-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FlrsstZed/DqCZ8DZfTRAFIZY3oNDJH0//PNB0CsSJxP5Lx0wiiu67B8Jr2x8tIH irxH4v2a0WTdsdB4mYB3wg== 0000795662-96-000006.txt : 19960515 0000795662-96-000006.hdr.sgml : 19960515 ACCESSION NUMBER: 0000795662-96-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING CHEMICALS INC CENTRAL INDEX KEY: 0000795662 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [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: 96562713 BUSINESS ADDRESS: STREET 1: 1200 SMITH ST, SUITE 1900 CITY: HOUSTON STATE: TX ZIP: 77002-4312 BUSINESS PHONE: 7136503700 MAIL ADDRESS: STREET 1: 1200 SMITH ST SUITE 1900 CITY: HOUSTON STATE: TX ZIP: 77002-4312 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996, 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 No.) 1200 Smith Street, Suite 1900, Houston, Texas 77002-4312 (Address of Principal Executive Offices) (Zip Code) 713-650-3700 (Registrant's telephone number, including area 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 May 6, 1996, the number of shares of common stock outstanding was 55,689,991 Part I. - FINANCIAL INFORMATION Item 1. - FINANCIAL STATEMENTS STERLING CHEMICALS, INC. CONDENSED CONSOLIDATED BALANCE SHEET (In Thousands Except Per Share Data) (Unaudited)
March 31, September 30, 1996 1995 --------- --------- ASSETS Current assets: Cash and cash equivalents........... $ 1,261 $ 30,882 Accounts receivable................. 123,867 112,102 Inventories......................... 58,833 67,867 Prepaid expenses.................... 4,782 3,878 Deferred income taxes............... 6,751 5,622 --------- --------- Total current assets.............. 195,494 220,351 Property, plant and equipment, net.. 336,371 309,084 Other assets........................ 82,594 80,504 --------- --------- Total assets..................... $614,459 $609,939 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................... $62,267 $ 72,016 Accrued liabilities................. 50,842 55,858 Current portion of long-term debt... 13,393 17,857 --------- --------- Total current liabilities......... 126,502 145,731 Long-term debt...................... 110,750 103,581 Deferred income taxes............... 43,577 40,297 Deferred credits and other liabilities 76,507 81,012 Commitments and contingencies Stockholders' equity: Common stock, $.01 par value, 150,000 shares authorized, 60,327 shares issued, 55,690 and 55,674 shares outstanding, respectively..................... 603 603 Additional paid-in capital.......... 33,225 33,269 Retained earnings................... 294,266 275,052 Pension adjustment.................. (1,556) (1,556) Accumulated translation adjustment.. (18,881) (17,307) Deferred compensation............... (94) (129) --------- --------- 307,563 289,932 Treasury stock, at cost, 4,637 and 4,653 shares, respectively.......... (50,440) (50,614) --------- --------- Total stockholders' equity...... 257,123 239,318 --------- --------- Total liabilities and stockholders' equity..... $614,459 $609,939 ========== =========
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 Six Months Ended March 31, March 31, ------------------ ---------------- 1996 1995 1996 1995 -------- -------- -------- -------- Revenues............ $190,879 $303,954 $382,421 $544,576 Cost of goods sold.. 161,481 210,424 323,628 402,690 -------- -------- -------- -------- Gross profit........ 29,398 93,530 58,793 141,886 Selling, general and administrative expenses........... 8,298 8,794 16,108 15,977 Stock appreciation rights (SARs) expense (benefit).. 6,447 (1,054) 6,658 503 Other expense (Note 8) 3,550 - 3,550 - Interest and debt related expenses, net of interest income..... 1,601 4,183 3,210 9,715 -------- -------- -------- -------- Income before income taxes........ 9,502 81,607 29,267 115,691 Provision for income taxes........ 3,075 25,530 10,053 37,354 -------- -------- -------- -------- Net income........... $ 6,427 $56,077 $19,214 $78,337 ======= ======= ======= ======= Net income per share $ 0.12 $ 1.01 $ 0.35 $ 1.41 ======= ======= ======= ======= Weighted average shares outstanding 55,690 55,674 55,682 55,674 ======= ======= ======= =======
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)
Six Months Ended March 31, -------------------------- 1996 1995 -------- -------- Cash flows from operating activities: Cash received from customers..... $422,542 $533,496 Miscellaneous cash receipts...... 11,044 9,682 Cash paid to suppliers and employees................... (404,391) (451,726) Interest paid.................... (3,280) (9,649) Interest received................ 538 2,188 Income taxes paid................ (10,303) (31,458) -------- -------- Net cash provided by operating activities............ 16,150 52,533 -------- -------- Cash flows from investing activities: Capital expenditures............ (48,996) (15,774) -------- -------- Cash flows from financing activities: Proceeds from long-term debt.... 38,000 - Repayment of long-term debt..... (34,392) (38,574) Other........................... (289) (50) -------- -------- Net cash provided by (used in) financing activities. 3,319 (38,624) -------- -------- Effect of exchange rate on cash. (94) (31) -------- -------- Net decrease in cash and cash equivalents........... (29,621) (1,896) Cash and cash equivalents - beginning of period.......... 30,882 2,013 -------- -------- Cash and cash equivalents - end of period................ $ 1,261 $ 117 ======== ========
STERLING CHEMICALS, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS, Continued (In Thousands) (Unaudited) RECONCILIATION OF NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES
Six Months Ended March 31, -------------------------- 1996 1995 -------- -------- Net income...................... $ 19,214 $ 78,337 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization... 21,188 20,769 Loss on disposal of assets...... 3,329 103 Deferred tax expense............ 1,600 3,374 Accrued compensation............ 6,850 571 Change in: Accounts receivable............. (15,570) (47,095) Inventories..................... 8,960 12,754 Prepaid expenses................ (912) (1,382) Other assets.................... (5,589) (1,187) Accounts payable................ (10,727) (7,301) Accrued liabilities............. (18,829) (8,802) Interest payable................ 705 (2,591) Taxes payable................... (840) 3,098 Other liabilities............... 6,771 1,885 -------- -------- Net cash provided by operating activities........... $ 16,150 $ 52,533 ======== ========
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) 1. Basis of Presentation: In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly the consolidated financial position of Sterling Chemicals, Inc. and its subsidiaries (the "Company") as of March 31, 1996 and its consolidated results of operations for the three and six- month periods ended March 31, 1996 and 1995 and consolidated cash flows for the six-month periods ended March 31, 1996 and 1995. 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 condensed consolidated financial statements should be, and are assumed to have been, read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report for the fiscal year ended September 30, 1995 (the "Annual Report"). The condensed consolidated balance sheet as of September 30, 1995 included herein has been derived from the consolidated balance sheet as of September 30, 1995 included in the Annual Report. Such balance sheet was audited by Coopers & Lybrand L.L.P. whose report dated October 25, 1995 expressed an unqualified opinion. Additionally, the condensed consolidated financial statements for the three and six-month periods ended March 31, 1995 were reviewed by Coopers & Lybrand L.L.P. The condensed consolidated financial statements as of and for the three and six-month periods ended March 31, 1996 included herein were reviewed by Arthur Andersen LLP, the Company's independent public accountants, whose report is included herein. 2. Reclassification: Certain amounts reported in the financial statements for the prior periods have been reclassified to conform with the current financial statement presentation with no effect on net income or stockholders' equity. 3. Inventories: Inventories consisted of the following:
March 31, September 30, 1996 1995 --------- ------------ Finished products............... $ 36,317 $ 44,802 Raw materials................... 11,172 16,506 -------- -------- Inventories at FIFO cost...... 47,489 61,308 Inventories under exchange agreements............. (528) (4,783) Stores and supplies............. 11,872 11,342 -------- -------- $ 58,833 $ 67,867 ======== ========
4. Long-Term Debt: Long-term debt consisted of the following:
March 31, September 30, 1996 1995 -------- ----------- Revolving credit facilities..... $ - $ 902 Term loan....................... 107,143 120,536 Loan under chlorate plant credit agreement........ 17,000 - -------- -------- Total debt outstanding.......... 124,143 121,438 Less: Current maturities.............. (13,393) (17,857) ======== ======== Total long-term debt............ $110,750 $103,581
5. Commitments and Contingencies: PRODUCT CONTRACTS The Company has certain long-term agreements which provide for the dedication of 100% of the Company's production of acetic acid, plasticizers, tertiary butylamine and sodium cyanide, each to one customer. The Company also has various sales and conversion agreements which dedicate significant portions of the Company's production of styrene monomer and acrylonitrile, the Company's major petrochemical products, to various customers. These agreements generally provide for cost recovery plus an agreed margin or element of profit based upon market price. ENVIRONMENTAL REGULATIONS The Company's operations involve the handling, production, transportation and disposal of materials classified as hazardous or toxic and are extensively regulated under environmental and health and safety laws. Operating permits which are required for the Company's operations are subject to periodic renewal and may be revoked or modified for cause. New laws or permit requirements and conditions may affect the Company's operations, products or waste disposal. Past or future operations may result in claims or liabilities. Expenditures could be required to upgrade waste water collection, pretreatment or disposal systems or for other matters. LEGAL PROCEEDINGS Shareholder Lawsuits In April and May, 1996, six class action lawsuits were filed against the Company and the Company's directors alleging conflict of interest and breach of fiduciary duties relating to the sale of the Company (see Note 7). These lawsuits are styled: 1. Kurt Kopf et al. v. Sterling Chemicals, Inc., Gordon A. Cain, et al; Civil Action No. 14960; In the Court of Chancery of the State of Delaware, New Castle County, Delaware. 2. Ernest Hack v. Sterling Chemicals, Inc., Gordon A. Cain, et al; Civil Action No. 14962; In the Court of Chancery of the State of Delaware, New Castle County, Delaware. 3. Salim Shiry, et al. v. Sterling Chemicals, Inc., Gordon A. Cain, et al; Civil Action No. 14963; In the Court of Chancery of the State of Delaware, New Castle County, Delaware. 4. Olga Fried, et al. v. Sterling Chemicals, Inc., Gordon A. Cain, et al; Civil Action No. 14969; In the Court of Chancery of the State of Delaware, New Castle County, Delaware. 5. Maria Lerman, et al. v. Sterling Chemicals, Inc., Gordon A. Cain, et al; Civil Action No. 14972; In the Court of Chancery of the State of Delaware, New Castle County, Delaware. 6. Alan R. Kahn v. Sterling Chemicals, Inc., The Sterling Group, Inc., Unicorn Group, STX Acquisition Corp., Gordon A. Cain, et al; Civil Action No. 14981; In the Court of Chancery of the State of Delaware, New Castle County, Delaware. While these lawsuits are in their early stages, at this time they are not anticipated to have a material adverse impact on the financial position, results of operations or cash flows of the Company. Petrochemicals HUNTSMAN LAWSUIT: On November 30, 1995, the court granted the motion for summary judgment filed by the Company in Sterling Chemicals, Inc. v. Huntsman Chemical Corporation, Huntsman Styrene Corporation and Huntsman Corporation. As discussed in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, the summary judgment confirms that, as a matter of law, no enforceable contract or agreement ever existed between the Company and the defendants. The court's order, which includes recovery of legal fees, also moots the defendants' counterclaim against the Company for damages resulting from breach of the alleged contract. The defendants have appealed this decision. The Company believes a loss with respect to this matter is not probable and is unable to quantify a reasonably possible loss estimate (as defined in Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies") at this time. Pulp Chemicals PATENT LITIGATION: The Company's primary competitor in the supply of patented technology for generators which convert sodium chlorate into chlorine dioxide is Akzo Nobel (formerly Eka Nobel) and its affiliates. The Company previously disclosed that it was engaged with Akzo Nobel in numerous patent disputes throughout the world in which the Company and Akzo Nobel were challenging certain patents of the other and attempting to restrict the other's operating range. The Company and Akzo Nobel have reached an out-of- court settlement resolving all such disputes. The settlement allows licensees of both the Company and Akzo Nobel to operate their chlorine dioxide generators within the broadest range of operating conditions. The settlement did not have a material adverse effect on the Company's financial position, results of operations or cash flows. LITIGATION CONTINGENCY: In accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies," and Financial Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts," the Company has made estimates of the reasonably possible range of liability with regard to its outstanding litigation for which it may incur liability. In addition, liabilities have been accrued based on the estimated probable loss from such litigation. These estimates are based on management's judgments using currently available information as well as consultation with the Company's insurance carriers and outside legal counsel. A number of the claims in these litigation matters are covered by the Company's insurance policies or by third-party indemnification of the Company. The Company therefore has also made estimates of its probable recoveries under insurance policies or from third- party indemnitors based on its understanding of its insurance policies and indemnifications, discussions with its insurers and indemnitors and consultation with outside legal counsel, in addition to management's judgments. Based on the foregoing as of March 31, 1996, the Company has accrued approximately $12 million as its estimate of aggregate contingent liability for these matters, and has also recorded aggregate receivables from its insurers and third-party indemnitors of $11 million. In addition, at March 31, 1996, management estimates that the aggregate reasonably possible range of loss for all litigation combined, in addition to the amount accrued, is from $0 to $41 million. The Company believes that it is insured or indemnified for this additional reasonably possible loss, except for a portion which is not material. While the Company has based its estimates on its evaluation of available information to date and the other matters described above, much of the litigation is in its early stages and it is impossible to predict with certainty the ultimate outcome. The Company will adjust its estimates as necessary as additional information is developed and evaluated. However, the Company believes that the final resolution of these contingencies will not have a material adverse impact on the financial position, results of operations or cash flows of the Company. The timing of probable insurance and indemnity recoveries, and additional accruals or payment of liabilities, if any, are not expected to have a material adverse effect on the financial position, results of operations or cash flows of the Company. 6. New Accounting Standards: The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This statement establishes new accounting standards for measuring the impairment of long-lived assets. The Company is required to adopt this Statement by fiscal 1997. The Company anticipates that the adoption of this Statement will not have a material adverse effect on the Company's financial position, results of operations or cash flows. 7. Recent Developments: On January 29, 1996, the Company announced that it was exploring all strategic alternatives to enhance stockholder value. In this connection, the Board of Directors established a Special Committee which retained Lazard Freres & Co. LLC as its financial advisor and Piper & Marbury L.L.P. as legal advisors. On April 25, 1996, the Company announced that it had entered into a definitive agreement for the sale of the Company to an investment group formed by The Sterling Group, Inc. and The Unicorn Group, Inc. Under the terms of the agreement, shareholders may elect to receive $12.00 per share in cash, or retain part or all of their shares in the Company, subject to a 5,000,000 share maximum, and proration to the extent aggregate elections exceed 5,000,000 shares. The transaction is expected to be concluded by late August of this year and is subject to customary closing conditions, including shareholder approval. 8. Write-off of Lactic Acid Plant The Company has decided to stop producing lactic acid at its Texas City, Texas facility by the end of the third quarter of fiscal 1996. In the second quarter of fiscal 1996, the Company charged to expense the remaining net book value and other related costs resulting in a $3.6 million pretax charge against earnings ($0.04 per share, after taxes). REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Sterling Chemicals, Inc. We have reviewed the accompanying condensed consolidated balance sheet of Sterling Chemicals, Inc. as of March 31, 1996, and the related condensed consolidated statement of operations for the three and six-month periods then ended and the condensed consolidated statement of cash flows for the six-month period then ended. 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. ARTHUR ANDERSEN LLP Houston, Texas April 24, 1996 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS On January 29, 1996, the Company announced that it was exploring all strategic alternatives to enhance stockholder value. In this connection, the Board of Directors established a Special Committee which retained Lazard Freres & Co. LLC as its financial advisor and Piper & Marbury L.L.P. as legal advisors. On April 25, 1996, the Company announced that it had entered into a definitive agreement for the sale of the Company to an investment group formed by The Sterling Group, Inc. and The Unicorn Group, Inc. Under the terms of the agreement, shareholders may elect to receive $12.00 per share in cash, or retain part or all of their shares in the Company, subject to a 5,000,000 share maximum, and proration to the extent aggregate elections exceed 5,000,000 shares. The transaction is expected to be concluded by late August of this year and is subject to customary closing conditions, including shareholder approval. RESULTS OF OPERATIONS Revenues for the first six months of fiscal 1996 were $382 million compared to revenues of $545 million for the first six months of fiscal 1995, a decrease of 30%. Net income for the first six months of fiscal 1996 was $19.2 million ($0.35 per share) compared to $78.3 million ($1.41 per share) for the first six months of fiscal 1995. Revenues for the second quarter of fiscal 1996 were $191 million compared to revenues of $304 million for the second quarter of fiscal 1995, a decrease of 37%. Net income for the second quarter of fiscal 1996 was $6.4 million ($.12 per share) compared to $56.1 million ($1.01 per share) for the second quarter of fiscal 1995. The decrease in revenues and earnings for the three and six- month periods ending March 31, 1996 compared to the same periods in fiscal 1995 was primarily in the Company's petrochemical business, while the pulp chemical business recorded increased revenues and earnings. Styrene and acrylonitrile, the Company's two major petrochemical products, experienced significantly lower sales prices and margins during the quarter compared to the same period a year ago. Earnings from the Company's pulp chemical business improved primarily as a result of higher sodium chlorate sales prices and margins. Earnings for the second quarter of fiscal 1996 were reduced $0.12 per share by two non-cash charges. The Company recorded $6.4 million in pretax expense ($0.08 per share, after taxes) related to stock appreciation rights resulting from an increase in the Company's stock price during the second quarter. The Company also recorded $3.6 million in pretax expense ($0.04 per share, after taxes) to write-off the remaining net book value of its lactic acid plant and other costs associated with the Company's decision to stop producing lactic acid by the end of the third fiscal quarter of 1996. PETROCHEMICALS: For the first six months of fiscal 1996, the Company's revenues from its petrochemical business decreased 36% to $307 million when compared to the first six months of fiscal 1995. This decrease in revenues resulted primarily from decreases in styrene and acrylonitrile average sales prices compared to the year ago period as well as from lower acrylonitrile and acetic acid sales volumes. Net income from the Company's petrochemical business decreased to $10.9 million ($0.20 per share) for the first six months of fiscal 1996 from $75.0 million ($1.35 per share) during the same period in fiscal 1995. The decrease in earnings resulted primarily from substantially lower margins for styrene and acrylonitrile in the fiscal 1996 period. STYRENE: Styrene revenues in the first six months of fiscal 1996 decreased approximately 37% to $162 million compared to the same period of fiscal 1995. Styrene sales prices and margins decreased substantially from the same fiscal 1995 period because of weak market conditions. Average sales prices for the first half of fiscal 1996 decreased by approximately 42% from the year ago period. Although sales prices and margins were substantially lower than a year ago, both began to increase in March. Sales volumes in the first half of fiscal 1996 increased by approximately 8% over the same period last year when a shutdown for scheduled maintenance and catalyst replacement restricted first-half production. The Company's styrene unit operated at approximately 112% of its rated capacity of 1.5 billion pounds per year for the first six months of fiscal 1996 and 116% for the second quarter, compared to approximately 100% and 111% for the corresponding periods in fiscal 1995. As noted above, the styrene unit was shut down for a portion of the first quarter of fiscal 1995 for scheduled maintenance and catalyst replacement. The prices of styrene's major raw materials, benzene and ethylene, were substantially lower during the first half of fiscal 1996 compared to the same period in fiscal 1995. Benzene prices were approximately 26% lower while ethylene prices were approximately 32% lower. These decreases helped to offset some of the decrease in selling prices discussed above, but margins still declined substantially. ACRYLONITRILE: Acrylonitrile revenues in the first six months of fiscal 1996 decreased approximately 42% to $75 million compared to the corresponding period in fiscal 1995. The decrease in revenues resulted from a decrease of approximately 30% in average sales prices and a decrease in sales volumes of approximately 32%. Reduced imports of acrylonitrile derivatives by the Far East market (primarily acrylic fiber and ABS) resulted in the lower acrylonitrile sales volumes and prices. In response to lower demand, the Company's acrylonitrile unit operated at approximately 72% of rated capacity during the first six months of fiscal 1996 and 63% during the second quarter compared to approximately 98% and 112% for the corresponding periods of fiscal 1995. In addition, the acrylonitrile unit was shut down for most of March for scheduled maintenance and installation of the first phase of a state-of-the-art distributive control system. As a result, profits decreased because of higher fixed cost per pound produced. The shutdown has been completed and should result in increased efficiencies and stronger operating fundamentals in the future. The prices of propylene and ammonia, which are the major raw materials used to make acrylonitrile, were approximately 22% and 19% lower, respectively, in the first six months of fiscal 1996 than in the corresponding period in fiscal 1995. These decreases helped to offset some of the decrease in selling prices discussed above, but margins still declined substantially. OTHER PETROCHEMICAL PRODUCTS: The profitability of the Company's other petrochemical products (acetic acid, plasticizers, lactic acid, tertiary butylamine and sodium cyanide) in the first six months of fiscal 1996 increased approximately 110% over the first six months of fiscal 1995. The improved profitability resulted primarily from the Company's plasticizer products (dedicated 100% to BASF), which enjoyed strong market conditions and low raw material prices during the first half of fiscal 1996. Revenues during the first six months of fiscal 1996 from the Company's other petrochemical products decreased approximately 24% to $69 million. The decrease in revenues was due to the acetic acid unit being shut down for most of the first quarter of fiscal 1996 for expansion of the unit from 600 million pounds to nearly 800 million pounds annual capacity and for installation of a distributive control system. While the expansion of the acetic acid unit is substantially complete, the additional capacity will not be fully utilized until the completion of the partial oxidation plant under construction by Praxair, Inc. at the Company's Texas City facility early in the third quarter of fiscal 1996. The partial oxidation plant will supply raw materials to the Company's acetic acid unit. The Company's methanol plant, which is currently under construction, is expected to be operational in the fourth quarter of fiscal 1996. In connection with the construction of this plant, the Company has incurred approximately $3.7 million in start-up expenses during the first six months of fiscal 1996. The Company has decided to stop producing lactic acid at its Texas City, Texas facility by the end of the third quarter of fiscal 1996. In the second quarter of fiscal 1996, the Company wrote off the remaining net book value and expensed other related costs resulting in a $3.6 million charge against earnings ($0.04 per share, after taxes). PULP CHEMICALS: Revenues from the Company's pulp chemical business for the first six months of fiscal 1996 increased by approximately 11% to $76 million compared to the first six months of fiscal 1995. The increase in revenues resulted primarily from an increase in sodium chlorate average sales prices of approximately 14%. Sales volume decreased approximately 2% from the year ago period. Sodium chlorate has experienced higher sales prices and improved margins as a result of improved demand due to increased chlorine dioxide utilization in pulp bleaching. Royalty revenues in the first six months of fiscal 1996 from installed generator technology increased approximately 8% over the first six months of fiscal 1995 as a result of higher customer operating rates and increased capacity. Net income for the pulp chemical business in the first half of fiscal 1996 was $8.3 million or $0.15 per share compared to $3.3 million or $0.06 per share for the first half of fiscal 1995. For the second quarter of fiscal 1996, revenues for the Company's pulp chemical business were $37 million, approximately 2% higher than in the second quarter of fiscal 1995. Net income in the second quarter of fiscal 1996 was $3.3 million or $0.06 per share compared to $2.9 million or $0.05 per share for the second quarter of fiscal 1995. Although average sales prices and margins for sodium chlorate and royalty revenues from the Company's installed generator technology were higher during the second quarter of fiscal 1996 compared to the same period in fiscal 1995, a decrease in sales volumes of approximately 9% and a $3.0 million charge for stock appreciation rights resulting from the increase in the Company's stock price offset most of this improvement. The Company's sodium chlorate plants operated at approximately 92% of rated capacity during the second quarter and for the first six months of fiscal 1996 compared to nearly 100% for the same period in fiscal 1995. The lower operating rate resulted from recent weakness in paper demand. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative ("SG&A") expenses for the first six months of fiscal 1996 were $22.8 million compared to $16.5 million in the first six months of fiscal 1995. An increase in the expense related to the stock appreciation rights program of $6.2 million accounted for the increase in SG&A expenses. Some of the information contained in this Results of Operations section may be forward looking and involves risks and uncertainties that could significantly impact anticipated results. The Company's outlook is based predominately on its interpretation of what it considers key economic and market assumptions, many of which have been discussed above. Factors that could cause actual results to differ materially from current expectations include: worldwide economic activity, particularly in the Far East, changes in the markets of the Company's major purchased raw materials; significant plant operating problems at one of the Company's facilities or one of the Company's competitors', suppliers' or customers' facilities; changes in China's economic, tax or monetary policies; or changes in federal, state, or provincial environmental regulations. LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL Working capital was $69 million at March 31, 1996, down slightly from $75 million at September 30, 1995. Higher styrene sales volumes in March 1996 compared to September 1995 resulted in a $12 million increase in accounts receivable. The high styrene sales volume as well as the acrylonitrile shutdown in March 1995 were the primary reasons for an $9 million decrease in inventory. Cash and cash equivalents decreased $30 million primarily as a result of expenditures in the first half of fiscal 1996 in connection with the Company's three-year $200 million capital program. CASH FLOW Net cash provided by operations was $16.2 million during the first six months of fiscal 1996 compared to $52.5 million for the corresponding period in fiscal 1995. The decrease was primarily attributable to the decreased earnings partially offset by lower payments for interest and income taxes. The Company's long-term debt increased by approximately $7 million, on a net basis, during the first six months of fiscal 1996. The increase was primarily due to $17 million which was borrowed to finance the construction of the Valdosta, Georgia sodium chlorate plant for the pulp chemical business. CAPITAL EXPENDITURES Capital expenditures for the first six months of fiscal 1996 were $49 million compared to $16 million in the same period last year. The capital expenditures in the first half of fiscal 1996 were primarily for the expansion of the acetic acid unit, the ongoing construction of the methanol plant and the Valdosta, Georgia sodium chlorate plant. As of March 31, 1996, the Company has spent approximately half of its three-year $200 million capital plan. During the remainder of fiscal 1996, the Company expects to spend an additional $50 - $60 million on capital expenditures. The remaining fiscal 1996 expenditures will primarily be for the methanol plant and for a portion of the new sodium chlorate plant in Valdosta, Georgia, which will be completed in fiscal 1997. The Company expects to fund its fiscal 1996 petrochemical business capital expenditures from operating cash flow and its $125 million revolving credit facility, as needed. The Company will utilize the chlorate plant credit agreement, entered into in September 1995, to finance the construction of its Georgia chlorate plant. CERTAIN KNOWN EVENTS, TRENDS AND UNCERTAINTIES PETROCHEMICAL RAW MATERIAL PRICES AND AVAILABILITY For each of the Company's petrochemical products, the cost of raw materials and utilities is far greater than all other costs of production combined. Therefore, an adequate supply of raw materials at reasonable prices is critical to the success of the Company's business. The Company does not produce any of its major raw materials (benzene, ethylene, propylene, ammonia and methanol), although the Company has a methanol plant under construction at Texas City. These materials are all commodity petrochemicals and the price for each can fluctuate widely for a variety of reasons, including changes in the availability of these products because of major capacity additions or significant plant operating problems. The Company has several long-term arrangements with ethylene suppliers that provide for the majority of its anticipated requirements for purchased ethylene. Although no assurances can be given, management believes that the Company will continue to secure adequate supplies of all its raw materials at acceptable prices. ENVIRONMENTAL AND SAFETY MATTERS The Company's operations involve the handling, production, transportation and disposal of materials classified as hazardous or toxic and are extensively regulated under environmental and health and safety laws. Operating permits which are required for the Company's operations are subject to periodic renewal and may be revoked or modified for cause. New laws or permit requirements and conditions may affect the Company's operations, products or waste disposal. Past or future operations may result in claims or liabilities. Expenditures could be required to upgrade wastewater collection, pretreatment or disposal systems or for other matters. The Company's prior negotiations with Monsanto with respect to the scope of Monsanto's obligations to the Company for pre-acquisition environmental conditions at the Company's Texas City facility under applicable state and federal laws and the indemnification provisions of the Assets Purchase Agreement are no longer ongoing. The negotiations did not produce any change in the parties respective rights and obligations. For further information on environmental and safety matters, please refer to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995. LEGAL PROCEEDINGS The information under "Legal Proceedings" in the notes to condensed consolidated financial statements herein is hereby incorporated by reference. Part II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The information under "Legal Proceedings" in the notes to condensed consolidated financial statements herein is hereby incorporated by reference in response to this item. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Stockholders held January 24, 1996 the Company's seven nominees for directors were elected and the appointment of Arthur Andersen LLP as the Company's independent public accountants for the fiscal year ending September 30, 1996 was ratified. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27. Financial Data Schedule (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the three months ended March 31, 1996. However, on April 26, 1996, the Company filed a report on Form 8-K announcing that it had entered into a definitive agreement for the sale of the Company to an investment group formed by The Sterling Group, Inc. and The Unicorn Group Inc. Under the terms of the agreement, shareholders may elect to receive $12.00 per share in cash, or retain part or all of their shares in the Company, subject to a 5,000,000 share maximum, and proration to the extent aggregate elections exceed 5,000,000 shares. The transaction is expected to be concluded by late August of this year, and is subject to customary closing conditions, including shareholder approval. 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: May 13, 1996 (signature appears here) J. Virgil Waggoner President and Chief Executive Officer (Principal Executive Officer) Date: May 13, 1996 (signature appears here) Jim P. Wise Vice President - Finance and Chief Financial Officer (Principal Financial Officer) EX-27 2
5 6-MOS SEP-30-1996 MAR-31-1996 1,261 0 123,867 0 58,833 195,494 536,371 336,371 614,459 126,502 0 603 0 0 256,520 614,459 382,421 382,421 323,628 323,628 26,316 0 3,210 29,267 10,053 19,214 0 0 0 19,214 0.35 0.35
-----END PRIVACY-ENHANCED MESSAGE-----