-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, koHvTbbT77o3hioXZKZeXvKxJOlcwMF3GzP/IF1GmxnQ/rkztbm04W+aqcAwQV9Z 9D6TBQBT5yczEz8d71s7Xg== 0000795662-94-000011.txt : 19940824 0000795662-94-000011.hdr.sgml : 19940824 ACCESSION NUMBER: 0000795662-94-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING CHEMICALS INC CENTRAL INDEX KEY: 0000795662 STANDARD INDUSTRIAL CLASSIFICATION: 2860 IRS NUMBER: 760185186 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10059 FILM NUMBER: 94544123 BUSINESS ADDRESS: STREET 1: 1200 SMITH ST, SUITE 1900 CITY: HOUSTON STATE: TX ZIP: 77002-4312 BUSINESS PHONE: 7136503700 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1994 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, 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 Number 1200 Smith Street, Suite 1900, Houston, Texas 77002-4312 - - --------------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Indicate by check mark whether the registrant (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 August 8, 1994, the number of shares of common stock outstanding was 55,660,141. Page 1 of __ Part I. - FINANCIAL INFORMATION Item 1. - FINANCIAL STATEMENTS --------------------
STERLING CHEMICALS, INC. CONDENSED CONSOLIDATED BALANCE SHEET (In Thousands Except Per Share Data) (Unaudited) June 30, September 30, 1994 1993 --------- ------------- ASSETS ------ Current assets: Cash and cash equivalents $ 72 $ 1,352 Accounts receivable 138,434 74,553 Inventories 55,961 60,328 Prepaid expenses 1,475 4,632 Deferred income taxes 6,100 3,856 -------- -------- Total current assets 202,042 144,721 Property, plant and equipment, net 290,136 314,315 Other assets 75,832 80,669 -------- -------- Total assets $568,010 $539,705 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $ 55,996 $ 42,241 Accrued liabilities 49,148 43,513 Current portion of long-term debt 30,228 28,015 -------- -------- Total current liabilities 135,372 113,769 Long-term debt 246,104 256,845 Deferred income taxes 43,551 36,098 Deferred credits and other liabilities 72,446 62,657 Commitments and contingencies Stockholders' equity: Common stock, $.01 par value 150,000 shares authorized, 60,327 and 60,325 shares issued and 55,660 and 55,435 shares outstanding, respectively 603 603 Additional paid-in capital 33,232 34,708 Retained earnings 109,754 105,871 Pension adjustment (1,297) (1,297) Accumulated translation adjustment (20,906) (16,184) Deferred compensation (85) (164) -------- -------- 121,301 123,537 Treasury stock at cost, 4,667 and 4,891 shares, respectively (50,764) (53,201) -------- -------- Total stockholders' equity 70,537 70,336 -------- -------- Total liabilities and stockholders' equity $568,010 $539,705 ======== ======== The accompanying notes are an integral part of the condensed consolidated financial statements.
STERLING CHEMICALS, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In Thousands Except Per Share Data) (Unaudited) Three Months Ended Nine Months Ended June 30, June 30, ------------------ ---------------- 1994 1993 1994 1993 -------- -------- -------- -------- Revenues $204,668 $132,259 $489,981 $383,092 Cost of goods sold 176,807 121,177 444,343 351,611 -------- -------- -------- -------- Gross profit 27,861 11,082 45,638 31,481 Selling, general and administrative expenses 13,579 6,073 25,777 17,881 Interest and debt related expenses, net of interest income 6,045 5,724 16,650 17,085 Other income - - 2,606 - -------- -------- -------- -------- Income (loss) before income taxes 8,237 (715) 5,817 (3,485) Provision (benefit) for income taxes 2,693 (268) 1,933 (530) -------- -------- -------- -------- Net income (loss) $ 5,544 $ (447) $ 3,884 $ (2,955) ======== ======== ======== ======== Per share data: Net income (loss) $ .10 $ (.01) $ .07 $ (.05) ======== ======== ======== ======== Dividends declared per share $ - $ .02 $ - $ .06 ======== ======== ======== ======== Weighted average shares outstanding 55,657 55,278 55,588 55,207 ======== ======== ======== ======== The accompanying notes are an integral part of the condensed consolidated financial statements.
STERLING CHEMICALS, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands) (Unaudited) Nine Months Ended June 30, -------------------------- 1994 1993 -------- -------- Cash flows from operating activities: Cash received from customers $471,368 $406,816 Miscellaneous cash receipts 7,220 4,518 Cash paid to suppliers and employees (452,622) (360,003) Interest paid (15,142) (16,460) Interest received 23 66 Income taxes paid (261) - -------- -------- Net cash provided by operating activities 10,586 34,937 Cash flows from investing activities: Capital expenditures (5,538) (9,657) Retirement of fixed assets (717) (1,081) Proceeds from joint venture distribution 1,850 2,491 Proceeds from sale of assets 2,606 - -------- -------- Net cash used in investing activities (1,799) (8,247) Cash flows from financing activities: Net change in revolving debt 11,138 (3,975) Scheduled payments on long-term debt (21,153) (19,486) Proceeds from sale of common stock - 203 Dividends paid - (3,312) Other (69) (119) -------- -------- Net cash used in financing activities (10,084) (26,689) Effect of exchange rate on cash 17 (106) -------- -------- Net decrease in cash and cash equivalents (1,280) (105) Cash and cash equivalents - beginning of period 1,352 2,625 Cash and cash equivalents - end of period $ 72 $ 2,520 ======== ======== (continued) The accompanying notes are an integral part of the condensed consolidated financial statements.
STERLING CHEMICALS, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS, Continued (In Thousands) (Unaudited) RECONCILIATION OF NET INCOME (LOSS) TO CASH PROVIDED BY OPERATING ACTIVITIES - - ------------------------------------------- Nine Months Ended June 30, -------------------------- 1994 1993 -------- -------- Net income (loss) $ 3,884 $(2,955) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 30,518 28,857 Loss on retirement of fixed assets 1,107 2,489 Gain on sale of assets (2,606) - Deferred tax expense 3,303 43 Deferred compensation 9,713 139 Treasury stock issued to ESOP 954 276 Change in: Accounts receivable (63,391) (12,020) Inventories 4,149 11,485 Prepaid expenses 3,839 (441) Other assets (4,270) (5,722) Accounts payable 14,697 13,214 Accrued liabilities 3,188 2,836 Interest payable (1,507) (929) Taxes payable 3,866 902 Other liabilities 3,142 (3,237) ------- ------- Cash provided by operating activities $10,586 $34,937 ======= ======= The accompanying notes are an integral part of the condensed consolidated financial statements.
STERLING CHEMICALS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In Thousands Except Per Share Data) 1. Basis of Presentation: --------------------- In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the consolidated financial position of Sterling Chemicals, Inc. and its subsidiaries (the "Company") as of June 30, 1994 and the consolidated results of their operations for the three and nine month periods ended June 30, 1994 and 1993 and consolidated cash flows for the nine months ended June 30, 1994 and 1993. 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 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report for the fiscal year ended September 30, 1993. The condensed consolidated financial statements included herein have been subjected to a review by Coopers & Lybrand, the Company's independent accountants, whose report is included herein. 2. Inventories: ----------- Inventories consisted of the following:
June 30, September 30, 1994 1993 --------- ------------- Inventories: Finished products $22,559 $27,024 Work in process 4,865 2,794 Raw materials 17,486 16,598 ------- ------- Inventories at FIFO cost 44,910 46,416 Inventories under exchange agreements 139 2,684 Stores and supplies 10,912 11,228 ------- ------- $55,961 $60,328 ======= =======
3. Long-Term Debt: -------------- Long-term debt consisted of the following:
June 30, September 30, 1994 1993 --------- ------------- Revolving credit facilities $ 65,270 $ 53,692 Term loan 37,500 39,563 Subsidiary term facility 117,513 130,900 Subordinated note 44,268 44,268 Project loan 18,036 23,486 -------- -------- Total debt outstanding 282,587 291,909 Less: Current maturities (30,228) (28,015) Unamortized debt issue costs (6,255) (7,049) -------- -------- Total long-term debt $246,104 $256,845 ======== ========
The Company has a credit agreement with a syndicate of banks ("Credit Agreement"). The Credit Agreement provides for a revolving credit facility of up to $80,000 ($50,000 outstanding at June 30, 1994), the availability of which is reduced by outstanding letters of credit ($2,307 at June 30, 1994), provides for the outstanding project loan of $18,036 at June 30, 1994 and provides for the outstanding term loan of $37,500 at June 30, 1994. The Credit Agreement also allows for up to $20,000 of additional borrowings from other lenders ($8,675 outstanding at June 30, 1994). The revolving credit facility matures in August 1996, at which time any outstanding principal and interest are due. The term loan matures in August 1999 and provides for scheduled quarterly payments and for mandatory prepayments of certain percentages of the Company's Excess Cash Flow (as defined in the Credit Agreement). The project loan provides for monthly principal payments and matures in July 1996. The average interest rates on the term loan, the revolving credit facility and the $8,675 of additional borrowings at June 30, 1994 and September 30, 1993 (including all associated interest rate swaps) were 7.6% and 6.5%, respectively. The Company has a separate stand-alone credit agreement and an unsecured $44,268 subordinated note for the pulp chemicals business ("Sterling Canada"). The Sterling Canada credit agreement includes a term loan to Sterling Canada ($117,513 outstanding at June 30, 1994), and an additional Cdn. $20,000 denominated revolving credit facility ($1,000 outstanding at June 30, 1994), the availability of which is reduced by outstanding letters of credit ($2,182 at June 30, 1994) and outstanding bank overdrafts (Cdn. $5,595 at June 30, 1994). The Sterling Canada term loan, which matures in August 1999, provides for scheduled quarterly payments and additionally provides for mandatory prepayments of certain percentages of the Excess Cash Flow (as defined in the Sterling Canada credit agreement) of Sterling Canada and its subsidiaries. The Sterling Canada revolving credit facility expires in August 1997, at which time any outstanding principal and interest are due. The interest rate on the term loan and revolving credit facility at June 30, 1994 and September 30, 1993 were 6.9% and 5.7%, respectively. The unsecured $44,268 subordinated note matures in December 1999 and provides for mandatory prepayments of a certain percentage of Sterling Canada's Excess Cash Flow (as defined in the Sterling Canada credit agreement). The interest rates on the subordinated note at June 30, 1994 and September 30, 1993 were 7.4% and 6.7%, respectively. 4. Income Taxes: ------------ The Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), effective October 1, 1993. Under SFAS 109, deferred income taxes are provided for temporary differences in recognition of income and expenses for tax and financial reporting purposes. The temporary differences which give rise to significant portions of the Company's deferred tax assets and liabilities are the excess of tax depreciation, amortization and pension expenses over such book expenses. The adoption of this statement did not have an effect on the Company's results of operations. Upon adoption of SFAS 109, the Company's current deferred tax asset and deferred tax liability each increased $1,609. The provision for income taxes was computed using effective tax rates of 33.2% and 15.2% for the nine month periods ended June 30, 1994 and 1993, respectively. The effective tax rate during the first nine months of fiscal 1993 was affected by the accrual of the earned surplus portion of the Texas Franchise Tax in addition to an adjustment for certain foreign taxes payable. 5. Commitments and Contingencies: ----------------------------- FEDERAL INCOME TAXES. In October 1993, the Company and the Internal Revenue Service ("IRS") agreed upon a basis for settlement of the adjustments proposed as a result of the IRS's examination of the Company's federal income tax returns for fiscal years 1987 through 1990. This settlement will result in a tax refund of approximately $3,800 plus interest. The settlement also requires adjustments to the fiscal year 1991 and 1992 federal income tax returns which will result in additional taxes owed of approximately $1,400 plus interest. In addition, the Company's deferred tax liability for future years will increase by approximately $4,000. During fiscal year 1992, the Company accrued $2,000 in anticipation of this settlement. These adjustments resulted in a reduction of $429 in tax expense during fiscal 1994. ACETIC ACID PATENT INFRINGEMENT. In January 1993, Hoechst Celanese Corporation ("HCC") filed suit against BP Chemicals Limited ("BP") and the Company alleging patent infringement in connection with the use of an ion exchange resin in a guard bed installed in the Company's acetic acid production facility in Texas City. The suit sought unspecified damages and issuance of an injunction against BP and the Company to enjoin further infringement. The trial commenced on January 10, 1994 and on January 19, 1994, the jury rendered its verdict that BP and the Company had willfully infringed HCC's patent and were liable to HCC for a reasonable royalty of .6 cents per pound ($.006/lb) for the acetic acid produced by the Company during the infringing period. On March 8, 1994, the court entered a final judgment upholding the jury verdict and awarding the following sums to HCC: $5,592 as lost royalties; $5,592 as enhancement damages; $186 as prejudgment interest through March 8, 1994; and $25 as HCC's costs. In addition, the court entered a permanent injunction against BP and the Company prohibiting any activities that constitute infringement or inducement of infringement of HCC's patent. On March 22, 1994, the court entered an order staying the final judgment pending a final decision of any appeal to the Court of Appeals for the Federal Circuit affirming the validity and infringement of HCC's patent and the award of damages. The order was based upon a stipulation of the parties waiving the condition of a supersedeas bond. Subject to the expected denial of a motion for new trial, BP and the Company intend to prosecute an appeal. Under the terms of the Lease and Production Agreement between the Company and BP Chemicals, Inc. ("BPC"), a U.S. subsidiary of British Petroleum Company plc, BPC has undertaken the defense of the Company and will indemnify the Company against all damages incurred as a result of the suit. Regardless of the outcome, the Company does not anticipate that final resolution of this matter will have a material adverse impact on the Company's financial position or results of operations. In addition, future operations of the acetic acid production facility are not expected to be materially impacted by the final resolution of this matter. AMMONIA RELEASE. On May 8, 1994, an ammonia release occurred at the Company's Texas City facility while a reactor in the acrylonitrile unit was being restarted after a shutdown for routine maintenance. The Company estimates that approximately three thousand pounds of ammonia were emitted into the atmosphere. Approximately 7,500 individuals have filed claims directly with the Company alleging personal injury and/or property damage as a result of exposure to the ammonia. The Company is in the process of determining the merit of these claims. As of July 29, 1994, 48% of these claims have either been settled or rejected by the Company. To date, two lawsuits involving approximately 221 plaintiffs have been filed against the Company seeking unspecified damages for personal injuries and property damage as a result of the release. The Company anticipates that there is a substantial likelihood that additional litigation against the Company asserting similar claims will ensue. The Company believes that its general liability insurance coverage is sufficient to cover anticipated claims and has accrued its deductible under this coverage. Accordingly, the Company believes that final resolution of these matters will not have a material adverse effect on the financial position, liquidity or results of operations of the Company. CHLORINE DIOXIDE GENERATOR PATENT ISSUES. The Company's primary competitor in the supply of patented technology for generators which convert sodium chlorate into chlorine dioxide is Akzo Nobel AB (formerly Eka Nobel AB) and its affiliates ("Akzo Nobel"). The Company is engaged with Akzo Nobel in numerous patent disputes throughout the world in which the Company and Akzo Nobel are challenging certain patents of the other and attempting to restrict the other's operating range. If either party is successful in these disputes, the other party may have to make adjustments and modifications in its commercial operations or obtain a license from the prevailing party. The Company's management believes that any potential costs for such adjustments or modifications would be immaterial. The Company believes it is entitled to certain indemnities from Tenneco Canada with respect to the acquired technology. ENVIRONMENTAL REGULATIONS. The Company's Texas City plant and Canadian operations are subject to extensive federal, state, provincial and local environmental regulations. The Company may incur significant expenditures in order to comply with environmental regulations. Report of Independent Accountants' Review of Interim Financial Information To the Board of Directors and Stockholders Sterling Chemicals, Inc. We have reviewed the accompanying condensed consolidated balance sheet of Sterling Chemicals, Inc. as of June 30, 1994 and the condensed consolidated statement of operations for the three and nine month periods ended June 30, 1994 and 1993 and the condensed consolidated statement of cash flows for the nine months ended June 30, 1994 and 1993. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of September 30, 1993, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated November 19, 1993, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 1993 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. As more fully discussed in Note 4 to the condensed consolidated financial statements, effective October 1, 1993 the Company changed its method of accounting for income taxes. COOPERS & LYBRAND Houston, Texas July 28, 1994 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------- RESULTS OF OPERATIONS Revenues for the third quarter of fiscal 1994 were $205 million compared to revenues of $132 million for the third quarter of fiscal 1993, an increase of 55%. Revenues for the nine month period ended June 30, 1994 were $490 million compared to revenues of $383 million for the same period a year ago, an increase of 28%. Net income for the third quarter of fiscal 1994 was $5.5 million ($.10 per share) versus a net loss of $.4 million ($.01 per share) for the third quarter of fiscal 1993. Net income for the first nine months of fiscal 1994 was $3.9 million ($.07 per share) compared to a net loss of $2.9 million ($.05 per share) for the corresponding period in fiscal 1993. For the third quarter of fiscal 1994, the Company's revenues from its petrochemical operations increased 69% to $171 million when compared to the third quarter of fiscal 1993. This increase in revenue was primarily due to an increase in direct sales of styrene resulting from a change in styrene product sales mix compared to a year ago. Near the end of fiscal 1993, the Company's styrene conversion agreement with Novacor Chemicals Inc. ("Novacor") expired and the Company replaced the lost conversion sales volumes with direct sales. The revenue recognized from a conversion sale is lower than the revenue from an equivalent direct sale by the value of the raw materials supplied by the conversion partner. Also, increased acrylonitrile export sales volumes in the third quarter of fiscal 1994 compared to the same period a year ago contributed to the increased revenues from petrochemical operations. Pulp chemicals revenues for the third quarter of fiscal 1994 increased 9% to $34 million compared to the third quarter of fiscal 1993. This increase in revenue was due primarily to higher sodium chlorate sales volumes resulting from contracts entered into during the first half of fiscal 1994. In fiscal 1993, the Company granted stock appreciation rights ("SAR's") to certain key employees and directors. The expense recognized for the SAR's is determined based on the number of SAR's granted (3.7 million), the vesting period (five years beginning September 1992) and the appreciation of the Company's stock price above $4 per share, which was the fair market value of the Company's common stock on the date of grant of the SAR's. On June 30, 1994, the Company's stock price was $9-3/8 per share, which resulted in an expense for the vested portion of the SAR's of $7.1 million for the third quarter of fiscal 1994 and $9.6 million for the first nine months of fiscal 1994. The expense for the SAR's is included in selling, general and administrative expenses in the Company's income statement and will continue to impact earnings during the vesting period. Each $1 change in the price of the Company's common stock will result in approximately $1.8 million (before tax) or $.02 per share impact based on the vested status at June 30, 1994. There was no expense related to SAR's in fiscal 1993. STYRENE: Styrene revenues in the third quarter of fiscal 1994 increased by 110% to $87 million compared to the third quarter of fiscal 1993. This increase was primarily due to an increase in direct sales of over 140% resulting from the change in sales mix as discussed above. Higher sales prices also contributed to the increase in revenues. Styrene's performance improved during the third quarter of fiscal 1994 compared to the same period in fiscal 1993 due to higher sales volumes resulting from increased demand and higher sales margins resulting from price increases and higher operating rates. Demand for styrene increased due to growing worldwide demand for styrenic polymers. The Company's styrene unit operated at more than 95% of its rated capacity for the first nine months of fiscal 1994 compared to about 70% during the first nine months of fiscal 1993. The price of styrene's two major raw materials, benzene and ethylene, were relatively stable in the third quarter of fiscal 1994 compared to the same period in fiscal 1993. However, the Company anticipates the prices for these raw materials will increase in the fourth quarter of fiscal 1994. Overall, styrene sales margins improved as a strengthening in the styrene market seems to be occurring much earlier than the Company anticipated. While it is difficult at this point in the styrene cycle to predict the duration of this improvement in market conditions, the Company expects styrene earnings to continue improving in the fourth quarter of fiscal 1994. ACRYLONITRILE: Acrylonitrile revenues in the third quarter of fiscal 1994 increased approximately 58% compared to the third quarter of fiscal 1993. This increase was a result of an approximate 110% increase in export sales volumes, partially offset by a decrease in export sales price during the third quarter of fiscal 1994 compared to the third quarter of fiscal 1993. The Company's acrylonitrile unit operated at approximately 85% of its rated capacity during the first nine months of fiscal 1994 compared to approximately 70% of its rated capacity during the same period a year ago. The increase in acrylonitrile demand is primarily due to strengthening in the synthetic fiber market, in part due to the current stabilization of the Chinese economy. Demand for acrylonitrile is heavily influenced by demand from export customers, particularly those supplying acrylic fiber to the People's Republic of China. In recent years, the acrylic fiber market, the largest market for acrylonitrile, has been subject to volatility due to the relatively unstable nature of the Chinese market. Acrylonitrile's performance during the third quarter of fiscal 1994 was comparable to the same period in fiscal 1993. Although export sales volumes and operating rates were higher during the third quarter of fiscal 1994 compared to the same period in fiscal 1993, export sales margins declined primarily due to lower export sales prices. Costs associated with the ammonia release on May 8, 1994 (See Part II, Item 1, "Legal Proceedings") also negatively impacted acrylonitrile's performance. Currently, export sales margins have firmed and are expected to improve in the fourth quarter of fiscal 1994. ACETIC ACID: Acetic acid revenues for the third quarter of fiscal 1994 increased 28% when compared to the corresponding period in fiscal 1993. The increase in revenues was due to increased profit sharing from the Company's contract partner. On August 8, 1994, the Company and BP Chemicals, Inc. ("BP") signed an Amended and Restated Lease and Production Agreement (the "Agreement"). The Agreement extends BP's exclusive right to purchase acetic acid produced by the Company through July 31, 2016 and contains terms and conditions which are similar to the previous agreement. PULP CHEMICALS: Pulp chemicals revenues for the third quarter of fiscal 1994 increased 9% to $34 million compared to the corresponding period a year ago. The revenue increase was due primarily due to higher sodium chlorate sales volumes resulting from contracts for additional volumes entered into with new and existing customers during the first half of fiscal 1994. Higher royalty income from the generator technology business also contributed to the increase in revenues. The increase in sales volumes was partially offset by lower sodium chlorate sales margins due in part to lower sales prices. The Company anticipates that sodium chlorate margins will improve during the fourth quarter of fiscal 1994 due to a price increase effective July 1st in North America. The Company's sodium chlorate plants operated at approximately 82% of their rated capacity during the first nine months of fiscal 1994 compared to 75% of their rated capacity for the same period in fiscal 1993. OTHER PRODUCTS: Performance of the Company's other products improved during the third quarter of fiscal 1994 compared to the third quarter of fiscal 1993 primarily because of plasticizers' performance. Demand has improved for plasticizers resulting in higher operating rates and increased profit sharing under the Company's long-term sales contract with BASF Corporation. Revenues during the third quarter of fiscal 1994 from plasticizers, lactic acid, tertiary butylamine and sodium cyanide increased approximately 17% compared to the third quarter of fiscal 1993. LIQUIDITY AND CAPITAL RESOURCES - - ------------------------------- Working capital increased to $67 million at June 30, 1994 from $31 million at September 30, 1993. Net cash provided by operating activities was $11 million during the first nine months of fiscal 1994 compared to $35 million for the corresponding period in fiscal 1993. The increase in working capital was primarily attributable to a $63 million increase in accounts receivable which also negatively affected cash provided by operations. This increase in accounts receivable was due to significantly higher styrene and acrylonitrile sales volumes during the third quarter of fiscal 1994 compared to the fourth quarter of fiscal 1993. The increase in working capital was partially offset by the increase in accounts payable at June 30, 1994 from September 30, 1993. The increase in accounts payable resulted primarily from increased raw material purchases during the third quarter of fiscal 1994 as the Company's operating rates for its products improved. The current deferred income tax asset increased, with a corresponding increase in the deferred income tax liability, due to the Company's adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), effective October 1, 1993. The adoption of SFAS 109 had no impact on the results of operations. The Company has a credit agreement with a syndicate of banks ("Credit Agreement"). The Credit Agreement provides for a revolving credit facility of up to $80 million ($50 million outstanding at June 30, 1994), the availability of which is reduced by outstanding letters of credit ($2.3 million at June 30, 1994), provides for the outstanding project loan of $18.0 million at June 30, 1994 and provides for the outstanding term loan of $37.5 million at June 30, 1994. The Credit Agreement also allows for up to $20 million of additional borrowings from other lenders ($8.7 million outstanding at June 30, 1994). The revolving credit facility matures in August 1996, at which time any outstanding principal and interest are due. The term loan matures in August 1999 and provides for scheduled quarterly payments and for mandatory prepayments of certain percentages of the Company's Excess Cash Flow (as defined in the Credit Agreement). The project loan provides for monthly principal payments and matures in July 1996. The average interest rates on the term loan, the revolving credit facility and the $8.7 million of additional borrowings at June 30, 1994 and September 30, 1993 (including all associated interest rate swaps) were 7.6% and 6.5%, respectively. The Company has a separate stand-alone credit agreement and an unsecured $44.3 million subordinated note for the pulp chemicals business ("Sterling Canada"). The Sterling Canada credit agreement includes a term loan to Sterling Canada ($117.5 million outstanding at June 30, 1994), and an additional Cdn. $20 million revolving credit facility ($1.0 million outstanding at June 30, 1994), the availability of which is reduced by outstanding letters of credit ($2.2 million at June 30, 1994) and outstanding bank overdrafts (Cdn.$5.6 million at June 30,1994). The Sterling Canada term loan, which matures in August 1999, provides for scheduled quarterly payments and additionally provides for mandatory prepayments of certain percentages of the Excess Cash Flow (as defined in the Sterling Canada credit agreement) of Sterling Canada and its subsidiaries. The Sterling Canada revolving credit facility expires in August 1997, at which time any outstanding principal and interest are due. The interest rate on the term loan and revolving credit facility at June 30, 1994 and September 30, 1993 were 6.9% and 5.7%, respectively. The unsecured $44.3 million subordinated note matures in December 1999 and provides for mandatory prepayments of a certain percentage of Sterling Canada's Excess Cash Flow (as defined in the Sterling Canada credit agreement). The interest rates on the subordinated note at June 30, 1994 and September 30, 1993 were 7.4% and 6.7%, respectively. Capital expenditures for the third quarter of fiscal 1994 were $1.4 million and totaled $5.5 million for the first nine months of fiscal 1994 and are expected to approach $16 million for fiscal 1994, approximately $5 million of which will be used for pulp chemicals operations. The Company anticipates $5 million of these expenditures will be for environmental and safety matters, while the majority of the remainder will be for a part of the Company's contribution to a planned acetic acid expansion. In the future, the Company may incur additional significant expenditures in order to comply with environmental regulations. The Company is subject to various litigation and tax contingencies which in the aggregate should not have a material impact on the Company's financial position of future results of operations. See "Note 5 of Notes to Condensed Consolidated Financial Statements" and Part II, Item 1, "Legal Proceedings" incorporated herein by reference. Part II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS ----------------- ACETIC ACID PATENT INFRINGEMENT. On January 5, 1993, Hoechst Celanese Corporation ("HCC") filed suit in U.S. District Court for the Southern District of Texas, Galveston Division against BP Chemicals Limited ("BP") and the Company (Civil Action No. G-93- 001) alleging patent infringement in connection with the use of an ion exchange resin in a guard bed installed in the Company's acetic acid production facility in Texas City. The suit sought unspecified damages and issuance of an injunction against BP and the Company to enjoin further infringement. The trial commenced on January 10, 1994 and on January 19, 1994, the jury rendered its verdict that BP and the Company had willfully infringed HCC's patent and were liable to HCC for a reasonable royalty of .6 cents per pound ($.006/lb) for the acetic acid produced by the Company during the infringing period. On March 8, 1994, the court entered a final judgment upholding the jury verdict and awarding the following sums to HCC: $5,592,000 as lost royalties; $5,592,000 as enhancement damages; $186,000 as prejudgment interest through March 8, 1994; and $25,000 as HCC's costs. In addition, the court entered a permanent injunction against BP and the Company prohibiting any activities that constitute infringement or inducement of infringement of HCC's patent. On March 22, 1994, the court entered an order staying the final judgment pending a final decision of any appeal to the Court of Appeals for the Federal Circuit affirming the validity and infringement of HCC's patent and the award of damages. The order was based upon a stipulation of the parties waiving the condition of a supersedeas bond. Subject to the expected denial of a motion for new trial, BP and the Company intend to prosecute an appeal. Under the terms of the Lease and Production Agreement between the Company and BP Chemicals, Inc. ("BPC"), a U.S. subsidiary of British Petroleum Company plc, BPC has undertaken the defense of the Company and will indemnify the Company against all damages incurred as a result of the suit. Regardless of the outcome, the Company does not anticipate that final resolution of this matter will have a material adverse impact on the Company's financial position or results of operations. In addition, future operations of the acetic acid production facility are not expected to be materially impacted by the final resolution of this matter. AMMONIA RELEASE. On May 8, 1994, an ammonia release occurred at the Company's Texas City facility while a reactor in the acrylonitrile unit was being restarted after a shutdown for routine maintenance. The Company estimates that approximately three thousand pounds of ammonia were emitted into the atmosphere. Approximately 7,500 individuals have filed claims directly with the Company alleging personal injury and/or property damage as a result of exposure to the ammonia. The Company is in the process of determining the merit of these claims. As of July 29, 1994, 48% of these claims have either been settled or rejected by the Company. To date, two lawsuits involving approximately 221 plaintiffs have been filed against the Company seeking unspecified damages for personal injuries and property damage as a result of the release. The Company anticipates that there is a substantial likelihood that additional litigation against the Company asserting similar claims will ensue. The Company believes that its general liability insurance coverage is sufficient to cover anticipated claims and has accrued its deductible under this coverage. Accordingly, the Company believes that final resolution of these matters will not have a material adverse effect on the financial position, liquidity or results of operations of the Company. CHLORINE DIOXIDE GENERATOR PATENT ISSUES. The Company's primary competitor in the supply of patented technology for generators which convert sodium chlorate into chlorine dioxide is Akzo Nobel AB (formerly Eka Nobel AB) and its affiliates ("Akzo Nobel"). The Company is engaged with Akzo Nobel in numerous patent disputes throughout the world in which the Company and Akzo Nobel are challenging certain patents of the other and attempting to restrict the other's operating range. If either party is successful in these disputes, the other party may have to make adjustments and modifications in its commercial operations or obtain a license from the prevailing party. The Company's management believes that any potential costs for such adjustments or modifications would be immaterial. At the time of the acquisition of the patented technology from Tenneco Canada, the Company received certain assurances in respect to the acquired technology. Item 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits: None (b) Reports on Form 8-K: No reports on Form 8-K were filed during the three months ended June 30, 1994. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STERLING CHEMICALS, INC. (Registrant) Date: August 15, 1994 _________________________________ J. Virgil Waggoner President and Chief Executive Officer (Principal Executive Officer) Date: August 15, 1994 __________________________________ J. David Heaney Vice President-Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----