-----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, OB9SpvuYTgL0oc5MPJyXuQ/Gg0vjZoeamTJNBtWtgm3kKopAUKn3NJaXGXgdb9b2 lmnWXNRmmE3p/8NnWbPscw== /in/edgar/work/0000950129-00-005715/0000950129-00-005715.txt : 20001123 0000950129-00-005715.hdr.sgml : 20001123 ACCESSION NUMBER: 0000950129-00-005715 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20001122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING CHEMICALS HOLDINGS INC /TX/ CENTRAL INDEX KEY: 0000795662 STANDARD INDUSTRIAL CLASSIFICATION: [2860 ] IRS NUMBER: 760502785 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-10059 FILM NUMBER: 775697 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: [2860 ] IRS NUMBER: 760502785 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 333-04343-01 FILM NUMBER: 775698 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/A 1 h82183ae10-qa.txt STERLING CHEMICALS HOLDINGS, INC. - 12/31/1999 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A AMENDMENT NO. 1 TO 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 December 31, 1999 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 INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 1200 SMITH STREET, SUITE 1900 HOUSTON, TEXAS 77002-4312 (713) 650-3700 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER, 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 OF INCORPORATION OR ORGANIZATION) (IRS EMPLOYER IDENTIFICATION NO.) 1200 SMITH STREET, SUITE 1900 HOUSTON, TEXAS 77002-4312 (713) 650-3700 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER, 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 January 31, 2000 Sterling Chemicals Holdings, Inc. had 12,751,201 shares of common stock outstanding. As of January 31, 2000, all outstanding equity securities of Sterling Chemicals, Inc. were owned by Sterling Chemicals Holdings, Inc. ================================================================================ 2 EXPLANATORY NOTE TO AMENDMENT NO. 1 The undersigned registrant hereby amends its Quarterly Report on Form 10-Q for the period ended December 31, 1999, for the sole purpose of filing the financial statements for Sterling Chemicals Energy, Inc., which are included in Item 1 "Financial Statements". PART I.--FINANCIAL INFORMATION ITEM 1.--FINANCIAL STATEMENTS 2 3 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------ ------------- ASSETS Current assets: Cash and cash equivalents ................................................... $ 6,948 $ 14,921 Accounts receivable ......................................................... 161,089 141,059 Inventories ................................................................. 74,184 70,464 Prepaid expenses ............................................................ 14,099 16,236 Deferred tax asset .......................................................... 16,888 16,888 --------- --------- Total current assets ...................................................... 273,208 259,568 Property, plant, and equipment, net ............................................ 398,408 402,723 Deferred tax asset ............................................................. 26,158 26,158 Other assets ................................................................... 81,747 86,650 --------- --------- Total assets .............................................................. $ 779,521 $ 775,099 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) Current liabilities: Accounts payable ............................................................ $ 65,027 $ 72,961 Accrued liabilities ......................................................... 91,233 79,883 Current portion of long-term debt ........................................... 2,662 4,246 --------- --------- Total current liabilities ................................................. 158,922 157,090 Long-term debt ................................................................. 973,054 964,555 Deferred tax liability ......................................................... 10,119 8,815 Deferred credits and other liabilities ......................................... 78,490 76,893 Common stock held by ESOP ...................................................... 2,946 2,946 Less: unearned compensation ................................................... (643) (745) Redeemable preferred stock ..................................................... 21,651 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 December 31, 1999, and 12,305,000 shares issued and 12,097,000 outstanding at September 30, 1999 ............ 123 123 Additional paid-in capital .................................................. (542,712) (542,712) Retained earnings ........................................................... 107,409 118,490 Accumulated other comprehensive income ...................................... (27,328) (28,768) Deferred compensation ....................................................... (46) (58) --------- --------- (462,554) (452,925) Treasury stock, at cost, 209,000 and 208,000 shares at December 31, 1999 and September 30, 1999, respectively .......................................... (2,464) (2,462) --------- --------- Total stockholders' equity (deficiency in assets) ....................... (465,018) (455,387) --------- --------- Total liabilities and stockholders' equity (deficiency in assets) ..... $ 779,521 $ 775,099 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 3 4 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, ------------------------------- 1999 1998 --------- --------- Revenues ........................................................ $ 246,921 $ 171,929 Cost of goods sold .............................................. 216,353 155,212 --------- --------- Gross profit .................................................... 30,568 16,717 --------- --------- Selling, general, and administrative expenses ................... 9,870 9,656 Other expense ................................................... -- 2,294 Interest and debt related expenses, net of interest income ...... 29,770 25,459 --------- --------- Loss before income taxes ........................................ (9,072) (20,692) Provision (benefit) for income taxes ............................ 1,290 (7,592) --------- --------- Net loss ........................................................ (10,362) (13,100) Preferred stock dividends ....................................... 719 645 --------- --------- Net loss attributable to common stockholders .................... $ (11,081) $ (13,745) ========= ========= Net loss per common share (Note 5) .............................. $ (0.88) $ (1.11) ========= ========= Weighted average shares outstanding ............................. 12,612 12,427 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 4 5 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, ------------------------------- 1999 1998 --------- -------- Cash flows from operating activities: Net loss ................................................ $ (10,362) $(13,100) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ........................ 13,526 14,030 Interest amortization ................................ 802 1,082 Deferred tax benefit (provision) ..................... 1,057 (5,709) Discount notes amortization .......................... 5,124 4,563 Other ................................................ (22) 227 Change in assets/liabilities: Accounts receivable .................................. (19,597) 9,081 Inventories .......................................... (3,554) (5,954) Prepaid expenses ..................................... 2,135 (546) Other assets ......................................... 1,214 (3,433) Accounts payable ..................................... (17,599) (982) Accrued liabilities .................................. 18,748 7,125 Other liabilities .................................... 2,422 1,419 --------- -------- Net cash provided by (used in) operating activities ......... (6,106) 7,803 --------- -------- Cash flows from investing activities: Capital expenditures .................................... (5,794) (5,931) --------- -------- Cash flows from financing activities: Proceeds from long-term debt ............................ 202,340 68,100 Repayment of long-term debt ............................. (198,546) (72,957) Other ................................................... (3) (5) --------- -------- Net cash provided by (used in) financing activities .......... 3,791 (4,862) --------- -------- Effect of United States /Canadian exchange rate on cash ...... 136 (6) --------- -------- Net decrease in cash and cash equivalents .................... (7,973) (2,996) Cash and cash equivalents - beginning of year ................ 14,921 11,168 --------- -------- Cash and cash equivalents - end of period .................... $ 6,948 $ 8,172 ========= ======== Supplement disclosures of cash flow information: Interest paid, net of interest income received .......... $ (11,397) $(16,025) Income taxes paid ....................................... (191) (103)
The accompanying notes are an integral part of the consolidated financial statements. 5 6 STERLING CHEMICALS, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------ ------------- ASSETS Current assets: Cash and cash equivalents .............................................. $ 6,923 $ 14,899 Accounts receivable .................................................... 163,622 143,556 Inventories ............................................................ 74,184 70,464 Prepaid expenses ....................................................... 12,873 15,059 Deferred tax asset ..................................................... 16,888 16,888 --------- --------- Total current assets ................................................. 274,490 260,866 Property, plant, and equipment, net ....................................... 398,408 402,723 Deferred income tax benefit ............................................... 8,384 8,384 Other assets .............................................................. 75,389 80,133 --------- --------- Total assets ......................................................... $ 756,671 $ 752,106 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS) Current liabilities: Accounts payable ....................................................... $ 65,027 $ 72,731 Accrued liabilities .................................................... 91,246 79,883 Current portion of long-term debt ...................................... 2,662 4,246 --------- --------- Total current liabilities ............................................ 158,935 156,860 Long-term debt ............................................................ 820,147 816,927 Deferred tax liability .................................................... 10,119 8,815 Deferred credits and other liabilities .................................... 78,488 76,893 Common stock held by ESOP ................................................. 2,946 2,946 Less: unearned compensation .............................................. (643) (745) Commitments and contingencies (Note 4) .................................... -- -- Stockholder's equity (deficiency in assets): Common stock, $.01 par value ........................................... -- -- Additional paid-in capital ............................................. (140,012) (139,786) Accumulated deficit .................................................... (145,936) (140,978) Accumulated other comprehensive income ................................. (27,327) (28,768) Deferred compensation .................................................. (46) (58) --------- --------- Total stockholder's equity (deficiency in assets) .................... (313,321) (309,590) --------- --------- Total liabilities and stockholder's equity (deficiency in assets) ...... $ 756,671 $ 752,106 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 6 7 STERLING CHEMICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, ------------------------------- 1999 1998 --------- --------- Revenues ........................................................ $ 246,921 $ 171,929 Cost of goods sold .............................................. 216,353 155,212 --------- --------- Gross profit .................................................... 30,568 16,717 Selling, general, and administrative expenses ................... 9,834 9,538 Other expense ................................................... -- 2,294 Interest and debt related expenses, net of interest income ...... 24,403 20,640 --------- --------- Loss before income taxes ........................................ (3,669) (15,755) Provision (benefit) for income taxes ............................ 1,289 (5,781) --------- --------- Net loss ........................................................ $ (4,958) $ (9,974) ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 7 8 STERLING CHEMICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED
THREE MONTHS ENDED DECEMBER 31, ------------------------------- 1999 1998 --------- -------- Cash flows from operating activities: Net loss .............................................. $ (4,958) $ (9,974) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ...................... 13,526 14,030 Debt fee amortization .............................. 684 916 Deferred tax benefit (provision) ................... 1,057 (4,599) Other .............................................. (150) 134 Change in assets/liabilities: Accounts receivable ................................ (19,633) 8,980 Inventories ........................................ (3,554) (5,954) Prepaid expenses ................................... 2,184 156 Other assets ....................................... 1,165 (3,433) Accounts payable ................................... (17,599) (982) Accrued liabilities ................................ 18,748 7,133 Other liabilities .................................. 2,421 1,393 --------- -------- Net cash provided by (used in) operating activities ........ (6,109) 7,800 --------- -------- Cash flows from investing activities: Capital expenditures .................................... (5,794) (5,931) --------- -------- Cash flows from financing activities: Proceeds from long-term debt ............................ 200,081 68,100 Repayment of long-term debt ............................. (196,917) (72,957) Other ................................................... 627 (5) --------- -------- Net cash provided by (used in) financing activities ....... 3,791 (4,862) --------- -------- Effect of United States /Canadian exchange rate on cash .... 136 (6) --------- -------- Net decrease in cash and cash equivalents .................. (7,976) (2,999) Cash and cash equivalents - beginning of year .............. 14,899 11,159 --------- -------- Cash and cash equivalents - end of period .................. $ 6,923 $ 8,160 ========= ======== Supplement disclosures of cash flow information: Interest paid, net of interest income received .......... $ (11,400) $(16,033) Income taxes paid .......................................... (191) (103)
The accompanying notes are an integral part of the consolidated financial statements. 8 9 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 December 31, 1999, 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 periods ended December 31, 1999 and 1998, 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 three month period ended December 31, 1999, 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 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.
THREE MONTHS ENDED DECEMBER 31, ------------------------------- 1999 1998 -------- --------- (Dollars in Thousands) Segment Information Revenues: Petrochemicals $197,294 $ 125,268 Pulp chemicals 49,627 46,661 -------- --------- Total $246,921 $ 171,929 ======== ========= Operating income (loss): Petrochemicals $ 13,256 $ (2,429) Pulp chemicals 7,442 7,196 -------- --------- Total $ 20,698 $ 4,767 ======== =========
9 10 Our total comprehensive net loss for the three months ended December 31, 1999 and 1998 was $8,922,000 and $13,021,000, respectively. The total comprehensive net loss of Chemicals and its subsidiaries for the three months ended December 31, 1999 and 1998 was $3,517,000 and $9,895,000, respectively. 2. INVENTORIES
DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------ ------------- (Dollars in Thousands) Inventories consisted of the following: Finished products ........................... $42,261 $37,484 Raw materials ............................... 7,544 10,355 Inventories under exchange agreements ....... 3,670 2,562 Stores and supplies ......................... 20,709 20,063 ------- ------- $74,184 $70,464 ======= =======
3. LONG-TERM DEBT
DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------ ------------- (Dollars in Thousands) Long-term debt consisted of the following: Revolving credit facilities ............... $ 58,491 $ 54,643 Saskatoon term loans ...................... 41,916 44,045 11-1/4% Notes ............................. 152,402 152,485 11-3/4% Notes ............................. 275,000 275,000 12-3/8% Notes ............................. 295,000 295,000 --------- --------- Total Chemicals' debt outstanding .... 822,809 821,173 13-1/2% Notes ............................. 152,907 147,628 --------- --------- Total Holdings' debt outstanding ..... 975,716 968,801 Less: Current maturities ................... (2,662) (4,246) --------- --------- Total long-term debt ...................... $ 973,054 $ 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. 10 11 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 and 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 and 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. Legal Proceedings Ammonia Release. A description of the ammonia release 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. All of the lawsuits against us based on this release have been resolved within the limits of our liability insurance policies. 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. As discussed therein, there is no lawsuit pending against us based on this release, but we have received, and in some instances resolved, claims from individuals for alleged damage from this incident. 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. 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 11 12 legal counsel, in addition to our own judgment. Based on the foregoing, as of December 31, 1999, we have accrued approximately $2.8 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 $2.2 million. At December 31, 1999, 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. 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 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. 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. 5. NET LOSS PER COMMON SHARE CALCULATION 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, except net loss per common share):
THREE MONTHS ENDED DECEMBER 31, ------------------------------- 1999 1998 -------- -------- Net loss attributable to common stockholders $(11,081) $(13,745) ======== ======== Net loss per common share $ (0.88) $ (1.11) ======== ======== Weighted average shares outstanding 12,612 12,427 ======== ========
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 12 13 currently evaluating the accounting impact and disclosures required when this statement is adopted in the first quarter of fiscal 2001. 13 14 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 December 31, 1999, and the related consolidated statements of operations and cash flows for the three-month periods ended December 31, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet 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 February 11, 2000 14 15 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 December 31, 1999, and the related consolidated statements of operations and cash flows for the three-month periods ended December 31, 1999 and 1998. 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 generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Chemicals as of September 30, 1999, and the related consolidated statement 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 February 11, 2000 15 16 STERLING CHEMICALS UNITED STATES SUBSIDIARIES COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS) (UNAUDITED)
DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------ ------------- ASSETS Current assets: Cash and cash equivalents .......................... $ 1,727 $ 9,323 Accounts receivable ................................ 42,393 45,139 Inventories ........................................ 28,293 29,207 Prepaid expenses ................................... 11,976 12,748 --------- --------- Total current assets ............................. 84,389 96,417 Property, plant, and equipment, net ................... 195,147 196,877 Due from affiliates ................................... 131,064 121,506 Other assets .......................................... 35,960 40,275 --------- --------- Total assets ..................................... $ 446,560 $ 455,075 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable ................................... $ 22,888 $ 22,399 Accrued liabilities ................................ 13,806 16,515 --------- --------- Total current liabilities ........................ 36,694 38,914 Long-term debt due to Parent .......................... 325,420 325,402 Deferred income taxes ................................. 7,905 7,272 Deferred credits and other liabilities ................ 7,760 7,227 Commitments and contingencies (Note 4) ................ -- -- Stockholder's equity: Common stock ....................................... -- -- Additional paid-in capital ......................... 92,734 92,734 Retained earnings .................................. 2,407 11,026 Accumulated other comprehensive income ............. (26,360) (27,500) --------- --------- Total stockholder's equity ....................... 68,781 76,260 --------- --------- Total liabilities and stockholder's equity .... $ 446,560 $ 455,075 ========= =========
The accompanying notes are an integral part of the combined financial statements. 16 17 STERLING CHEMICALS UNITED STATES SUBSIDIARIES COMBINED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, ---------------------- 1999 1998 -------- -------- Revenues .............................................. $ 56,345 $ 53,645 Cost of goods sold .................................... 49,021 45,244 -------- -------- Gross profit .......................................... 7,324 8,401 Selling, general, and administrative expenses ......... 5,337 5,568 Interest and debt related expenses .................... 10,019 8,488 -------- -------- Net loss before income taxes .......................... (8,032) (5,655) Provision (benefit) for income taxes .................. 587 (2,064) -------- -------- Net loss .............................................. $ (8,619) $ (3,591) ======== ========
The accompanying notes are an integral part of the combined financial statements. 17 18 STERLING CHEMICALS UNITED STATES SUBSIDIARIES COMBINED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, -------------------- 1999 1998 ------- ------- Cash flows from operating activities: Net loss ......................................................................... $(8,619) $(3,591) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization .................................................. 6,132 5,938 Deferred tax benefit ........................................................... 633 9,595 Other .......................................................................... 46 777 Change in assets/liabilities: Accounts receivable ............................................................ 2,746 2,794 Inventories .................................................................... 914 131 Prepaid expenses ............................................................... 772 (3,797) Due from affiliates ............................................................ (8,418) (4,227) Other assets ................................................................... 1,598 1,636 Accounts payable ............................................................... 489 (8,390) Accrued liabilities ............................................................ (2,713) (441) Other liabilities .............................................................. 533 144 ------- ------- Net cash flows provided by (used in) operating activities ........................... (5,887) 569 ------- ------- Cash flows used in investing activities: Capital expenditures ............................................................. (1,685) (1,535) ------- ------- Cash flows provided by (used in) financing activities: Net change in long-term debt due to Parent ....................................... 18 (83) ------- ------- Effect of United States/Canadian exchange rate on cash .............................. (42) (15) ------- ------- Net decrease in cash and cash equivalents ........................................... (7,596) (1,064) Cash and cash equivalents--beginning of year ........................................ 9,323 4,093 ------- ------- Cash and cash equivalents--end of period ............................................ $ 1,727 $ 3,029 ======= =======
The accompanying notes are an integral part of the combined financial statements. 18 19 STERLING CHEMICALS UNITED STATES SUBSIDIARIES NOTES TO COMBINED FINANCIAL STATEMENTS 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 same U.S. subsidiaries. These U.S. subsidiaries consist of Sterling Canada, Inc. and its U.S. subsidiaries, Sterling Chemicals Energy, Inc., Sterling Chemicals International, Inc., and Sterling Fibers, Inc. The financial statements of these companies (except for Sterling Chemicals Energy, Inc., whose securities do not constitute a substantial portion of the collateral) have been combined to present the accompanying financial statements. Sterling Canada, Inc. (including its U.S. and Canadian subsidiaries), Sterling Chemicals International, Inc., and Sterling Fibers, Inc. are collectively referred to in these notes as the "Company". The Company manufactures chemicals for use primarily in the pulp and paper industry at four plants in Canada and a plant in Valdosta, Georgia, and manufactures 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 Company also licenses, engineers, and oversees construction of large-scale chlorine dioxide generators for the pulp and paper industry as part of the pulp chemicals business. These generators convert sodium chlorate into chlorine dioxide at pulp mills. The Company produces regular textiles, specialty textiles, and technical fibers at the Santa Rosa plant, as well as licensing its 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 Company as of December 31, 1999, and its combined results of operations and cash flows for the three-month periods ended December 31, 1999 and 1998, 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 Company 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 Company's audited combined balance sheet as of September 30, 1999 included in the Annual Report. The Company's total comprehensive net loss for the three months ended December 31, 1999 and 1998 was $ 7,479,000 and $3,594,000, respectively. 2. INVENTORIES
DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------ ------------- (Dollars in Thousands) Inventories consisted of the following: Finished products ...................... $16,726 $17,513 Raw materials .......................... 1,748 2,235 Inventories under exchange agreements .. 275 170 Stores and supplies .................... 9,544 9,289 ------- ------- $28,293 $29,207 ======= =======
19 20 3. LONG-TERM DEBT As of December 31, 1999 and September 30, 1999, debt allocated to the Company by Chemicals amounted to $325.4 million and $325.4 million, respectively. At December 31, 1999, interest rates on this debt ranged from 11.25% to 12.375%. 4. COMMITMENTS AND CONTINGENCIES Environmental Regulations The Company'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 and health and safety laws, regulations, and permit requirements. Environmental permits required for the Company's operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements can affect the manufacturing, handling, processing, distribution, and use of the Company's products and the raw materials used to produce such products and, if so affected, the Company's business and operations may be materially and adversely affected. In addition, changes in environmental requirements can cause the Company to incur substantial costs in upgrading or redesigning its facilities and processes, including waste treatment, storage, disposal, and other waste handling practices and equipment. While the Company believes that its business operations and facilities generally are operated in compliance in all material respects with all applicable environmental and 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 Company, as it is with other companies engaged in similar businesses. In addition, a catastrophic event at any of the Company's facilities could result in liabilities to the Company substantially in excess of its insurance coverages. Any significant ban on all chlorine containing compounds could have a materially adverse effect on the Company'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 the Company'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, the Company would seek to sell the products it manufactures at its British Columbia facility to customers in other markets. The Company is not aware of any other laws or regulations in place in North America which would restrict the use of such products for other purposes. Legal Proceedings The Company is subject to various claims and legal actions that arise in the ordinary course of its business. The Company believes that the ultimate liability, if any, with respect to these claims and legal actions will not have a material effect on the financial position or results of operations of the Company. 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 20 21 certain derivative instruments embedded in other contracts, and for hedging activities. The Company is 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 STERLING PULP CHEMICALS, LTD. BALANCE SHEETS (U.S. DOLLARS IN THOUSANDS) (UNAUDITED)
DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------ ------------- ASSETS Current Cash and cash equivalents ............................. $ 1,069 $ 8,481 Accounts receivable ................................... 16,294 16,840 Due from related parties .............................. 1,672 1,369 Other receivables ..................................... 1,717 2,254 Inventories ........................................... 5,529 5,146 Prepaid expenses ...................................... 334 633 --------- --------- 26,615 34,723 Property, plant, and equipment, net ........................ 75,354 75,531 Other assets ............................................... 268 440 --------- --------- $ 102,237 $ 110,694 ========= ========= LIABILITIES Current Accounts payable ...................................... $ 7,321 $ 8,978 Accrued generator construction costs .................. 3,835 2,967 Accrued liabilities ................................... 5,911 7,093 Due to related parties ................................ 3,882 1,241 --------- --------- 20,949 20,279 Note payable ............................................... 57,590 56,667 Deferred income taxes ...................................... 7,905 7,272 Deferred credits and other liabilities ..................... 4,250 3,972 Commitments and contingencies (Note 4) ..................... -- -- Stockholder's equity Common stock .......................................... 1 1 Additional paid-in capital ............................ 10,508 16,871 Retained earnings ..................................... 9,707 14,470 Accumulated other comprehensive income ................ (8,673) (8,838) --------- --------- Total liabilities and stockholder's equity ......... 11,543 22,504 --------- --------- $ 102,237 $ 110,694 ========= =========
The accompanying notes are an integral part of these financial statements. 22 23 STERLING PULP CHEMICALS, LTD. STATEMENTS OF OPERATIONS (U.S. DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, --------------------- 1999 1998 ------- ------- Revenue .......................................... $28,440 $26,653 Cost of goods sold ............................... 23,607 22,469 ------- ------- Gross profit ..................................... 4,833 4,184 Selling, general, and administrative expenses .... 2,235 2,297 Interest and debt related expenses, net .......... 1,103 1,364 ------- ------- Income before income taxes ....................... 1,495 523 Provision for income taxes ....................... 580 203 ------- ------- Net income ....................................... $ 915 $ 320 ======= =======
The accompanying notes are an integral part of these financial statements. 23 24 STERLING PULP CHEMICALS, LTD. STATEMENTS OF CASH FLOWS (U.S. DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, ------------------------ 1999 1998 -------- -------- Cash flows from operating activities: Net income ................................................................ $ 915 $ 320 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................................ 2,027 1,870 Deferred tax expense ................................................. 348 140 Accrued compensation and other ....................................... 2 9 Changes in assets/liabilities: Accounts receivable .................................................. 867 (839) Due from related parties ............................................. (373) 10 Other receivables .................................................... 546 46 Inventories .......................................................... (285) 127 Prepaid expenses ..................................................... 303 301 Other assets ......................................................... 177 1,177 Accounts payables .................................................... (2,013) 1,071 Accrued generator construction costs ................................. 780 (931) Other accrued liabilities ............................................ (1,022) (3,108) Due to related parties ............................................... 2,580 1,879 Other liabilities .................................................... 377 265 -------- -------- Net cash provided by operating activities ...................................... 5,229 2,337 -------- -------- Cash flows from investing activities: Capital expenditures ...................................................... (664) (769) -------- -------- Cash flows from financing activities: Distribution to parent .................................................... (6,377) -- Dividends ................................................................. (5,558) (3,025) -------- -------- Net cash used in financing activities .......................................... (11,935) (3,025) -------- -------- -------- -------- Effect of exchange rate on cash ................................................ (42) 9 -------- -------- Net (decrease) increase in cash and cash equivalents ........................... (7,412) (1,448) Cash and cash equivalents, beginning of period ................................. 8,481 3,426 -------- -------- Cash and cash equivalents, end of period ....................................... $ 1,069 $ 1,978 ======== ========
The accompanying notes are an integral part of these financial statements. 24 25 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS--(UNAUDITED) 1. BASIS OF PRESENTATION Sterling Pulp Chemicals, Ltd. (the "Company") is a Canadian company which operates four pulp chemical facilities in Canada. These plants primarily produce sodium chlorate, a chemical used primarily to make chlorine dioxide, which in turn is used by pulp mills in the pulp bleaching process. The Company also oversees construction of large-scale chlorine dioxide generators for the pulp and paper industry. The Company is a wholly-owned subsidiary of Sterling Canada, Inc. ("Parent"), which is a wholly-owned subsidiary of Sterling Chemicals, Inc. ("Chemicals"). In the opinion of management, the accompanying unaudited financial statements reflect all adjustments necessary to present fairly the financial position of the Company as of December 31, 1999 and its results of operations and cash flows for the three-month periods ended December 31, 1999 and 1998, 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 the Company'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 the Company's audited balance sheet as of September 30, 1999 included in the Annual Report. The Company's total comprehensive net income for the three months ended December 31, 1999 and 1998 was $1,080,000 and $333,000, respectively. 2. INVENTORIES
DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------ ------------- (Dollars in Thousands) Inventories Finished products ...................... $2,273 $1,872 Raw materials .......................... 209 209 ------ ------ Inventories at FIFO cost .................... 2,482 2,081 Inventories under exchange agreements ....... 225 77 Stores and supplies ......................... 2,822 2,988 ------ ------ $5,529 $5,146 ====== ======
3. LONG-TERM DEBT On August 20, 1992, the Company entered into an agreement for a $109,087,000 demand note facility with Sterling NRO, Ltd. ("Sterling NRO"). Sterling NRO is also owned by Parent and is therefore related to the Company 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 the Company has represented that no other repayments will be made before January 1, 2001. Interest expense for the three-month periods ended December 31, 1999 and 1998 were $1,125,000 and $1,398,000, respectively. 25 26 4. COMMITMENTS AND CONTINGENCIES Environmental and Safety Matters The Company'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 and health and safety laws, regulations, and permit requirements. Environmental permits required for the Company's operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements can affect the manufacturing, handling, processing, distribution, and use of the Company's products and the raw materials used to produce such products and, if so affected, the Company's business and operations may be materially and adversely affected. In addition, changes in environmental requirements can cause the Company to incur substantial costs in upgrading or redesigning its facilities and processes, including waste treatment, storage, disposal, and other waste handling practices and equipment. While the Company believes that its business operations and facilities generally are operated in compliance in all material respects with all applicable environmental and 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 Company, as it is with other companies engaged in similar businesses. In addition, a catastrophic event at any of the Company's facilities could result in liabilities to the Company substantially in excess of its insurance coverages. Any significant ban on all chlorine containing compounds could have a materially adverse effect on the Company'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 the Company'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, the Company would seek to sell the products it manufactures at its British Columbia facility to customers in other markets. The Company is not aware of any other laws or regulations in place in North America which would restrict the use of such products for other purposes. Legal Proceedings The Company is subject to claims and legal actions that arise in the ordinary course of its business. The Company believes that the ultimate liability, if any, with respect to these claims and legal actions will not have a material effect on the financial position or results of operations of the Company. Pledge of Common Stock In order to secure the repayment of a 1999 issuance of $295,000,000 of 123/8% Senior Secured Notes due 2006 by Chemicals, Parent granted the note holders a first priority pledge of 65% of the Company's common stock. 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. 26 27 STERLING CHEMICALS ENERGY, INC. BALANCE SHEETS (AMOUNTS IN THOUSANDS) (UNAUDITED)
DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------ ------------- ASSETS Current assets: Cash and cash equivalents .......................... $ -- $ -- Accounts receivable ................................ 113 101 ------- ------- Total current assets ............................. 113 101 Property, plant, and equipment, net ................... 4,627 4,815 Due from affiliates ................................... 26,053 24,721 Investment in joint venture ........................... 3,539 3,539 ------- ------- Total assets ..................................... $34,332 $33,176 ======= ======= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable ................................... $ 3,260 $ 1,535 ------- ------- Total current liabilities ........................ 3,260 1,535 Long-term debt due to Parent .......................... 25,934 25,934 Commitments and contingencies (Note 3) ................ -- -- Stockholder's equity: Common stock ....................................... 1 1 Retained earnings .................................. 5,137 5,706 ------- ------- Total stockholder's equity ....................... 5,138 5,707 ------- ------- Total liabilities and stockholder's equity .... $34,332 $33,176 ======= =======
The accompanying notes are an integral part of these financial statements. 27 28 STERLING CHEMICALS ENERGY, INC. STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, -------------------- 1999 1998 ------ ------ Revenues ............................... $ 527 $ 439 Cost of goods sold ..................... 527 439 ----- ----- Gross profit ........................... -- -- Interest and debt related expenses ..... 786 664 ----- ----- Loss before income taxes ............... (786) (664) Benefit for income taxes ............... -- 186 Equity in earnings of joint venture .... 217 590 ----- ----- Net income (loss) ...................... $(569) $ 112 ===== =====
The accompanying notes are an integral part of these financial statements. 28 29 STERLING CHEMICALS ENERGY, INC. STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, ---------------------- 1999 1998 ------- ------- Cash flows from operating activities: Net income (loss) .......................................................... $ (569) $ 112 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ............................................ 175 175 Undistributed earnings from joint venture ................................ (115) -- Change in assets/liabilities: Accounts receivable ...................................................... (12) (47) Due from affiliates ...................................................... (1,332) (488) Other assets ............................................................. 128 (223) Accounts payable ......................................................... 1,725 335 ------- ------- Net cash flows from operating activities ...................................... -- (136) ------- ------- Net cash flows from investing activities- Distributions from joint venture in excess of earnings ................... -- 136 ------- ------- Net change in cash and cash equivalents ....................................... -- -- Cash and cash equivalents--beginning of year .................................. -- -- ------- ------- Cash and cash equivalents--end of period ...................................... $ -- $ -- ======= =======
The accompanying notes are an integral part of these financial statements. 29 30 STERLING CHEMICALS ENERGY, INC. NOTES TO FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS Sterling Chemicals Energy, Inc. ("Energy") owns and operates a turbo generator that produces electricity which is sold to its parent, Sterling Chemicals, Inc. ("Chemicals"). Energy also owns a 50% general partnership interest in a joint venture cogeneration facility ("S & L Cogeneration Company") with Praxair Energy Resources, Inc. owning the other 50% interest. The cogeneration facility produces electricity and steam which is sold to Chemicals. The assets of Energy and S&L Cogeneration Company are located in Texas City, Texas on leased property adjacent to Chemicals' production facility. On July 23, 1999, Chemicals 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"). The 123/8% Notes are guaranteed by Energy and all of Chemicals' other existing direct and indirect subsidiaries incorporated in the United States (other than Sterling Chemicals Acquisitions, Inc.) on a joint and several basis and are secured by, among other things, a second priority pledge of 100% of the stock of these subsidiaries. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments necessary to present fairly the financial position of Energy as of December 31, 1999, and its results of operations and cash flows for the three month periods ended December 31, 1999, and December 31, 1998, 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 the audited financial statements of Energy included in Holdings' and Chemicals' combined Annual Report on Form 10-K/A for the fiscal year ended September 30, 1999 (the "Annual Report"). The accompanying balance sheet as of September 30, 1999 has been derived from Energy's audited balance sheet as of September 30, 1999 included in the Annual Report. Energy's total comprehensive net income (loss) for the three month periods ended December 31, 1999 and December 31, 1998 were $(569,000) and $112,000, respectively. 2. LONG-TERM DEBT As of December 31, 1999 and September 30, 1999, debt allocated to Energy by Chemicals was $25.9 million. As of December 31, 1999, the weighted average interest rate on long-term debt was 11.7%. 3. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS Energy is subject to claims and legal actions that arise in the ordinary course of its business. Energy believes that the ultimate liability, if any, with respect to these claims and legal actions will not have a material adverse effect on its financial position or results of operations. 30 31 4. INVESTMENT IN JOINT VENTURE Energy accounts for its investments in S & L Cogeneration Company under the equity method of accounting. Amounts included in Energy's financial statements represent the amounts reported by S & L Cogeneration Company for the three-month periods ended December 31, 1999 and 1998. Summarized financial information reported by S & L Cogeneration Company for such periods is (in thousands):
THREE MONTHS ENDED DECEMBER 31, -------------------- 1999 1998 ------ ------ Revenues ...... $5,687 $5,440 Net income .... 721 1,468
DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------ ------------- Total assets ....... $17,307 $17,659
5. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," and No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Management is currently evaluating the accounting impact and disclosures that will be required when these statements are adopted in the first quarter of fiscal 2001. 31 32 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: November 22, 2000 /s/ FRANK P. DIASSI ------------------------------------ Frank P. Diassi Chairman of the Board of Directors (Principal Executive Officer) Date: November 22, 2000 /s/ GARY M. SPITZ ------------------------------------ Gary M. Spitz Executive Vice President-Finance and Chief Financial Officer (Principal Financial Officer 32 -----END PRIVACY-ENHANCED MESSAGE-----