<PAGE> 1
EXHIBIT 99.2
STERLING PULP CHEMICALS, LTD.
STATEMENTS OF OPERATIONS
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
2000 1999 1998
---------- ---------- -----------
<S> <C> <C> <C>
Revenues........................................ $ 123,331 $ 109,510 $ 112,750
Cost of goods sold.............................. 101,766 90,656 86,403
---------- ---------- -----------
Gross profit.................................... 21,565 18,854 26,347
Selling, general, and administrative expenses... 9,496 12,740 16,650
Interest and debt related expenses, net......... 4,550 5,548 4,997
---------- ---------- -----------
Net income before income taxes.................. 7,519 566 4,700
Provision for income taxes ..................... 2,945 313 1,800
---------- ---------- -----------
Net income...................................... $ 4,574 $ 253 $ 2,900
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 2
STERLING PULP CHEMICALS, LTD.
BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $ -- $ 8,481
Accounts receivable, net .......................... 17,165 16,840
Due from related parties .......................... 1,832 1,369
Other receivables ................................. 1,821 2,254
Inventories ....................................... 6,035 5,146
Prepaid expenses .................................. 568 633
--------- ---------
Total current assets ........................... 27,421 34,723
Property, plant, and equipment, net .................... 69,297 75,531
Other assets ........................................... 293 440
--------- ---------
Total assets ...................................... $ 97,011 $ 110,694
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable .................................. $ 10,634 $ 8,978
Accrued generator construction costs .............. 508 2,967
Other accrued liabilities ......................... 8,465 7,093
Due to related parties ............................ 1,407 1,241
--------- ---------
Total current liabilities ...................... 21,014 20,279
Note payable ........................................... 34,546 56,667
Deferred income taxes .................................. 8,338 7,272
Deferred credits and other liabilities ................. 4,335 3,972
Commitments and contingencies (Note 7) ................. -- --
Stockholder's equity:
Common stock ...................................... 1 1
Additional paid-in capital ........................ 24,585 16,871
Retained earnings ................................. 13,366 14,470
Accumulated other comprehensive income ............ (9,174) (8,838)
--------- ---------
Total stockholder's equity ..................... 28,778 22,504
--------- ---------
Total liabilities and stockholder's equity ... $ 97,011 $ 110,694
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
STERLING PULP CHEMICALS, LTD.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
-------------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
-------- -------- ---------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997 .... 1 $ 1 $ 7,338 $ 33,062 $ (5,992) $ 34,409
Net capital distributions ...... -- -- (7,338) -- -- (7,338)
Dividends ...................... -- -- -- (10,666) -- (10,666)
Comprehensive income:
Net income .................. -- -- -- 2,900 --
Translation adjustment ...... -- -- -- -- (2,998)
Comprehensive loss ....... (98)
-------- -------- -------- -------- -------- --------
Balance, September 30, 1998 .... 1 1 -- 25,296 (8,990) 16,307
Net capital contributions ...... -- -- 16,871 -- -- 16,871
Dividends ...................... -- -- -- (11,079) -- (11,079)
Comprehensive income:
Net income .................. -- -- -- 253 --
Translation adjustment ...... -- -- -- -- 152
Comprehensive income ..... 405
-------- -------- -------- -------- -------- --------
Balance, September 30, 1999 .... 1 1 16,871 14,470 (8,838) 22,504
Net capital contributions ...... -- -- 7,714 -- -- 7,714
Dividends ...................... -- -- -- (5,678) -- (5,678)
Comprehensive income:
Net income .................. -- -- -- 4,574
Translation adjustment ...... -- -- -- -- (336)
Comprehensive income ..... 4,238
-------- -------- -------- -------- -------- --------
Balance, September 30, 2000 .... 1 $ 1 $ 24,585 $ 13,366 $ (9,174) $ 28,778
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
STERLING PULP CHEMICALS, LTD.
STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 4,574 $ 253 $ 2,900
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................. 8,532 7,757 7,700
Loss on disposal/write off of assets ...................... 333 50 70
Deferred tax expense/(benefit) ............................ 1,247 (539) (2,479)
Other ..................................................... (31) (31) 505
Changes in assets/liabilities:
Accounts receivable ....................................... (788) (2,156) 6,036
Due from related parties .................................. (475) (377) 2,216
Other receivables ......................................... 382 (436) 4,136
Inventories ............................................... (1,026) 1,791 (1,113)
Prepaid expenses .......................................... 51 (21) 117
Other assets--net ......................................... 142 4,530 846
Accounts payable .......................................... 1,936 (607) 5,496
Accrued generator construction costs ...................... (2,448) 2,450 (4,414)
Other accrued liabilities ................................. 1,581 (2,467) (1,252)
Due to related parties .................................... 204 (6,505) 3,702
Other liabilities ......................................... 503 299 (4,240)
-------- -------- --------
Net cash provided by operating activities ........................... 14,717 3,991 20,226
-------- -------- --------
Cash flows from investing activities:
Proceeds on disposal of fixed assets ........................... -- 3,578 --
Capital expenditures ........................................... (4,325) (3,465) (4,381)
-------- -------- --------
Net cash provided by (used in) investing activities ................. (4,325) 113 (4,381)
-------- -------- --------
Cash flows from financing activities:
Repayment of note payable ...................................... (20,987) (4,527) --
Contribution from parent ....................................... 7,714 16,871 --
Distribution to parent ......................................... -- -- (7,338)
Dividends ...................................................... (5,678) (11,079) (10,666)
-------- -------- --------
Net cash provided by (used in) financing activities ................. (18,951) 1,265 (18,004)
Effect of exchange rate on cash ..................................... 78 (314) 405
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ................ (8,481) 5,055 (1,754)
Cash and cash equivalents, beginning of year ........................ 8,481 3,426 5,180
-------- -------- --------
Cash and cash equivalents, end of year .............................. $ -- $ 8,481 $ 3,426
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid, net of interest income received ................. $ (4,663) $(11,608) $ (92)
Income taxes paid .............................................. (696) (749) (541)
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
STERLING PULP CHEMICALS, LTD.
NOTES TO FINANCIAL STATEMENTS
(U.S. DOLLARS)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Sterling Pulp Chemicals, Ltd. ("Sterling Pulp") 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. Sterling Pulp sells
sodium chlorate to customers in Canada and the United States. Sterling Pulp also
produces sodium chlorite at one of its' facilities and oversees construction of
large-scale chlorine dioxide generators for the pulp and paper industry.
Sterling Pulp is a wholly owned subsidiary of Sterling Canada, Inc. ("Parent"),
which is a wholly-owned subsidiary of Sterling Chemicals, Inc. ("Chemicals").
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 all of Chemicals'
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 certain of Chemicals' subsidiaries incorporated outside of the United
States, including Sterling Pulp.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of Sterling Pulp are described below.
The financial statements of Sterling Pulp are presented in accordance with
generally accepted accounting principles in the United States of America
("U.S.") and have been translated from Canadian dollars, Sterling Pulp's
functional currency, to U.S. dollars, the reporting currency of the Parent,
following the guidelines established by Statement of Financial Accounting
Standards ("SFAS") No. 52, "Foreign Currency Translation."
CASH EQUIVALENTS
Sterling Pulp 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 primarily
determined on the first-in, first-out basis, except for stores and supplies
which are valued at average cost.
Sterling Pulp 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 Sterling Pulp are included in inventory.
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.
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
5
<PAGE> 6
operations. Depreciation is provided using the straight-line method over
estimated useful lives ranging from 5 to 25 years, with the predominant life of
plant and equipment being 15 years.
PATENTS
The costs of patents are amortized on a straight-line basis over their
estimated useful lives, which approximate ten years.
INCOME TAXES
Sterling Pulp files a federal Canadian tax return as well as returns in the
provinces in which it operates. Deferred income taxes are recorded to reflect
the tax effect of the temporary differences between the tax basis of Sterling
Pulp's assets and liabilities and the financial reporting basis.
REVENUE RECOGNITION
Sterling Pulp generates revenues through sales in the open market pursuant
to short-term and long-term contracts with its customers. Sterling Pulp
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 costs. Sterling Pulp classifies amounts billed to customers for
shipping and handling as revenues, with the related shipping and handling costs
included in cost of good sold.
FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE
Sterling Pulp's functional currency is the Canadian dollar. The Parent's
reporting currency is the U.S. dollar. For financial reporting purposes, assets
and liabilities denominated in Canadian dollars are translated into U.S. dollars
at year-end rates of exchange 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.
EARNINGS PER SHARE
All issued and outstanding shares of Sterling Pulp are held by the Parent.
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.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In preparing disclosures about the fair value of financial instruments,
Sterling Pulp 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) or on the current interest rates available to Sterling Pulp 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.
6
<PAGE> 7
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 standards on
October 1, 2000. The transition adjustment relating to the adoption of these
statements was not material.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
Inventories:
Finished products ....................... $ 2,967 $ 1,872
Raw materials ........................... 199 209
--------- ---------
Inventories at cost .......................... 3,166 2,081
Inventories under exchange agreements......... 278 77
Stores and supplies .......................... 2,591 2,988
--------- ---------
$ 6,035 $ 5,146
========= =========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
Property, plant, and equipment:
Land .................................... $ 1,413 $ 1,448
Buildings ............................... 13,635 13,808
Plant and equipment ..................... 111,650 110,711
--------- ---------
Property, plant, and equipment at cost .. 126,698 125,967
Less accumulated depreciation ........... (57,401) (50,436)
--------- ---------
$ 69,297 $ 75,531
========= =========
</TABLE>
4. NOTE PAYABLE
On August 20, 1992, Sterling Pulp entered into an agreement for a $109.1
million demand note facility with Sterling NRO, Ltd. ("Sterling NRO"). Sterling
NRO is also owned by the Parent and is therefore related 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.
Interest expensed for the years ended September 30, 2000, 1999, and 1998 were
$4.5 million, $5.5 million and $4.9 million, respectively. Principal repayments
for the years ended September 30, 2000 and 1999 were $21.0 million and $4.5
million, respectively.
5. 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.
A reconciliation of federal statutory income taxes to Sterling Pulp's
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
------- ------- -------
$ 2,945 $ 313 $ 1,800
======= ======= =======
</TABLE>
7
<PAGE> 8
The provision for 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 tax provision .... $ 2,945 $ 313 $ 1,800
======= ======= =======
</TABLE>
The components of Sterling Pulp's 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)
Other ............................ -- --
-------- --------
(11,334) (13,593)
-------- --------
Net deferred tax liabilities .......... $ (8,338) $ (7,272)
======== ========
</TABLE>
6. EMPLOYEE BENEFITS
Sterling Pulp has established the following benefit plans:
RETIREMENT BENEFIT PLANS
Sterling Pulp has employer and employee contributory plans which cover all
salaried and wage employees. The benefits under these plans are based primarily
on years of service and/or employee's pay near retirement. Sterling Pulp's
funding policy is consistent with the funding requirements of Canadian federal
and provincial laws and regulations. Plan assets consist principally of common
stocks and government and corporate securities.
8
<PAGE> 9
Information concerning the pension obligation, plan assets, amounts recognized
in Sterling Pulp'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 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 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>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Sterling Pulp provides certain health care and life insurance benefits for
retired employees. Employees become eligible for these benefits at normal
retirement age.
Retiree insurance plans provide health and life insurance benefits to
employees who retire from Sterling Pulp with ten or more years of service. All
of Sterling Pulp's employees are eligible for postretirement life insurance and,
except
9
<PAGE> 10
for collectively bargained employees, are eligible for postretirement medical
insurance. Postretirement medical insurance is a non-contributory plan. Benefit
provisions for most hourly and some salaried employees are subject to collective
bargaining.
Information concerning the plan obligation, the funded status, amounts
recognized in Sterling Pulp'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 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 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:
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% INCREASE 1% 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>
PROFIT SHARING AND BONUS PLANS
Sterling Pulp established a Profit Sharing Plan for the benefit of salaried
and hourly employees meeting certain eligibility requirements and a Bonus Plan
that is designed to provide certain exempt salaried employees of Sterling Pulp
with the opportunity to earn bonuses, depending, among other things, on the
annual financial performance of Sterling Chemicals Holdings, Inc. Sterling Pulp
incurred $0.9 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 and bonuses were incurred by Sterling Pulp in fiscal 1999 or 1998.
EMPLOYEE SAVINGS PLAN
Sterling Pulp introduced an employee savings plan for all eligible
full-time Canadian employees with an effective date of October 1, 2000. Each
10
<PAGE> 11
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.
Sterling Pulp 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).
PHANTOM STOCK PLAN
Sterling Pulp 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 Sterling Chemicals
Holdings, Inc. ("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.
Sterling Pulp 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
Sterling Pulp has entered into various long-term noncancelable rail car and
other operating leases, some of which have been allocated to commonly controlled
companies. Future minimum lease commitments are as follows: fiscal 2001--$3.6
million, fiscal 2002--$3.1 million, fiscal 2003--$2.9 million, fiscal 2004--$2.8
million, fiscal 2005--$2.3 million, and thereafter--$5.1 million.
ENVIRONMENTAL AND SAFETY MATTERS
Sterling Pulp's operations involve the handling, production,
transportation, treatment, and disposal of materials that are classified as
hazardous or toxic waste and that are extensively regulated by environmental,
health, and safety laws, regulations, and permit requirements. Environmental
permits required for Sterling Pulp's operations are subject to periodic renewal
and can be revoked or modified for cause or when new or revised environmental
requirements are implemented. Changing and increasingly strict environmental
requirements can affect the manufacture, handling, processing, distribution, and
use of Sterling Pulp's chemical products and, if so affected, Sterling Pulp's
business and operations may be materially and adversely affected. In addition,
changes in environmental requirements can cause the Company to incur substantial
costs in upgrading or redesigning its facilities and processes, including its
waste treatment, storage, disposal, and other waste handling practices and
equipment.
Sterling Pulp conducts environmental management programs designed to
maintain compliance with applicable environmental requirements at all of its
facilities. Sterling Pulp 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. Sterling
Pulp believes that its procedures for waste handling are consistent with
industry standards and applicable requirements. In addition, Sterling Pulp
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 Sterling Pulp believes its
business operations and facilities generally are operated in compliance in all
material respects with all applicable environmental and health and safety
requirements, Sterling Pulp 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 our operations and products,
as it is with other companies engaged in similar businesses. In addition, a
catastrophic event at any of the Sterling Pulp's facilities could result in the
incurrence of liabilities substantially in excess of their insurance coverages.
Sterling Pulp's operating expenditures for environmental matters, mostly
waste management and compliance, were approximately $1.9 million for fiscal 2000
and $2.0 million for fiscal 1999. Sterling Pulp also spent approximately $0.4
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million for environmentally related capital projects in fiscal 2000 and $1.1
million for these types of capital projects in fiscal 1999. In fiscal 2001,
Sterling Pulp anticipates spending approximately $0.7 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 Sterling Pulp's financial condition and results of
operations. British Columbia has a regulation in place requiring elimination of
the use of all chlorine products, including chlorine dioxide, in the bleaching
process by the year 2002. Chlorine dioxide is produced from sodium chlorate,
which is Sterling Pulp'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, Sterling Pulp would seek
to sell the products it manufactures at its British Columbia facility to
customers in other markets. Sterling Pulp is not aware of any other laws or
regulations in place in North America which would restrict the use of such
products for other purposes.
LEGAL PROCEEDINGS
Sterling Pulp is subject to claims and legal actions that arise in the
ordinary course of its business. Sterling Pulp believes that the ultimate
liability, if any, with respect to these claims and legal actions will not have
a material adverse effect on its financial position, results of operations, or
cash flows, although Sterling Pulp cannot give any assurances to that effect.
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 Sterling Pulp's common stock.
8. RELATED PARTY TRANSACTIONS
In the normal course of operations of Sterling Pulp, 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>
Chemicals:
Management fees ......................... $ 853 $ 869 $ 795
Parent:
Services, marketing, and R&D revenue .... $ 878 $ 921 $ 833
Commonly controlled companies:
Sale of goods ........................... $7,334 $9,295 $4,867
Purchase of goods ....................... 6,087 6,401 4,580
Administration fee revenue .............. 340 335 323
Interest expense ........................ 4,663 5,630 4,860
</TABLE>
The amounts due from and to related parties for the years ended September
30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
2000 1999
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Due from related parties:
Parent ........................... $ -- $ 12
Commonly controlled companies .... 1,832 1,357
-------- --------
$ 1,832 $ 1,369
======== ========
Due to related parties:
Parent ........................... $ 125 $ 132
Commonly controlled companies .... 1,282 1,109
-------- --------
$ 1,407 $ 1,241
======== ========
</TABLE>
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9. EXPORT SALES
Sterling Pulp is engaged in the sale of products for export into the United
States. These were primarily sodium chlorate sales and represented 50%, 47%, and
46% of revenues for fiscal 2000, 1999, and 1998, respectively.
10. FINANCIAL INSTRUMENTS
FORWARD EXCHANGE CONTRACTS
Sterling Pulp has entered into forward exchange contracts to reduce risk
due to Canadian dollar exchange rate movements. The foreign exchange contracts
had varying maturities with none exceeding 18 months. Sterling Pulp made net
settlements of United States dollars for Canadian dollars at rates agreed to at
inception of the contracts. Sterling Pulp does not engage in currency
speculation. The last of Sterling Pulp's 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
Sterling Pulp sells its products primarily to companies involved in the
pulp and paper industry. Sterling Pulp performs ongoing credit evaluations of
its customers and generally does not require collateral for accounts receivable.
Sterling Pulp maintains cash deposits with major banks which from time to
time may exceed federally insured limits. Management periodically assesses the
financial condition of these institutions and believes that any possible credit
loss is minimal.
Approximately 45% of Sterling Pulp's employees are covered by union
agreements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value approximated the carrying value of financial instruments
included in current assets and current liabilities on the balance sheet at
September 30, 2000 due to the short maturities of these instruments. The fair
value of the note payable on the balance sheet at September 30, 2000
approximated its carrying value, as the interest rate fluctuates with changes in
market rates.
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Sterling Pulp Chemicals, Ltd.
We have audited the accompanying balance sheets of Sterling Pulp Chemicals, Ltd.
(an indirect wholly-owned subsidiary of Sterling Chemicals, Inc.) as at
September 30, 2000 and 1999 and the related 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
Sterling Pulp'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 an audit to obtain
reasonable assurance 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, the accompanying financial statements present fairly, in all
material respects, the financial positions of Sterling Pulp Chemicals, Ltd. as
at 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.
Since the accompanying financial statements have not been prepared in
accordance with Canadian generally accepted accounting principles, they will not
satisfy the reporting requirements of Canadian statutes and regulations. Since
the financial statements have been prepared in accordance with United States of
America generally accepted accounting principles, the financial position,
results of operations and cash flows might be significantly different than if
the financial statements had been prepared in accordance with Canadian generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Chartered Accountants
Mississauga, Canada
December 12, 2000
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