-----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, NbDZZf6/ZJOpH4H3LmsjfZ7fzuSkZOXqfoTKf5MG5LmfrG/iDSAeYrVNftOa/y43 g9uN9iGcIaid2E5idcf2sw== /in/edgar/work/0000950129-00-005716/0000950129-00-005716.txt : 20001123 0000950129-00-005716.hdr.sgml : 20001123 ACCESSION NUMBER: 0000950129-00-005716 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000331 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: 775702 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: 775703 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 h82184ae10-qa.txt STERLING CHEMICALS HOLDINGS, INC. - 03/31/2000 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 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 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 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 (IRS EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1200 SMITH STREET, SUITE 1900 (713) 650-3700 HOUSTON, TEXAS 77002-4312 (REGISTRANT'S TELEPHONE (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 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 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 EXPLANATORY NOTE TO AMENDMENT NO. 1 The undersigned registrant hereby amends its Quarterly Report on Form 10-Q for the period ended March 31, 2000, 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)
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. 3 4 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) $ (39,233) ============= ============= ============= ============== 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. 4 5 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. 5 6 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. 6 7 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. 7 8 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. 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 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) =============== ===============
9 10 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. 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 ----------- ------------- 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. 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, 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. 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 11 12 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 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): 12 13
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. 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 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 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 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 15 16 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. 16 17 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. 17 18 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. 18 19 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 12 3/8% Senior Secured Notes due 2006. On November 5, 1999, Chemicals completed a registered exchange offer, pursuant to which all of these 12 3/8% Notes were exchanged for publicly registered 12 3/8% Notes with substantially similar terms. The 12 3/8% 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 ========== ==============
19 20 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%. 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. 20 21 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. 26 27 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 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. 27 28 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. 28 29 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 29 30 STERLING CHEMICALS ENERGY, INC. BALANCE SHEETS (AMOUNTS IN THOUSANDS) (UNAUDITED)
MARCH 31, SEPTEMBER 30, 2000 1999 -------------- -------------- ASSETS Current assets: Cash and cash equivalents.......................... $ -- $ -- Accounts receivable................................ 68 101 -------------- -------------- Total current assets............................. 68 101 Property, plant, and equipment, net................... 4,438 4,815 Due from affiliates................................... 25,590 24,721 Investment in joint venture........................... 3,733 3,539 -------------- -------------- Total assets..................................... $ 33,829 $ 33,176 ============== ============== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable................................... $ 3,124 $ 1,535 -------------- -------------- Total current liabilities........................ 3,124 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 ................................. 4,770 5,706 -------------- -------------- Total stockholder's equity....................... 4,771 5,707 -------------- -------------- Total liabilities and stockholder's equity.... $ 33,829 $ 33,176 ============== ==============
The accompanying notes are an integral part of these financial statements. 30 31 STERLING CHEMICALS ENERGY, INC. STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, --------------------------- ---------------------------- 2000 1999 2000 1999 ------------- ------------- ------------- ------------- Revenues........................................ $ 548 $ 387 $ 1,075 $ 826 Cost of goods sold.............................. 548 387 1,075 826 ------------- ------------- ------------- ------------- Gross profit.................................... -- -- -- -- Interest and debt related expenses.............. 787 664 1,573 1,328 ------------- ------------- ------------- ------------- Net loss before income taxes.................... (787) (664) (1,573) (1,328) Benefit for income taxes........................ -- 114 -- 300 Equity in earnings of joint venture............. 420 572 637 1,162 ------------- ------------- ------------- ------------- Net income (loss)............................... $ (367) $ 22 $ (936) $ 134 ============= ============= ============= =============
The accompanying notes are an integral part of these combined financial statements. 31 32 STERLING CHEMICALS ENERGY, INC. STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED MARCH 31, ------------------------- 2000 1999 ------------ ----------- Cash flows from operating activities: Net income (loss)................................................................... $ (936) $ 134 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization..................................................... 349 349 Undistributed earnings from joint venture......................................... (90) (85) Change in assets/liabilities: Accounts receivable............................................................... 33 5 Due from affiliates............................................................... (869) (598) Other assets...................................................................... (76) (111) Accounts payable.................................................................. 1,589 306 ------------ ----------- Net cash flows from operating activities............................................... -- -- ------------ ----------- 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. 32 33 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 12 3/8% Senior Secured Notes due 2006. On November 5, 1999, Chemicals completed a registered exchange offer, pursuant to which all of these 12 3/8% Notes were exchanged for publicly registered 12 3/8% Notes with substantially similar terms (the "12 3/8% Notes"). The 12 3/8% 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 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 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 six month periods ended March 31, 2000 and March 31, 1999 were $(936,000) and $134,000, respectively. 2. LONG-TERM DEBT As of March 31, 2000 and September 30, 1999, debt allocated to Energy by Chemicals was $25.9 million. As of March 31, 2000, 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. 33 34 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 and six-month periods ended March 31, 2000 and 1999. Summarized financial information reported by S & L Cogeneration Company for such periods is (in thousands):
SIX MONTHS ENDED THREE MONTHS ENDED MARCH 31, MARCH 31, ------------------------------ ------------------------------ 2000 1999 2000 1999 -------------- --------------- -------------- -------------- Revenues........................................ $ 11,080 $ 10,103 $ 5,393 $ 4,663 Net income...................................... 1,245 2,971 524 1,503
MARCH 31, SEPTEMBER 30, 2000 1999 -------------- ------------------- (DOLLARS IN THOUSANDS) Total assets.................................... $ 17,070 $ 17,659
5. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," and No. 133, "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. 34 35 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) 35 -----END PRIVACY-ENHANCED MESSAGE-----