<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-10059
STERLING CHEMICALS HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0185186
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1200 SMITH STREET, SUITE 1900 (713) 650-3700
HOUSTON, TEXAS 77002-4312 (REGISTRANT'S TELEPHONE NUMBER,
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
COMMISSION FILE NUMBER 333-04343-01
STERLING CHEMICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0502785
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1200 SMITH STREET, SUITE 1900 (713) 650-3700
HOUSTON, TEXAS 77002-4312 (REGISTRANT'S TELEPHONE NUMBER,
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Sterling Chemicals, Inc. meets the conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q, and is therefore filing this form with
the reduced disclosure format provided for by General Instruction H(2) of Form
10-Q.
---------------
Indicate by check mark whether each of the registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of May 1, 2000 Sterling Chemicals Holdings, Inc. had 12,751,201 shares
of common stock outstanding. As of May 1, 2000, all outstanding equity
securities of Sterling Chemicals, Inc. were owned by Sterling Chemicals
Holdings, Inc.
================================================================================
<PAGE> 2
IMPORTANT INFORMATION REGARDING THIS FORM 10-Q
Readers should consider the following information as they review this Form 10-Q.
PRESENTATION OF FINANCIAL STATEMENTS
This Form 10-Q includes three separate sets of financial statements and
related notes. The first set of financial statements and related notes present
the consolidated financial position of Sterling Chemicals Holdings, Inc.
("Holdings") and its subsidiaries. Holdings directly or indirectly owns all of
the other subsidiaries whose financial results are included in this Form 10-Q.
The first set of financial statements and related notes also present the
consolidated financial position of Sterling Chemicals, Inc. ("Chemicals"), the
primary operating subsidiary of Holdings, and its subsidiaries.
Under SEC rules, specified financial information is required to be provided
with respect to subsidiaries of an issuer of debt securities that guarantee the
repayment of those debt securities. In addition, under different provisions of
those rules, specified financial information is required to be provided with
respect to subsidiaries of an issuer of debt securities whose capital stock is
pledged to secure the repayment of those debt securities. Under each of these
provisions, the required financial information may be omitted for any subsidiary
whose operations are not considered significant for purposes of the SEC rules.
In July of 1999, Chemicals issued $295 million of its 123/8% Senior Secured
Notes due 2006. The obligations of Chemicals related to the 123/8% Notes were
guaranteed by most of its subsidiaries incorporated in the United States (the
"Guarantors"). In addition, all of the capital stock of each of the Guarantors
was pledged to secure the repayment of the 123/8% Notes. Finally, 65% of the
capital stock of three of our subsidiaries incorporated outside of the United
States was pledged to secure the repayment of the 123/8% Notes but these
subsidiaries did not guarantee the repayment of the 123/8% Notes. In order to
set forth the additional financial information required by the SEC rules in a
meaningful way, we have included two additional sets of financial statements and
related notes in this Form 10-Q, one set that presents the combined financial
statements of the Guarantors and their subsidiaries (excluding those Guarantors
whose operations are not considered significant for purposes of the SEC rules)
and another set that presents the financial statements of Sterling Pulp
Chemicals, Ltd., which is the only foreign subsidiary whose capital stock was
pledged that is considered significant for purposes of the SEC rules.
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 May 12, 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 May 12, 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.
2
<PAGE> 3
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.
3
<PAGE> 4
This combined Form 10-Q is separately filed by Holdings and Chemicals.
Information contained herein relating to Chemicals is filed by Holdings and
separately by Chemicals on its own behalf. Unless otherwise indicated, Holdings
and its subsidiaries, including Chemicals, are collectively referred to as "we",
"our", "ours", and "us".
PART I.--FINANCIAL INFORMATION
ITEM 1.--FINANCIAL STATEMENTS
4
<PAGE> 5
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 7,611 $ 14,921
Accounts receivable ......................................................... 164,893 141,059
Inventories ................................................................. 82,512 70,464
Prepaid expenses ............................................................ 1,393 5,157
Deferred tax asset .......................................................... 16,888 16,888
--------- ---------
Total current assets ...................................................... 273,297 248,489
Property, plant, and equipment, net ............................................ 397,705 402,723
Deferred tax asset ............................................................. 37,156 37,237
Other assets ................................................................... 85,850 86,650
--------- ---------
Total assets .............................................................. $ 794,008 $ 775,099
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable ............................................................ $ 87,270 $ 72,961
Accrued liabilities ......................................................... 80,071 79,883
Current portion of long-term debt ........................................... 2,652 4,246
--------- ---------
Total current liabilities ................................................. 169,993 157,090
Long-term debt ................................................................. 975,470 964,555
Deferred tax liability ......................................................... 8,087 8,815
Deferred credits and other liabilities ......................................... 78,268 76,893
Common stock held by ESOP ...................................................... 2,946 2,946
Less: unearned compensation ................................................... (290) (745)
Redeemable preferred stock ..................................................... 22,390 20,932
Commitments and contingencies (Note 4) ......................................... -- --
Stockholders' equity (deficiency in assets):
Common stock, $.01 par value, 20,000,000 shares authorized, 12,305,000 shares
issued and 12,097,000 outstanding at March 31, 2000 and
September 30, 1999 ....................................................... 123 123
Additional paid-in capital .................................................. (542,712) (542,712)
Retained earnings ........................................................... 109,972 118,490
Accumulated other comprehensive income ...................................... (27,736) (28,768)
Deferred compensation ....................................................... (38) (58)
--------- ---------
(460,391) (452,925)
Treasury stock, at cost, 209,000 and 208,000 shares at March 31, 2000 and
September 30, 1999, respectively .......................................... (2,465) (2,462)
--------- ---------
Total stockholders' equity (deficiency in assets) ....................... (462,856) (455,387)
--------- ---------
Total liabilities and stockholders' equity (deficiency in assets) ..... $ 794,008 $ 775,099
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5
<PAGE> 6
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
--------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ................................................. $ 264,827 $ 152,472 $ 511,748 $ 324,401
Cost of goods sold ....................................... 220,473 148,160 436,826 303,372
------------ ------------ ------------ ------------
Gross profit ............................................. 44,354 4,312 74,922 21,029
Selling, general, and administrative expenses ............ 9,596 8,801 19,466 18,457
Other expense ............................................ -- 6,782 -- 9,076
Interest and debt related expenses, net of
interest income ....................................... 30,461 24,492 60,231 49,951
------------ ------------ ------------ ------------
Income (loss) before income taxes ........................ 4,297 (35,763) (4,775) (56,455)
Provision (benefit) for income taxes ..................... 996 (10,943) 2,286 (18,535)
------------ ------------ ------------ ------------
Net income (loss) ........................................ 3,301 (24,820) (7,061) (37,920)
Preferred stock dividends ................................ 738 658 1,457 1,303
------------ ------------ ------------ ------------
Net income (loss) attributable to common stockholders .... $ 2,563 $ (25,478) $ (8,518) $ (39,223)
============ ============ ============ ============
Net income (loss) per common share, basic ................ $ 0.20 $ (1.96) $ (0.67) $ (3.07)
============ ============ ============ ============
Net income (loss) per common share, diluted .............. $ 0.20 $ (1.96) $ (0.67) $ (3.07)
============ ============ ============ ============
Weighted average shares outstanding:
Basic ................................................. 12,651 12,466 12,632 12,446
Diluted ............................................... 13,049 12,466 12,632 12,446
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
6
<PAGE> 7
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (7,061) $ (37,920)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ........................ 27,875 28,028
Interest amortization ................................ 2,320 1,688
Deferred tax benefit ................................. (906) (14,645)
Discount notes amortization .......................... 10,439 9,197
Early retirement programs and benefit changes ........ -- 6,782
Other ................................................ 36 721
Change in assets/liabilities:
Accounts receivable .................................. (23,537) 23,608
Inventories .......................................... (11,926) 1,755
Prepaid expenses ..................................... 14,839 (2,460)
Other assets ......................................... (8,581) (12,521)
Accounts payable ..................................... 5,918 6,696
Accrued liabilities .................................. 6,962 (11,082)
Other liabilities .................................... (6,804) 1,383
----------- -----------
Net cash provided by operating activities ................... 9,574 1,230
----------- -----------
Cash flows from investing activities:
Capital expenditures .................................... (17,718) (12,186)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt ............................ 430,375 139,982
Repayment of long-term debt ............................. (429,639) (135,616)
Other ................................................... (3) (45)
----------- -----------
Net cash provided by financing activities .................... 733 4,321
----------- -----------
Effect of United States /Canadian exchange rate on cash ...... 101 75
----------- -----------
Net decrease in cash and cash equivalents .................... (7,310) (6,560)
Cash and cash equivalents - beginning of year ................ 14,921 11,168
----------- -----------
Cash and cash equivalents - end of period .................... $ 7,611 $ 4,608
=========== ===========
Supplement disclosures of cash flow information:
Interest paid, net of interest income received .......... $ (48,199) $ (39,406)
Income taxes (paid) refunded ............................ (221) 5,441
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
7
<PAGE> 8
STERLING CHEMICALS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 7,584 $ 14,899
Accounts receivable ............................................. 167,520 143,556
Inventories ..................................................... 82,512 70,464
Prepaid expenses ................................................ 93 3,980
Deferred tax asset .............................................. 16,888 16,888
----------- -----------
Total current assets .......................................... 274,597 249,787
Property, plant, and equipment, net ................................ 397,705 402,723
Deferred tax asset ................................................. 18,815 19,463
Other assets ....................................................... 80,160 80,133
----------- -----------
Total assets .................................................. $ 771,277 $ 752,106
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable ................................................ $ 86,950 $ 72,731
Accrued liabilities ............................................. 80,112 79,883
Current portion of long-term debt ............................... 2,652 4,246
----------- -----------
Total current liabilities ..................................... 169,714 156,860
Long-term debt ..................................................... 817,094 816,927
Deferred tax liability ............................................. 8,087 8,815
Deferred credits and other liabilities ............................. 78,268 76,893
Common stock held by ESOP .......................................... 2,946 2,946
Less: unearned compensation ....................................... (290) (745)
Commitments and contingencies (Note 4) ............................. -- --
Stockholder's equity (deficiency in assets):
Common stock, $.01 par value .................................... -- --
Additional paid-in capital ...................................... (139,786) (139,786)
Accumulated deficit ............................................. (136,982) (140,978)
Accumulated other comprehensive income .......................... (27,736) (28,768)
Deferred compensation ........................................... (38) (58)
----------- -----------
Total stockholder's equity (deficiency in assets) ............. (304,542) (309,590)
----------- -----------
Total liabilities and stockholder's equity
(deficiency in assets) ...................................... $ 771,277 $ 752,106
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
8
<PAGE> 9
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ..................................................... $ 264,827 $ 152,472 $ 511,748 $ 324,401
Cost of goods sold ........................................... 220,473 148,160 436,826 303,372
------------ ------------ ------------ ------------
Gross profit ................................................. 44,354 4,312 74,922 21,029
Selling, general, and administrative expenses ................ 9,502 8,663 19,336 18,201
Other expense ................................................ -- 6,782 -- 9,076
Interest and debt related expenses, net of interest income ... 24,901 19,601 49,304 40,241
------------ ------------ ------------ ------------
Income (loss) before income taxes ............................ 9,951 (30,734) 6,282 (46,489)
Provision (benefit) for income taxes ......................... 997 (9,099) 2,286 (14,880)
------------ ------------ ------------ ------------
Net income (loss) ............................................ $ 8,954 $ (21,635) $ 3,996 $ (31,609)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
9
<PAGE> 10
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................... $ 3,996 $ (31,609)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization .......................... 27,875 28,028
Interest amortization .................................. 2,081 1,415
Deferred tax benefit ................................... (906) (14,645)
Early retirement programs and benefit changes .......... -- 6,782
Other .................................................. (90) 474
Change in assets/liabilities:
Accounts receivable .................................... (23,667) 23,507
Inventories ............................................ (11,926) 1,755
Prepaid expenses ....................................... 14,962 (1,438)
Other assets ........................................... (8,704) (9,920)
Accounts payable ....................................... 5,918 6,556
Accrued liabilities .................................... 6,962 (11,074)
Other liabilities ...................................... (6,932) 1,391
------------ ------------
Net cash provided by operating activities ...................... 9,569 1,222
------------ ------------
Cash flows from investing activities:
Capital expenditures ........................................ (17,718) (12,186)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt ................................ 430,375 139,982
Repayment of long-term debt ................................. (429,639) (135,616)
Other ....................................................... (3) (45)
------------ ------------
Net cash provided by (used in) financing activities ............ 733 4,321
------------ ------------
Effect of United States/Canadian exchange rate on cash ......... 101 75
------------ ------------
Net decrease in cash and cash equivalents ...................... (7,315) (6,568)
Cash and cash equivalents - beginning of year .................. 14,899 11,159
------------ ------------
Cash and cash equivalents - end of period ...................... $ 7,584 $ 4,591
============ ============
Supplement disclosures of cash flow information:
Interest paid, net of interest income received .............. $ (48,204) $ (39,415)
Income taxes (paid) refunded ................................ (221) 5,441
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
10
<PAGE> 11
STERLING CHEMICALS HOLDINGS, INC.
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In our opinion, the accompanying unaudited consolidated financial
statements reflect all adjustments necessary to present fairly:
o the consolidated financial position of Sterling Chemicals Holdings,
Inc. ("Holdings") and its subsidiaries and the consolidated financial
position of Sterling Chemicals, Inc. ("Chemicals") and its
subsidiaries as of March 31, 2000, and
o the respective consolidated results of operations and cash flows of
Holdings and its subsidiaries and Chemicals and its subsidiaries for
the applicable three month and six month periods ended March 31, 2000
and March 31, 1999, respectively.
All such adjustments are of a normal and recurring nature. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year. The accompanying unaudited
consolidated financial statements should be, and are assumed to have been, read
in conjunction with the consolidated financial statements and notes included in
Holdings' and Chemicals' combined Annual Report on Form 10-K for the fiscal year
ended September 30, 1999 (the "Annual Report"). The accompanying consolidated
balance sheets as of September 30, 1999 have been derived from the audited
consolidated balance sheets as of September 30, 1999, included in the Annual
Report. The accompanying consolidated financial statements as of and for the six
month period ended March 31, 2000, have been reviewed by Deloitte & Touche LLP,
our independent public accountants, whose reports are included herein. Unless
otherwise indicated, Holdings and its subsidiaries, including Chemicals, are
collectively referred to as "we", "our", "ours", and "us".
Certain amounts reported in the financial statements for the prior periods
have been reclassified to conform with the current financial statement
presentation with no effect on net income (loss) or stockholders' equity
(deficiency in assets).
Our operations are divided into two reportable segments: petrochemicals and
pulp chemicals. The petrochemicals segment manufactures commodity petrochemicals
and acrylic fibers. The pulp chemicals segment manufactures chemicals for use
primarily in the pulp and paper industry. Operating segment information is
presented below.
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
-------------------------
2000 1999
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Revenues:
Petrochemicals ...................... $ 408,470 $ 232,757
Pulp chemicals ...................... 103,278 91,644
----------- -----------
Total .................................. $ 511,748 $ 324,401
=========== ===========
Operating income (loss):
Petrochemicals ...................... $ 39,501 $ (21,400)
Pulp chemicals ...................... 15,955 14,896
----------- -----------
Total .................................. $ 55,456 $ (6,504)
=========== ===========
</TABLE>
Our total comprehensive net income (loss) for the six month periods ended
March 31, 2000 and March 31, 1999 was $6,029,000 and $36,420,000, respectively.
The total comprehensive net income (loss) of Chemicals and its subsidiaries for
the six month periods ended March 31, 2000 and March 31, 1999 was $5,028,000 and
$(30,109,000), respectively.
11
<PAGE> 12
2. INVENTORIES
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
------------ ------------
(Dollars in Thousands)
<S> <C> <C>
Inventories consisted of the following:
Finished products ........................... $ 44,234 $ 37,484
Raw materials ............................... 10,852 10,355
Inventories under exchange agreements ....... 7,035 2,562
Stores and supplies ......................... 20,391 20,063
------------ ------------
$ 82,512 $ 70,464
============ ============
</TABLE>
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Long-term debt consisted of the following:
Revolving credit facilities ................ $ 56,186 $ 54,643
Saskatoon term loans ....................... 41,241 44,045
11-1/4% Notes .............................. 152,319 152,485
11-3/4% Notes .............................. 275,000 275,000
12-3/8% Notes .............................. 295,000 295,000
----------- -----------
Total Chemicals' debt outstanding ..... 819,746 821,173
13-1/2% Notes .............................. 158,376 147,628
----------- -----------
Total Holdings' debt outstanding ... 978,122 968,801
Less:
Current maturities .................... (2,652) (4,246)
----------- -----------
Total long-term debt ....................... $ 975,470 $ 964,555
=========== ===========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Product Contracts
We have certain long-term agreements that provide for the dedication of
100% of our production of acetic acid, plasticizers, tertiary butylamine, and
sodium cyanide, each to one customer. We also have various sales and conversion
agreements that dedicate significant portions of our production of styrene,
acrylonitrile, and methanol to certain customers. Some of these agreements
provide for cost recovery plus an agreed profit margin based upon market prices.
Environmental Regulations
Our operations involve the handling, production, transportation, treatment,
and disposal of materials that are classified as hazardous or toxic waste and
that are extensively regulated by environmental, health and safety laws,
regulations, and permit requirements. Environmental permits required for our
operations are subject to periodic renewal and can be revoked or modified for
cause or when new or revised environmental requirements are implemented.
Changing and increasingly strict environmental requirements can affect the
manufacturing, handling, processing, distribution, and use of our chemical
products and the raw materials used to produce such products and, if so
affected, our business and operations may be materially and adversely affected.
In addition, changes in environmental requirements can cause us to incur
substantial costs in upgrading or redesigning our facilities and processes,
including our waste treatment, storage, disposal, and other waste handling
practices and equipment.
While we believe that our business operations and facilities generally are
operated in compliance in all material respects with all applicable
environmental, health and safety requirements, we cannot be sure that past
practices or future operations will not result in material claims or regulatory
action, require material environmental expenditures, or result in exposure or
injury claims by employees, contractors and their employees, or the public. Some
risk of environmental costs and liabilities is inherent in our operations and
products, as it is with other companies engaged in similar businesses. In
addition, a catastrophic event at any of our facilities could result in our
incurrence of liabilities substantially in excess of our insurance coverages.
12
<PAGE> 13
Legal Proceedings
Nickel Carbonyl Release. A description of the nickel carbonyl lawsuits is
found under "Legal Proceedings" in Note 6 of the "Notes to Consolidated
Financial Statements" of the Annual Report and is incorporated herein by
reference. As discussed therein, we continue to vigorously defend against the
claims of the approximately 290 remaining plaintiffs. Additional claims and
litigation against us relating to this incident may ensue. We believe that all
or substantially all of our future out-of-pocket costs and expenses, including
settlement payments and judgments, relating to these lawsuits will be covered by
our liability insurance policies or indemnification from third parties. We do
not believe that the claims and litigation arising out of this incident will
have a material adverse effect on us, although we cannot give any assurances to
that effect.
Ethylbenzene Release. A description of this release is found under "Legal
Proceedings" in Note 6 of the "Notes to Consolidated Financial Statements" of
the Annual Report and is incorporated herein by reference. The seven lawsuits
listed below and three interventions, involving a total of approximately 1,600
plaintiffs, alleging personal injury, property damage, and nuisance claims have
been filed based on this release:
o Zabrina Alexander, et al. v. Sterling Chemicals Holdings, Inc., et
al.; Case No. 00-CV0217; In the 10th - Judicial District Court of
Galveston County, Texas
o Nettie Allen, et al. v. Sterling Chemicals, Inc., et al.; Case No.
00-CV0304; In the 10th Judicial District Court of Galveston County,
Texas
o Bobbie Adams, et al. v. Sterling Chemicals International, Inc., et
al.; Case No. 00-CV0311; In the 212th Judicial District Court of
Galveston County, Texas
o Climon Davis, et al. v. Sterling Chemicals, Inc.; Case No. 00-CV0343;
In the 212th Judicial District Court of Galveston County, Texas
o James C. Allen, et al. v. Sterling Chemicals, Inc., et al.; Case No.
2000-15823; In the 152nd Judicial District Court of Harris County,
Texas
o Ida Goldman, et al. v. Sterling Chemicals, Inc. and Catalytic
Industrial Maintenance Co.; Case No. - 00-CV0338; In the 56th Judicial
District Court of Galveston County, Texas
o Olivia Ellis v. Sterling Chemicals, Inc.; Case No. JC7096; In Precinct
No. 3 Justice Court of Galveston County, Texas
We believe that our general liability insurance coverage is sufficient to cover
all costs and expenses, including settlement payments and judgments, related to
this incident in excess of the deductible, although we cannot give any
assurances to that effect.
Other Lawsuits. We are subject to various other claims and legal actions
that arise in the ordinary course of our business.
Litigation Contingency
We have made estimates of the reasonably possible range of liability with
regard to our outstanding litigation for which we may incur any liability. These
estimates are based on our judgment using currently available information as
well as consultation with our insurance carriers and outside legal counsel. A
number of the claims in these litigation matters are covered by our insurance
policies or by third party indemnification. Therefore, we have also made
estimates of our probable recoveries under insurance policies or from
third-party indemnitors based on our understanding of our insurance policies and
indemnification arrangements, discussions with our insurers and indemnitors, and
consultation with outside legal counsel, in addition to our own judgment. Based
on the foregoing, as of March 31, 2000, we have accrued approximately $2.5
million as our estimate of our aggregate contingent liability for these matters
and have also recorded aggregate receivables from our insurers and third-party
indemnitors of approximately $2.3 million. At March 31, 2000, we estimate that
the aggregate reasonably possible range of loss for all litigation combined, in
addition to the amount accrued, is between zero and $3 million. We believe that
this additional reasonably possible loss would be substantially covered by
insurance or indemnification. The timing of probable insurance and indemnity
recoveries and payment of liabilities, if any, are not expected to have a
material adverse effect on our financial position, results of operations, or
cash flows. While we have based our estimates on our evaluation of available
information and the other matters described above, much of the litigation
remains in the discovery stage and it is impossible to predict with certainty
the ultimate outcome. We will adjust our estimates as necessary as additional
information is developed and evaluated. However, we
13
<PAGE> 14
believe that the final resolution of these contingencies will not have a
material adverse impact on our financial position, results of operations, or
cash flows, although we cannot give any assurances to that effect.
5. NET INCOME (LOSS) PER COMMON SHARE CALCULATION
For purposes of computing net income (loss) per common share, net income
(loss) has been reduced by an amount equal to the fair market value at the end
of the period of "Released Shares", which are shares held by Chemicals' employee
stock ownership plan that have been allocated to the ESOP accounts of our
employees, minus amounts previously recognized as compensation expense with
respect to Released Shares, adjusted to reflect the amount of
depreciation/appreciation in value of Released Shares in prior periods. This
reduction in net income (loss) is made because we are obligated, under certain
circumstances, to purchase from participants under the plan any shares of
Holdings' common stock distributed by the ESOP to these participants. The
weighted average number of outstanding shares of the common stock of Holdings
and the computation of the net loss per common share are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) attributable to common
stockholders ....................................... $ 2,563 $ (25,478) $ (8,518) $ (39,223)
Plus depreciation in value of Released Shares ........ -- 1,048 -- 1,048
------------ ------------ ------------ ------------
Net income (loss) for purpose of computing basic
and diluted income (loss) per share ................ $ 2,563 $ (24,430) $ (8,518) $ (38,175)
============ ============ ============ ============
Weighted average shares outstanding for basic ........ 12,651 12,466 12,632 12,446
Effect of dilutive securities:
Warrants ........................................... 398 -- -- --
------------ ------------ ------------ ------------
Weighted average shares outstanding for diluted ...... 13,049 12,466 12,632 12,446
============ ============ ============ ============
</TABLE>
6. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. We are
currently evaluating the accounting impact and disclosures required when this
statement is adopted in the first quarter of fiscal 2001.
14
<PAGE> 15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Sterling Chemicals Holdings, Inc.
We have reviewed the accompanying consolidated balance sheet of Sterling
Chemicals Holdings, Inc. and subsidiaries (the "Company") as of March 31, 2000,
and the related consolidated statements of operations and cash flows for the
three-month and six-month periods ended March 31, 2000 and 1999. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of September 30, 1999, and the related consolidated statements of
operations, stockholders' equity (deficiency in assets), and cash flows for the
year then ended (not presented herein); and in our report dated December 9,
1999, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of September 30, 1999 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Houston, Texas
May 11, 2000
15
<PAGE> 16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of Sterling Chemicals, Inc.
We have reviewed the accompanying consolidated balance sheet of Sterling
Chemicals, Inc. and subsidiaries ("Chemicals") as of March 31, 2000, and the
related consolidated statements of operations and cash flows for the three-month
and six-month periods ended March 31, 2000 and 1999. These financial statements
are the responsibility of Chemicals' management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Chemicals as of September 30, 1999, and the related consolidated statements of
operations, stockholder's equity (deficiency in assets), and cash flows for the
year then ended (not presented herein); and in our report dated December 9,
1999, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of September 30, 1999 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Houston, Texas
May 11, 2000
16
<PAGE> 17
STERLING CHEMICALS GUARANTORS
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 702 $ 9,323
Accounts receivable ................................ 45,164 45,139
Inventories ........................................ 29,681 29,207
Prepaid expenses ................................... 74 1,669
----------- -----------
Total current assets ............................. 75,621 85,338
Property, plant, and equipment, net ................... 191,596 196,877
Due from affiliates ................................... 127,150 121,506
Other assets .......................................... 46,586 51,354
----------- -----------
Total assets ..................................... $ 440,953 $ 455,075
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ................................... $ 25,799 $ 22,399
Accrued liabilities ................................ 13,241 16,515
----------- -----------
Total current liabilities ........................ 39,040 38,914
Long-term debt due to Parent .......................... 325,405 325,402
Deferred tax liability ................................ 7,312 7,272
Deferred credits and other liabilities ................ 8,254 7,227
Commitments and contingencies (Note 4) ................ -- --
Stockholder's equity:
Common stock ....................................... -- --
Additional paid-in capital ......................... 92,734 92,734
Retained earnings (accumulated deficit) ............ (5,108) 11,026
Accumulated other comprehensive income ............. (26,684) (27,500)
----------- -----------
Total stockholder's equity ....................... 60,942 76,260
----------- -----------
Total liabilities and stockholder's equity .... $ 440,953 $ 455,075
=========== ===========
</TABLE>
The accompanying notes are an integral part of the combined
financial statements.
17
<PAGE> 18
STERLING CHEMICALS GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ....................................... $ 62,487 $ 51,859 $ 118,832 $ 105,504
Cost of goods sold ............................. 53,957 44,534 102,978 89,778
----------- ----------- ----------- -----------
Gross profit ................................... 8,530 7,325 15,854 15,726
Selling, general, and administrative expenses .. 5,756 4,232 11,093 9,800
Other income ................................... -- (818) -- (818)
Interest and debt related expenses ............. 9,968 8,787 19,987 17,275
----------- ----------- ----------- -----------
Net loss before income taxes ................... (7,194) (4,876) (15,226) (10,531)
Provision (benefit) for income taxes ........... 321 (1,219) 908 (3,283)
----------- ----------- ----------- -----------
Net loss ....................................... $ (7,515) $ (3,657) $ (16,134) $ (7,248)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the combined
financial statements.
18
<PAGE> 19
STERLING CHEMICALS GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................................... $ (16,134) $ (7,248)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization ............................................... 12,289 11,932
Deferred tax expense (benefit) .............................................. 40 (484)
Other ....................................................................... 46 15
Change in assets/liabilities:
Accounts receivable ......................................................... (25) 2,337
Inventories ................................................................. (474) 244
Prepaid expenses ............................................................ 12,674 (1,982)
Due from affiliates ......................................................... (4,828) 1,411
Other assets ................................................................ (10,217) 4,518
Accounts payable ............................................................ 3,400 (4,266)
Accrued liabilities ......................................................... (3,278) (1,108)
Other liabilities ........................................................... 1,027 (512)
----------- -----------
Net cash flows provided by (used in) operating activities ........................ (5,480) 4,857
----------- -----------
Cash flows used in investing activities:
Capital expenditures .......................................................... (3,102) (3,170)
----------- -----------
Cash flows provided by (used in) financing activities:
Net change in long-term debt due to Parent .................................... 3 (2,815)
----------- -----------
Effect of United States/Canadian exchange rate on cash ........................... (42) (15)
----------- -----------
Net decrease in cash and cash equivalents ........................................ (8,621) (1,143)
Cash and cash equivalents--beginning of year ..................................... 9,323 4,093
----------- -----------
Cash and cash equivalents--end of period ......................................... $ 702 $ 2,950
=========== ===========
</TABLE>
The accompanying notes are an integral part of the combined
financial statements.
19
<PAGE> 20
STERLING CHEMICALS GUARANTORS
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
On July 23, 1999, Sterling Chemicals, Inc. ("Chemicals"), a wholly-owned
subsidiary of Sterling Chemicals Holdings, Inc. ("Holdings"), completed a
private offering of $295,000,000 of its 123/8% Senior Secured Notes due 2006. On
November 5, 1999, Chemicals completed a registered exchange offer, pursuant to
which all of these 123/8% Notes were exchanged for publicly registered 123/8%
Notes with substantially similar terms. The 123/8% Notes are guaranteed by all
of Chemicals' existing direct and indirect United States subsidiaries (other
than Sterling Chemicals Acquisitions, Inc.) on a joint and several basis and are
secured by, among other things, a second priority pledge of 100% of the stock of
these subsidiaries. These subsidiaries consist of Sterling Canada, Inc.,
Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling
Chemicals Energy, Inc., Sterling Chemicals International, Inc., and Sterling
Fibers, Inc. and, together with two Canadian subsidiaries of Sterling Canada,
Inc., are collectively referred to as the "Guarantors". The financial statements
of the Guarantors (except for Sterling Chemicals Energy, Inc., whose securities
do not constitute a substantial portion of the collateral) have been combined to
produce the accompanying financial statements.
The Guarantors manufacture chemicals for use primarily in the pulp and
paper industry at four plants in Canada and a plant in Valdosta, Georgia, and
manufacture acrylic fibers in a plant in Santa Rosa County, Florida. Sodium
chlorate is produced at the four plants in Canada and the Valdosta plant. Sodium
chlorite is produced at one of the Canadian locations. The Guarantors also
license, engineer, and oversee construction of large-scale chlorine dioxide
generators for the pulp and paper industry as part of their pulp chemicals
business. These generators convert sodium chlorate into chlorine dioxide at pulp
mills. The Guarantors produce regular textiles, specialty textiles, and
technical fibers at the Santa Rosa plant, as well as licensing their acrylic
fibers manufacturing technology to producers worldwide.
In the opinion of management, the accompanying unaudited combined financial
statements reflect all adjustments necessary to present fairly the combined
financial position of the Guarantors as of March 31, 2000, and its combined
results of operations and cash flows for the three month and six month periods
ended March 31, 2000 and March 31, 1999, respectively. All such adjustments are
of a normal and recurring nature. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for the
full year. The accompanying unaudited combined financial statements should be,
and are assumed to have been, read in conjunction with the audited combined
financial statements of the Guarantors included in Holdings' and Chemicals'
combined Annual Report on Form 10-K for the fiscal year ended September 30, 1999
(the "Annual Report"). The accompanying combined balance sheet as of September
30, 1999 has been derived from the Guarantors' audited combined balance sheet as
of September 30, 1999 included in the Annual Report.
The Guarantors' total comprehensive net loss for the six month periods
ended March 31, 2000 and March 31, 1999 were $15,318,000 and $5,965,000,
respectively.
2. INVENTORIES
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Inventories consisted of the following:
Finished products ........................... $ 18,258 $ 17,513
Raw materials ............................... 1,827 2,235
Inventories under exchange agreements ....... 444 170
Stores and supplies ......................... 9,152 9,289
----------- -----------
$ 29,681 $ 29,207
=========== ===========
</TABLE>
3. LONG-TERM DEBT
As of each of March 31, 2000 and September 30, 1999, debt allocated to the
Guarantors by Chemicals was $325.4 million. At March 31, 2000, interest rates on
this debt ranged from 11.25% to 12.375%.
20
<PAGE> 21
4. COMMITMENTS AND CONTINGENCIES
Environmental Regulations
The Guarantors' operations involve the handling, production,
transportation, treatment, and disposal of materials that are classified as
hazardous or toxic waste and that are extensively regulated by environmental,
health and safety laws, regulations, and permit requirements. Environmental
permits required for the Guarantors' operations are subject to periodic renewal
and can be revoked or modified for cause or when new or revised environmental
requirements are implemented. Changing and increasingly strict environmental
requirements can affect the manufacturing, handling, processing, distribution,
and use of the Guarantors' products and the raw materials used to produce such
products and, if so affected, the Guarantors' business and operations may be
materially and adversely affected. In addition, changes in environmental
requirements can cause the Guarantors to incur substantial costs in upgrading or
redesigning their facilities and processes, including waste treatment, storage,
disposal, and other waste handling practices and equipment.
While the Guarantors believe that their business operations and facilities
generally are operated in compliance in all material respects with all
applicable environmental, health and safety requirements, there can be no
assurance that past practices or future operations will not result in material
claims or regulatory action, require material environmental expenditures, or
result in exposure or injury claims by employees, contractors and their
employees, or the public. Some risk of environmental costs and liabilities is
inherent in the operations and products of the Guarantors, as it is with other
companies engaged in similar businesses. In addition, a catastrophic event at
any of the Guarantors' facilities could result in liabilities to the Guarantors
substantially in excess of their insurance coverages.
Any significant ban on chlorine containing compounds could have a
materially adverse effect on the Guarantors' financial condition and results of
operations. British Columbia has a regulation in place requiring elimination of
the use of all chlorine products, including chlorine dioxide, in the bleaching
process by the year 2002. Chlorine dioxide is produced from sodium chlorate,
which is one of the Guarantors' pulp chemicals products. The pulp and paper
industry believes that a ban of chlorine dioxide in the bleaching process will
yield no measurable environmental or public health benefit and is working to
change this regulation but there can be no assurance that the regulation will be
changed. In the event such a regulation is implemented, the Guarantors would
seek to sell the products they manufacture at the British Columbia facility to
customers in other markets. The Guarantors are not aware of any other laws or
regulations in place in North America which would restrict the use of such
products for other purposes.
The Guarantors' pulp chemicals business is sensitive to environmental
regulations. Regulations restricting, but not altogether banning, absorbable
organic halides and other chlorine derivatives in bleach plant effluent have a
favorable effect on their pulp chemicals business. Several pending lawsuits are
challenging an important group of these regulations known as the "Cluster
Rules." Although the Guarantors believe that the Cluster Rules will ultimately
be upheld in this litigation, they cannot be sure that they will. Even if the
Cluster Rules are upheld, the existence of these actions adds uncertainty as to
the rate of implementation of the Cluster Rules, which may negatively affect the
performance of the Guarantors' pulp chemicals business.
Legal Proceedings
The Guarantors are subject to various claims and legal actions that arise
in the ordinary course of business. The Guarantors believe that the ultimate
liability, if any, with respect to these claims and legal actions will not have
a material adverse impact on their financial position or results of operations.
5. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
Guarantors are currently evaluating the accounting impact and disclosures that
will be required when this statement is adopted in the first quarter of fiscal
2001.
21
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
Sterling Canada, Inc.
Sterling Fibers, Inc.
Sterling Chemicals International, Inc.
Sterling Pulp Chemicals US, Inc.
Sterling Pulp Chemicals, Inc.
We have reviewed the accompanying combined balance sheet of the Guarantors (as
defined in Note 1) as of March 31, 2000, and the related combined statements of
operations and cash flows for the three month and six month periods ended March
31, 2000 and 1999. These financial statements are the responsibility of the
Guarantors' management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such combined financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the combined balance sheet of the
Guarantors as of September 30, 1999, and the related combined statements of
operations, stockholder's equity, and cash flows for the year then ended (not
presented herein); and in our report dated December 9, 1999, we expressed an
unqualified opinion on those combined financial statements. In our opinion, the
information set forth in the accompanying combined balance sheet as of September
30, 1999 is fairly stated, in all material respects, in relation to the combined
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Houston, Texas
May 11, 2000
22
<PAGE> 23
STERLING PULP CHEMICALS, LTD.
BALANCE SHEETS
(AMOUNTS IN U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................... $ 269 $ 8,481
Accounts receivable ......................... 16,324 16,840
Due from related parties .................... 1,208 1,369
Other receivables ........................... 1,324 2,254
Inventories ................................. 5,977 5,146
Prepaid expenses ............................ 469 633
----------- -----------
25,571 34,723
Property, plant, and equipment, net .............. 73,584 75,531
Other assets ..................................... 184 440
----------- -----------
Total assets ................................ $ 99,339 $ 110,694
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUIITY
Current liabilities:
Accounts payable ............................ $ 8,939 $ 8,978
Accrued generator construction costs ........ 2,667 2,967
Accrued liabilities ......................... 6,731 7,093
Due to related parties ...................... 2,565 1,241
----------- -----------
20,902 20,279
Note payable ..................................... 57,332 56,667
Deferred tax liability ........................... 7,312 7,272
Deferred credits and other liabilities ........... 4,473 3,972
Commitments and contingencies (Note 4) ........... -- --
Stockholder's equity:
Common stock ................................ 1 1
Additional paid-in capital .................. 7,662 16,871
Retained earnings ........................... 10,385 14,470
Accumulated other comprehensive income ...... (8,728) (8,838)
----------- -----------
Total stockholder's equity ............... 9,320 22,504
----------- -----------
Total liabilities and stockholder's
equity .................................. $ 99,339 $ 110,694
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
23
<PAGE> 24
STERLING PULP CHEMICALS, LTD.
STATEMENTS OF OPERATIONS
(AMOUNTS IN U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue ............................................ $ 31,499 $ 24,903 $ 59,939 $ 51,556
Cost of goods sold ................................. 26,615 22,137 50,223 44,605
----------- ----------- ----------- -----------
Gross profit ....................................... 4,884 2,766 9,716 6,951
Selling, general, and administrative expenses ...... 2,691 891 4,923 3,188
Interest and debt related expenses, net ............ 1,194 1,422 2,297 2,786
----------- ----------- ----------- -----------
Income before income taxes ......................... 999 453 2,496 977
Provision for income taxes ......................... 321 212 902 415
----------- ----------- ----------- -----------
Net income ......................................... $ 678 $ 241 $ 1,594 $ 562
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
24
<PAGE> 25
STERLING PULP CHEMICALS, LTD.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 1,594 $ 562
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .................................. 4,105 3,791
Deferred benefit ............................................... (53) (484)
Other .......................................................... (6) 14
Changes in assets/liabilities:
Accounts receivable ............................................ 919 (77)
Due from related parties ....................................... (75) 15
Other receivables .............................................. 932 10
Inventories .................................................... (760) (62)
Prepaid expenses ............................................... 167 (92)
Other assets ................................................... 258 3,427
Accounts payables .............................................. (131) 644
Accrued generator construction costs ........................... (353) (954)
Other accrued liabilities ...................................... (427) (3,884)
Due to related parties ......................................... 1,274 2,630
Other liabilities .............................................. 467 371
----------- -----------
Net cash provided by operating activities ................................ 7,911 5,911
----------- -----------
Cash flows from investing activities:
Capital expenditures ................................................ (1,307) (1,369)
----------- -----------
Cash flows from financing activities:
Distribution to parent .............................................. (9,209) --
Dividends ........................................................... (5,679) (5,114)
----------- -----------
Net cash used in financing activities .................................... (14,888) (5,114)
----------- -----------
Effect of exchange rate on cash .......................................... 72 69
----------- -----------
Net decrease in cash and cash equivalents ................................ (8,212) (503)
Cash and cash equivalents, beginning of period ........................... 8,481 3,426
----------- -----------
Cash and cash equivalents, end of period ................................. $ 269 $ 2,923
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
25
<PAGE> 26
STERLING PULP CHEMICALS, LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Sterling Pulp Chemicals, Ltd. ("Sterling Pulp") is a Canadian company which
operates four pulp chemicals facilities in Canada. These plants primarily
produce sodium chlorate, a chemical used primarily to make chlorine dioxide,
which in turn is used by pulp mills in the pulp bleaching process. Sterling Pulp
also oversees construction of large-scale chlorine dioxide generators for the
pulp and paper industry. Sterling Pulp is a wholly-owned subsidiary of Sterling
Canada, Inc. ("Sterling Canada"), which is a wholly-owned subsidiary of Sterling
Chemicals, Inc. ("Chemicals"), a wholly owned subsidiary of Sterling Chemicals
Holdings, Inc. ("Holdings").
In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments necessary to present fairly the financial
position of Sterling Pulp as of March 31, 2000, and its results of operations
and cash flows for the three month and six month periods ended March 31, 2000
and March 31, 1999, respectively. All such adjustments are of a normal and
recurring nature. The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year. The
accompanying unaudited financial statements should be, and are assumed to have
been, read in conjunction with Sterling Pulp's annual financial statements
included in Holdings' and Chemicals' combined Annual Report on Form 10-K for the
fiscal year ended September 30, 1999 (the "Annual Report"). The accompanying
balance sheet as of September 30, 1999, has been derived from Sterling Pulp's
audited balance sheet as of September 30, 1999 included in the Annual Report.
Sterling Pulp's total comprehensive net income for the six month periods
ended March 31, 2000 and March 31, 1999 was $1,704,000 and $347,000,
respectively.
2. INVENTORIES
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
----------- -----------
(U.S. Dollars in Thousands)
<S> <C> <C>
Inventories consisted of the following:
Finished products ........................ $ 2,525 $ 1,872
Raw materials ............................ 220 209
Inventories under exchange agreements .... 394 77
Stores and supplies ...................... 2,838 2,988
----------- -----------
$ 5,977 $ 5,146
=========== ===========
</TABLE>
3. LONG-TERM DEBT
On August 20, 1992, Sterling Pulp entered into a $109,087,000 intercompany
demand note facility with Sterling NRO, Ltd. ("Sterling NRO"), of which
$57,332,000 was outstanding at March 31, 2000. Sterling NRO is also owned by
Sterling Canada and is therefore related to Sterling Pulp by virtue of common
control. The note has no scheduled terms of repayment and interest is calculated
and payable monthly in arrears at 1.5% above the Bank of Nova Scotia prime rate.
All of the indebtedness evidenced by the note is classified as long-term debt
because Sterling Canada has represented that no repayments will be made before
April 1, 2001.
4. COMMITMENTS AND CONTINGENCIES
Environmental and Safety Matters
Sterling Pulp's operations involve the handling, production,
transportation, treatment, and disposal of materials that are classified as
hazardous or toxic waste and that are extensively regulated by environmental,
health and safety laws, regulations, and permit requirements. Environmental
permits required for Sterling Pulp's operations are subject to periodic renewal
and can be revoked or modified for cause or when new or revised environmental
requirements are implemented. Changing and increasingly
26
<PAGE> 27
strict environmental requirements can affect the manufacturing, handling,
processing, distribution, and use of Sterling Pulp's products and the raw
materials used to produce such products and, if so affected, Sterling Pulp's
business and operations may be materially and adversely affected. In addition,
changes in environmental requirements can cause Sterling Pulp to incur
substantial costs in upgrading or redesigning its facilities and processes,
including waste treatment, storage, disposal, and other waste handling practices
and equipment.
While Sterling Pulp believes that its business operations and facilities
generally are operated in compliance in all material respects with all
applicable environmental, health and safety requirements, there can be no
assurance that past practices or future operations will not result in material
claims or regulatory action, require material environmental expenditures, or
result in exposure or injury claims by employees, contractors and their
employees, or the public. Some risk of environmental costs and liabilities is
inherent in the operations and products of Sterling Pulp, as it is with other
companies engaged in similar businesses. In addition, a catastrophic event at
any of Sterling Pulp's facilities could result in liabilities to Sterling Pulp
substantially in excess of its insurance coverages.
Any significant ban on chlorine containing compounds could have a
materially adverse effect on Sterling Pulp's financial condition and results of
operations. British Columbia has a regulation in place requiring elimination of
the use of all chlorine products, including chlorine dioxide, in the bleaching
process by the year 2002. Chlorine dioxide is produced from sodium chlorate,
which is one of Sterling Pulp's pulp chemicals products. The pulp and paper
industry believes that a ban of chlorine dioxide in the bleaching process will
yield no measurable environmental or public health benefit and is working to
change this regulation but there can be no assurance that the regulation will be
changed. In the event such a regulation is implemented, Sterling Pulp would seek
to sell the products it manufactures at its British Columbia facility to
customers in other markets. Sterling Pulp is not aware of any other laws or
regulations in place in North America which would restrict the use of such
products for other purposes.
Sterling Pulp's business is sensitive to environmental regulations.
Regulations restricting, but not altogether banning, absorbable organic halides
and other chlorine derivatives in bleach plant effluent have a favorable effect
on Sterling Pulp. Several pending lawsuits are challenging an important group of
these regulations known as the "Cluster Rules." Although Sterling Pulp believes
that the Cluster Rules will ultimately be upheld in this litigation, it cannot
be sure that they will. Even if the Cluster Rules are upheld, the existence of
these actions adds uncertainty as to the rate of implementation of the Cluster
Rules, which may negatively affect the performance of Sterling Pulp.
Legal Proceedings
Sterling Pulp is subject to claims and legal actions that arise in the
ordinary course of its business. Sterling Pulp believes that the ultimate
liability, if any, with respect to these claims and legal actions will not have
a material adverse impact on its financial position or results of operations.
Pledge of Common Stock
Sterling Canada has pledged 65% of Sterling Pulp's common stock to secure
its guarantee of $295,000,000 of Chemicals' 12 3/8% Senior Secured Notes due
2006.
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.
27
<PAGE> 28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
Sterling Pulp Chemicals, Ltd.
We have reviewed the accompanying balance sheet of Sterling Pulp Chemicals, Ltd.
("Sterling Pulp") as of March 31, 2000, and the related statements of operations
and cash flows for the three-month and six-month periods ended March 31, 2000
and 1999. These financial statements are the responsibility of Sterling Pulp's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet of Sterling Pulp as
of September 30, 1999, and the related statements of operations, stockholder's
equity, and cash flows for the year then ended (not presented herein); and in
our report dated December 9, 1999, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth in the
accompanying balance sheet as of September 30, 1999 is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
DELOITTE & TOUCHE LLP
Chartered Accountants
Mississauga, Canada
May 11, 2000
28
<PAGE> 29
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
During the second quarter of fiscal 2000, we generated net income of
approximately $2.6 million, which was the first quarter in which we generated
net income since our recapitalization in August of 1996. Our improved
performance was primarily due to significant improvement in the markets for
styrene during the last six months.
Our ethylbenzene unit, an important component of our 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 also shut down
our ethylbenzene unit later in the second quarter of fiscal 2000 to perform
additional maintenance work. These events did not have a material adverse effect
on our financial condition or results of operations.
On January 4, 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 fiscal quarter. In
addition, we engaged in a minimal amount of borrowing, purchasing, and swapping
of raw materials and product with other suppliers. This event did not have a
material adverse effect on our financial condition or results of operations.
During February of 2000, we completed a small equity investment in
ChemConnect, Inc., a global internet exchange for chemicals and plastics. The
investment in ChemConnect assures us a Charter Membership which entitles us to a
seat on ChemConnect's e-commerce Roundtable of the World Chemical Exchange. The
World Chemical Exchange is a neutral marketplace where the global chemicals and
plastics industries conduct on-line trades. We completed the first on-line
styrene monomer sale in early February using ChemConnect's corporate trading
room.
On April 6, 2000, we announced our intention to evaluate strategic
alternatives with respect to our acrylic fibers business, Sterling Fibers,
located in Santa Rosa County, Florida. This decision reflects the continuing
consolidation within the worldwide fibers industry as producers pursue synergy
benefits through economies of scale, cost savings, and business improvements. We
have engaged a financial advisor to help us identify and evaluate a variety of
options ranging from an outright sale of our acrylic fibers business to a joint
venture or alliance arrangement. We do not know whether or not this process will
result in a transaction. In addition, we may elect to forgo a possible
transaction in favor of continuing our ownership and operation of the business.
We do not currently plan to discontinue operations at the Santa Rosa facility if
a transaction does not occur.
On May 1, 2000, we announced that Peter W. De Leeuw, our President and
Chief Executive Officer, was retiring effective May 8, 2000. Our Board of
Directors formed a search committee and have begun an external search for a new
CEO. Frank P. Diassi, our executive Chairman of the Board, has assumed the
additional duties of CEO until a new CEO is hired, after which time Mr. Diassi
will serve as our non-executive Chairman of the Board. We also announced that
Richard K. Crump has been promoted to Executive Vice President - Operations,
Gary M. Spitz (CFO) has been promoted to Executive Vice President - Finance, and
David G. Elkins has been promoted to Executive Vice President - Administration
and Law. In addition, in an unrelated development, George J. Damiris resigned
from the Board of Directors, effective April 19, 2000. Koch Capital Services,
Inc., who has the right under our 1996 Voting Agreement to designate a
replacement for Mr. Damiris, subsequently waived that right.
In May of 2000, we entered into a new 3-1/2 year ammonia supply agreement
with Koch Nitrogen Company, an affiliate of one of our significant stockholders.
The new ammonia supply agreement replaced our prior ammonia supply agreement
with
29
<PAGE> 30
Koch which was not scheduled to terminate until 2002. The new ammonia supply
agreement requires us to purchase the same annual quantity of ammonia from Koch
but at a revised formula. In connection with the execution of the new ammonia
supply agreement, we made a payment to Koch of $1.2 million to settle a dispute
under the old ammonia supply agreement and we also made a one-time payment to
Koch of $1.8 million in exchange for the revised formula. The impact of this
settlement was reflected in our financial statements for the fiscal quarter
ended March 31, 2000.
RESULTS OF OPERATIONS
Our revenues were approximately $265 million in the second quarter of
fiscal 2000, an increase of approximately 74% from the approximately $152
million in revenues we received in the second quarter of fiscal 1999. Our
revenues were approximately $512 million in the first six months of fiscal 2000,
an increase of approximately 58% from the approximately $324 million in revenues
we received in the first six months of fiscal 1999. These increases in our
revenues resulted primarily from higher styrene sales prices and sales volumes
attributable to the continued improved conditions in the styrene market. Our
revenues were also favorably impacted by increased acrylonitrile sales prices
and increased sodium chlorate sales volumes. We recorded net income attributable
to common stockholders of approximately $2.6 million, or $0.20 per basic and
diluted share, for the second quarter of fiscal 2000, compared to the net loss
attributable to common stockholders of approximately $25.5 million, or $1.96 per
basic and diluted share, we recorded for the second quarter of fiscal 1999. We
recorded a net loss attributable to common stockholders of approximately $8.5
million, or $0.67 per share, for the first six months of fiscal 2000, compared
to the net loss attributable to common stockholders of approximately $39.2
million, or $3.07 per share, we recorded for the first six months of fiscal
1999. Our improved performance was primarily due to increased styrene margins
and sales volumes, partially offset by increased interest expense. programs and
benefit changes.
Revenues, Cost of Goods Sold, and Gross Profit
Petrochemicals. Revenues from our petrochemicals operations were
approximately $211 million in the second quarter of fiscal 2000, an increase of
approximately 97% from the approximately $107 million in revenues we received
from these operations during the second quarter of fiscal 1999. Revenues from
our petrochemicals operations were approximately $409 million for the first six
months of fiscal 2000, an increase of approximately 76% from the approximately
$233 million in revenues we received from these operations during the first six
months of fiscal 1999. These increases in revenues resulted primarily from
increased styrene sales prices and volumes and to a lesser extent increased
acrylonitrile sales prices. In addition, our styrene unit had a scheduled
shutdown during the second quarter of fiscal 1999. Our petrochemicals operations
recorded operating income of approximately $26 million for the second quarter of
fiscal 2000, whereas these operations recorded operating losses of approximately
$19 million for the second quarter of fiscal 1999. Our petrochemicals operations
recorded operating income of approximately $40 million for the first six months
of fiscal 2000, whereas these operations recorded operating losses of
approximately $21 million for the first six months of fiscal 1999. The improved
performance of our petrochemicals operations resulted primarily from increased
styrene margins and sales volumes. In addition, our results of operations during
the second quarter and first six months of fiscal 1999 were negatively impacted
by a scheduled shutdown of our styrene unit during the second quarter of fiscal
1999 and a one-time non-cash charge related to early retirement programs and
benefit changes.
Revenues from our styrene operations were approximately $135 million in the
second quarter of fiscal 2000, an increase of approximately 193% from the
approximately $46 million in revenues we received from these operations in the
second quarter of fiscal 1999. Revenues from our styrene operations were
approximately $243 million in the first six months of fiscal 2000, an increase
of approximately 141% from the approximately $101 million in revenues we
received from these operations in the first six months of fiscal 1999. Sales
prices for our styrene in the second quarter and first six months of fiscal 2000
increased approximately 108% and 86%, respectively, from those realized during
the second quarter and first six months of fiscal 1999. In addition, sales
volumes of our styrene in the second quarter and first six months of fiscal 2000
increased approximately 34% and 38%, respectively, from those realized during
the second quarter and first six months of fiscal 1999. These increases in
revenues, sales prices and volumes for 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. In addition,
during the second quarter of fiscal 1999 the styrene unit was shutdown for
approximately one month for routine maintenance. During the second quarter and
first six months of fiscal 2000, prices for benzene, one of the primary raw
materials for styrene, were approximately 75% and 56% higher, respectively, than
the prices we paid for benzene in the second quarter and first six months of
fiscal 1999, and prices for ethylene, the other primary raw material for
styrene, were approximately 79% and 86% higher, respectively, than the prices we
paid for ethylene in the second quarter and first six months of fiscal 1999.
Margins on our styrene sales in the second quarter and first six months of
fiscal 2000 increased from the margins we received in the second quarter and
first six months of fiscal 1999, primarily as a result of the significant
increase in sales prices, which more than offset our higher raw materials costs.
Revenues from our acrylonitrile operations were approximately $24 million
in the second quarter of fiscal 2000, an
30
<PAGE> 31
increase of approximately 41% from the approximately $17 million in revenues we
received from these operations in the second quarter of fiscal 1999. Revenues
from our acrylonitrile operations were approximately $55 million in the first
six months of fiscal 2000, an increase of approximately 53% from the
approximately $36 million in revenues we received from these operations in the
first six months of fiscal 1999. Sales prices for our acrylonitrile in the
second quarter and first six months of fiscal 2000 increased approximately 152%
and 114%, respectively, from those realized during the second quarter and first
six months of fiscal 1999. These increases in revenues and sales prices from 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. Sales volumes of our acrylonitrile decreased
approximately 36% in the second quarter of fiscal 2000 from those realized
during the second quarter of fiscal 1999. This decrease in sales volumes of our
acrylonitrile was primarily the result of our acrylonitrile facilities being
operated at reduced rates in the second quarter of fiscal 2000 to facilitate
planned tie-in work for our disodium iminodiacetic acid ("DSIDA") project and
for routine maintenance work. Sales volume of our acrylonitrile remained the
same in the first six months of fiscal 2000 as those realized during the first
six months of fiscal 1999. The acrylonitrile facility was operating at full
operating rates in March of 2000 after the completion of the tie-in work and
routine maintenance. During the second quarter and first six months of fiscal
2000, prices for propylene, one of the primary raw materials for acrylonitrile,
were approximately 38% and 83% higher, respectively, than the prices we paid for
propylene in the second quarter and first six months of fiscal 1999, and prices
for ammonia, the other primary raw material for acrylonitrile, were
approximately 4% lower and 20% higher, respectively, than the prices we paid for
ammonia in the second quarter and first six months of fiscal 1999. Although we
performed a scheduled shut down of our acrylonitrile facilities and operated at
lower rates during the second quarter and first six months of fiscal 2000,
margins on our acrylonitrile sales in the second quarter and first six months of
fiscal 2000 increased from the margins we received in the second quarter and
first six months of fiscal 1999, primarily as a result of higher sales prices,
which more than offset our higher raw materials prices and the impact of lower
operating rates.
Revenues from our acrylic fibers operations were approximately $19 million
in the second quarter of fiscal 2000, an increase of approximately 19% from the
approximately $16 million in revenues we received from these operations in the
second quarter of fiscal 1999. Revenues from our acrylic fibers operations were
approximately $35 million in the first six months of fiscal 2000, an increase of
approximately 13% from the approximately $31 million in revenues we received
from these operations in the first six months of fiscal 1999. Sales volumes of
our acrylic fibers in the second quarter and first six months of fiscal 2000
increased approximately 21% and 23%, respectively, from those realized during
the second quarter and first six months of fiscal 1999. Sales prices for our
acrylic fibers in the second quarter and first six months of fiscal 2000
remained the same and increased approximately 8%, respectively, from those
realized during the second quarter and first six months of fiscal 1999. The
performance of our acrylic fibers operations in the second quarter and first six
months of fiscal 2000 was negatively impacted by weak market conditions, imports
from foreign suppliers, and higher raw materials cost.
Revenues from our other petrochemicals operations, including acetic acid,
plasticizers, and methanol, were approximately $34 million in the second quarter
of fiscal 2000, an increase of approximately 17% from the approximately $29
million in revenues we received from these operations in the second quarter of
fiscal 1999. Revenues from our other petrochemicals were approximately $75
million in the first six months of fiscal 2000, an increase of approximately 14%
from the approximately $66 million in revenues we received from these operations
in the first six months of fiscal 1999. Our other petrochemicals operations
reported a decrease in operating earnings in the second quarter and first six
months of fiscal 2000 compared to that realized in the second quarter and first
six months of fiscal 1999. This decrease in operating earnings resulted
primarily from a reduction in margins for our plasticizers caused by higher raw
materials costs.
Pulp Chemicals. Revenues from our pulp chemicals operations were
approximately $54 million in the second quarter of fiscal 2000, an increase of
approximately 20% from the approximately $45 million in revenues we received
from these operations in the second quarter of fiscal 1999. Revenues from our
pulp chemicals operations were approximately $103 million in the first six
months of fiscal 2000, an increase of approximately 12% from the approximately
$92 million in revenues we received from these operations in the first six
months of fiscal 1999. Sales volumes of our sodium chlorate business in the
second quarter and first six months of fiscal 2000 increased approximately 10%
and 9%, respectively, from those realized in the second quarter and first six
months of fiscal 1999. Sales prices of our sodium chlorate in the second quarter
and first six months of fiscal 2000 increased approximately 4% and 1%,
respectively, from those realized in the second quarter and first six months of
fiscal 1999. Our pulp chemicals operations recorded operating earnings of
approximately $9 million in the second quarter of fiscal 2000 compared to
operating earnings of approximately $8 million the second quarter of fiscal
1999. Our pulp chemicals operations recorded operating earnings of approximately
$16 million in the first six months of fiscal 2000 compared to operating
earnings of approximately $15 million the first six months of fiscal 1999. These
increases in revenues, sales volumes, sales prices, and operating earnings
resulted primarily from increased operating rates at pulp mills and the
continued conversion to elemental chlorine free bleaching at pulp mills.
Selling, General, and Administrative ("SG&A") Expenses
Our SG&A expenses in the second quarter and first six months of fiscal 2000
were approximately $10 million and $19 million, respectively, compared to
approximately $9 million and $18 million for the same periods of fiscal 1999.
31
<PAGE> 32
Other Expense
We had other expense of approximately $7 million and $9 million for the
second quarter and first six months of fiscal 1999, respectively. These amounts
relate to a one-time non-cash charge related to early retirement programs and
benefit changes and workforce reductions in our petrochemicals business and at
our Saskatoon, Saskatchewan, Canada plant.
Interest and Debt Related Expenses
Our interest and debt related expense was approximately $30 million and $60
million for the second quarter and first six months of fiscal 2000,
respectively, compared to approximately $24 million and $50 million for the same
periods of fiscal 1999. These increases resulted primarily from the higher
interest rates we paid on some of our indebtedness after we refinanced that
indebtedness in July of 1999 and the payment of interest on the additional
indebtedness we incurred at that time.
Provision (Benefit) for Income Taxes
Our provision for income taxes for the second quarter and first six months
of fiscal 2000 was approximately $1 million and $2 million, respectively,
reflecting the foreign tax provision on the income of our Canadian subsidiaries.
Due to the recurring losses of our United States subsidiaries, in fiscal 2000 we
recorded a valuation allowance in an amount equal to the benefit for income
taxes generated by losses from our United States subsidiaries. Our benefit for
income taxes for the second quarter and first six months of fiscal 1999 was
approximately $11 million and $19 million, respectively, with an effective tax
rate of approximately 31% and 33%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, our long-term debt, including current maturities,
totaled approximately $978 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 an
additional revolving credit facility secured by its and some of its
subsidiaries' working capital. The two revolving credit facilities provide an
aggregate borrowing capacity of $155 million. The refinancing increased our
liquidity by eliminating near-term debt amortization and financial covenants
associated with the old senior credit facility, as well as by increasing
revolving credit availability. Although no assurances can be given, we believe
the additional liquidity provided by the refinancing, when combined with cash
flows from operations and other sources of available capital, will be sufficient
to enable us to operate through current 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 March 31, 2000, the total
credit available under the secured revolving credit facilities was $155 million,
with approximately $56 million drawn under the fixed assets revolver. Therefore,
at March 31, 2000, we had additional borrowing capacity of approximately $99
million.
The credit agreement obligates us to make mandatory prepayments of the
outstanding revolving credit loans if we take certain actions, including selling
certain assets owned by Chemicals and various subsidiaries and issuing equity
securities of Holdings. If such a mandatory prepayment becomes due, there will
be a corresponding permanent reduction of the loan commitments under the secured
revolving credit facilities. We have no current plans to take any action that
would trigger a mandatory prepayment of this nature.
32
<PAGE> 33
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, annual limits on our aggregate capital
expenditures and restrictions on our ability to incur indebtedness, pay
dividends, create liens, sell assets, engage in mergers and acquisitions, and
refinance existing indebtedness. In addition, these indentures and the credit
agreement specify various circumstances that will constitute, upon occurrence
and subject in certain cases to notice and grace periods, an event of default
thereunder. However, none of 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 March 31, 2000. We believe the credit available under the
Saskatoon revolving credit facility, when added to internally generated funds
and other sources of capital, will be sufficient to meet the Saskatoon
subsidiary's liquidity needs for the reasonably foreseeable future, although we
can give no assurances to that effect.
Covenants contained in the Saskatoon credit agreement severely restrict our
ability to access the cash flows of our Saskatoon subsidiary. In addition, as
our Saskatoon subsidiary is designated as an "Unrestricted Subsidiary" under the
credit agreement and the indentures for the 13 1/2% Notes, the 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.
Working Capital
Working capital at March 31, 2000 was approximately $103 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, offset by an increase in accounts payable as a result of changes
in payment terms for some of our major raw materials and higher raw material
costs.
33
<PAGE> 34
Cash Flow
Net cash provided by our operations was approximately $10 million for the
first six months of fiscal 2000, compared to net cash provided by our operations
of approximately $1 million for the first six months of fiscal 1999. This
approximately $9 million increase in net cash provided by operations was
primarily due to the decrease in net loss.
Capital Expenditures
Our capital expenditures in the first six months of fiscal 2000 were
approximately $18 million, compared to our capital expenditures in the first six
months of fiscal 1999 of approximately $12 million. Our capital expenditures in
the first six months of fiscal 2000 were primarily related to our DSIDA project,
a water disposal project, and routine safety, environmental, and replacement
capital. During the remainder of fiscal 2000, we expect to spend approximately
$12 million to $14 million on the DSIDA project and routine safety,
environmental, and replacement capital. We expect to fund our remaining fiscal
2000 capital expenditures from operating cash flow, plus borrowings under our
secured revolving credit facilities, if needed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Through the first six months of fiscal 2000, there were no significant
changes in our market risk disclosures as set forth in the Annual Report.
34
<PAGE> 35
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
The 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 were
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>
On May 1, 2000, we announced the retirement of Peter W. De Leeuw effective
May 8, 2000. In addition, in an unrelated development, George J. Damiris,
designee of Koch Capital Services, Inc., resigned as a director. Koch Capital
Services has waived its right under our Voting Agreement to designate a
replacement.
The voting results for the appointment of Deloitte & Touche LLP as our
independent accountants for the fiscal year ending September 30, 2000 were 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
------ ----------------------
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.
35
<PAGE> 36
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: May 12, 2000 /s/ FRANK P. DIASSI
-----------------------------------
Frank P. Diassi
Chairman of the Board of Directors
(Principal Executive Officer)
Date: May 12, 2000 /s/ GARY M. SPITZ
-----------------------------------
Gary M. Spitz
Executive Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
36
<PAGE> 37
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C> <C>
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
STERLING CHEMICALS HOLDINGS, INC.
EXHIBIT 11.1
EARNINGS PER SHARE COMPUTATION
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Weighted average number of shares of common
stock outstanding 12,651 12,466 12,632 12,446
Net income (loss) $ 3,301 $ (24,820) $ (7,061) $ (37,920)
Less: preferred dividend requirements and accretion (738) (658) (1,457) (1,303)
Plus: depreciation of value of Released Shares -- 1,048 -- 1,048
---------- ---------- ---------- ----------
Net income (loss) used in basic loss per share $ 2,563 (24,430) (8,518) $ (38,175)
========== ========== ========== ==========
BASIC INCOME (LOSS) PER SHARE $ 0.20 $ (1.96) $ (0.67) $ (3.07)
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE
Weighted average number of shares of common
stock outstanding 12,651 12,466 12,632 12,446
Effect of dilutive warrants 398 -- -- --
---------- ---------- ---------- ----------
Total weighted average number of shares
outstanding used in diluted income (loss) per share
computation 13,049 12,466 12,632 12,446
========== ========== ========== ==========
Net income (loss) $ 3,301 $ (24,820) $ (7,061) $ (37,920)
Less: preferred dividend requirements and accretion (738) (658) (1,457) (1,303)
Plus: depreciation of value of Released Shares -- 1,048 -- 1,048
---------- ---------- ---------- ----------
Net income (loss) used in diluted earning per share $ 2,563 $ (24,430) $ (8,518) $ (38,175)
========== ========== ========== ==========
DILUTED INCOME (LOSS) PER SHARE $ 0.20 $ (1.96) $ (0.67) $ (3.07)
========== ========== ========== ==========
</TABLE>
<PAGE> 1
Exhibit 15.1
Deloitte & Touche LLP
333 Clay Street
Suite 2300
Houston, Texas 77002
May 12, 2000
Sterling Chemicals Holdings, Inc.
1200 Smith Street, Suite 1900
Houston, Texas 77002
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 and six-month periods ended March 31, 2000 and 1999, as indicated in
our report dated May 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 March 31, 2000, 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> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 7,611
<SECURITIES> 0
<RECEIVABLES> 167,349
<ALLOWANCES> (2,456)
<INVENTORY> 82,512
<CURRENT-ASSETS> 273,297
<PP&E> 801,922
<DEPRECIATION> 404,217
<TOTAL-ASSETS> 794,008
<CURRENT-LIABILITIES> 169,993
<BONDS> 975,470
22,390
0
<COMMON> 123
<OTHER-SE> (462,979)
<TOTAL-LIABILITY-AND-EQUITY> 794,008
<SALES> 511,748
<TOTAL-REVENUES> 511,748
<CGS> 436,826
<TOTAL-COSTS> 436,826
<OTHER-EXPENSES> 19,466
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,231
<INCOME-PRETAX> (4,775)
<INCOME-TAX> 2,286
<INCOME-CONTINUING> (7,061)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,061)
<EPS-BASIC> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001014669
<NAME> STERLING CHEMICALS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 7,584
<SECURITIES> 0
<RECEIVABLES> 169,976
<ALLOWANCES> (2,456)
<INVENTORY> 82,512
<CURRENT-ASSETS> 274,597
<PP&E> 801,922
<DEPRECIATION> 404,217
<TOTAL-ASSETS> 771,277
<CURRENT-LIABILITIES> 169,714
<BONDS> 817,094
0
0
<COMMON> 0
<OTHER-SE> (304,542)
<TOTAL-LIABILITY-AND-EQUITY> 771,277
<SALES> 511,748
<TOTAL-REVENUES> 511,748
<CGS> 436,826
<TOTAL-COSTS> 436,826
<OTHER-EXPENSES> 19,336
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,304
<INCOME-PRETAX> 6,282
<INCOME-TAX> 2,286
<INCOME-CONTINUING> 3,996
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,996
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
