<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-10059
STERLING CHEMICALS HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0185186
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1200 SMITH STREET, SUITE 1900
HOUSTON, TEXAS 77002-4312 (713) 650-3700
(Address of principal executive offices) (Registrant's telephone number,
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR
VALUE $.01 PER SHARE
COMMISSION FILE NUMBER 333-04343-01
STERLING CHEMICALS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0502785
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1200 SMITH STREET, SUITE 1900
HOUSTON, TEXAS 77002-4312 (713) 650-3700
(Address of principal executive offices) (Registrant's telephone number,
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Sterling Chemicals, Inc. meets the conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q, and is therefore filing this form with
the reduced disclosure format provided for by General Instruction H(2) of Form
10-Q.
----------------
Indicate by check mark whether each of the registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of January 31, 2000 Sterling Chemicals Holdings, Inc. had 12,751,201
shares of common stock outstanding. As of January 31, 2000, all outstanding
equity securities of Sterling Chemicals, Inc. were owned by Sterling Chemicals
Holdings, Inc.
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IMPORTANT INFORMATION REGARDING THIS FORM 10-Q
Readers should consider the following information as they review this Form 10-Q.
FORWARD-LOOKING STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 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. Although we
believe that the expectations reflected in the forward-looking statements
contained herein 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 expectations 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 February 14, 2000, except for those
statements that 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 February 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.
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.
FISCAL YEAR
We keep our books of record and account 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.
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This combined Form 10-Q is separately filed by Sterling Chemicals Holdings,
Inc. ("Holdings") and Sterling Chemicals, Inc. ("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
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STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 6,948 $ 14,921
Accounts receivable .............................................................. 161,089 141,059
Inventories ...................................................................... 74,184 70,464
Prepaid expenses ................................................................. 14,099 16,236
Deferred tax asset ............................................................... 16,888 16,888
--------- ---------
Total current assets ........................................................... 273,208 259,568
Property, plant, and equipment, net ................................................. 398,408 402,723
Deferred tax asset .................................................................. 26,158 26,158
Other assets ........................................................................ 81,747 86,650
--------- ---------
Total assets ................................................................... $ 779,521 $ 775,099
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable ................................................................. $ 65,027 $ 72,961
Accrued liabilities .............................................................. 91,233 79,883
Current portion of long-term debt ................................................ 2,662 4,246
--------- ---------
Total current liabilities ...................................................... 158,922 157,090
Long-term debt ...................................................................... 973,054 964,555
Deferred tax liability .............................................................. 10,119 8,815
Deferred credits and other liabilities .............................................. 78,490 76,893
Common stock held by ESOP ........................................................... 2,946 2,946
Less: unearned compensation ........................................................ (643) (745)
Redeemable preferred stock .......................................................... 21,651 20,932
Commitments and contingencies (Note 4) .............................................. -- --
Stockholders' equity (deficiency in assets):
Common stock, $.01 par value, 20,000,000 shares authorized, 12,305,000 shares
issued and 12,097,000 outstanding at December 31, 1999, and 12,305,000
shares issued and 12,097,000 outstanding at September 30, 1999 ................. 123 123
Additional paid-in capital ....................................................... (542,712) (542,712)
Retained earnings ................................................................ 107,409 118,490
Accumulated other comprehensive income ........................................... (27,328) (28,768)
Deferred compensation ............................................................ (46) (58)
--------- ---------
(462,554) (452,925)
Treasury stock, at cost, 209,000 and 208,000 shares at December 31, 1999 and
September 30, 1999, respectively ............................................... (2,464) (2,462)
--------- ---------
Total stockholders' equity (deficiency in assets) ............................ (465,018) (455,387)
--------- ---------
Total liabilities and stockholders' equity (deficiency in assets) .......... $ 779,521 $ 775,099
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
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STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues ...................................................... $ 246,921 $ 171,929
Cost of goods sold ............................................ 216,353 155,212
--------- ---------
Gross profit .................................................. 30,568 16,717
Selling, general, and administrative expenses ................. 9,870 9,656
Other expense ................................................. -- 2,294
Interest and debt related expenses, net of interest income .... 29,770 25,459
--------- ---------
Loss before income taxes ...................................... (9,072) (20,692)
Provision (benefit) for income taxes .......................... 1,290 (7,592)
--------- ---------
Net loss ...................................................... (10,362) (13,100)
Preferred stock dividends ..................................... 719 645
--------- ---------
Net loss attributable to common stockholders .................. $ (11,081) $ (13,745)
========= =========
Net loss per common share (Note 5) ............................ $ (0.88) $ (1.11)
========= =========
Weighted average shares outstanding ........................... 12,612 12,427
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE> 6
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................... $ (10,362) $ (13,100)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ............................ 13,526 14,030
Interest amortization .................................... 802 1,082
Deferred tax benefit (provision) ......................... 1,057 (5,709)
Discount notes amortization .............................. 5,124 4,563
Other .................................................... (22) 227
Change in assets/liabilities:
Accounts receivable ...................................... (19,597) 9,081
Inventories .............................................. (3,554) (5,954)
Prepaid expenses ......................................... 2,135 (546)
Other assets ............................................. 1,214 (3,433)
Accounts payable ......................................... (17,599) (982)
Accrued liabilities ...................................... 18,748 7,125
Other liabilities ........................................ 2,422 1,419
--------- ---------
Net cash provided by (used in) operating activities .............. (6,106) 7,803
--------- ---------
Cash flows from investing activities:
Capital expenditures ........................................ (5,794) (5,931)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt ................................ 202,340 68,100
Repayment of long-term debt ................................. (198,546) (72,957)
Other ....................................................... (3) (5)
--------- ---------
Net cash provided by (used in) financing activities .............. 3,791 (4,862)
--------- ---------
Effect of United States/Canadian exchange rate on cash ........... 136 (6)
--------- ---------
Net decrease in cash and cash equivalents ........................ (7,973) (2,996)
Cash and cash equivalents - beginning of year .................... 14,921 11,168
--------- ---------
Cash and cash equivalents - end of period ........................ $ 6,948 $ 8,172
========= =========
Supplement disclosures of cash flow information:
Interest paid, net of interest income received .............. $ (11,397) $ (16,025)
Income taxes paid ........................................... (191) (103)
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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STERLING CHEMICALS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 6,923 $ 14,899
Accounts receivable .................................................. 163,622 143,556
Inventories .......................................................... 74,184 70,464
Prepaid expenses ..................................................... 12,873 15,059
Deferred tax asset ................................................... 16,888 16,888
--------- ---------
Total current assets ............................................... 274,490 260,866
Property, plant, and equipment, net ..................................... 398,408 402,723
Deferred income tax benefit ............................................. 8,384 8,384
Other assets ............................................................ 75,389 80,133
--------- ---------
Total assets ....................................................... $ 756,671 $ 752,106
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable ..................................................... $ 65,027 $ 72,731
Accrued liabilities .................................................. 91,246 79,883
Current portion of long-term debt .................................... 2,662 4,246
--------- ---------
Total current liabilities .......................................... 158,935 156,860
Long-term debt .......................................................... 820,147 816,927
Deferred tax liability .................................................. 10,119 8,815
Deferred credits and other liabilities .................................. 78,488 76,893
Common stock held by ESOP ............................................... 2,946 2,946
Less: unearned compensation ............................................ (643) (745)
Commitments and contingencies (Note 4) .................................. -- --
Stockholder's equity (deficiency in assets):
Common stock, $.01 par value ......................................... -- --
Additional paid-in capital ........................................... (140,012) (139,786)
Accumulated deficit .................................................. (145,936) (140,978)
Accumulated other comprehensive income ............................... (27,327) (28,768)
Deferred compensation ................................................ (46) (58)
--------- ---------
Total stockholder's equity (deficiency in assets) .................. (313,321) (309,590)
--------- ---------
Total liabilities and stockholder's equity (deficiency in assets) .... $ 756,671 $ 752,106
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
7
<PAGE> 8
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues ...................................................... $ 246,921 $ 171,929
Cost of goods sold ............................................ 216,353 155,212
--------- ---------
Gross profit .................................................. 30,568 16,717
Selling, general, and administrative expenses ................. 9,834 9,538
Other expense ................................................. -- 2,294
Interest and debt related expenses, net of interest income .... 24,403 20,640
--------- ---------
Loss before income taxes ...................................... (3,669) (15,755)
Provision (benefit) for income taxes .......................... 1,289 (5,781)
--------- ---------
Net loss ...................................................... $ (4,958) $ (9,974)
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
8
<PAGE> 9
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss .............................................. $ (4,958) $ (9,974)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization ...................... 13,526 14,030
Debt fee amortization .............................. 684 916
Deferred tax benefit (provision) ................... 1,057 (4,599)
Other .............................................. (150) 134
Change in assets/liabilities:
Accounts receivable ................................ (19,633) 8,980
Inventories ........................................ (3,554) (5,954)
Prepaid expenses ................................... 2,184 156
Other assets ....................................... 1,165 (3,433)
Accounts payable ................................... (17,599) (982)
Accrued liabilities ................................ 18,748 7,133
Other liabilities .................................. 2,421 1,393
--------- ---------
Net cash provided by (used in) operating activities ........ (6,109) 7,800
--------- ---------
Cash flows from investing activities:
Capital expenditures .................................... (5,794) (5,931)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt ............................ 200,081 68,100
Repayment of long-term debt ............................. (196,917) (72,957)
Other ................................................... 627 (5)
--------- ---------
Net cash provided by (used in) financing activities ....... 3,791 (4,862)
--------- ---------
Effect of United States/Canadian exchange rate on cash ..... 136 (6)
--------- ---------
Net decrease in cash and cash equivalents .................. (7,976) (2,999)
Cash and cash equivalents - beginning of year .............. 14,899 11,159
--------- ---------
Cash and cash equivalents - end of period .................. $ 6,923 $ 8,160
========= =========
Supplement disclosures of cash flow information:
Interest paid, net of interest income received .......... $ (11,400) $ (16,033)
Income taxes paid .......................................... (191) (103)
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
9
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STERLING CHEMICALS HOLDINGS, INC.
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In our opinion, the accompanying unaudited consolidated financial
statements reflect all adjustments necessary to present fairly:
o the consolidated financial position of Sterling Chemicals Holdings, Inc.
("Holdings") and its subsidiaries and the consolidated financial position
of Sterling Chemicals, Inc. ("Chemicals") and its subsidiaries as of
December 31, 1999, and
o the respective consolidated results of operations and cash flows of
Holdings and its subsidiaries and Chemicals and its subsidiaries for the
applicable three month periods ended December 31, 1999 and 1998,
respectively.
All such adjustments are of a normal and recurring nature. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year. The accompanying unaudited
consolidated financial statements should be, and are assumed to have been, read
in conjunction with the consolidated financial statements and notes included in
Holdings' and Chemicals' combined Annual Report on Form 10-K for the fiscal year
ended September 30, 1999 (the "Annual Report"). The accompanying consolidated
balance sheets as of September 30, 1999 have been derived from the audited
consolidated balance sheets as of September 30, 1999, included in the Annual
Report. The accompanying consolidated financial statements as of and for the
three month period ended December 31, 1999, have been reviewed by Deloitte &
Touche LLP, our independent public accountants, whose reports are included
herein. Unless otherwise indicated, Holdings and its subsidiaries, including
Chemicals, are collectively referred to as "we", "our", "ours", and "us".
Certain amounts reported in the financial statements for the prior periods
have been reclassified to conform with the current financial statement
presentation with no effect on net loss or stockholders' equity (deficiency in
assets).
Our operations are divided into two reportable segments: petrochemicals and
pulp chemicals. The petrochemicals segment manufactures commodity petrochemicals
and acrylic fibers. The pulp chemicals segment manufactures chemicals for use
primarily in the pulp and paper industry. Operating segment information is
presented below.
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1999 1998
--------- ---------
(Dollars in Thousands)
<S> <C> <C>
Segment Information
Revenues:
Petrochemicals $ 197,294 $ 125,268
Pulp chemicals 49,627 46,661
--------- ---------
Total $ 246,921 $ 171,929
========= =========
Operating income (loss):
Petrochemicals $ 13,256 $ (2,429)
Pulp chemicals 7,442 7,196
--------- ---------
Total $ 20,698 $ 4,767
========= =========
</TABLE>
Our total comprehensive net loss for the three months ended December 31,
1999 and 1998 was $8,922,000 and $13,021,000, respectively. The total
comprehensive net loss of Chemicals and its subsidiaries for the three months
ended December 31, 1999 and 1998 was $3,517,000 and $9,895,000, respectively.
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2. INVENTORIES
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
(Dollars in Thousands)
<S> <C> <C>
Inventories consisted of the following:
Finished products ................................ $42,261 $37,484
Raw materials .................................... 7,544 10,355
Inventories under exchange agreements ............ 3,670 2,562
Stores and supplies .............................. 20,709 20,063
------- -------
$74,184 $70,464
======= =======
</TABLE>
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
(Dollars in Thousands)
<S> <C> <C>
Long-term debt consisted of the following:
Revolving credit facilities .................... $ 58,491 $ 54,643
Saskatoon term loans ........................... 41,916 44,045
11-1/4% Notes .................................. 152,402 152,485
11-3/4% Notes .................................. 275,000 275,000
12-3/8% Notes .................................. 295,000 295,000
--------- ---------
Total Chemicals' debt outstanding ......... 822,809 821,173
13-1/2% Notes .................................. 152,907 147,628
--------- ---------
Total Holdings' debt outstanding ....... 975,716 968,801
Less:
Current maturities ........................ (2,662) (4,246)
--------- ---------
Total long-term debt ........................... $ 973,054 $ 964,555
========= =========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Product Contracts
We have certain long-term agreements that provide for the dedication of
100% of our production of acetic acid, plasticizers, tertiary butylamine, and
sodium cyanide, each to one customer. We also have various sales and conversion
agreements that dedicate significant portions of our production of styrene,
acrylonitrile, and methanol to certain customers. Some of these agreements
provide for cost recovery plus an agreed profit margin based upon market prices.
Environmental Regulations
Our operations involve the handling, production, transportation, treatment,
and disposal of materials that are classified as hazardous or toxic waste and
that are extensively regulated by environmental and health and safety laws,
regulations, and permit requirements. Environmental permits required for our
operations are subject to periodic renewal and can be revoked or modified for
cause or when new or revised environmental requirements are implemented.
Changing and increasingly strict environmental requirements can affect the
manufacturing, handling, processing, distribution, and use of our chemical
products and the raw materials used to produce such products and, if so
affected, our business and operations may be materially and adversely affected.
In addition, changes in environmental requirements can cause us to incur
substantial costs in upgrading or redesigning our facilities and processes,
including our waste treatment, storage, disposal, and other waste handling
practices and equipment.
While we believe that our business operations and facilities generally are
operated in compliance in all material respects with all applicable
environmental and health and safety requirements, we cannot be sure that past
practices or future operations will not result in material claims or regulatory
action, require material environmental expenditures, or result in exposure or
injury claims by employees, contractors and their employees, or the public. Some
risk of environmental costs and liabilities is inherent in our operations and
products, as it is with other companies engaged in similar businesses. In
addition, a catastrophic event at any of our facilities could result in our
incurrence of liabilities substantially in excess of our insurance coverages.
11
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Legal Proceedings
Ammonia Release. A description of the ammonia release lawsuits is found
under "Legal Proceedings" in Note 6 of the "Notes to Consolidated Financial
Statements" of the Annual Report and is incorporated herein by reference. All of
the lawsuits against us based on this release have been resolved within the
limits of our liability insurance policies.
Nickel Carbonyl Release. A description of the nickel carbonyl lawsuits is
found under "Legal Proceedings" in Note 6 of the "Notes to Consolidated
Financial Statements" of the Annual Report and is incorporated herein by
reference. As discussed therein, we continue to vigorously defend against the
claims of the approximately 290 remaining plaintiffs. Additional claims and
litigation against us relating to this incident may ensue. We believe that all
or substantially all of our future out-of-pocket costs and expenses, including
settlement payments and judgments, relating to these lawsuits will be covered by
our liability insurance policies or indemnification from third parties. We do
not believe that the claims and litigation arising out of this incident will
have a material adverse effect on us, although we cannot give any assurances to
that effect.
Ethylbenzene Release. A description of this release is found under "Legal
Proceedings" in Note 6 of the "Notes to Consolidated Financial Statements" of
the Annual Report and is incorporated herein by reference. As discussed therein,
there is no lawsuit pending against us based on this release, but we have
received, and in some instances resolved, claims from individuals for alleged
damage from this incident. We believe that our general liability insurance
coverage is sufficient to cover all costs and expenses, including settlement
payments and judgments, related to this incident in excess of the deductible.
Other Lawsuits. We are subject to various other claims and legal actions
that arise in the ordinary course of our business.
Litigation Contingency
We have made estimates of the reasonably possible range of liability with
regard to our outstanding litigation for which we may incur any liability. These
estimates are based on our judgment using currently available information as
well as consultation with our insurance carriers and outside legal counsel. A
number of the claims in these litigation matters are covered by our insurance
policies or by third party indemnification. Therefore, we have also made
estimates of our probable recoveries under insurance policies or from
third-party indemnitors based on our understanding of our insurance policies and
indemnification arrangements, discussions with our insurers and indemnitors, and
consultation with outside legal counsel, in addition to our own judgment. Based
on the foregoing, as of December 31, 1999, we have accrued approximately $2.8
million as our estimate of our aggregate contingent liability for these matters
and have also recorded aggregate receivables from our insurers and third-party
indemnitors of approximately $2.2 million. At December 31, 1999, we estimate
that the aggregate reasonably possible range of loss for all litigation
combined, in addition to the amount accrued, is between zero and $3 million. We
believe that this additional reasonably possible loss would be substantially
covered by insurance or indemnification.
While we have based our estimates on our evaluation of available
information and the other matters described above, much of the litigation
remains in the discovery stage and it is impossible to predict with certainty
the ultimate outcome. We will adjust our estimates as necessary as additional
information is developed and evaluated. However, we believe that the final
resolution of these contingencies will not have a material adverse impact on our
financial position, results of operations, or cash flows, although we cannot
give any assurances to that effect.
The timing of probable insurance and indemnity recoveries and payment of
liabilities, if any, are not expected to have a material adverse effect on our
financial position, results of operations, or cash flows.
12
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5. NET LOSS PER COMMON SHARE CALCULATION
The weighted average number of outstanding shares of the common stock of
Holdings and the computation of the net loss per common share are as follows (in
thousands, except net loss per common share):
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss attributable to common stockholders .... $(11,081) $(13,745)
======== ========
Net loss per common share ....................... $ (0.88) $ (1.11)
======== ========
Weighted average shares outstanding ............. 12,612 12,427
======== ========
</TABLE>
6. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. We are
currently evaluating the accounting impact and disclosures required when this
statement is adopted in the first quarter of fiscal 2001.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Sterling Chemicals Holdings, Inc.
We have reviewed the accompanying consolidated balance sheet of Sterling
Chemicals Holdings, Inc. and subsidiaries (the "Company") as of December 31,
1999, and the related consolidated statements of operations and cash flows for
the three-month periods ended December 31, 1999 and 1998. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of September 30,
1999, and the related consolidated statements of operations, stockholders'
equity (deficiency in assets), and cash flows for the year then ended (not
presented herein); and in our report dated December 9, 1999, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
September 30, 1999 is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Houston, Texas
February 11, 2000
14
<PAGE> 15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of Sterling Chemicals, Inc.
We have reviewed the accompanying consolidated balance sheet of Sterling
Chemicals, Inc. and subsidiaries ("Chemicals") as of December 31, 1999, and the
related consolidated statements of operations and cash flows for the three-month
periods ended December 31, 1999 and 1998. These financial statements are the
responsibility of Chemicals' management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Chemicals as of September 30, 1999,
and the related consolidated statement of operations, stockholder's equity
(deficiency in assets), and cash flows for the year then ended (not presented
herein); and in our report dated December 9, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
September 30, 1999 is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Houston, Texas
February 11, 2000
15
<PAGE> 16
STERLING CHEMICALS UNITED STATES SUBSIDIARIES
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 1,727 $ 9,323
Accounts receivable ................................ 42,393 45,139
Inventories ........................................ 28,293 29,207
Prepaid expenses ................................... 11,976 12,748
--------- ---------
Total current assets ............................. 84,389 96,417
Property, plant, and equipment, net ................... 195,147 196,877
Due from affiliates ................................... 131,064 121,506
Other assets .......................................... 35,960 40,275
--------- ---------
Total assets ..................................... $ 446,560 $ 455,075
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ................................... $ 22,888 $ 22,399
Accrued liabilities ................................ 13,806 16,515
--------- ---------
Total current liabilities ........................ 36,694 38,914
Long-term debt due to Parent .......................... 325,420 325,402
Deferred income taxes ................................. 7,905 7,272
Deferred credits and other liabilities ................ 7,760 7,227
Commitments and contingencies (Note 4) ................ -- --
Stockholder's equity:
Common stock ....................................... -- --
Additional paid-in capital ......................... 92,734 92,734
Retained earnings .................................. 2,407 11,026
Accumulated other comprehensive income ............. (26,360) (27,500)
--------- ---------
Total stockholder's equity ....................... 68,781 76,260
--------- ---------
Total liabilities and stockholder's equity .... $ 446,560 $ 455,075
========= =========
</TABLE>
The accompanying notes are an integral part of the
combined financial statements.
16
<PAGE> 17
STERLING CHEMICALS UNITED STATES SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues ......................................... $ 56,345 $ 53,645
Cost of goods sold ............................... 49,021 45,244
-------- --------
Gross profit ..................................... 7,324 8,401
Selling, general, and administrative expenses .... 5,337 5,568
Interest and debt related expenses ............... 10,019 8,488
-------- --------
Net loss before income taxes ..................... (8,032) (5,655)
Provision (benefit) for income taxes ............. 587 (2,064)
-------- --------
Net loss ......................................... $ (8,619) $ (3,591)
======== ========
</TABLE>
The accompanying notes are an integral part of the
combined financial statements.
17
<PAGE> 18
STERLING CHEMICALS UNITED STATES SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
----------------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................................................ $(8,619) $(3,591)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization ..................................................... 6,132 5,938
Deferred tax benefit .............................................................. 633 9,595
Other ............................................................................. 46 777
Change in assets/liabilities:
Accounts receivable ............................................................... 2,746 2,794
Inventories ....................................................................... 914 131
Prepaid expenses .................................................................. 772 (3,797)
Due from affiliates ............................................................... (8,418) (4,227)
Other assets ...................................................................... 1,598 1,636
Accounts payable .................................................................. 489 (8,390)
Accrued liabilities ............................................................... (2,713) (441)
Other liabilities ................................................................. 533 144
------- -------
Net cash flows provided by (used in) operating activities .............................. (5,887) 569
------- -------
Cash flows used in investing activities:
Capital expenditures ................................................................ (1,685) (1,535)
------- -------
Cash flows provided by (used in) financing activities:
Net change in long-term debt due to Parent .......................................... 18 (83)
------- -------
Effect of United States/Canadian exchange rate on cash ................................. (42) (15)
------- -------
Net decrease in cash and cash equivalents .............................................. (7,596) (1,064)
Cash and cash equivalents--beginning of year ........................................... 9,323 4,093
------- -------
Cash and cash equivalents--end of period ............................................... $ 1,727 $ 3,029
======= =======
</TABLE>
The accompanying notes are an integral part of the
combined financial statements.
18
<PAGE> 19
STERLING CHEMICALS UNITED STATES SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On July 23, 1999, Sterling Chemicals, Inc. ("Chemicals"), a wholly-owned
subsidiary of Sterling Chemicals Holdings, Inc. ("Holdings"), completed a
private offering of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006.
On November 5, 1999, Chemicals completed a registered exchange offer, pursuant
to which all of these 12 3/8% Notes were exchanged for publicly registered 12
3/8% Notes with substantially similar terms. The 12 3/8% Notes are guaranteed by
all of Chemicals' existing direct and indirect United States subsidiaries (other
than Sterling Chemicals Acquisitions, Inc.) on a joint and several basis and are
secured by, among other things, a second priority pledge of 100% of the stock of
these same U.S. subsidiaries. These U.S. subsidiaries consist of Sterling
Canada, Inc. and its U.S. subsidiaries, Sterling Chemicals Energy, Inc.,
Sterling Chemicals International, Inc., and Sterling Fibers, Inc. The financial
statements of these companies (except for Sterling Chemicals Energy, Inc., whose
securities do not constitute a substantial portion of the collateral) have been
combined to present the accompanying financial statements. Sterling Canada, Inc.
(including its U.S. and Canadian subsidiaries), Sterling Chemicals
International, Inc., and Sterling Fibers, Inc. are collectively referred to in
these notes as the "Company".
The Company manufactures chemicals for use primarily in the pulp and paper
industry at four plants in Canada and a plant in Valdosta, Georgia, and
manufactures acrylic fibers in a plant in Santa Rosa County, Florida. Sodium
chlorate is produced at the four plants in Canada and the Valdosta plant. Sodium
chlorite is produced at one of the Canadian locations. The Company also
licenses, engineers, and oversees construction of large-scale chlorine dioxide
generators for the pulp and paper industry as part of the pulp chemicals
business. These generators convert sodium chlorate into chlorine dioxide at pulp
mills. The Company produces regular textiles, specialty textiles, and technical
fibers at the Santa Rosa plant, as well as licensing its acrylic fibers
manufacturing technology to producers worldwide.
In the opinion of management, the accompanying unaudited combined financial
statements reflect all adjustments necessary to present fairly the combined
financial position of the Company as of December 31, 1999, and its combined
results of operations and cash flows for the three-month periods ended December
31, 1999 and 1998, respectively. All such adjustments are of a normal and
recurring nature. The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year. The
accompanying unaudited combined financial statements should be, and are assumed
to have been, read in conjunction with the audited combined financial statements
of the Company included in Holdings' and Chemicals' combined Annual Report on
Form 10-K for the fiscal year ended September 30, 1999 (the "Annual Report").
The accompanying combined balance sheet as of September 30, 1999 has been
derived from the Company's audited combined balance sheet as of September 30,
1999 included in the Annual Report.
The Company's total comprehensive net loss for the three months ended
December 31, 1999 and 1998 was $7,479,000 and $3,594,000, respectively.
2. INVENTORIES
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
(Dollars in Thousands)
<S> <C> <C>
Inventories consisted of the following:
Finished products ........................... $16,726 $17,513
Raw materials ............................... 1,748 2,235
Inventories under exchange agreements ....... 275 170
Stores and supplies ......................... 9,544 9,289
------- -------
$28,293 $29,207
======= =======
</TABLE>
3. LONG-TERM DEBT
As of December 31, 1999 and September 30, 1999, debt allocated to the
Company by Chemicals amounted to $325.4 million and $325.4 million,
respectively. At December 31, 1999, interest rates on this debt ranged from
11.25% to 12.375%.
19
<PAGE> 20
4. COMMITMENTS AND CONTINGENCIES
Environmental Regulations
The Company's operations involve the handling, production, transportation,
treatment, and disposal of materials that are classified as hazardous or toxic
waste and that are extensively regulated by environmental and health and safety
laws, regulations, and permit requirements. Environmental permits required for
the Company's operations are subject to periodic renewal and can be revoked or
modified for cause or when new or revised environmental requirements are
implemented. Changing and increasingly strict environmental requirements can
affect the manufacturing, handling, processing, distribution, and use of the
Company's products and the raw materials used to produce such products and, if
so affected, the Company's business and operations may be materially and
adversely affected. In addition, changes in environmental requirements can cause
the Company to incur substantial costs in upgrading or redesigning its
facilities and processes, including waste treatment, storage, disposal, and
other waste handling practices and equipment.
While the Company believes that its business operations and facilities
generally are operated in compliance in all material respects with all
applicable environmental and health and safety requirements, there can be no
assurance that past practices or future operations will not result in material
claims or regulatory action, require material environmental expenditures, or
result in exposure or injury claims by employees, contractors and their
employees, or the public. Some risk of environmental costs and liabilities is
inherent in the operations and products of the Company, as it is with other
companies engaged in similar businesses. In addition, a catastrophic event at
any of the Company's facilities could result in liabilities to the Company
substantially in excess of its insurance coverages.
Any significant ban on all chlorine containing compounds could have a
materially adverse effect on the Company's financial condition and results of
operations. British Columbia has a regulation in place requiring elimination of
the use of all chlorine products, including chlorine dioxide, in the bleaching
process by the year 2002. Chlorine dioxide is produced from sodium chlorate,
which is one of the Company's pulp chemicals products. The pulp and paper
industry believes that a ban of chlorine dioxide in the bleaching process will
yield no measurable environmental or public health benefit and is working to
change this regulation but there can be no assurance that the regulation will be
changed. In the event such a regulation is implemented, the Company would seek
to sell the products it manufactures at its British Columbia facility to
customers in other markets. The Company is not aware of any other laws or
regulations in place in North America which would restrict the use of such
products for other purposes.
Legal Proceedings
The Company is subject to various claims and legal actions that arise in
the ordinary course of its business. The Company believes that the ultimate
liability, if any, with respect to these claims and legal actions will not have
a material effect on the financial position or results of operations of the
Company.
5. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
is currently evaluating the accounting impact and disclosures that will be
required when this statement is adopted in the first quarter of fiscal 2001.
20
<PAGE> 21
STERLING PULP CHEMICALS, LTD.
BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents ................. $ 1,069 $ 8,481
Accounts receivable ....................... 16,294 16,840
Due from related parties .................. 1,672 1,369
Other receivables ......................... 1,717 2,254
Inventories ............................... 5,529 5,146
Prepaid expenses .......................... 334 633
--------- ---------
26,615 34,723
Property, plant, and equipment, net ............ 75,354 75,531
Other assets ................................... 268 440
--------- ---------
$ 102,237 $ 110,694
========= =========
LIABILITIES
Current
Accounts payable .......................... $ 7,321 $ 8,978
Accrued generator construction costs ...... 3,835 2,967
Accrued liabilities ....................... 5,911 7,093
Due to related parties .................... 3,882 1,241
--------- ---------
20,949 20,279
Note payable ................................... 57,590 56,667
Deferred income taxes .......................... 7,905 7,272
Deferred credits and other liabilities ......... 4,250 3,972
Commitments and contingencies (Note 4) ......... -- --
Stockholder's equity
Common stock .............................. 1 1
Additional paid-in capital ................ 10,508 16,871
Retained earnings ......................... 9,707 14,470
Accumulated other comprehensive income .... (8,673) (8,838)
--------- ---------
Total liabilities and stockholder's
equity ............................... 11,543 22,504
--------- ---------
$ 102,237 $ 110,694
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 22
STERLING PULP CHEMICALS, LTD.
STATEMENTS OF OPERATIONS
(U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
---------------------
1999 1998
------- -------
<S> <C> <C>
Revenue .......................................... $28,440 $26,653
Cost of goods sold ............................... 23,607 22,469
------- -------
Gross profit ..................................... 4,833 4,184
Selling, general, and administrative expenses .... 2,235 2,297
Interest and debt related expenses, net .......... 1,103 1,364
------- -------
Income before income taxes ....................... 1,495 523
Provision for income taxes ....................... 580 203
------- -------
Net income ....................................... $ 915 $ 320
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 23
STERLING PULP CHEMICALS, LTD.
STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------
1999 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................... $ 915 $ 320
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ....................................... 2,027 1,870
Deferred tax expense ................................................ 348 140
Accrued compensation and other ...................................... 2 9
Changes in assets/liabilities:
Accounts receivable ................................................. 867 (839)
Due from related parties ............................................ (373) 10
Other receivables ................................................... 546 46
Inventories ......................................................... (285) 127
Prepaid expenses .................................................... 303 301
Other assets ........................................................ 177 1,177
Accounts payables ................................................... (2,013) 1,071
Accrued generator construction costs ................................ 780 (931)
Other accrued liabilities ........................................... (1,022) (3,108)
Due to related parties .............................................. 2,580 1,879
Other liabilities ................................................... 377 265
-------- -------
Net cash provided by operating activities ..................................... 5,229 2,337
-------- -------
Cash flows from investing activities:
Capital expenditures ..................................................... (664) (769)
-------- -------
Cash flows from financing activities:
Distribution to parent ................................................... (6,377) --
Dividends ................................................................ (5,558) (3,025)
-------- -------
Net cash used in financing activities ......................................... (11,935) (3,025)
-------- -------
-------- -------
Effect of exchange rate on cash ............................................... (42) 9
-------- -------
Net (decrease) increase in cash and cash equivalents .......................... (7,412) (1,448)
Cash and cash equivalents, beginning of period ................................ 8,481 3,426
-------- -------
Cash and cash equivalents, end of period ...................................... $ 1,069 $ 1,978
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 24
STERLING PULP CHEMICALS, LTD.
NOTES TO THE FINANCIAL STATEMENTS--(UNAUDITED)
1. BASIS OF PRESENTATION
Sterling Pulp Chemicals, Ltd. (the "Company") is a Canadian company which
operates four pulp chemical facilities in Canada. These plants primarily produce
sodium chlorate, a chemical used primarily to make chlorine dioxide, which in
turn is used by pulp mills in the pulp bleaching process. The Company also
oversees construction of large-scale chlorine dioxide generators for the pulp
and paper industry. The Company is a wholly-owned subsidiary of Sterling Canada,
Inc. ("Parent"), which is a wholly-owned subsidiary of Sterling Chemicals, Inc.
("Chemicals").
In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments necessary to present fairly the financial
position of the Company as of December 31, 1999 and its results of operations
and cash flows for the three-month periods ended December 31, 1999 and 1998,
respectively. All such adjustments are of a normal and recurring nature. The
results of operations for the periods presented are not necessarily indicative
of the results to be expected for the full year. The accompanying unaudited
financial statements should be, and are assumed to have been, read in
conjunction with the Company's annual financial statements included in Holdings'
and Chemicals' combined Annual Report on Form 10-K for the fiscal year ended
September 30, 1999 (the "Annual Report"). The accompanying balance sheet as of
September 30, 1999, has been derived from the Company's audited balance sheet as
of September 30, 1999 included in the Annual Report.
The Company's total comprehensive net income for the three months ended
December 31, 1999 and 1998 was $1,080,000 and $333,000, respectively.
2. INVENTORIES
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
(Dollars in Thousands)
<S> <C> <C>
Inventories
Finished products ................... $2,273 $1,872
Raw materials ....................... 209 209
------ ------
Inventories at FIFO cost ................. 2,482 2,081
Inventories under exchange agreements .... 225 77
Stores and supplies ...................... 2,822 2,988
------ ------
$5,529 $5,146
====== ======
</TABLE>
3. LONG-TERM DEBT
On August 20, 1992, the Company entered into an agreement for a
$109,087,000 demand note facility with Sterling NRO, Ltd. ("Sterling NRO").
Sterling NRO is also owned by Parent and is therefore related to the Company by
virtue of common control. The note has no scheduled terms of repayment and
interest is calculated and payable monthly in arrears at 1.5% above the Bank of
Nova Scotia prime rate. All of the indebtedness evidenced by the note is
classified as long-term debt because the Company has represented that no other
repayments will be made before January 1, 2001. Interest expense for the
three-month periods ended December 31, 1999 and 1998 were $1,125,000 and
$1,398,000, respectively.
4. COMMITMENTS AND CONTINGENCIES
Environmental and Safety Matters
The Company's operations involve the handling, production, transportation,
treatment, and disposal of materials that are classified as hazardous or toxic
waste and that are extensively regulated by environmental and health and safety
laws, regulations, and permit requirements. Environmental permits required for
the Company's operations are subject to periodic renewal and can be revoked or
modified for cause or when new or revised environmental requirements are
implemented. Changing and increasingly strict environmental requirements can
affect the manufacturing, handling, processing, distribution, and use of the
Company's
24
<PAGE> 25
products and the raw materials used to produce such products and, if so
affected, the Company's business and operations may be materially and adversely
affected. In addition, changes in environmental requirements can cause the
Company to incur substantial costs in upgrading or redesigning its facilities
and processes, including waste treatment, storage, disposal, and other waste
handling practices and equipment.
While the Company believes that its business operations and facilities
generally are operated in compliance in all material respects with all
applicable environmental and health and safety requirements, there can be no
assurance that past practices or future operations will not result in material
claims or regulatory action, require material environmental expenditures, or
result in exposure or injury claims by employees, contractors and their
employees, or the public. Some risk of environmental costs and liabilities is
inherent in the operations and products of the Company, as it is with other
companies engaged in similar businesses. In addition, a catastrophic event at
any of the Company's facilities could result in liabilities to the Company
substantially in excess of its insurance coverages.
Any significant ban on all chlorine containing compounds could have a
materially adverse effect on the Company's financial condition and results of
operations. British Columbia has a regulation in place requiring elimination of
the use of all chlorine products, including chlorine dioxide, in the bleaching
process by the year 2002. Chlorine dioxide is produced from sodium chlorate,
which is one of the Company's pulp chemicals products. The pulp and paper
industry believes that a ban of chlorine dioxide in the bleaching process will
yield no measurable environmental or public health benefit and is working to
change this regulation but there can be no assurance that the regulation will be
changed. In the event such a regulation is implemented, the Company would seek
to sell the products it manufactures at its British Columbia facility to
customers in other markets. The Company is not aware of any other laws or
regulations in place in North America which would restrict the use of such
products for other purposes.
Legal Proceedings
The Company is subject to claims and legal actions that arise in the
ordinary course of its business. The Company believes that the ultimate
liability, if any, with respect to these claims and legal actions will not have
a material effect on the financial position or results of operations of the
Company.
Pledge of Common Stock
In order to secure the repayment of a 1999 issuance of $295,000,000 of
12 3/8% Senior Secured Notes due 2006 by Chemicals, Parent granted the note
holders a first priority pledge of 65% of the Company's common stock.
5. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Management
is currently evaluating the accounting impact and disclosures required when this
statement is adopted in the first quarter of fiscal 2001.
25
<PAGE> 26
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
Our ethylbenzene unit, an important component of the styrene unit, was shut
down for repairs for approximately two weeks from late January to early February
of 2000. The impact to our styrene business was minimized as a result of
internal ethylbenzene inventories and spot market purchases. We anticipate that
we will need to shut down the ethylbenzene unit again later in the second fiscal
quarter or in the third fiscal quarter to complete further maintenance work. We
do not believe these events will have a material adverse effect on our financial
condition and results of operations, although we cannot give any assurances to
that effect.
On January 5, 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 and a portion of our plasticizers
facilities. Praxair finished repairing the damaged equipment on February 5,
2000. 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 later in the second fiscal
quarter. In addition, we engaged in a minimal amount of borrowing, purchasing,
and swapping of raw materials and product with other suppliers. We do not
believe this event will have a material adverse effect on our financial
condition and results of operations, although we cannot give any assurances to
that effect.
In December of 1999, Flexsys America L.P. notified us of their intention to
terminate our long-term conversion agreement for the production of tertiary
butylamine effective as of December 31, 2001. We currently use a portion of our
hydrogen cyanide by-product from our Texas City acrylonitrile operations to
produce tertiary butylamine. We are currently reviewing our options related to
the future production and sales of tertiary butylamine, however, the potential
loss of this long-term conversion agreement is not expected to have a material
adverse effect on our financial condition and results of operations.
RESULTS OF OPERATIONS
Our revenues were approximately $247 million in the first quarter of fiscal
2000, an increase of approximately 44% from the approximately $172 million in
revenues we received in the first quarter of fiscal 1999. This increase in our
revenues resulted primarily from higher styrene selling prices and sales volumes
attributable to improved conditions in the styrene market. Our revenues were
also favorably impacted by increased sodium chlorate sales volumes. These
positive impacts were partially offset by:
o reduced acrylonitrile and methanol margins,
o increased interest expense, and
o reduced benefit for income taxes.
We recorded a net loss attributable to common stockholders of approximately
$11.1 million, or $0.88 per share, for the first quarter of fiscal 2000,
compared to the net loss attributable to common stockholders of approximately
$13.7 million, or $1.11 per share, we recorded for the first quarter of fiscal
1999. This decrease in net loss was primarily due to increased styrene margins
and sales volumes in the first quarter of fiscal 2000, mostly offset by a
reduction of tax benefit recorded against the pre-tax loss and increased
interest expense in the first quarter of fiscal 2000.
Revenues, Cost of Goods Sold, and Gross Profit
Petrochemicals. Revenues from our petrochemicals operations were
approximately $197 million in the first quarter of fiscal
26
<PAGE> 27
2000, an increase of approximately 58% from the approximately $125 million in
revenues we received from these operations during the first quarter of fiscal
1999. This increase in revenues resulted primarily from increased styrene sales
prices and volumes. Our petrochemicals operations recorded operating income of
approximately $13 million for the first quarter of fiscal 2000, whereas these
operations recorded operating losses of approximately $3 million for the first
quarter of fiscal 1999. This difference resulted primarily from increased
styrene margins and sales volumes, which were partially offset by reduced
margins in acrylonitrile and methanol.
Revenues from our styrene operations were approximately $108 million in the
first quarter of fiscal 2000, an increase of approximately 97% from the
approximately $55 million in revenues we received from these operations in the
first quarter of fiscal 1999. Sales prices for our styrene in the first quarter
of fiscal 2000 increased approximately 67% from those realized during the first
quarter of fiscal 1999. In addition, sales volumes of our styrene increased
approximately 25% in the first quarter of fiscal 2000 from those realized during
the first quarter of fiscal 1999. These increases in sales prices and volumes of
our styrene resulted primarily from the combination of stronger market demand,
operating problems experienced at several of our competitors, and generally low
inventory levels worldwide. During the first quarter of fiscal 2000, prices for
benzene, one of the primary raw materials for styrene, were approximately 36%
higher than the prices we paid for benzene in the first quarter of fiscal 1999
and prices for ethylene, the other primary raw material for styrene, were
approximately 80% higher than the prices we paid for ethylene in the first
quarter of fiscal 1999. Margins on our styrene sales in the first quarter of
fiscal 2000 increased from the margins we received in the first quarter of
fiscal 1999, primarily as a result of the significant increase in sales prices,
which more than offset our higher raw materials costs. These improved market
conditions in styrene have continued through January of 2000. We cannot,
however, be sure that these market conditions can be sustained or whether prices
and margins will increase or decrease in the future.
Revenues from our acrylonitrile operations were approximately $32 million
in the first quarter of fiscal 2000, an increase of approximately 72% from the
approximately $19 million in revenues we received from these operations in the
first quarter of fiscal 1999. Sales prices for our acrylonitrile in the first
quarter of fiscal 2000 increased approximately 86% from those realized during
the first quarter of fiscal 1999. In addition, sales volumes of our
acrylonitrile increased approximately 36% in the first quarter of fiscal 2000
from those realized during the first quarter of fiscal 1999. These increases in
sales prices and volumes of our acrylonitrile resulted primarily from the
combination of stronger market demand, operating problems experienced at several
of our competitors, and generally low inventory levels worldwide. Our
acrylonitrile facility operated at reduced rates in the first quarter of fiscal
2000 to facilitate planned tie-in work for our disodium iminodiacetic acid
("DSIDA") project. Our acrylonitrile facility will continue to operate at
reduced rates during much of the second quarter of fiscal 2000 to complete these
tie-ins, as well as some additional scheduled maintenance work. During the first
quarter of fiscal 2000, prices for propylene, one of the primary raw materials
for acrylonitrile, were approximately 67% higher than the prices we paid for
propylene in the first quarter of fiscal 1999 and prices for ammonia, the other
primary raw material for acrylonitrile, were approximately the same as the
prices we paid for ammonia in the first quarter of fiscal 1999. Margins on our
acrylonitrile sales in the first quarter of fiscal 2000 decreased from the
margins we received in the first quarter of fiscal 1999, primarily as a result
of the higher propylene prices, unfavorable sales mix, temporary operating
problems, and the start of our scheduled shutdown for maintenance, which more
than offset our significantly higher sales prices.
Revenues from our acrylic fibers operations were approximately $16 million
in the first quarter of fiscal 2000, an increase of approximately 5% from the
approximately $15 million in revenues we received from these operations in the
first quarter of fiscal 1999. Sales volumes for our acrylic fibers in the first
quarter of fiscal 2000 increased approximately 26% from those realized during
the first quarter of fiscal 1999, while sales prices for our acrylic fibers
decreased approximately 16% over the same periods. The performance of our
acrylic fibers operations in the first quarter of fiscal 2000 continued to be
negatively impacted by weak market conditions and imports from foreign
suppliers.
Revenues from our other petrochemicals operations, including acetic acid,
plasticizers, and methanol, were approximately $41 million in the first quarter
of fiscal 2000, an increase of approximately 12% from the approximately $37
million in revenues we received from these operations in the first quarter of
fiscal 1999. Our other petrochemicals operations reported a decrease in
operating earnings in the first quarter of fiscal 2000 compared to that realized
in the first quarter 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 $50 million in the first quarter of fiscal 2000, an increase of
approximately 6% from the approximately $47 million in revenues we received from
these operations in the first quarter of fiscal 1999. This increase in revenues
resulted primarily from an approximately 10% increase in sales volumes of our
sodium chlorate in the first quarter of fiscal 2000 compared to those realized
during the first quarter of fiscal 1999, but was partially offset by an
approximately 5% decrease in sales prices for our sodium chlorate over the same
periods. The increase in sales volumes of our sodium chlorate resulted primarily
from increased operating rates at pulp mills and the continued conversion to
elemental chlorine free bleaching at pulp mills. Our pulp chemicals operations
recorded operating earnings of approximately $7 million in both the first
quarter of fiscal 2000 and the first quarter of fiscal 1999.
27
<PAGE> 28
Selling, General, and Administrative ("SG&A") Expenses
Our SG&A expenses in the first quarter of fiscal 2000 and the first quarter
of fiscal 1999 remained constant at approximately $10 million.
Other Expense
We had other expense of approximately $2 million in the first quarter of
fiscal 1999 related to the workforce reductions at our Texas City, Texas
facility and our Saskatoon, Saskatchewan facility.
Interest and Debt Related Expenses
Our interest and debt related expense was approximately $30 million for the
first quarter of fiscal 2000, compared to our interest and debt related expense
of approximately $25 million for the first quarter of fiscal 1999. This increase
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
additional indebtedness incurred at that time.
Provision (Benefit) for Income Taxes
Our provision for income taxes for the first quarter of fiscal 2000 was
approximately $1 million, reflecting the foreign tax provision on the income of
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 of our United States
subsidiaries. Our benefit for income taxes for the first quarter of fiscal 1999
was approximately $8 million, with an effective tax rate of approximately 37%.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, our long-term debt, including current maturities,
totaled approximately $976 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 12 3/8% 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 12 3/8% Notes,
establishing a revolving credit facility secured by its and some of its
subsidiaries' fixed assets and certain other assets and establishing a 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
market conditions for our primary petrochemicals products. 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.
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 December 31, 1999, the total credit available under the secured
revolving credit facilities was $155 million, with
28
<PAGE> 29
approximately $58 million drawn under the fixed assets revolver. Therefore, at
December 31, 1999, we had additional borrowing capacity of approximately $97
million.
The commitments for each of the secured revolving credit facilities will be
permanently reduced to the extent required under the credit agreement upon
prepayments made out of specific sources of funds, including assets sales by
Chemicals and the co-borrowers and certain equity issuances by Holdings.
The credit agreement and the indentures governing the 13 1/2% Notes, the 12
3/8% Notes, the 11 3/4% Notes, and the 11 1/4% Notes contain numerous covenants,
including, but not limited to, 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 these indentures or the credit
agreement require us to satisfy any financial ratios or maintenance tests.
The credit agreement and the indentures governing the 12 3/8% 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" 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 December 31, 1999. 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 12 3/8% 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.
29
<PAGE> 30
Working Capital
Working capital at December 31, 1999 was approximately $114 million, an
increase of approximately $12 million from September 30, 1999. This increase in
working capital was primarily due to an increase in the amount of our accounts
receivables resulting from the higher sales prices for our styrene and
acrylonitrile.
Cash Flow
Net cash used in our operations was approximately $6 million for the first
quarter of fiscal 2000, compared to net cash provided by our operations of
approximately $8 million for the first quarter of fiscal 1999. This
approximately $14 million decrease in net cash provided by operations was
primarily due to the increase in working capital resulting from the higher sales
prices and volumes of our styrene and higher sales preices for our
acrylonitrile.
Capital Expenditures
Our capital expenditures in the first quarter of fiscal 2000 and the first
quarter of fiscal 1999 remained constant at approximately $6 million. Our
capital expenditures in the first quarter of fiscal 2000 were primarily related
to our DSIDA project, and routine safety, environmental, and replacement
capital. During the remainder of fiscal 2000, we expect to spend approximately
$24 million to $26 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.
Year 2000 Issue
Some computer systems and other equipment with computer chips store dates
as two digits rather than four to define the applicable year. For example, these
computer systems would store the year "1999" as "99". Any clock or date
recording mechanism (including date sensitive software) which uses only two
digits to represent the year may interpret the digits "00" as the Year 1900
rather than the Year 2000. We went through the process of using both internal
and external resources to address the Year 2000 issue, including the completion
of a comprehensive project to upgrade our critical business systems with systems
intended to be Year 2000 compliant. We have not experienced any significant
system errors or failures resulting from Year 2000 issues, including over the
period when the year 1999 ended and the year 2000 began. The total cost for our
Year 2000 compliance projects, including system upgrades, was approximately $11
million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Through the first quarter of fiscal 2000, there were no significant changes
in our market risk disclosures as set forth in the Annual Report.
30
<PAGE> 31
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
There were no matters submitted to a vote of security holders during the
three months ended December 31, 1999. However, Holdings' Annual Meeting of
Stockholders was held on January 26, 2000, at which time Holding's ten incumbent
directors were re-elected, and the appointment of Deloitte & Touche LLP as our
independent accountants for the fiscal year ending September 30, 2000 was
ratified.
The voting results for the re-election of the ten incumbent directors are
as set forth below:
<TABLE>
<CAPTION>
FOR WITHHELD
---------- --------
<S> <C> <C>
Frank P. Diassi........................................... 10,806,484 44,429
Peter W. De Leeuw......................................... 10,804,768 46,145
Robert W. Roten........................................... 10,810,325 40,588
Allan R. Dragone.......................................... 10,810,325 40,588
John L. Garcia............................................ 10,802,847 48,066
Frank J. Hevrdejs......................................... 10,810,325 40,588
Hunter Nelson............................................. 10,810,325 40,588
George J. Damiris......................................... 10,810,325 40,588
Rolf H. Towe.............................................. 10,806,484 44,429
William A. McMinn......................................... 10,810,325 40,588
</TABLE>
The voting results for the appointment of Deloitte & Touche LLP as our
independent accountants for the fiscal year ending September 30, 2000 are as
follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
---------- ------- -------
<S> <C> <C>
10,818,974 31,323 316
</TABLE>
There were no broker non-votes for the election of directors or for the
ratification and approval of the appointment of Deloitte & Touche LLP as our
independent accountants for the fiscal year ending September 30, 2000.
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 - 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.
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrants have duly caused this report to be signed on their
behalf by the undersigned thereunto duly authorized.
STERLING CHEMICALS HOLDINGS, INC.
STERLING CHEMICALS, INC.
(Registrants)
Date: February 14, 2000 /s/ PETER W. DE LEEUW
----------------------------------------
Peter W. De Leeuw
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 14, 2000 /s/ GARY M. SPITZ
----------------------------------------
Gary M. Spitz
Vice President-Finance and Chief
Financial Officer
(Principal Financial Officer)
32
<PAGE> 33
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
10.1 - 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>
<PAGE> 1
EXHIBIT 10.1
STERLING CHEMICALS HOLDINGS, INC.
STERLING CHEMICALS, INC.
KEY EMPLOYEE PROTECTION PLAN
PRELIMINARY STATEMENTS
Sterling Chemicals Holdings, Inc. ("Holdings") and Sterling Chemicals,
Inc. ("Chemicals") are Delaware corporations. The Board of Directors of Holdings
(the "Holdings Board") and the Board of Directors of Chemicals (the "Chemicals
Board") have duly adopted this Plan, effective as of January 1, 2000 (the
"Effective Date").
ARTICLE I
Definitions and Interpretations
Section 1.01. Definitions. Capitalized terms used in this Plan shall
have the following respective meanings, except as otherwise provided or as the
context shall otherwise require:
"Annual Compensation" shall mean, when used as of any date with
reference to any Participant, the sum of (i) the highest annual base salary of
such Participant in effect at any time during the three-year period ending
immediately prior to the date on which the applicable Change of Control occurs
plus (ii) the Targeted Bonus, if any, of such Participant in effect immediately
prior to the date on which the applicable Change of Control occurs.
"Applicable Multiplier" shall mean, when used with reference to any
Participant, the multiplier specified in the Instrument of Designation executed
and delivered by Holdings and such Participant in accordance with Section
2.01(b); provided, however, that in no event shall the Applicable Multiplier of
any Participant be less than 0.50 (except as provided in Section 2.03) or
greater than 2.99.
"Benefit Plan" shall mean any employee benefit plan (including any
employee benefit plan within the meaning of section 3(3) of the Employee
Retirement Income Security Act of 1974), program, arrangement or practice
maintained, sponsored or provided by Holdings or any Subsidiary, including those
relating to bonuses, incentive compensation, retirement benefits, stock options,
stock ownership or stock awards, healthcare and medical benefits, disability
benefits, death benefits, disability, life, accident and travel insurance, sick
leave, vacation pay or termination pay.
<PAGE> 2
"CEO" shall mean the Chief Executive Officer of Holdings.
"Chairman" shall mean the Chairman of the Board of Holdings.
"Change of Control" shall mean the occurrence of any of the following
events: (i) Holdings shall not be the surviving entity in any merger,
consolidation or other reorganization (or survives only as a subsidiary of an
entity other than a previously wholly-owned Subsidiary), (ii) Holdings sells,
leases or exchanges all or a substantial part of its assets (other than in the
ordinary course of business) to any other person or entity (other than a
wholly-owned Subsidiary), (iii) Holdings is to be dissolved and liquidated, (iv)
Chemicals sells, leases or exchanges all or a substantial part of its assets
(other than in the ordinary course of business) to any other person or entity
(other than Holdings or another wholly-owned Subsidiary), (v) Chemicals ceases
to be a wholly-owned Subsidiary for any reason other than a merger,
consolidation or other reorganization in which Holdings or a wholly-owned
Subsidiary is the surviving entity, (vi) Chemicals sells, leases or exchanges
all or substantially all of its assets to any other person or entity (other than
Holdings or another wholly-owned Subsidiary), (vii) any person or entity,
including a "group" as contemplated by section 13(d)(3) of the Securities
Exchange Act of 1934, as amended, acquires or gains ownership or control
(including the power to vote) of more than 50% of the outstanding shares of
Holdings' voting stock (based upon voting power) or (viii) as a result of or in
connection with any tender or exchange offer, merger or other business
combination, sale of assets or contested election of directors (by proxy or
otherwise), the persons who were directors of Holdings immediately prior to such
offer, merger or other business combination, sale of assets or election shall
cease to constitute a majority of the Holdings Board (or a majority of the board
of directors of any successor to Holdings) or a majority of the elected officers
of Holdings immediately prior to such offer, merger or other business
combination, sale of assets or election shall cease to serve as elected officers
of Holdings (or any successor to Holdings).
"Chemicals" has the meaning specified in the Preliminary Statements.
"Chemicals Board" has the meaning specified in the Preliminary
Statements.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Reference in this Plan to any section of the Code shall be deemed to include any
amendments or successor provisions to such section and any regulations under
such section.
"Company" shall mean Holdings and the Subsidiaries, including
Chemicals.
"Compensation Committee" shall mean the Compensation Committee of the
Holdings Board.
-2-
<PAGE> 3
"Disability" shall mean, when used with reference to any Participant, a
physical or mental condition of such Participant that, in the opinion of a
licensed physician reasonably acceptable to Holdings and such Participant or his
or her legal representative, (a) prevents such Participant from being able to
perform the services required of him or her as an employee of the Company, (b)
has continued for at least 180 days during any period of twelve consecutive
months and (c) is reasonably expected to continue.
"Effective Date" has the meaning specified in the Preliminary
Statements.
"Good Reason" shall mean, when used with reference to any Participant,
any of the following actions or failures to act, but in each case only if it
occurs at the time of or after a Change of Control and while such Participant is
employed by Holdings or any Subsidiary and then only if it is not consented to
by such Participant in writing:
(a) if (but only if) such Participant is Grade S23 or higher,
a material change in such Participant's reporting responsibilities,
titles or elected or appointed offices as in effect immediately prior
to the date on which the Change of Control occurs, including any change
caused by the removal of such Participant from, or the failure to
re-elect such Participant to, any material corporate office of the
Company held by such Participant immediately prior to the date on which
the Change of Control occurs but excluding any such change that occurs
in connection with such Participant's death, disability or retirement;
(b) if (but only if) such Participant is Grade S23 or higher,
the assignment to such Participant of duties and/or responsibilities
that are materially inconsistent with such Participant's status,
positions, duties, responsibilities and functions with the Company
immediately prior to the date on which the Change of Control occurs;
(c) a material reduction by the Company in such Participant's
total compensation in effect immediately prior to the date on which the
Change of Control occurs or as such compensation may thereafter be
increased from time to time;
(d) the failure of the Company to continue such Participant's
eligibility for participation in Benefit Plans providing benefits that,
in the aggregate, are at least as favorable to such Participant as
those provided under the Benefit Plans in which he or she was a
participant immediately prior to the date on which the Change of
Control occurs;
(e) the failure of the Company to maintain Benefit Plans
entitling such Participant to benefits that, in the aggregate, are at
least as favorable to such Participant as those available to such
Participant immediately prior to the date on which the Change of
Control occurs;
-3-
<PAGE> 4
(f) any change of more than 75 miles (or, in the case of any
Participant for whom the Compensation Committee has approved a shorter
distance, such shorter distance) in the location of the principal place
of employment of such Participant immediately prior to the date on
which the Change of Control occurs;
(g) any purported termination of such Participant's employment
for Misconduct or Disability not in accordance with the provisions of
Section 3.02; or
(h) any purported termination of such Participant's
participation in this Plan not in accordance with the provisions of
Section 2.01(c).
For purposes of this definition, none of the actions described in clauses (a)
through (c) above shall constitute a Good Reason with respect to any Participant
if it was an isolated and inadvertent action not taken in bad faith by the
Company and if it is remedied by the Company promptly after receipt of notice
thereof given by such Participant. For purposes of this definition, any action
or failure to act described in clauses (a) through (h) above shall cease to be a
Good Reason with respect to any Participant on the date which is 60 days after
such Participant acquires actual knowledge of such action or failure to act
unless, prior to such date, such Participant gives a Termination Notice pursuant
to Section 3.01. In the event of any dispute between the Company, on the one
hand, and any Participant, on the other hand, with respect to the amount of
total compensation of such Participant for purposes of clause (c) above or the
aggregate value or level of any of such Participant's benefits for purposes of
clause (d) or (e) above, the Company and such Participant shall use their best
efforts to resolve such dispute themselves. If they are unable to resolve the
dispute within 15 business days, Deloitte & Touche L.L.P., or such other
nationally recognized accounting firm or employee benefits firm acceptable to
the Company and such Participant, shall be engaged by the Company to make its
own determination with respect to the dispute and the determination by such firm
shall be final and binding on the Company (including the Compensation Committee)
and such Participant. If any firm is engaged with respect to any dispute as
aforesaid, (i) such firm shall be instructed to make its determination as soon
as practicable and to use such materiality standard as such firm may determine
to be reasonable under the circumstances and (ii) the disputants shall provide
such firm with all books, records and other information relevant to such dispute
as such firm may reasonably request. No firm engaged as aforesaid shall be
liable or responsible to the Company (including the Compensation Committee) or
any Participant for any determination made by such firm in good faith.
"Grade" shall mean (i) when used with reference to any Participant for
purposes of Section 2.02, his or her salary classification by the Company
immediately prior to the date on which a Change of Control occurs and (ii) when
used with reference to any Participant for purposes of Section 2.03, his or her
salary classification by the Company on the relevant Termination Date.
"Holdings" has the meaning specified in the Preliminary Statements.
"Holdings Board" has the meaning specified in the Preliminary
Statements.
-4-
<PAGE> 5
"Misconduct" shall mean, when used with reference to any Participant:
(a) the commission by such Participant of acts that are both
dishonest and demonstrably injurious to the Company (monetarily or
otherwise) in any material respect;
(b) the failure of such Participant to observe and comply with
the Company's published policies relating to alcohol and drugs,
harassment or antitrust;
(c) the failure of such Participant to observe and comply with
any other lawful published policy of the Company, but, in the case of
any such failure that is capable of being remedied, only if such
failure shall have continued unremedied for more than 30 days after
written notice thereof is given to such Participant by Holdings and/or
Chemicals;
(d) the willful failure of such Participant to observe and
comply with all lawful and ethical directions and instructions of the
Holdings Board, the Chairman and/or the CEO;
(e) the failure of such Participant to perform, in any
material respect, his or her duties with the Company, but only if such
failure was not caused by disability or incapacity and shall have
continued unremedied for more than 30 days after written notice thereof
is given to such Participant by Holdings and/or Chemicals;
(f) the conviction of such Participant for a felony offense;
or
(g) any willful conduct on the part of such Participant that
prejudices, in any material respect, the reputation of the Company in
the fields of business in which it is engaged or with the investment
community or the public at large, but only if such Participant knew, or
should have known, that such conduct could have such result.
For purposes of clauses (d) and (g) above, no act or failure to act on the part
of any Participant shall be considered "willful" if such act or failure to act
was done or omitted to be done by such Participant in good faith and with the
reasonable belief that such Participant's action or omission was in the best
interest of the Company. If any Participant is a party to a written employment
agreement with the Company, then clause (d) above shall not apply to any
directions or instructions that are contrary to or inconsistent with any of the
positions, functions, duties or reporting responsibilities of such Participant
as set forth in such written employment agreement or that violate any of such
Participant's rights, privileges or immunities under such employment agreement.
In case of any dispute regarding whether or not any conduct by a Participant
meets any of the standards set forth in clauses (a) through (g) above, the
burden of proof shall rest with the Company.
-5-
<PAGE> 6
"Participants" shall mean, except as otherwise provided in Section
2.01(c), those employees of Holdings or any Subsidiary who are from time to time
designated by the Compensation Committee as Participants in accordance with
Section 2.01(b).
"Pension Plan" shall mean the Sterling Chemicals, Inc. Amended and
Restate Salaried Employees' Pension Plan (effective as of May 1, 1996) or any
successor plan.
"Plan" shall mean this Key Employee Protection Plan, as amended,
supplemented or modified from time to time in accordance with its terms.
"Qualified Plan" shall mean a "qualified plan" within the meaning of
section 401(a) of the Code.
"Severance Amount" has the meaning specified in Section 2.02(a)(i).
"Subsidiary" shall mean any corporation, limited partnership, general
partnership, limited liability company or other form of entity a majority of any
class of voting stock or other voting rights of which is owned, directly or
indirectly, by Holdings.
"Targeted Bonus" shall mean, when used with reference to any
Participant at any time, the amount determined by multiplying the annual base
salary of such Participant in effect immediately prior to the applicable Change
of Control times such Participant's Target Bonus Percentage, if any, in effect
immediately prior to the date on which such Change of Control occurs under the
Company's bonus plan for salaried employees.
"Termination Date" shall mean the termination date specified in a
Termination Notice delivered in accordance with Article III.
"Termination Notice" shall mean, as appropriate, (a) a notice from a
Participant to Holdings purporting to terminate such Participant's employment
for Good Reason in accordance with Section 3.01 or (b) a notice from Holdings
and/or Chemicals to any Participant purporting to terminate such Participant's
employment for Misconduct or Disability in accordance with Section 3.02.
Section 1.02. Interpretation. In this Plan, unless a clear contrary
intention appears, (a) the words "herein," "hereof" and "hereunder" and other
words of similar import refer to this Plan as a whole and not to any particular
Article, Section or other subdivision, (b) reference to any Article or Section,
means such Article or Section hereof and (c) the words "including" (and with
correlative meaning "include") means including, without limiting the generality
of any description preceding such term. The Article and Section headings herein
are for convenience only and shall not affect the construction hereof.
-6-
<PAGE> 7
ARTICLE II
Eligibility and Benefits
Section 2.01. Eligible Employees. (a) This Plan is only for the benefit
of Participants, and no other employees or personnel shall be eligible to
participate in this Plan or to receive any rights or benefits hereunder.
(b) The Compensation Committee (acting upon the recommendation of the
Chairman and the CEO) shall be authorized from time to time to designate one or
more members of a select group of management or highly compensated employees of
the Company as Participants. Each such designation shall be evidenced by an
Instrument of Designation signed by Holdings and the Participant substantially
in the form of Exhibit A hereto. Each such Instrument of Designation, and the
designation evidenced thereby, shall be binding on the Company.
(c) In the event the Compensation Committee determines in good faith
that any Participant is no longer a key employee of the Company and thus should
not continue to participate in this Plan, the Compensation Committee shall be
permitted, subject to the limitations set forth below, to terminate such
Participant's participation in this Plan on such date as shall be specified by
written notice delivered to such Participant not less than 60 days prior to the
date so specified, which notice shall state that it is a termination notice
given pursuant to this Section 2.01(c). Upon the effective date of such
termination, such Participant shall cease to be a Participant and, accordingly,
such Participant shall no longer be entitled to receive any rights or benefits
hereunder; provided, however, that such termination shall not affect the rights
or benefits of such Participant or the obligations of the Company accrued under
this Plan as of the effective date of such termination or the rights or benefits
of such Participant or the obligations of the Company accruing under this Plan
after the effective date of such termination on account of any Change of Control
that occurred on or before such effective date. Notwithstanding the foregoing,
the Compensation Committee shall not be permitted to terminate any Participant's
participation in this Plan unless the sole reason therefor is that, in the good
faith opinion of the Compensation Committee, such Participant has ceased to be a
key employee of the Company and thus should not continue to participate in this
Plan. Without limitation of the foregoing, the Compensation Committee may not
terminate any Participant's participation in this Plan if such termination is
directly or indirectly related to, connected with, in anticipation of, in
furtherance of, pursuant to the terms of or during the pendency of any Change of
Control or is for the purpose of directly or indirectly encouraging or
facilitating a Change of Control. In case of any dispute regarding whether or
not any purported termination of any Participant's participation in this Plan is
permitted by, or satisfies any of the requirements of, this paragraph (c), the
burden of proof shall rest with the Company.
-7-
<PAGE> 8
Section 2.02. Description of Benefits Triggered by Termination
following a Change of Control. (a) Each Participant shall be entitled to receive
the benefits described below if a Change of Control occurs after the Effective
Date and if, within two years after the date on which such Change in Control
occurs, either such Participant terminates his or her employment for Good Reason
in accordance with Section 3.01 or the Company terminates such Participant's
employment for any reason other than a termination for Misconduct or Disability
in accordance with Section 3.02:
(i) the Company shall pay to such Participant, within 30 days
after the Termination Date, a lump sum cash payment equal to the sum of
(A) the amount (the "Severance Amount") determined (subject to Section
2.04(b)) by multiplying the Annual Compensation of such Participant
times the Applicable Multiplier, plus (B) all unused vacation time
accrued by such Participant as of the Termination Date under the
Company's vacation policy, plus (C) all accrued but unpaid compensation
earned by such Participant as of the Termination Date, plus (D) all
unpaid vested benefits earned or accrued by such Participant as of the
Termination Date under any Benefit Plan (other than a Qualified Plan)
in effect immediately prior to the date on which the Change of Control
occurs; and
(ii) for a period of 24 months (including 18 months of COBRA
coverage) following the Termination Date, such Participant shall
continue to be covered by all life, health care, medical and dental
insurance plans and programs (excluding disability) of the Company by
which he or she was covered on the Termination Date notwithstanding any
subsequent termination or amendment of any such plan or programs and
notwithstanding any eligibility provisions thereof to the contrary,
provided that (A) such Participant makes a timely COBRA election
following the Termination Date and (B) such Participant pays the
regular employee premium required by such plans and programs or by
COBRA, as the case may be.
(b) No Participant shall be entitled to receive any of the benefits
described in this Section 2.02 on account of any Change of Control unless such
Change of Control occurred while such Participant was employed by the Company.
Section 2.03. Description of Benefits Triggered by Termination Without
a Change of Control. (a) The Compensation Committee shall be authorized, in its
discretion, to confer the benefits described in paragraph (b) below upon one or
more Participants who are Grade S23 or higher. As used in paragraph (b) below,
"Senior Executive Participants" means those Participants, if any, who are Grade
23 or higher and upon whom the Compensation Committee shall have conferred the
benefits provided by paragraph (b) below; provided, however, that each Senior
Executive Participant who ceases to be a Participant in accordance with Section
2.01(c) shall thereupon also cease to be a Senior Executive Participant.
-8-
<PAGE> 9
(b) If, under circumstances where Section 2.02 is inapplicable, any
Senior Executive Participant terminates his or her employment for Good Reason in
accordance with Section 3.01 or the Company terminates such Senior Executive
Participant's employment for any reason other than a termination for Misconduct
or Disability in accordance with Section 3.02, then such Senior Executive
Participant shall be entitled to receive, and the Company shall be obligated to
pay and provide, all the benefits described in Section 2.02 the same as if a
Change of Control had occurred on the date which is 60 days prior to the
relevant Termination Date; provided, however, that, for purposes of calculating
the Severance Amount payable to such Senior Executive Participant under this
Section 2.03, the Applicable Multiplier of such Senior Executive Participant
shall be reduced by 50%. In the case of each termination of employment covered
by this Section 2.03, a Change of Control shall be deemed to have occurred on
the date which is 60 days prior to the relevant Termination Date and,
accordingly, all other provisions of this Plan shall be construed as if a Change
of Control had actually occurred on such date.
Section 2.04. Additional Provisions Relating to Benefits under Sections
2.02 and 2.03. (a) Anything in this Plan to the contrary notwithstanding, (i)
the Company shall not be obligated to pay a Severance Amount to any Participant
below Grade S23 or continue the non-COBRA benefits described in Section
2.02(a)(ii) for such Participant if the Termination Date is after such
Participant's normal Retirement Date (as defined in the Pension Plan) and (ii)
the Company's obligation to continue the benefits described in Section
2.02(a)(ii) for any Participant shall cease if and when such Participant becomes
employed, on a full-time basis, by a third party which provides such Participant
with substantially similar benefits.
(b) Anything in this Plan to the contrary notwithstanding, in the event
any Participant becomes entitled to receive a Severance Amount and if such
Participant shall also be entitled to receive any lump-sum separation or
severance pay under any Benefit Plan (other than this Plan) or any agreement
between such Participant and the Company, then such Severance Amount shall be
reduced by the amount of such lump-sum separation or severance pay.
Section 2.05. Certain Additional Payments by the Company. Anything in
this Plan to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution to or for the benefit of any Participant under
this Plan (the "Triggering Payment") would be subject to the excise tax imposed
by Section 4999 of the Code or any interest or penalties with respect to such
excise tax (such excise tax, together with any such interest or penalties, being
collectively referred to below as the "Excise Tax"), then such Participant shall
be entitled to receive from the Company an additional payment (the "Gross-Up
Payment") in an amount such that after payment by such Participant of all taxes
(including any interest or penalties imposed with respect to such taxes)
including any Excise Tax imposed on the Gross-Up Payment, such Participant
retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Triggering Payment. Notwithstanding the foregoing, in no event shall any
Participant be entitled to receive a Gross-Up Payment greater than 25% of such
Participant's Annual Compensation. All determinations required to be made under
this
-9-
<PAGE> 10
Section 2.05 with respect to a particular Participant shall be made by the
independent accounting firm then retained by Holdings in the ordinary course of
business (which firm shall provide detailed supporting calculations to the
Company and such Participant) and such determinations shall be final and binding
on the Company (including the Compensation Committee) and all Participants.
Section 2.06. Cost of Plan; Plan Unfunded; Participant's Rights
Unsecured. The entire cost of this Plan shall be borne by the Company, and no
contributions shall be required of the Participants. The Company shall not be
required to establish any special or separate fund or make any other segregation
of funds or assets to assure the payment of any benefit hereunder. The right of
any Participant to receive the benefits provided for herein shall be an
unsecured claim against the general assets of the Company.
ARTICLE III
Termination Notices
Section 3.01. Termination Notices from Participants. For purposes of
this Plan, in order for any Participant to terminate his or her employment for
Good Reason, such Participant must give a written notice of termination to
Holdings and/or Chemicals, which notice shall be in writing and signed by such
Participant, shall be dated the date it is given to Holdings and/or Chemicals,
shall specify the termination date and shall state that the termination is for a
Good Reason and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for such Good Reason. Any Termination Notice given by
a Participant that is not in compliance, in all material respects, with the
foregoing requirements shall be invalid and ineffective for purposes of this
Plan. If Holdings or Chemicals receives from any Participant a Termination
Notice that it believes is invalid and ineffective as aforesaid, it shall
promptly notify such Participant of such belief and the reasons therefor.
Section 3.02. Termination Notices from Company. For purposes of this
Plan, in order for the Company to terminate any Participant's employment for
Misconduct, Holdings and/or Chemicals must give a written notice of termination
to such Participant, which notice shall be dated the date it is given to such
Participant, shall specify the termination date and shall state that the
termination is for Misconduct and shall set forth in reasonable detail the
particulars thereof. For purposes of this Plan, in order for the Company to
terminate any Participant's employment for Disability, Holdings and/or Chemicals
must give a written notice of termination to such Participant, which notice
shall be dated the date it is given to such Participant, shall specify the
termination date and shall state that the termination is for Disability and
shall set forth in reasonable detail the particulars thereof. Any Termination
Notice given by Holdings and/or Chemicals that is not in compliance, in all
material respects, with the foregoing requirements shall be invalid and
ineffective for purposes of this Plan. Any Termination Notice purported to be
given by Holdings and/or Chemicals to any Participant after the death or
retirement of such Participant shall be invalid and ineffective.
-10-
<PAGE> 11
ARTICLE IV
Dispute Resolution
Section 4.01. Negotiation. Subject to Section 4.03, in case a dispute
or controversy shall arise between any Participant (or any person claiming by,
through or under any Participant) and the Company (including the Compensation
Committee) relating to or arising out of this Plan, either disputant may give
written notice to the other disputant ("Dispute Notice") that it wishes to
resolve such dispute or controversy by negotiations, in which event the
disputants shall attempt in good faith to negotiate a resolution of such dispute
or controversy. If the dispute or controversy is not so resolved within 30 days
after the effective date of the Dispute Notice, subject to Section 4.03, either
disputant may initiate arbitration of the matter as provided in Section 4.02.
All negotiations pursuant to this Section 4.01 shall be held at the Company's
principal offices in Houston, Texas (or such other place as the disputants shall
mutually agree) and shall be treated as compromise and settlement negotiations
for the purposes of the federal and state rules of evidence and procedure.
Section 4.02. Arbitration. Subject to Section 4.03, any dispute or
controversy arising out of or relating to this Plan which has not been resolved
by negotiations in accordance with Section 4.01 within 60 days of the effective
date of the Dispute Notice shall be finally settled by arbitration conducted
expeditiously in accordance with the labor arbitration rules of the American
Arbitration Association. The arbitrator shall be not empowered to award damages
in excess of compensatory damages and each disputant shall be deemed to have
irrevocably waived any damages in excess of compensatory damages. The
arbitrator's decision shall be final and legally binding on the disputants and
their successors and assigns. The fees and expenses of the arbitrator shall be
borne solely by the prevailing disputant or, in the event there is no clear
prevailing disputant, as the arbitrator deems appropriate. All arbitration
conferences and hearings shall be held in Houston, Texas.
Section 4.03. Exclusivity, etc. The dispute resolution procedures set
forth in Sections 4.01 and 4.02 shall not apply to any matter which, by the
express provisions of this Plan, is to be finally determined by the Compensation
Committee or by an accounting firm or employee benefits firm. No legal action
may be brought with respect to this Plan except for the purpose of specifically
enforcing the provisions of this Article IV or for the purpose of enforcing any
arbitration award made pursuant to Section 4.02.
ARTICLE V
Miscellaneous Provisions
Section 5.01. Cumulative Benefits. Except as provided in Section
2.04(b), the rights and benefits provided to any Participant under this Plan are
cumulative of, and are in addition to, all of the other rights and benefits
provided to such Participant under any Benefit Plan or any agreement between
such Participant and the Company.
-11-
<PAGE> 12
Section 5.02. No Mitigation. No Participant shall be required to
mitigate the amount of any payment provided for in this Plan by seeking or
accepting other employment following a termination of his or her employment with
the Company or otherwise, nor shall the amount of any payment provided for in
this Plan be reduced by any compensation or benefit earned by a Participant as
the result of employment by another employer or by retirement benefits. The
Company's obligations to make payments to any Participant required under this
Plan shall not be affected by any set off, counterclaim, recoupment, defense or
other claim, right or action that the Company may have against such Participant.
Section 5.03. Amendment and Termination. (a) The Holdings Board and the
Chemicals Board shall be entitled to terminate this Plan at any time and for any
reason; provided, however, that in no event shall such termination become
effective with respect to any Participant prior to 90 days after notice of such
termination is given to such Participant.
(b) The Holdings Board and the Chemicals Board shall be entitled to
amend this Plan at any time and for any reason; provided, however, that no
amendment that would effectively reduce, alter, suspend or otherwise impair or
prejudice the rights and benefits (whether accrued or unaccrued) of any
Participant in any material respect (a "Material Amendment") shall become
effective with respect to any Participant prior to 90 days after notice of such
amendment is given to such Participant. For purposes of this paragraph (b), the
termination of a Participant's participation in this Plan in accordance with
Section 2.01(c) shall not be deemed to be an amendment of this Plan.
(c) Notwithstanding the foregoing, no termination of this Plan and no
Material Amendment shall be effective with respect to, or binding upon, any
person who at the time is a Participant if such termination or such Material
Amendment is directly or indirectly related to, connected with, in anticipation
of, in furtherance of, pursuant to the terms of or during the pendency of any
Change of Control or is for the purpose of directly or indirectly encouraging or
facilitating a Change of Control.
(d) No termination or amendment of this Plan shall affect the rights or
benefits of any Participant or the obligations of the Company accrued under this
Plan as of the effective date of such termination or amendment or any of the
rights or benefits of such Participant or the obligations of the Company
accruing under this Plan after the effective date of such termination or
amendment on account of any Change of Control that occurred prior to such
effective date. If any Participant shall become entitled to benefits under this
Plan during the term of this Plan, then, notwithstanding the termination or
amendment of this Plan, the benefits payable hereunder to such Participant shall
be paid in full.
(e) In case of any dispute regarding whether or not any purported
termination or amendment of this Plan is permitted by, or satisfies any of the
requirements of, this Section 5.03, the burden of proof shall rest with the
Company.
-12-
<PAGE> 13
(f) As used in this Section 5.03, "Holdings Board" shall include the
board of directors of any successor to Holdings and "Chemicals Board" shall
include the board of directors of any successor to Chemicals.
Section 5.04. Enforceability. The provisions of this Plan (i) are for
the benefit of, and may be enforced directly by, each Participant the same as if
the provisions of this Plan were set forth in their entirety in a written
instrument executed and delivered by the Company and such Participant and (ii)
constitute a continuing offer to all present and future Participants. Holdings
and Chemicals, by their adoption of this Plan, (a) acknowledge and agree that
each present and future Participant has relied upon and will continue to rely
upon the provisions of this Plan in becoming, and serving as, an employee of the
Company, (b) waive reliance upon, and all notices of acceptance of, this Plan by
the Participants and (c) acknowledge and agree that no present or future
Participant shall be prejudiced in his or her right to enforce directly the
provisions of this Plan in accordance with the terms by any act or failure to
act on the part of the Company.
Section 5.05. Administration. (a) The Compensation Committee shall have
full and final authority to make determinations with respect to the
administration of this Plan, to construe and interpret its provisions and to
take all other actions deemed necessary or advisable for the proper
administration of this Plan, but such authority shall be subject to the
provisions of this Plan. Subject to Section 2.02(c), the Compensation Committee
shall have no authority to change or modify the level of benefits provided for
Participants under this Plan. No discretionary action by the Compensation
Committee shall amend or supersede the express provisions of this Plan. In
making determinations and taking other actions with respect to this Plan, the
members of the Compensation Committee will be deemed to be fiduciaries with the
same duties imposed upon plan fiduciaries by the Employee Retirement Income
Security Act of 1974.
(b) The members of the Compensation Committee shall receive no
additional compensation for their services relating to this Plan. Any expenses
properly incurred by the Compensation Committee incident to this Plan, including
the cost of any bond required by applicable law, shall be paid by the Company.
(c) The Company shall indemnify and hold harmless each member of the
Compensation Committee against and all expenses and liabilities arising out of
his or her administrative functions or fiduciary responsibilities, including any
expenses and liabilities that are caused by or result from an act or omission
constituting the negligence of such member in the performance of such functions
or responsibilities, but excluding expenses and liabilities that are caused by
or result from such member's own gross negligence or willful misconduct.
Expenses against which such member shall be indemnified hereunder shall include,
without limitation, the amounts of any settlement or judgment, costs, counsel
fees, and related charges reasonably incurred in connection with a claim
asserted or a proceeding brought or settlement thereof.
-13-
<PAGE> 14
Section 5.06. Release of Claims. As a condition to receipt of the
benefits under this Plan, a Participant will be required to sign an agreement,
to be prepared by Holdings, in which he or she releases the Company and its
successors, assigns, divisions, subsidiaries, representatives, agents, officers,
directors, stockholders, and employees from any claims, demands and/or causes of
action relating to or arising out of the termination of his or her employment
with the Company, including, but not limited to any statutory claims under the
Age Discrimination in Employment Act of 1967, the Americans with Disabilities
Act of 1990, the Civil Rights Acts of 1964 and 1991, and/or the Texas Commission
on Human Rights Act.
Section 5.07. Assignability. The Company shall have the right to assign
this Plan and to delegate its duties and obligations hereunder, but not
otherwise; provided, however, that no such assignment shall relieve or discharge
the Company of or from any of its obligations under this Plan. Unless otherwise
approved by the Compensation Committee, no Participant shall transfer or assign
any of his or her rights under this Plan except by will or the laws of descent
and distribution.
Section 5.08. Successors and Assigns. This Plan shall be binding upon
and inure to the benefit of the Company and its successors and assigns. This
Plan and all rights of each Participant shall inure to the benefit of and be
enforceable by such Participant and his or her personal or legal
representatives, executors, administrators, heirs and permitted assigns. If any
Participant should die while any amounts are due and payable to such Participant
hereunder, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Plan to such Participant's devisees, legatees
or other designees or, if there be no such devisees, legatees or other
designees, to such Participant's estate.
Section 5.09. Notices. All notices and other communications provided
for in this Plan shall be in writing and shall be sent, delivered or mailed,
addressed as follows: (i) if to Holdings, Chemicals or any other Subsidiary, at
Holdings' principal office address or such other address as Holdings may have
designated by written notice to all Participants for purposes hereof, directed
to the attention of the Treasurer, and (ii) if to any Participant, at his or her
residence address on the records of Holdings or to such other address as he or
she may have designated to Holdings in writing for purposes hereof. Each such
notice or other communication shall be deemed to have been duly given or mailed
by United States registered mail, return receipt requested, postage prepaid,
except that any change of notice address shall be effective only upon receipt.
Section 5.10. Tax Withholdings. The Company shall have the right to
deduct from any payment hereunder all taxes (federal, state or other) which it
is required to be withhold therefrom.
Section 5.11. No Employment Rights Conferred. Nothing contained in this
Plan shall (i) confer upon any Participant any right with respect to
continuation of employment with the Company or (ii) subject to the rights and
benefits of any Participant hereunder, interfere in any way with the right of
the Company to terminate such Participant's employment at any time.
-14-
<PAGE> 15
Section 5.12. Governing Law. This Plan shall be governed in accordance
with the laws of the State of Texas and applicable federal law.
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of this
Plan by the Holdings Board and the Chemicals Board, Holdings and Chemicals have
each caused this Plan to be duly executed in its name and behalf by its proper
officer thereunto duly authorized as of the Effective Date.
STERLING CHEMICALS HOLDINGS, INC.
By:
--------------------------------------
Frank P. Diassi, Chairman of the Board
STERLING CHEMICALS, INC.
By:
--------------------------------------
Frank P. Diassi, Chairman of the Board
-15-
<PAGE> 16
EXHIBIT A
STERLING CHEMICALS HOLDINGS, INC.
Instrument of Designation
THIS INSTRUMENT OF DESIGNATION (this "Instrument") is intended to
evidence the designation by the Compensation Committee of the Board of Directors
of Sterling Chemicals Holdings, Inc., a Delaware corporation (the
"Corporation"), of the undersigned employee as a "Participant," within the
meaning of that certain Key Employee Protection Plan of the Corporation and
Sterling Chemicals Holdings, Inc., a Delaware corporation, with an Applicable
Multiplier (as defined therein) of _____________.
IN WITNESS WHEREOF, the Corporation has caused its duly authorized
officer to execute this Instrument effective as of the date set forth below.
Dated: STERLING CHEMICALS HOLDINGS, INC.
By:
----------------------------------
Printed Name:
------------------------
Title:
-------------------------------
EMPLOYEE:
- -------------------------------------
Printed Name:
------------------------
-16-
<PAGE> 1
EXHIBIT 11.1
STERLING CHEMICALS HOLDINGS, INC.
EARNINGS PER SHARE COMPUTATION
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
BASIC EARNINGS PER SHARE
Weighted average number of shares of common stock outstanding 12,612 12,427
Net Loss $(10,362) $(13,100)
Less: Preferred dividend requirements and accretion (719) (645)
-------- --------
Net loss used in basic loss per share $(11,081) $(13,745)
======== ========
BASIC LOSS PER SHARE $ (0.88) $ (1.11)
======== ========
DILUTED EARNINGS PER SHARE
Weighted average number of shares of common stock outstanding 12,612 12,427
Total weighted average number of shares outstanding used in
diluted loss per share computation(1) 12,612 12,427
Net loss $(10,362) $(13,100)
Less: Preferred dividend requirements and accretion (719) (645)
-------- --------
Net loss used in diluted earning per share $(11,081) $(13,745)
======== ========
DILUTED LOSS PER SHARE(1) $ (0.88) $ (1.11)
======== ========
</TABLE>
(1) Due to losses resulting in anti-dilution, same as amount used in basic
computation.
<PAGE> 1
EXHIBIT 15.1
Deloitte & Touche LLP
333 Clay Street
Suite 2300
Houston, Texas 77002
February 11, 2000
Sterling Chemicals Holdings, Inc.
1200 Smith Street, Suite 1900
Houston, Texas 77094
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Sterling Chemicals Holdings, Inc. and subsidiaries for the three
month periods ended December 31, 1999 and 1998, as indicated in our report dated
February 11, 2000; because we did not perform an audit, we expressed no opinion
on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended December 31, 1999, is
incorporated by reference in Registration Statement No. 333-30917 for Sterling
Chemicals Holdings, Inc. on Form S-3 and in Registration Statement No. 333-52795
for Sterling Chemicals Holdings, Inc. on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statements prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000795662
<NAME> STERLING CHEMICALS HOLDINGS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,948
<SECURITIES> 0
<RECEIVABLES> 163,246
<ALLOWANCES> (2,157)
<INVENTORY> 74,184
<CURRENT-ASSETS> 273,208
<PP&E> 790,689
<DEPRECIATION> 392,281
<TOTAL-ASSETS> 779,521
<CURRENT-LIABILITIES> 158,922
<BONDS> 973,054
21,651
0
<COMMON> 123
<OTHER-SE> (465,141)
<TOTAL-LIABILITY-AND-EQUITY> 779,521
<SALES> 246,921
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