-----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, SUUJJtVITAKDSdDEUeHStxZbKq364+9pLRzVFFhvihTjWNKIiLqqo3uuJsaoP7C9 pUdP0Ok7vnl+Cg8jJznOUQ== 0000950129-00-002352.txt : 20000515 0000950129-00-002352.hdr.sgml : 20000515 ACCESSION NUMBER: 0000950129-00-002352 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING CHEMICALS HOLDINGS INC /TX/ CENTRAL INDEX KEY: 0000795662 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 760502785 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10059 FILM NUMBER: 627295 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 FORMER COMPANY: FORMER CONFORMED NAME: STERLING CHEMICALS INC /TX/ DATE OF NAME CHANGE: 19961218 FORMER COMPANY: FORMER CONFORMED NAME: STERLING CHEMICALS HOLDINGS INC DATE OF NAME CHANGE: 19960828 FORMER COMPANY: FORMER CONFORMED NAME: STERLING CHEMICALS INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING CHEMICAL INC CENTRAL INDEX KEY: 0001014669 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 760502785 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-04343-01 FILM NUMBER: 627296 BUSINESS ADDRESS: STREET 1: 1200 SMITH STREET STREET 2: SUITE 1900 CITY: HOUSTON STATE: TX ZIP: 77002-4312 BUSINESS PHONE: 7136503700 MAIL ADDRESS: STREET 1: C/O STERLING GROUP INC STREET 2: EIGHT GREENWAY PLAZA, SUITE 702 CITY: HOUSTON STATE: TX ZIP: 77046 FORMER COMPANY: FORMER CONFORMED NAME: STX CHEMICALS CORP DATE OF NAME CHANGE: 19960516 10-Q 1 STERLING CHEMICALS HOLDINGS, INC. - DATED 3/31/00 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. ================================================================================ 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 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 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 5 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
MARCH 31, SEPTEMBER 30, 2000 1999 --------- --------- 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 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 5 6 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31, --------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ 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
The accompanying notes are an integral part of the consolidated financial statements. 6 7 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED MARCH 31, -------------------------- 2000 1999 ----------- ----------- 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
The accompanying notes are an integral part of the consolidated financial statements. 7 8 STERLING CHEMICALS, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
MARCH 31, SEPTEMBER 30, 2000 1999 ----------- ----------- 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 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 8 9 STERLING CHEMICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31, --------------------------- --------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ 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) ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 9 10 STERLING CHEMICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED
SIX MONTHS ENDED MARCH 31, ---------------------------- 2000 1999 ------------ ------------ 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
The accompanying notes are an integral part of the consolidated financial statements. 10 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.
SIX MONTHS ENDED MARCH 31, ------------------------- 2000 1999 ----------- ----------- (Dollars in Thousands) 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) =========== ===========
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 12 2. INVENTORIES
MARCH 31, SEPTEMBER 30, 2000 1999 ------------ ------------ (Dollars in Thousands) 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 ============ ============
3. LONG-TERM DEBT
MARCH 31, SEPTEMBER 30, 2000 1999 ----------- ----------- (Dollars in Thousands) 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 =========== ===========
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 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 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):
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31, -------------------------- -------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ 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 ============ ============ ============ ============
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 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 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 17 STERLING CHEMICALS GUARANTORS COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS) (UNAUDITED)
MARCH 31, SEPTEMBER 30, 2000 1999 ----------- ----------- 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 =========== ===========
The accompanying notes are an integral part of the combined financial statements. 17 18 STERLING CHEMICALS GUARANTORS COMBINED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, -------------------------- -------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- 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) =========== =========== =========== ===========
The accompanying notes are an integral part of the combined financial statements. 18 19 STERLING CHEMICALS GUARANTORS COMBINED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED MARCH 31, -------------------------- 2000 1999 ----------- ----------- 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 =========== ===========
The accompanying notes are an integral part of the combined financial statements. 19 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
MARCH 31, SEPTEMBER 30, 2000 1999 ----------- ----------- (Dollars in Thousands) 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 =========== ===========
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 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 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 23 STERLING PULP CHEMICALS, LTD. BALANCE SHEETS (AMOUNTS IN U.S. DOLLARS IN THOUSANDS) (UNAUDITED)
MARCH 31, SEPTEMBER 30, 2000 1999 ----------- ----------- 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 =========== ===========
The accompanying notes are an integral part of these financial statements. 23 24 STERLING PULP CHEMICALS, LTD. STATEMENTS OF OPERATIONS (AMOUNTS IN U.S. DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, ------------------------- ------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- 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 =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 24 25 STERLING PULP CHEMICALS, LTD. STATEMENTS OF CASH FLOWS (AMOUNTS IN U.S. DOLLARS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED MARCH 31, ------------------------- 2000 1999 ----------- ----------- 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 =========== ===========
The accompanying notes are an integral part of these financial statements. 25 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
MARCH 31, SEPTEMBER 30, 2000 1999 ----------- ----------- (U.S. Dollars in Thousands) 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 =========== ===========
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 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 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 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 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 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 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 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 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 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:
FOR WITHHELD ------------- ---------- 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
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:
FOR AGAINST ABSTAIN - --------------------- -------------------- ------------------- 10,818,974 31,323 316
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 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 37 EXHIBIT INDEX
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.
EX-11.1 2 EARNINGS PER SHARE CALCULATION 1 STERLING CHEMICALS HOLDINGS, INC. EXHIBIT 11.1 EARNINGS PER SHARE COMPUTATION (Amounts in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, ------------------------ ------------------------ 2000 1999 2000 1999 ---------- ---------- ---------- ---------- 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) ========== ========== ========== ==========
EX-15.1 3 LETTER OF DELOITTE & TOUCHE LLP 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 EX-27.1 4 FDS FOR STERLING CHEMICALS HOLDINGS, INC.
5 0000795662 STERLING CHEMICALS HOLDINGS, INC. 1,000 6-MOS SEP-30-2000 OCT-01-1999 MAR-31-2000 7,611 0 167,349 (2,456) 82,512 273,297 801,922 404,217 794,008 169,993 975,470 22,390 0 123 (462,979) 794,008 511,748 511,748 436,826 436,826 19,466 0 60,231 (4,775) 2,286 (7,061) 0 0 0 (7,061) (0.67) (0.67)
EX-27.2 5 FDS FOR STERLING CHEMICALS, INC.
5 0001014669 STERLING CHEMICALS, INC. 1,000 6-MOS SEP-30-2000 OCT-01-1999 MAR-31-2000 7,584 0 169,976 (2,456) 82,512 274,597 801,922 404,217 771,277 169,714 817,094 0 0 0 (304,542) 771,277 511,748 511,748 436,826 436,826 19,336 0 49,304 6,282 2,286 3,996 0 0 0 3,996 0 0
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