<PAGE> 1
EXHIBIT 99.1
STERLING CANADA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Revenues ......................................... $ 173,204 $ 155,673 $ 162,066
Cost of goods sold ............................... 135,049 125,812 124,887
--------- --------- ---------
Gross profit ..................................... 38,155 29,861 37,179
Selling, general, and administrative expenses .... 12,746 9,839 9,941
Interest and debt related expenses ............... 29,768 29,463 28,484
--------- --------- ---------
Net loss before income taxes ..................... (4,359) (9,441) (1,246)
Provision (benefit) for income taxes ............. 2,946 487 (534)
--------- --------- ---------
Net loss ......................................... $ (7,305) $ (9,928) $ (712)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 2
STERLING CANADA, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 86 $ 8,588
Accounts receivable, net ........................... 49,930 33,342
Inventories ........................................ 7,459 6,288
Prepaid expenses ................................... 568 1,869
--------- ---------
Total current assets ............................. 58,043 50,087
Property, plant, and equipment, net ................... 117,785 127,658
Due from affiliates ................................... 168,008 150,946
Other assets .......................................... 21,450 34,389
--------- ---------
Total assets ..................................... $ 365,286 $ 363,080
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ................................... $ 15,478 $ 14,680
Accrued liabilities ................................ 16,511 11,238
--------- ---------
Total current liabilities ........................ 31,989 25,918
Long-term debt due to parent .......................... 244,001 243,999
Deferred income taxes ................................. 8,338 7,272
Deferred credits and other liabilities ................ 8,832 4,927
Commitments and contingencies (Note 7) ................ -- --
Stockholder's equity:
Common stock ....................................... -- --
Additional paid-in capital ......................... 83,396 83,396
Retained earnings .................................. 17,763 25,068
Accumulated other comprehensive income ............. (29,033) (27,500)
--------- ---------
Total stockholder's equity ....................... 72,126 80,964
--------- ---------
Total liabilities and stockholder's equity .... $ 365,286 $ 363,080
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
2
<PAGE> 3
STERLING CANADA, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
-------- ---------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1997 .... $ -- $ 83,396 $ 35,708 $(20,772) $ 98,332
Comprehensive income:
Net loss .................... -- -- (712) --
Translation adjustment ...... -- -- -- (10,041)
Comprehensive loss ....... (10,753)
-------- -------- -------- -------- --------
Balance, September 30, 1998 .... -- 83,396 34,996 (30,813) 87,579
Comprehensive income:
Net loss .................... -- -- (9,928) --
Translation adjustment ...... -- -- -- 3,313
Comprehensive loss ....... (6,615)
-------- -------- -------- -------- --------
Balance, September 30, 1999 .... -- 83,396 25,068 (27,500) 80,964
Comprehensive income:
Net loss .................... -- -- (7,305) --
Translation adjustment ...... -- -- -- (1,533)
Comprehensive loss ....... (8,838)
-------- -------- -------- -------- --------
Balance, September 30, 2000 .... $ -- $ 83,396 $ 17,763 $(29,033) $ 72,126
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE> 4
STERLING CANADA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ........................................................................... $ (7,305) $ (9,928) $ (712)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization ................................................... 19,476 18,328 18,140
Deferred tax expense (benefit) .................................................. 1,066 763 (361)
Other ........................................................................... 60 (234) 448
Change in assets/liabilities:
Accounts receivable ............................................................. (16,588) (6,943) 6,863
Inventories ..................................................................... (1,171) 1,578 (1,718)
Prepaid expenses ................................................................ 1,301 4,721 (2,846)
Due from affiliates ............................................................. (18,595) 2,017 (3,796)
Other assets .................................................................... 8,802 2,298 (1,062)
Accounts payable ................................................................ 798 1,142 5,208
Accrued liabilities ............................................................. 5,273 (1,629) 1,606
Other liabilities ............................................................... 3,907 (4,792) 298
-------- -------- --------
Net cash flows provided by (used in) operating activities .......................... (2,976) 7,321 22,068
-------- -------- --------
Cash flows from investing activities:
Capital expenditures ............................................................ (5,466) (4,357) (6,154)
Proceeds on disposal of fixed assets ............................................ -- 3,583 --
-------- -------- --------
Net cash used in investing activities .............................................. (5,466) (774) (6,154)
-------- -------- --------
Cash flows from financing activities -
Net change in long-term debt due to Parent ...................................... -- (1,765) (17,806)
-------- -------- --------
Effect of United States/Canadian exchange rate on cash ............................. (60) 234 (447)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............................... (8,502) 5,016 (2,339)
Cash and cash equivalents--beginning of year ....................................... 8,588 3,572 5,911
-------- -------- --------
Cash and cash equivalents--end of year ............................................. $ 86 $ 8,588 $ 3,572
======== ======== ========
Supplemental disclosures of cash flow information:
Income taxes paid ............................................................... $ (696) $ (749) $ (541)
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE> 5
STERLING CANADA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Sterling Canada, Inc., through its subsidiaries (Sterling Canada, Inc. and
its subsidiaries collectively, the "Company"), manufactures chemicals for use
primarily in the pulp and paper industry at four plants in Canada and one plant
in Valdosta, Georgia. 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 produces sodium chlorite at one of
its Canadian locations and oversees construction of large-scale chlorine dioxide
generators for the pulp and paper industry. Sterling Canada, Inc. is a wholly
owned subsidiary of Sterling Chemicals, Inc. ("Chemicals"), which is a wholly
owned subsidiary of Sterling Chemicals Holdings, Inc. ("Holdings").
On July 23, 1999, Chemicals completed a private offering of $295,000,000 of
its 12 3/8% Senior Secured Notes due 2006. On November 5, 1999, Chemicals
completed a registered exchange offer, pursuant to which all of these notes were
exchanged for publicly registered 12 3/8% Notes with substantially similar terms
(the "12 3/8% Notes"). The 12 3/8% Notes are guaranteed by Sterling Canada,
Inc., Sterling Pulp Chemicals, Inc., and Sterling Pulp Chemicals US, Inc.
(Sterling Canada, Inc.'s subsidiaries incorporated in the United States) and all
of Chemicals' other existing direct and indirect subsidiaries incorporated in
the United States (other than Sterling Chemicals Acquisitions, Inc.) on a joint
and several basis and are secured by, among other things, a second priority
pledge of 100% of the stock of these subsidiaries. The 12 3/8% Notes are also
secured by 65% of the stock of Sterling Pulp Chemicals, Ltd. ("Sterling Pulp")
and Sterling NRO, Ltd., each of which is a Canadian subsidiary of Sterling
Canada, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are described below.
The financial statements of the Company are presented in accordance with
generally accepted accounting principles in the United States of America
("U.S.") and certain subsidiaries have been translated from Canadian dollars,
their functional currency, to U.S. dollars, the reporting currency of the
Company following the guidelines established by Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation."
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Sterling
Canada, Inc. and all of its direct and indirect wholly owned subsidiaries, which
include Sterling Pulp, Sterling Pulp Chemicals, Inc., Sterling Pulp Chemicals
US, Inc., and Sterling NRO, Ltd. All significant intercompany accounts and
transactions have been eliminated.
CASH EQUIVALENTS
The Company considers all investments with a remaining maturity of three
months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost and market. Cost is determined
on the first-in, first-out basis, except for stores and supplies which are
valued at average cost.
The Company enters into agreements with other companies to exchange
chemical inventories in order to minimize working capital requirements and to
facilitate distribution logistics. Balances related to quantities due to or
payable by the Company are included in inventory.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Major renewals and
improvements which extend the useful lives of equipment are capitalized, while
repair and maintenance expenses are charged to operations as incurred. Disposals
are removed at carrying costs less accumulated depreciation with any resulting
gain or loss reflected in operations.
5
<PAGE> 6
Depreciation is provided using the straight-line method over estimated useful
lives ranging from five to 25 years, with the predominant life of plant and
equipment being 15 years.
IMPAIRMENT OF LONG-LIVED ASSETS
Impairment tests of long-lived assets are made when conditions indicate
their carrying costs may not be recoverable. Such impairment tests are based on
a comparison of undiscounted future cash flows or the market value of similar
assets to the carrying cost of the asset. If an impairment is indicated, the
asset value is written down to its estimated fair value.
PATENTS AND ROYALTIES
The costs of patents are amortized on a straight-line basis over their
estimated useful lives, which approximate ten years. The Company capitalized the
value of its chlorine dioxide generator technology acquired in fiscal 1992 based
on the net present value of all estimated remaining royalty payments associated
with this technology. The resulting intangible amount is included in other
assets and is amortized over the average life for these royalty payments of ten
years.
INCOME TAXES
The Company is included in the consolidated United States federal income
tax returns filed by Holdings. The Company's provision (benefit) for United
States income taxes has been allocated by Holdings as if the Company filed its
annual tax returns on a separate return basis. The Company's Canadian
subsidiaries file separate federal Canadian tax returns, as well as returns in
the provinces in which they operate. For these Canadian subsidiaries, deferred
income taxes are recorded to reflect the tax effect of the temporary differences
between the financial reporting basis and the tax basis of the subsidiary's
assets and liabilities.
REVENUE RECOGNITION
The Company generates revenues through sales in the open market pursuant to
short-term and long-term contracts with its customers. The Company recognizes
revenue from sales as the products are shipped. Revenues associated with the
constructing of chlorine dioxide generators are recognized using the percentage
of completion method based on cost incurred compared to total estimated cost.
The Company also receives prepaid royalties for use of its chlorine dioxide
generator technology, which are typically recognized as revenues over a period
of ten years. The Company classifies amounts billed to customers for shipping
and handling as revenues, with the related shipping and handling costs included
in cost of goods sold.
FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE
Assets and liabilities denominated in Canadian dollars are translated into
United States dollars at year-end exchange rates and revenues and expenses are
translated at the average monthly exchange rates. Translation adjustments are
included in accumulated other comprehensive income, while transaction gains and
losses are included in operations when incurred.
The Company's Canadian subsidiaries previously entered into forward foreign
exchange contracts to minimize the short-term impact of Canadian dollar
fluctuations on some of its Canadian dollar denominated commitments. Gains or
losses on these contracts were deferred and were included in operations in the
same period in which the related transactions were settled.
EARNINGS PER SHARE
All issued and outstanding shares of the Company are held directly or
indirectly by Chemicals and, accordingly, earnings per share information is not
presented.
ENVIRONMENTAL COSTS
Environmental costs are expensed as incurred unless the expenditures extend
the economic useful life of the relevant assets. Costs that extend the economic
life of assets are capitalized and depreciated over the remaining life of those
assets. Liabilities are recorded when environmental assessments or remedial
efforts are probable and the cost can be reasonably estimated.
6
<PAGE> 7
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In preparing disclosures about the fair value of financial instruments, the
Company has assumed that the carrying amount approximates fair value for cash
and cash equivalents, receivables, accounts payable, and certain accrued
expenses due to the short maturities of these instruments. The fair values of
long-term debt instruments are estimated based upon quoted market values (if
applicable) of the debt allocated to the Company by Chemicals or on the current
interest rates available for debt with similar terms and remaining maturities.
Considerable judgment is required in developing these estimates and,
accordingly, no assurances can be given that the estimated values presented
herein are indicative of the amounts that would be realized in a free market
exchange.
ACCOUNTING ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
ALLOCATIONS
Sterling Canada, Inc. and each of its subsidiaries is directly or
indirectly wholly owned by Chemicals, which incurs certain direct and indirect
expenses for the benefit and support of the Company. These services include,
among others, tax planning, treasury, legal, risk management, and the
maintenance of insurance coverage for the Company. Chemicals allocated $3.5
million, $2.5 million, and $2.5 million of such expenses to the Company in
fiscal years 2000, 1999, and 1998, respectively, which are included in selling,
general, and administrative expenses. Allocations are based on the Company's
proportionate share of the respective amounts and are determined primarily on
revenue. In addition, the Company is dependent on Chemicals for financing.
NEW ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," establish accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. We adopted these statements as of
October 1, 2000. The transition adjustment relating to the adoption of these
statements was not material.
RECLASSIFICATION
Certain amounts reported in the financial statements for the prior periods
have been reclassified to conform with the current financial statement
presentation with no effect on net income (loss) or stockholder's equity.
7
<PAGE> 8
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
<TABLE>
<CAPTION>
September 30,
-------------------------
2000 1999
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
Inventories:
Finished products ....................... $ 3,823 $ 2,512
Raw materials ........................... 250 270
--------- ---------
Inventories, at cost ....................... 4,073 2,782
Inventories under exchange agreements ...... 278 170
Stores and supplies ........................ 3,108 3,336
--------- ---------
$ 7,459 $ 6,288
========= =========
Property, plant, and equipment:
Land .................................... $ 1,430 $ 1,465
Buildings ............................... 27,109 27,040
Plant and equipment ..................... 163,619 161,824
--------- ---------
Property, plant, and equipment, at cost .... 192,158 190,329
Less accumulated depreciation .............. (74,373) (62,671)
--------- ---------
$ 117,785 $ 127,658
========= =========
Accrued liabilities:
Accrued compensation .................... $ 3,008 $ 2,169
Billings in excess of costs incurred .... 508 3,135
Accrued interest ........................ 6,559 1,976
Other ................................... 6,436 3,958
--------- ---------
$ 16,511 $ 11,238
========= =========
</TABLE>
4. LONG TERM DEBT
In August of 1996, in connection with a recapitalization transaction,
Chemicals allocated $276.8 million of debt to the Company. Principal payments
were allocated to the Company by Chemicals as scheduled principal payments were
made on a basis consistent with the original allocation. In addition, the
Company has made payments to Chemicals, from time to time, out of available cash
which were applied by Chemicals as a reduction of the principal of the
previously allocated debt. Interest expense is allocated to the Company based on
the terms of Chemicals' debt agreements. At September 30, 1999, interest rates
on the allocated debt ranged from 11.25% to 12.375%. Debt issue costs relating
to long-term debt have been allocated to the Company by Chemicals on a basis
consistent with long-term debt and are included in other assets.
On July 23, 1999, Chemicals completed a private offering of $295,000,000 of
its 12 3/8% Senior Secured Notes due 2006 which were subsequently exchanged for
the 12 3/8% Notes. The 12 3/8% Notes are guaranteed by Sterling Canada, Inc.,
Sterling Pulp Chemicals, Inc., Sterling Pulp Chemicals US, Inc., and most of
Chemicals' other existing direct and indirect subsidiaries incorporated in the
United States on a joint and several basis. Each subsidiary's guarantee ranks
equally in right of payment with all of its existing and future senior
indebtedness and senior in right of payment to all of its existing and future
subordinated indebtedness. However, the 12 3/8% Notes and each subsidiary's
guarantee are subordinated to the extent of the collateral securing Chemicals'
secured revolving credit facilities. The 12 3/8% Notes and the subsidiary
guarantees are secured by (i) a second priority lien on all of Chemicals' and
the subsidiary guarantors' United States production facilities and related
assets, (ii) a second priority pledge of all of the capital stock of each
subsidiary guarantor, and (iii) a first priority pledge of 65% of the stock of
certain of the Chemicals' subsidiaries incorporated outside of the United
States, including Sterling Pulp and Sterling NRO, Ltd. The proceeds of the
offering of the 12 3/8% Notes were used to fully repay and terminate Chemicals'
three outstanding term loans. Upon
8
<PAGE> 9
consummation of the offering of the 12 3/8% Notes, the debt allocated to the
Company by Chemicals increased to $244.0 million.
On July 23, 1999, Chemicals also established two secured revolving credit
facilities providing for up to $155,000,000 in revolving credit loans (the
"Revolvers") under a single Revolving Credit Agreement (the "Credit Agreement").
Under the Credit Agreement, Chemicals and most of its direct and indirect
subsidiaries incorporated in the United States, including Sterling Canada, Inc.,
Sterling Pulp Chemicals, Inc., and Sterling Pulp Chemicals US, Inc., are
co-borrowers and are jointly and severally liable for any indebtedness
thereunder. The Revolvers consist of (i) an $85,000,000 revolving credit
facility (the "Current Assets Revolver") secured by a first priority lien on all
accounts receivable, inventory, and other specified assets of Chemicals and the
other co-borrowers, and (ii) a $70,000,000 revolving credit facility (the "Fixed
Assets Revolver") secured by a first priority lien on all United States
production facilities and related assets of Chemicals and the other co-borrowers
and all of the capital stock of Chemicals and the other co-borrowers and a
second priority lien on all accounts receivable, inventory, and other specified
assets of Chemicals and the other co-borrowers.
Funding under the 12 3/8% Notes and the Revolvers occurred on July 23,
1999. The proceeds of the 12 3/8% Notes and the initial borrowings under the
Revolvers were used to completely repay all outstanding indebtedness under
Chemicals' then existing senior credit facilities.
Approximately $37.2 million was drawn by Chemicals under the Fixed Assets
Revolver at September 30, 2000, of which no amounts were allocated to the
Company. Borrowings under the Fixed Assets Revolver bear interest, at Chemicals'
option, at an annual rate of either the "LIBOR Rate" (as defined in the Credit
Agreement) plus 3.75% or the "Alternate Base Rate" plus 2.25%. Borrowings under
the Current Assets Revolver bear interest, at Chemicals' option, at an annual
rate of either the LIBOR Rate plus 3.00% or the "Alternate Base Rate" plus
1.50%. The "Alternate Base Rate" is equal to the greater of the "Base Rate" as
announced from time to time by The Chase Manhattan Bank in New York, New York or
the "Federal Funds Effective Rate" plus 1/2% (as defined in the Credit
Agreement). The Credit Agreement also requires Chemicals and the other
co-borrowers to pay an aggregate commitment fee ranging from 0.75% to 1.25% on
the unused portion of the commitment for the Fixed Assets Revolver, depending on
the amount drawn, and an aggregate commitment fee of 0.5% on the unused portion
of the commitment for the Current Assets Revolver. Available credit under the
Current Assets 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 $42,500,000. In addition, the borrowing base for the Current Assets
Revolver must exceed outstanding borrowings thereunder by $12,000,000 at all
times.
The Fixed Assets Revolver matures on July 23, 2004, with quarterly
commitment reductions totaling 30% of the total commitment in the twelve month
period ending July 23, 2003, and the balance in the following twelve month
period. The Current Assets Revolver matures on July 23, 2004, with no scheduled
commitment reductions prior to that time. However, the commitments for each of
the Fixed Assets Revolver and the Current Assets Revolver are permanently
reduced to the extent required under the Credit Agreement upon prepayments made
out of specific sources of funds, including certain equity issuances by Holdings
and asset sales.
5. INCOME TAXES
The Company is included in the consolidated federal United States tax
returns filed by Holdings. The Company's provision (benefit) for United States
income taxes has been allocated as if the Company filed their annual federal
United States tax returns on a separate return basis. As of September 30, 2000,
and 1999, $13.1 million and $13.1 million, respectively, of deferred income tax
assets were included in Due from Affiliates.
For the years ended September 30, 2000, 1999, and 1998, the Company
recorded zero, $0.2 million, and $(2.3) million, respectively, of United States
income tax provision (benefit) in its provision (benefit) for income taxes.
Canadian deferred income taxes are recorded to reflect the tax consequences
in future years of differences between the tax basis of assets and liabilities
and the financial reporting amounts at each year-end.
9
<PAGE> 10
A reconciliation of the Canadian income taxes to the Canadian effective tax
provision follows:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Provision for federal income tax at the statutory rate ............. $ 2,308 $ 259 $ 1,367
Provincial income taxes at the statutory rate ...................... 1,114 88 563
Federal and provincial manufacturing and processing tax credits .... (477) (50) (286)
Other .............................................................. -- 16 156
------- ------- -------
Total Canadian tax provision ....................................... $ 2,945 $ 313 $ 1,800
======= ======= =======
</TABLE>
The provision for Canadian income taxes is composed of the following:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Current federal .................................................... $ 3,328 $ 2,098 $ 2,852
Deferred federal ................................................... (1,380) (1,859) (1,611)
Current provincial ................................................. 1,702 619 1,427
Deferred provincial ................................................ (705) (545) (868)
------- ------- -------
Total Canadian tax provision ....................................... $ 2,945 $ 313 $ 1,800
======= ======= =======
</TABLE>
The components of the Company's Canadian deferred income tax assets and
liabilities are summarized below:
<TABLE>
<CAPTION>
September 30,
----------------------
2000 1999
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Deferred tax assets:
Accrued liabilities .................................................... $ 249 $ 318
Accrued postretirement cost ............................................ 1,339 1,236
Investment tax credits ................................................. 1,408 4,767
-------- --------
2,996 6,321
-------- --------
Deferred tax liabilities:
Property, plant, and equipment ......................................... (11,334) (13,593)
-------- --------
(11,334) (13,593)
-------- --------
Net deferred tax liabilities .............................................. $ (8,338) $ (7,272)
======== ========
</TABLE>
6. EMPLOYEE BENEFITS
The Company's United States employees participate in various employee
benefit plans of Chemicals. Costs, assets, and liabilities associated with
United States employees participating in these various plans are allocated to
the Company by Chemicals based on the number of employees. In addition, the
Company sponsors various employee benefit plans in Canada.
RETIREMENT BENEFIT PLANS
Chemicals has non-contributory pension plans in the United States which
cover all salaried and wage employees. The benefits under these plans are based
primarily on years of service and employees' pay near retirement. Chemicals'
funding policy is consistent with the funding requirements of federal law and
regulations. Plan assets consist principally of government and corporate
securities. The liability relating to United States employees allocated to the
Company by Chemicals for the retirement benefit plans and included in Due from
Affiliates was $0.6 million and $0.4 million at September 30, 2000 and 1999,
respectively. The total pension expense relating to United States employees
allocated to the Company was $0.2 million, $0.1 million, and $0.1 million for
the years ended September 30, 2000, 1999, and 1998, respectively.
10
<PAGE> 11
The Company has employer and employee contributory plans in Canada which
cover all salaried and wage employees. Information for Canadian benefit plans
concerning the pension obligation, plan assets, amounts recognized in the
Company's financial statements, and underlying actuarial assumptions is stated
below.
<TABLE>
<CAPTION>
September 30,
----------------------
2000 1999
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year .................... $ 16,283 $ 14,577
Currency rate conversion ................................... (293) 556
Service cost ............................................... 716 919
Interest cost .............................................. 1,240 1,112
Actuarial loss (gain) ...................................... (31) (124)
Benefits paid .............................................. (307) (757)
-------- --------
Benefit obligation at end of year .......................... $ 17,608 $ 16,283
======== ========
Change in plan assets:
Fair value at beginning of year ............................ $ 15,330 $ 13,062
Currency rate conversion ................................... (276) 498
Actual return on plan assets ............................... 2,412 1,858
Employer contributions ..................................... 658 669
Benefits paid .............................................. (307) (757)
-------- --------
Fair value at end of year .................................. $ 17,817 $ 15,330
======== ========
Development of net amount recognized:
Funded status .............................................. $ 209 $ (953)
Unrecognized cost:
Actuarial loss (gain) ................................... (1,318) (22)
Prior service cost ...................................... 298 333
-------- --------
Net amount recognized ...................................... $ (811) $ (642)
======== ========
Amounts recognized in the statement of financial position:
Prepaid pension cost ....................................... $ 418 $ 529
Accrued pension cost ....................................... (1,229) (1,198)
Intangible asset ........................................... -- 27
-------- --------
Net amount recognized ...................................... $ (811) $ (642)
======== ========
</TABLE>
Net periodic pension costs for the Canadian pension plan consist of the
following components:
<TABLE>
<CAPTION>
September 30,
------------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Components of net pension costs:
Service cost-benefits earned during the year ............. $ 716 $ 919 $ 748
Interest on prior year's projected benefit obligation .... 1,240 1,112 1,016
Expected return on plan assets ........................... (1,144) (963) (1,092)
Net amortization:
Actuarial loss (gain) ................................. 28 68 (130)
Prior service cost .................................... (2) 29 15
------- ------- -------
Net pension costs ........................................ $ 838 $ 1,165 $ 557
======= ======= =======
Weighted-average assumptions:
Discount Rate ............................................ 7.5% 7.5% 7.0%
Rates of increase in salary compensation level ........... 4.5% 4.5% 4.0%
Expected long-term rate of return on plan assets ......... 7.5% 7.5% 7.0%
</TABLE>
11
<PAGE> 12
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Chemicals and the Company provide certain health care benefits and life
insurance benefits for retired employees. Substantially all employees become
eligible for these benefits at normal retirement age. The cost of these benefits
is accrued during the period in which the employee renders the necessary
service.
Health care benefits are provided to employees who retire with ten or more
years of service, excluding Canadian employees covered by collective bargaining
agreements. All employees are eligible for postretirement life insurance.
Postretirement health care benefits for United States plans are
non-contributory. Benefit provisions for most hourly and some salaried employees
are subject to collective bargaining agreements. In general, the plans stipulate
that retiree health care benefits are paid as covered expenses are incurred. The
liability relating to United States employees allocated to the Company by
Chemicals for the postretirement benefits other than pensions and included in
Due from Affiliates was $0.4 million and $0.4 million at September 30, 2000 and
1999, respectively. The total postretirement benefits other than pensions
expense for United States employees allocated to the Company was $ 0.1 million,
$0.1 million, and $0.1 million for the years ended September 30, 2000, 1999, and
1998, respectively.
Information for Canadian benefit plans with respect to the plan obligation,
the funded status, amounts recognized in the Company's financial statements, and
underlying actuarial assumptions is stated below.
<TABLE>
<CAPTION>
September 30,
---------------------
2000 1999
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year .... $ 4,886 $ 4,306
Service cost ............................... 314 307
Interest cost .............................. 329 299
Actuarial loss (gain) ...................... (754) --
Benefits paid .............................. (24) (26)
------- -------
Benefit obligation at end of year .......... $ 4,751 $ 4,886
======= =======
Development of net amount recognized:
Funded status .............................. $(4,751) $(4,886)
Unrecognized cost:
Actuarial loss (gain) ................... (91) 637
------- -------
Net amount recognized ...................... $(4,842) $(4,249)
======= =======
</TABLE>
Net periodic plan costs for the Canadian postretirement benefit consist of the
following components:
<TABLE>
<CAPTION>
September 30,
------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Components of net plan costs:
Service cost .................................. 314 $307 $264
Interest cost ................................. 329 299 286
Net amortization of actuarial loss ............ 16 32 --
---- ---- ----
Net plan costs ................................ 659 $638 $550
==== ==== ====
Weighted-average assumptions:
Discount rate ................................. 7.50% 6.75% 7.50%
</TABLE>
The weighted average annual assumed health care trend rate is assumed to be
7.3% for 2000. The rate is assumed to decrease gradually to 5.6% in 2027 and
remain level thereafter. Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plans. A one-percentage point
change in assumed health care trend rates would have the following effects:
<TABLE>
<CAPTION>
1% 1%
Increase Decrease
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Effect on total of service and interest cost components..... $ 36 $ (31)
Effect on post-retirement benefit obligation................ 229 (199)
</TABLE>
12
<PAGE> 13
SAVINGS AND INVESTMENT PLAN
Chemicals' Sixth Amended and Restated Savings and Investment Plan covers
substantially all United States employees of the Company, including executive
officers. This Plan is qualified under Section 401(k) of the Internal Revenue
Code. Each participant has the option to defer taxation of a portion of his or
her earnings by directing the Company to contribute a percentage of such
earnings to this Plan. A participant may direct up to a maximum of 20% of
eligible earnings to this Plan, subject to certain limitations set forth in the
Internal Revenue Code for "highly compensated" participants. A participant's
contributions become distributable upon the termination of his or her
employment. The Company did not make any contribution to this Plan in fiscal
2000. Beginning October 1, 2000, the Company began matching 50% of a
participant's contributions, to the extent such contributions do not exceed 7%
of such participant's cash compensation (excluding bonuses, profit sharing, and
similar types of compensation).
EMPLOYEE SAVINGS PLAN
The Company introduced an employee savings plan for all eligible full-time
Canadian employees with an effective date of October 1, 2000. Each participant
has the option to contribute a percentage of his or her earnings to the Canadian
savings plan, with no limit on the maximum percentage contributed. The Company
will match 100% of a participant's contributions, to the extent such
contributions do not exceed 3.5% of such participant's cash compensation
(excluding bonuses, profit sharing, and similar types of compensation).
PROFIT SHARING AND BONUS PLANS
In January of 1997, the Board of Directors of Holdings, upon recommendation
of its Compensation Committee, approved the establishment of a Profit Sharing
Plan that is designed to benefit all qualified employees, and a Bonus Plan that
is designed to provide certain exempt salaried employees of the Company with the
opportunity to earn bonuses, depending, among other things, on the annual
financial performance of Holdings.
The Company incurred $1.3 million and $1.1 million of expenses related to
the Profit Sharing Plan and Bonus Plan, respectively, in fiscal 2000. No
expenses for profit sharing or bonuses were incurred by Holdings or allocated to
the Company in fiscal 1999 or 1998.
PHANTOM STOCK PLAN
The Company has a phantom stock plan for all eligible full-time Canadian
employees. The effective date of this Plan was August 21, 1996 and the
expiration date is December 31, 2000. At the end of each plan year, the plan
administrator establishes a "determined percentage" for the preceding plan year.
This percentage is then multiplied by each participant's compensation for the
plan year to determine the award amount. The award amount is then divided by the
fair market value of one share of the common stock of Holdings, as of December
31 of that plan year, to determine the number of rights to be credited to the
participant. Upon termination of employment, the benefit amount becomes payable
to the participant. The benefit amount is the number of vested rights in the
participant's account, multiplied by the fair market value of one share of
common stock of Holdings as of the most recent valuation date.
The Company has recorded expense of $0.2 million, $0.2 million, and $0.2
million related to the phantom stock plan for the fiscal years ended September
30, 2000, 1999, and 1998, respectively.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company has entered into various long-term noncancelable operating
leases, some of which have been allocated to commonly controlled companies.
Future minimum lease commitments at September 30, 2000 are as follows: fiscal
2001 - $5.0 million; fiscal 2002 - $4.1 million; fiscal 2003 - $4.0 million;
fiscal 2004 - $3.8 million; fiscal 2005 - $3.1 million; and thereafter - $6.4
million.
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
13
<PAGE> 14
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 manufacture, handling, processing, distribution, and use of the
Company's chemical 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 our waste
treatment, storage, disposal, and other waste handling practices and equipment.
The Company conducts environmental management programs designed to maintain
compliance with applicable environmental requirements at all of its facilities.
The Company routinely conducts inspection and surveillance programs designed to
detect and respond to leaks or spills of regulated hazardous substances and to
correct identified regulatory deficiencies. The Company believes that its
procedures for waste handling are consistent with industry standards and
applicable requirements. In addition, the Company believes that its operations
are consistent with good industry practice. However, a business risk inherent
with chemical operations is the potential for personal injury and property
damage claims from employees, contractors and their employees, and nearby
landowners and occupants. While the Company believes its business operations and
facilities generally are operated in compliance in all material respects with
all applicable environmental and health and safety requirements, the Company
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, and the public. Some risk of environmental costs and
liabilities is inherent in the Company's operations and products, 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 the incurrence of liabilities
substantially in excess of its insurance coverages.
The Company's operating expenditures for environmental matters, mostly
waste management and compliance, were approximately $2.5 million for fiscal 2000
and $2.6 million for fiscal 1999. The Company also spent approximately $0.7
million for environmentally related capital projects in fiscal 2000 and $1.4
million for these types of capital projects in fiscal 1999. In fiscal 2001, the
Company anticipates spending approximately $0.9 million for capital projects
related to waste management and environmental compliance. There are no capital
expenditures related to remediation of environmental conditions projected for
fiscal 2001.
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 the Company's primary pulp chemicals product. 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 adverse effect on its financial position, results of operations, or
cash flows, although the Company cannot give any assurances to that effect.
PLEDGE OF COMMON STOCK
In order to secure the repayment of indebtedness under the Fixed Assets
Revolver, a first priority pledge of 100% of the common stock of Sterling
Canada, Inc., Sterling Pulp Chemicals, Inc., and Sterling Pulp Chemicals US,
Inc. was granted by the holders of such stock.
In order to secure the repayment of the 12 3/8% Notes, a second priority
pledge of 100% of the common stock of Sterling Canada, Inc., Sterling Pulp
Chemicals, Inc., and Sterling Pulp Chemicals US, Inc. was granted by the holders
of such stock. In addition, a first priority pledge of 65% of the common stock
of Sterling Pulp and Sterling NRO, Ltd. was given by the holders of such stock.
14
<PAGE> 15
8. RELATED PARTY TRANSACTIONS
In the normal course of operations of the Company, the following represents
significant transactions with related parties for the fiscal years ended
September 30, 2000, 1999, and 1998:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
2000 1999 1998
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Commonly controlled companies:
Sale of goods ................ $3,500 $6,661 $3,725
Purchase of goods ............ 6,087 6,401 4,580
Administration fee revenue.... 340 335 323
</TABLE>
9. FINANCIAL INSTRUMENTS
FOREIGN EXCHANGE
The Company has entered into forward foreign exchange contracts to reduce
risk due to Canadian dollar exchange rate movements. The forward foreign
exchange contracts had varying maturities with none exceeding 18 months. The
Company made net settlements of United States dollars for Canadian dollars at
rates agreed to at inception of the contracts. The Company does not engage in
currency speculation. The last of the Company's existing forward exchange
contracts expired in March of 2000, and it does not currently intend to enter
into any additional forward exchange contracts.
CONCENTRATIONS OF RISK
The Company sells its products primarily to companies involved in the pulp
and paper manufacturing industries. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral for
accounts receivable.
The Company maintains cash deposits with major banks, which from time to
time may exceed federally insured limits. The Company periodically assesses the
financial condition of these institutions and believes that the possibility of
any loss is minimal.
Approximately 36% of the Company's employees are covered by union
agreements. Approximately 23% of the Company's employees are covered by union
agreements which could expire within one year.
INVESTMENTS
It is the policy of the Company to invest its excess cash in investment
instruments or securities whose value is not subject to market fluctuations,
such as certificates of deposit, repurchase agreements, or Eurodollar deposits
with domestic or foreign banks or other financial institutions. Other permitted
investments include commercial paper of major United States corporations with
ratings of A1 by Standard & Poor's Ratings Group or P1 by Moody's Investor
Services, Inc., loan participations of major United States corporations with a
short term credit rating of A1/P1, and direct obligations of the United States
Government or its agencies. In addition, not more than $5 million may be
invested by the Company with any single bank, financial institution, or United
States corporation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheet for cash
and cash equivalents, receivables, payables, and certain accrued expenses
approximate fair value due to the short maturities of these instruments. Based
on the Company's allocated portion of Chemicals' debt at September 30, 2000, the
carrying value was $244.0 million and the fair value was $210.2 million.
15
<PAGE> 16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Sterling Canada, Inc.
We have audited the accompanying consolidated balance sheets of Sterling Canada,
Inc. (the "Company") as of September 30, 2000 and 1999, and the related
consolidated statements of operations, changes in stockholder's equity, and cash
flows for each of the three years in the period ended September 30, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 2000, in conformity with
United States of America generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Chartered Accountants
Mississauga, Canada
December 12, 2000
16
