The two revolving credit facilities provide an
aggregate borrowing capacity of $155 million. The refinancing increased our
liquidity by eliminating near-term debt amortization and financial covenants
associated with the old senior credit facility, as well as by increasing
revolving credit availability. Although no assurances can be given, we believe
the additional liquidity provided by the refinancing, when combined with cash
flows from operations and other sources of available capital, will be sufficient
to enable us to operate through current and expected market conditions for our
primary petrochemicals products through at least fiscal 2001. This belief is
largely based upon assumptions regarding the condition of the markets of our
primary products over the next few years, which assumptions are based in part on
published reports of industry experts. If these assumptions prove to be
incorrect or there is a material deterioration in the markets for our primary
products, there is a strong possibility that we would be unable to fund our
operations and meet our debt service requirements over an extended period.
As noted in the Annual Report, dividend restrictions in the indentures
governing the 123/8% Notes, the 11 3/4% Notes and the 11 1/4% Notes allow
Chemicals to pay dividends to Holdings in connection with required interest
payments on the 13 1/2% Notes only if the ratio of the consolidated EBITDA of
Chemicals and certain of its subsidiaries to their interest expense is 2.0 to
1.0 or greater, on a trailing four quarter basis. Holdings currently has no
source of funds to make interest payments on the 13 1/2% Notes other than
dividends from Chemicals and must make the first cash interest payment on the 13
1/2% Notes on February 15, 2002. Based upon our anticipated consolidated
interest expense for the four quarter period ending December 31, 2001, Chemicals
and its subsidiaries (excluding our subsidiary that conducts operations in
Saskatoon) would need to generate approximately $190 million in consolidated
EBITDA during such four quarter period in order to pay a dividend to Holdings to
make the required cash interest payment on February 15, 2002. While there is a
possibility that Chemicals could generate sufficient EBITDA to pay dividends to
Holdings for the purpose of paying one or more of the initial interest payments
on the 13 1/2% Notes, we can give no assurances to that effect. Moreover, we
believe that it is unlikely that Chemicals will generate sufficient EBITDA to
pay dividends to Holdings every time an interest payment becomes due on the 13
1/2% Notes through their maturity in 2008. The permissible methods for reducing
the risk of a cash interest payment default on the 13 1/2% Notes are limited in
scope and amount and no assurances can be given that any such permissible method
will be available or sufficient.
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<PAGE> 26
If Holdings fails to make a required interest payment on the 13 1/2% Notes,
the holders would have certain remedies available to them under the Indenture,
including the option of accelerating the maturity of the 13 1/2% Notes. A
default under the 13 1/2% Notes will not, in and of itself, cause a default
under the Indentures for 123/8% Notes, the 11 3/4% Notes or the 11 1/4% Notes.
However, a default under the 13 1/2% Notes will cause a default under Chemicals'
Credit Agreement, giving the lenders under the Credit Agreement the option of
accelerating the indebtedness under the Credit Agreement and terminating all
commitments to lend under the Credit Agreement. If the indebtedness under the
Credit Agreement is accelerated, a default will occur under the Indentures for
the 123/8% Notes, the 11 3/4% Notes or the 11 1/4% Notes. Consequently, whether
a default under the 13-1/2% Notes Indenture results in a default under the
Indentures for the 123/8% Notes, the 11 3/4% Notes or the 11 1/4% Notes depends
on the actions of the lenders under the Credit Agreement. If the lenders under
the Credit Agreement do not accelerate the indebtedness under the Credit
Agreement, the default under the 13 1/2% Notes Indenture will have no effect
under the Credit Agreement or the Indentures for the 123/8% Notes, the 11 3/4%
Notes or the 11 1/4% Notes. We cannot predict what actions (if any) any of our
lenders or noteholders would take following a default under the 13 1/2% Notes.
Additional possible implications of a default under the 13-1/2% Notes are
described in the Annual Report.
Available credit under the working capital revolver is subject to a monthly
borrowing base consisting of 85% of eligible accounts receivable and 65% of
eligible inventory, with an inventory cap of $42.5 million. In addition, the
borrowing base for the working capital revolver must exceed outstanding
borrowings thereunder by $12 million at all times. At June 30, 2000, the total
credit available under the secured revolving credit facilities was $155 million,
with approximately $40 million drawn under the fixed assets revolver. Therefore,
at June 30, 2000, we had additional borrowing capacity of approximately $115
million.
The credit agreement obligates us to make mandatory prepayments of the
outstanding revolving credit loans if we take certain actions, including selling
certain assets owned by Chemicals and various subsidiaries and issuing equity
securities of Holdings. If such a mandatory prepayment becomes due, there will
be a corresponding permanent reduction of the loan commitments under the secured
revolving credit facilities. We have no current plans to take any action that
would trigger a mandatory prepayment of this nature.
The credit agreement and the indentures governing the 13 1/2% Notes, the
123/8% Notes, the 11 3/4% Notes, and the 11 1/4% Notes contain numerous
covenants, including, but not limited to, annual limits on our aggregate capital
expenditures and restrictions on our ability to incur indebtedness, pay
dividends, create liens, sell assets, engage in mergers and acquisitions, and
refinance existing indebtedness. In addition, these indentures and the credit
agreement specify various circumstances that will constitute, upon occurrence
and subject in certain cases to notice and grace periods, an event of default
thereunder. However, none of the indentures or the credit agreement require us
to satisfy any financial ratios or maintenance tests.
The credit agreement and the indentures governing the 123/8% Notes, the 11
1/4% Notes, and the 11 3/4% Notes also contain provisions which restrict the
ability of Chemicals to pay dividends or make loans or advances to Holdings. The
most restrictive of these covenants limits these types of payments during fiscal
2000 to approximately $2.0 million, plus any amounts due to Holdings from
Chemicals under our intercompany tax sharing agreement.
Standby Equity Commitments
In December of 1998, Holdings entered into separate Standby Purchase
Agreements with each of Gordon A. Cain, William A. McMinn, James Crane, Frank P.
Diassi, Frank J. Hevrdejs, and Koch Capital Services, Inc. Pursuant to the terms
of the Standby Purchase Agreements, the purchasers committed to purchase up to
2.5 million shares of Holdings' common stock, at a price of $6.00 per share, if,
as, and when requested by us at any time or from time to time prior to December
15, 2001. Under each of the Standby Purchase Agreements, we may only require the
purchasers to purchase these shares if we believe that such capital is necessary
to maintain, reestablish, or enhance our borrowing ability under our revolving
credit facilities or to satisfy any requirement thereunder to raise additional
equity. To induce the purchasers to enter into the Standby Purchase Agreements,
Holdings issued warrants to purchase an aggregate of 300,000 shares of its
common stock to the purchasers at an exercise price of $6.00 per share. Under
the Standby Purchase Agreements, Holdings is obligated to issue additional
warrants to purchase up to 300,000 additional shares of its common stock to the
purchasers if, as, and when they purchase shares of Holdings' common stock under
the Standby Purchase Agreements.
Saskatoon Facility
In July of 1997, Sterling Pulp Chemicals (Sask) Ltd., our Canadian
subsidiary that operates our Saskatoon facility, entered into a credit agreement
with The Chase Manhattan Bank of Canada, individually and as administrative
agent, and certain other financial institutions. The indebtedness under the
Saskatoon credit agreement is secured by substantially all of the assets of this
subsidiary, including the Saskatoon facility. The Saskatoon credit agreement
requires that certain amounts of "Excess Cash Flow"
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<PAGE> 27
be used to prepay amounts outstanding under the term portion of the credit
facility. A mandatory prepayment in the amount of approximately Cdn. $2 million
was made in the first quarter of fiscal 2000 pursuant to this obligation.
The Saskatoon credit agreement provides a revolving credit facility of Cdn.
$8 million to be used by the Saskatoon subsidiary solely for its general
corporate purposes. No borrowings were outstanding under the Saskatoon revolving
credit facility as of June 30, 2000. We believe the credit available under the
Saskatoon revolving credit facility, when added to internally generated funds
and other sources of capital, will be sufficient to meet the Saskatoon
subsidiary's liquidity needs for the reasonably foreseeable future, although we
can give no assurances to that effect.
Covenants contained in the Saskatoon credit agreement severely restrict our
ability to access the cash flows of our Saskatoon subsidiary. In addition, as
our Saskatoon subsidiary is designated as an "Unrestricted Subsidiary" under the
credit agreement and the indentures for the 13 1/2% Notes, the 123/8% Notes, the
11 3/4% Notes, and the 11 1/4% Notes, our Saskatoon subsidiary's results are not
considered in determining compliance with the covenants contained in those
documents.
The Saskatoon credit agreement also contains provisions which restrict the
ability of our Saskatoon subsidiary to pay dividends or make advances or loans
to us. The most restrictive of these covenants limits these types of payments
during fiscal 2000 to approximately $1 million, plus any amounts it owes us
under our intercompany tax sharing agreement.
Working Capital
Our working capital at June 30, 2000 was approximately $109 million, an
increase of approximately $17 million from September 30, 1999. This increase in
our working capital was primarily due to an increase in the amount of our
accounts receivables which resulted from higher sales prices for our styrene and
acrylonitrile and an increase in inventories, offset by an increase in accounts
payable resulting from favorable changes in payment terms for some of our major
raw materials, higher raw material costs, and an increase in accrued
liabilities.
Cash Flow
Net cash provided by our operations was approximately $40 million for the
first nine months of fiscal 2000, compared to net cash used in our operations of
approximately $12 million for the first nine months of fiscal 1999. This
approximately $52 million increase in net cash provided by operations was
primarily due to the decrease in net loss.
Capital Expenditures
Our capital expenditures in the first nine months of fiscal 2000 were
approximately $22 million, compared to capital expenditures in the first nine
months of fiscal 1999 of approximately $18 million. Our capital expenditures in
the first nine months of fiscal 2000 were primarily related to the DSIDA
project, a water disposal project, and routine safety, environmental, and
replacement capital. During the remainder of fiscal 2000, we expect to spend
approximately $8 million to $10 million on the DSIDA project and routine safety,
environmental, and replacement capital. We expect to fund our remaining fiscal
2000 capital expenditures from operating cash flow, plus borrowings under our
secured revolving credit facilities, if needed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Through the first nine months of fiscal 2000, there were no significant
changes in our market risk disclosures as set forth in the Annual Report.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information under "Legal Proceedings" in Note 4 of the Notes to
Consolidated Financial Statements herein is hereby incorporated by reference.
See also "Item 3. Legal Proceedings" in the Annual Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are filed as part of this Form 10-Q.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.1 - Amended and Restated Key Employee Protection Plan.
11.1 - Earnings Per Share Calculation.
15.1 - Letter of Deloitte & Touche LLP regarding unaudited interim
financial information.
27.1 - Financial Data Schedule of Sterling Chemicals Holdings, Inc.
27.2 - Financial Data Schedule of Sterling Chemicals, Inc.
(b) Reports on Form 8-K.
None.
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<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrants have duly caused this report to be signed on their
behalf by the undersigned thereunto duly authorized.
STERLING CHEMICALS HOLDINGS, INC.
STERLING CHEMICALS, INC.
(Registrants)
Date: August 14, 2000 /s/ FRANK P. DIASSI
------------------------------------------
Frank P. Diassi
Chairman of the Board of Directors
(Principal Executive Officer)
Date: August 14, 2000 /s/ GARY M. SPITZ
------------------------------------------
Gary M. Spitz
Executive Vice President-Finance and Chief
Financial Officer
(Principal Financial Officer)
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<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
10.1 - Amended and Restated Key Employee Protection Plan.
11.1 - Earnings Per Share Calculation.
15.1 - Letter of Deloitte & Touche LLP regarding unaudited interim
financial information.
27.1 - Financial Data Schedule of Sterling Chemicals Holdings, Inc.
27.2 - Financial Data Schedule of Sterling Chemicals, Inc.
</TABLE>
(b) Reports on Form 8-K.
None.
