-----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, N7eDC/+sZj0vSyD/KcBSr/1FfcyWTqWC2t+1UbL3RcqZlsjfEAwhKjDB8pChfVcf S5p83/zTErMNTjhiFjG6Qg== 0000950129-99-005440.txt : 19991217 0000950129-99-005440.hdr.sgml : 19991217 ACCESSION NUMBER: 0000950129-99-005440 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING CHEMICALS HOLDINGS INC /TX/ CENTRAL INDEX KEY: 0000795662 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 760502785 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10059 FILM NUMBER: 99775910 BUSINESS ADDRESS: STREET 1: 1200 SMITH ST, SUITE 1900 CITY: HOUSTON STATE: TX ZIP: 77002-4312 BUSINESS PHONE: 7136503700 MAIL ADDRESS: STREET 1: 1200 SMITH ST SUITE 1900 CITY: HOUSTON STATE: TX ZIP: 77002-4312 FORMER COMPANY: FORMER CONFORMED NAME: STERLING CHEMICALS INC /TX/ DATE OF NAME CHANGE: 19961218 FORMER COMPANY: FORMER CONFORMED NAME: STERLING CHEMICALS HOLDINGS INC DATE OF NAME CHANGE: 19960828 FORMER COMPANY: FORMER CONFORMED NAME: STERLING CHEMICALS INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING CHEMICAL INC CENTRAL INDEX KEY: 0001014669 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 760502785 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-04343-01 FILM NUMBER: 99775911 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-K 1 STERLING CHEMICALS HOLDINGS, INC. & S.C., INC. 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ---------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 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) (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: NONE STERLING CHEMICALS, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K, AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PROVIDED FOR BY GENERAL INSTRUCTION I(2) OF FORM 10-K ------------------------------- 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. X --- As of December 6, 1999, Sterling Chemicals Holdings, Inc. had 12,751,793 shares of common stock outstanding. As of such date, the aggregate market value of such common stock held by nonaffiliates, based upon the last sales price of these shares as reported on the OTC Electronic Bulletin Board maintained by the National Association of Securities Dealers, Inc., was approximately $36 million. As of December 6, 1999, all outstanding equity securities of Sterling Chemicals, Inc. were owned by Sterling Chemicals Holdings, Inc. Portions of the definitive Proxy Statement relating to the 2000 Annual Meeting of Stockholders of Sterling Chemicals Holdings, Inc. are incorporated by reference in Part III of this Form 10-K. ================================================================================ 2 TABLE OF CONTENTS
PAGE ---- PART I Important Information Regarding this Form 10-K........................................................ 1 Item 1. Business.............................................................................................. 2 Business Strategy................................................................................. 2 Recent Developments............................................................................... 2 Industry Overview................................................................................. 3 Product Summary................................................................................... 5 Products.......................................................................................... 6 Sales and Marketing............................................................................... 8 Contracts......................................................................................... 9 Raw Materials for Products and Energy Resources................................................... 10 Technology and Licensing.......................................................................... 12 Competition....................................................................................... 12 Environmental Matters............................................................................. 13 Employees......................................................................................... 15 Insurance......................................................................................... 15 Item 2. Properties............................................................................................ 15 Item 3. Legal Proceedings..................................................................................... 17 Item 4. Submission of Matters to Vote of Security Holders..................................................... 18 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................. 19 Item 6. Selected Financial Data of the Company................................................................ 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 22 Overview.......................................................................................... 22 Liquidity and Capital Resources................................................................... 23 New Accounting Standards.......................................................................... 26 Certain Known Events, Trends, Uncertainties, and Risk Factors..................................... 26 Results of Operations............................................................................. 32 Comparison of Fiscal 1999 to Fiscal 1998.......................................................... 33 Comparison of Fiscal 1998 to Fiscal 1997.......................................................... 35 Item 7A. Qualitative and Quantitative Disclosure about Market Risk............................................. 38 Item 8. Financial Statements and Supplementary Data........................................................... 39 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 107 PART III Item 10. Directors and Executive Officers of the Registrant.................................................... 107 Item 11. Executive Compensation................................................................................ 107 Item 12. Security Ownership of Certain Beneficial Owners and Management........................................ 107 Item 13. Certain Relationships and Related Transactions........................................................ 107 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K.......................... 108
i 3 IMPORTANT INFORMATION REGARDING THIS FORM 10-K Readers should consider the following information as they review this Form 10-K. FORWARD-LOOKING STATEMENTS This Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical facts included in this Form 10-K, including without limitation the statements under "Business", "Management's Discussion and Analysis of Financial Condition and Results of Operations", and "Qualitative and Quantitative Disclosure about Market Risk" regarding the cyclicality of our industry, current and future industry conditions, the potential effects of such matters on our business strategy, results of operations and financial position, and our market sensitive financial instruments are forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, no assurance can be given that such expectations will prove to have been correct. Certain important factors that could cause actual results to differ materially from expectations are stated herein in cautionary statements made in conjunction with the forward-looking statements or are included elsewhere in this Form 10-K. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Known Events, Trends, Uncertainties and Risk Factors." All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. SUBSEQUENT EVENTS, ETC. All statements contained in this Form 10-K, including the forward-looking statements discussed above, are made as of December 16, 1999, except for those statements that are expressly made as of another date. We disclaim any responsibility for the correctness of any information contained in this Form 10-K to the extent such information is affected or impacted by events, circumstances, or developments occurring after December 16, 1999, or by the passage of time after such date and, except as required by applicable securities laws, we do not intend to update such information. DOCUMENT SUMMARIES Statements contained in this Form 10-K describing documents and agreements are provided in summary form only and such summaries are qualified in their entirety by reference to the actual documents and agreements filed as exhibits to this Form 10-K. FISCAL YEAR We keep our books of record and account based on annual accounting periods ending on September 30 of each year. Accordingly, all references in this Form 10-K to a particular fiscal year refers to the twelve calendar month period ending on September 30 of that year. 1 4 PART I This combined Form 10-K is separately filed by Sterling Chemicals Holdings, Inc. ("Holdings") and Sterling Chemicals, Inc. ("Chemicals"). Information contained herein relating to Chemicals is filed by Holdings and separately by Chemicals on its own behalf. Unless otherwise indicated, Holdings and its subsidiaries, including Chemicals, are collectively referred to as the "Company," "we," "our," "ours," and "us." ITEM 1. BUSINESS We were organized as a Delaware corporation in 1986 and have our principal executive offices in Houston, Texas. In connection with our August 21, 1996 merger with STX Acquisition Corp., we recapitalized and reorganized into a holding company structure, with our only material asset after the merger being the capital stock of Chemicals, our wholly owned operating subsidiary. Through Chemicals and its subsidiaries, we manufacture seven commodity petrochemicals at our Texas City, Texas plant. We also manufacture chemicals for use primarily in the pulp and paper industry at five plants in Canada and one plant in Valdosta, Georgia, and acrylic fibers at our plant near Pensacola, Florida. At our Texas City facility, we produce styrene, acrylonitrile, acetic acid, plasticizers, methanol, tertiary butylamine, or "TBA", and sodium cyanide. We generally sell our petrochemicals products to customers for use in the manufacture of other chemicals and products, which in turn are used in the production of a wide array of consumer goods and industrial products. We produce regular textile fibers, specialty textile fibers, and technical fibers at our acrylic fibers facility, as well as licensing our acrylic fibers manufacturing technology to producers worldwide. Sodium chlorate is produced at our five plants in Canada and at our Valdosta facility. Sodium chlorite is produced at one of our Canadian locations. In addition, chlor-alkali and calcium hypochlorite are produced at one of our Canadian locations. We license, engineer, and oversee construction of large-scale chlorine dioxide generators for the pulp and paper industry as part of our pulp chemicals business. These generators convert sodium chlorate into chlorine dioxide at pulp mills. BUSINESS STRATEGY Our objectives are to be a premier producer of chemicals, to maintain a strong market position, to achieve first quartile cost performance in all of our major products, and to provide superior customer service. Our management team has adopted the following strategies in pursuit of these objectives: o Continue to improve our cost structure; o Pursue growth opportunities through facility expansions, upgrades, and strategic alliances; and o Optimize capacity utilization rates through long-term supply arrangements. The cyclicality of the markets for our primary products, however, subjects us to periods of overcapacity accompanied by lower prices and profit margins. In addition, the instruments governing our outstanding debt limit our ability to incur additional debt to finance additional acquisitions and other expenditures. These and other factors may limit our ability to successfully implement our business strategy. RECENT DEVELOPMENTS During fiscal 1999, we reduced our pulp chemicals workforce by approximately 50 employees and reduced our Texas City facility and corporate office workforce by approximately 140 employees. We also completed a new labor contract with our unionized employees at our Texas City facility in December of 1998, which allows reduced staffing levels and improved work practices. In connection with these workforce reductions and new labor contract, we took one-time non-cash pre-tax charges of approximately $11 million in fiscal 1999. We expect these actions to generate combined annual savings of approximately $11 million to $13 million. We cannot, however, give you any assurance of the level of savings that will actually be achieved. We entered into several agreements with Monsanto Company on October 22, 1999, related to the construction by Monsanto of a new disodium iminodiacetate, or "DSIDA", plant at our Texas City facility. DSIDA is an essential intermediate in the production of Monsanto's Roundup(R), a glyphosate based herbicide. We believe the DSIDA project, as currently planned, could generate additional annual cash flows of up to $8 million, depending on operating rates and market conditions. We cannot, however, give you any assurance that the DSIDA project will generate any specific amount of additional cash flows. 2 5 On July 23, 1999, we completed a private offering of $295,000,000 of 12 3/8% Senior Secured Notes due 2006. In addition, on July 23, 1999, we established two new secured revolving credit facilities providing for up to $155,000,000 in revolving credit loans under a single revolving credit agreement. The proceeds from the sale of the 12 3/8% Notes and the initial borrowings under these revolving credit facilities were used to fully repay and terminate Chemicals' prior senior credit facility. During the fourth quarter of fiscal 1999, we recorded pre-tax non-cash impairment expense related to our methanol plant of $26.4 million. This impairment was precipitated in part by recently enacted legislation in the State of California, and similar legislation proposed by other States and the Environmental Protection Agency's Blue Ribbon Panel, mandating the rapid phase-out of MTBE in reformulated gasoline. The MTBE market consumes a significant portion of the methanol produced in the United States. The impairment of our methanol plant also reflects the competitive advantage that foreign methanol producers have over domestic methanol producers due to the significant disparity between prices for foreign and domestic natural gas, one of the primary raw materials for methanol. Selling prices and margins for styrene, which have a profound effect on our earnings, have increased significantly during the first quarter of fiscal 2000 as a result of increased global demand and restrictions on supply of these products. We cannot, however, be sure that these increases can be sustained or whether prices and margins will increase or decrease in the future. INDUSTRY OVERVIEW The primary markets in which we compete, especially styrene and acrylonitrile, are cyclical and are sensitive to several factors including: o changes in the balance between supply and demand; o the price of raw materials; and o the level of general worldwide economic activity. Historically, these markets have experienced alternating periods of tight supply and rising prices and profit margins, followed by periods of large capacity additions resulting in overcapacity and declining prices and profit margins. During the last several years large global capacity additions of styrene and acrylonitrile and events in the financial markets in certain Asian countries have had a negative impact on sales volumes, prices, and margins, particularly for styrene and acrylonitrile. Petrochemicals Styrene. The global styrene capacity is approximately 45 billion pounds. Total North American styrene capacity is currently approximately 13 billion pounds per year. Similar to other petrochemicals, styrene tends to experience periods of strong demand resulting in tight supply and high prices and margins. This tight balance in supply and demand often results in new capacity additions. In most cases, incremental capacity comes in the form of large new plants or major expansions of existing facilities. As this new capacity comes on line, it often exceeds current demand growth and results in a decline in prices and margins. The North American styrene industry ran at high utilization rates during 1994 and 1995, resulting from strong demand growth from worldwide economic expansion. Strong demand growth and high utilization rates resulted in high styrene prices and margins. In response to favorable market conditions, several major producers announced new capacity increases in 1997 and 1998, particularly in the Far East. At the time of this announced new capacity, there was a general slowdown in the worldwide economic growth rate, prompting customers to begin utilizing their available inventories and decrease purchases of additional product. As a result, our styrene prices declined by approximately 41% from fiscal 1995 to fiscal 1996. This decline in styrene pricing intensified in fiscal 1997 and fiscal 1998, as the previously announced new capacity came on line at the same time that economic events in various Asian countries significantly reduced demand growth for styrene. In light of conditions at the time, several planned capacity expansion programs, including announced plans by Dow Chemical Company, Chevron Chemical Company, and Huntsman Corporation, were either canceled or delayed in 1998. Except for 1998, when the Asian economic crisis impacted demand growth for all petrochemical products, styrene demand growth has significantly exceeded growth in global GDP since 1985. 3 6 During the first quarter of fiscal 2000, styrene prices and margins have increased significantly from levels experienced in fiscal 1999. These improvements were driven by a combination of increased demand from Asia and operating problems at several styrene plants. We cannot, however, be sure that these increases can be sustained or whether prices and margins will increase or decrease in the future. Acrylonitrile. Global acrylonitrile capacity is currently approximately 12 billion pounds per year. The acrylonitrile market exhibits similar characteristics regarding capacity utilization, selling prices, and profit margins as those of styrene. Moreover, as a result of our high percentage of export acrylonitrile sales, demand for our acrylonitrile is significantly influenced by export customers, particularly those that supply acrylic fibers to customers in China. During 1995, strong demand for acrylic fibers and ABS resins, particularly in China, increased demand for acrylonitrile resulting in high prices and margins. High utilization rates and prices prompted many major producers to announce new capacity increases and approximately two billion pounds of capacity increases came on line between 1996 and 1998. At the same time, acrylonitrile demand began to weaken in late 1995 for many of the same reasons that caused the deterioration in the styrene market. As new acrylonitrile capacity in the United States and Asia came on line and demand growth in Asian markets weakened, acrylonitrile prices and margins decreased significantly from 1996 through 1999. Solutia Inc. is constructing a new acrylonitrile production facility in North America, which is expected to have a rated annual production capacity of approximately 500 million pounds and which is currently expected to begin production in the third calendar quarter of 2000. Acrylic Fibers. We and Solutia Inc. are only two manufacturers of acrylic fibers in North America. In general, the two acrylic fibers producers sell to different customers and focus on different segments of the market. Acrylic fibers compete with other fibers, including polyester and wool. During 1998 and 1999, the acrylic fibers industry experienced decreased sales prices and margins due to a significant drop in the demand for acrylic fibers products, which resulted from the economic events in various countries in Asia and increased competition from European suppliers. Acetic Acid. United States acetic acid capacity is currently 6.5 billion pounds per year. Several capacity additions occurred in 1998 and 1999, including an expansion of our acetic acid unit in Texas City from 800 million pounds of rated annual production capacity to 1 billion pounds. BP Chemicals Inc. and Celanese AG are each building 1.1 billion pound acetic acid production units in Malaysia and Singapore, respectively. These units are expected to startup in mid 2000. Demand for acetic acid is linked to demand for vinyl acetate monomer, a key intermediate in the production of a wide array of polymers. Plasticizers. Our rated plasticizers capacity is 280 million pounds per year. We have an agreement with BASF pursuant to which we sell all of our plasticizers production to BASF through 2007. Pulp Chemicals Sodium Chlorate. Historically, sodium chlorate has experienced cycles in capacity utilization, selling prices, and profit margins, although not to the extremes seen in the petrochemicals markets. Since the mid-1980s, North American demand for sodium chlorate has grown at an average annual rate of approximately 9% as pulp mills have accelerated substitution of chlorine dioxide for elemental chlorine in bleaching applications. Substitution of chlorine dioxide for elemental chlorine is driven primarily by environmental concerns. Chlorine dioxide is produced from sodium chlorate, which is one of our primary pulp chemicals products. The Environmental Protection Agency recently instituted new regulations known as "Cluster Rules," which mandate the elimination of elemental chlorine usage in bleaching applications, resulting in increased substitution of chlorine dioxide for elemental chlorine by the North American pulp and paper industry. In 1998 and 1999, demand for sodium chlorate did not increase at historical rates as a result of weak market conditions and lower operating rates in the pulp and paper industry. United States operating rates remained flat from 4 7 1998 to 1999 and average prices for our sodium chlorate decreased by approximately 8% from fiscal 1998 to fiscal 1999. We and two other companies collectively account for more than 70% of North American sodium chlorate production capacity. PRODUCT SUMMARY The following table summarizes our principal products, including our capacity, primary end uses, raw materials, and major competitors for each product. "Capacity" represents rated annual production capacity at September 30, 1999, which is calculated by estimating the number of days in a typical year a production facility is expected to operate after allowing for downtime for regular maintenance and multiplying that number by an amount equal to the facility's optimal daily output based on the design feedstock mix. As the capacity of a facility is an estimated amount, actual production may be more or less than capacity.
STERLING PRODUCT INTERMEDIATE (CAPACITY) PRODUCTS PRIMARY END PRODUCTS RAW MATERIALS MAJOR COMPETITORS - ----------------- -------------------- ----------------------------- --------------------- ----------------------------- PETROCHEMICALS Styrene Polystyrene, Building products, boat and Ethylene and benzene Dow Chemical Company, (1.7 billion ABS/SAN resins, automotive components, Lyondell Chemical pounds per year) styrene butadiene disposable cups and trays, Company, Amoco latex, and packaging and containers, Chemical Company, unsaturated and housewares, tires, audio and Chevron Chemical polyester resins video cassettes, luggage, Company, Cos-Mar (a children's toys, paper joint venture of General coating, appliance parts, and Electric Company and carpet backing FINA Inc.), and Nova Corporation Acrylonitrile Acrylic fibers and Apparel, furnishings, Ammonia and BP Chemicals Inc., Cytec (740 million ABS/SAN resins upholstery, household propylene Industries Inc., E.I. du Pont pounds per year) appliances, carpets, and de Nemours and Company, Asahi plastics for automotive parts Chemical Industry Company, using ABS and SAN Ltd., EC Erdoelchemie GmbH, polymers and Solutia Inc. Acrylic Fibers NA Apparel, fleece, hosiery, Acrylonitrile, vinyl Solutia Inc. (150 million industrial, sweaters, pile acetate, sodium pounds per year) fabrics, outdoor furniture, thiocyanate, sodium friction materials, gaskets, bisulfate, and finish specialty papers, and oil non-wovens Acetic Acid Vinyl acetate, Adhesives, PET bottles, Methanol and carbon Celanese AG, Eastman (1 billion terephthalic acid, fibers, and surface coatings monoxide Chemical Company, and pounds per year) and acetate solvents Millennium Chemicals Inc. Methanol Acetic acid, Adhesives, cigarette filters, Natural gas, steam, Methanex Corporation, (150 million MTBE, and surface coatings, and carbon dioxide Borden Chemical, gallons per year) formaldehyde gasoline oxygenate and Lyondell Methanol octane enhancer, and Company, L.P., Celanese plywood adhesives AG, and Terra Industries Plasticizers Polyvinyl chloride Flexible plastics, such as Alpha-olefins, carbon Exxon Corporation, (280 million (PVC) shower curtains and liners, monoxide, hydrogen, Aristech Chemical, and pounds per year) floor coverings, cable and orthoxylene Eastman Chemical insulation, upholstery, and Company plastic molding TBA NA Pesticides, solvents, Isobutylene, sulfuric BASF Corporation and (21 million pharmaceuticals, and acid, caustic soda, Nitto Chemical Industry pounds per year) synthetic rubber and hydrogen cyanide Co., Ltd.
5 8
STERLING PRODUCT INTERMEDIATE (CAPACITY) PRODUCTS PRIMARY END PRODUCTS RAW MATERIALS MAJOR COMPETITORS - --------------------- ---------------- --------------------------- ------------------- ------------------------ Sodium Cyanide NA Electroplating and Caustic soda and (85 million precious metals recovery hydrogen cyanide pounds per year) PULP CHEMICALS Sodium Chlorate Chlorine dioxide Bleaching agent for pulp Electricity, salt, Akzo Nobel N.V., CXY (500,000 tons production; downstream and water Chemicals Ltd., Kerr per year) products include high McGee Corporation, and quality office and coated Huron Chemicals papers Chlorine Dioxide NA Chlorine dioxide for use NA Akzo Nobel, N.V. Generators in the bleaching of pulp Sodium Chlorite Chlorine dioxide Antimicrobial agent for Sodium chlorate and Vulcan Chemicals (3,500 tons per year) municipal water treatment hydrochloric acid and disinfectant for fresh produce Chlor Alkali NA Bleaching and digesting Electricity, salt, Occidental Chemical agent for pulp and paper, and water Company, Dow Chemical widely used in potable Company, and Pioneer water and wastewater Companies, Inc. treatment programs and in swimming pools Calcium Hypochlorite NA Sanitizing agent to control Lime, water, caustic Olin Corporation and PPG (8,500 metric bacteria and algae in soda, and chlorine Industries tons per year) swimming pools
PRODUCTS Petrochemicals Styrene. We are the fourth largest North American producer of styrene. Our styrene unit, located at our Texas City facility, is one of the largest in the world and has a rated annual production capacity of approximately 1.7 billion pounds, which represents approximately 12% of total North American capacity. We sold approximately 25% of our styrene sales volumes pursuant to conversion and other long-term agreements during fiscal 1999. Approximately 55% of our styrene sales volumes were exported in fiscal 1999, principally to Asia, either directly or through arrangements with large international trading companies. On March 3, 1999, we announced a capital project to upgrade our styrene plant at our Texas City facility. The project will reduce phenylacetylene, or "PA," in our styrene by employing Raytheon/Fina technology and a Criterion catalyst. PA is difficult to remove from styrene through conventional distillation, but the new technology has been demonstrated to selectively remove PA at a low processing cost and with reduced loss of styrene. We expect lower PA styrene to be a growing segment of the styrene market. We plan to invest approximately $7 to $8 million in this project. We began the process of upgrading our styrene production during the shutdown of our styrene unit in fiscal 1999 and we expect to be producing lower PA styrene product by December 31, 1999. Acrylonitrile. We are the second largest North American producer of acrylonitrile. Our acrylonitrile unit, located at our Texas City facility, has a rated annual production capacity of approximately 740 million pounds, which represents approximately 19% of total North American capacity. We sold approximately 44% of our acrylonitrile sales volumes pursuant to conversion and other long-term agreements during fiscal 1999. Approximately 50% of our acrylonitrile production in fiscal 1999 was exported. In April of 1998, ANEXCO, LLC, our joint venture with BP Chemicals Inc., commenced operations to market both companies' acrylonitrile in Asia and South America. We currently use a portion of our hydrogen cyanide, a by-product of acrylonitrile manufacturing, as a raw material for the production of TBA and sodium cyanide and we burn the rest as fuel. As previously discussed, we and Monsanto entered into several agreements related to the construction by Monsanto of a new DSIDA plant at our Texas City facility. The DSIDA plant will use our previously under-utilized hydrogen cyanide as a primary feedstock. When the DSIDA plant begins production, we expect to use all of our hydrogen cyanide for chemical value. Acrylic Fibers. We are one of two North American producers of acrylic fibers. Our acrylic fibers facility's rated annual production capacity is approximately 150 million pounds, which represents approximately 33% of total North American capacity. Approximately 14% of our acrylic fibers production was exported in fiscal 1999. We produce regular textile fibers, specialty textile fibers, and technical fibers. Regular textile fibers are commodity fibers whose sales are primarily driven by price and service rather than product characteristics. Specialty textile fibers are targeted for specific applications or end uses and typically have higher margins than regular textile fibers. Technical fibers are 6 9 specially engineered for industrial, non-textile uses such as brake linings and typically have higher margins than textile fibers. Acetic Acid. We are the second largest North American producer of acetic acid. Our acetic acid unit, located at our Texas City facility, has a rated annual production capacity of approximately 1 billion pounds, which represents approximately 16% of total North American capacity. All of our acetic acid production is sold to BP Chemicals pursuant to a long-term contract that expires in 2016. In March of 1999, we completed an expansion of our acetic acid facilities in conjunction with BP Chemicals. BP Chemicals is providing its Cativa(TM) technology and provided a significant portion of the capital for the expansion. The expansion increased our annual acetic acid production capacity by approximately 25% to our current rated annual capacity of 1 billion pounds. Methanol. In August of 1996, we and BP Chemicals completed construction of a methanol unit at our Texas City facility with a rated annual production capacity of approximately 150 million gallons. We share capital investment in the unit and production capacity with BP Chemicals. Approximately 54% of our methanol production was used as a raw material in our acetic acid unit during fiscal 1999, replacing methanol that was previously purchased from third parties. The remaining methanol is available for sale in the merchant market and for BP Chemicals' worldwide acetic acid business. In April of 1999, we restarted our methanol facility, which had been shut down since August of 1998 for the previously discussed economic reasons. We are currently evaluating the best use of our methanol facility given the current and projected market conditions. Plasticizers. We produce plasticizers at our Texas City facility under an agreement with BASF Corporation pursuant to which BASF is obligated to purchase all of our plasticizers production through 2007. Our rated annual production capacity of plasticizers is approximately 280 million pounds. TBA. We use a portion of our hydrogen cyanide by-product from our Texas City acrylonitrile facility to produce TBA, which we sell to Flexsys America L.P. pursuant to a long-term conversion agreement. The agreement automatically renews for successive one-year periods unless terminated by either party on at least 24 months notice. In December of 1999, Flexsys notified us of their intention to terminate the contract as of December 31, 2001. Our rated annual production capacity for TBA is approximately 21 million pounds. Sodium Cyanide. Pursuant to a long-term arrangement, we operate a sodium cyanide unit at our Texas City facility which is owned by E. I. du Pont de Nemours and Company. This sodium cyanide unit uses our hydrogen cyanide by-product from our Texas City acrylonitrile facility as a raw material. The rated annual production capacity of this unit is approximately 85 million pounds. Pulp Chemicals Sodium Chlorate. We are the second largest producer of sodium chlorate in North America. Our six sodium chlorate facilities have an aggregate rated annual production capacity of approximately 500,000 tons, which represents approximately 23% of total North American capacity. Chlorine Dioxide Generators. Through our ERCO Systems Group, we are the largest worldwide supplier of patented technology for generators that certain pulp mills use to convert sodium chlorate into chlorine dioxide. Each mill that uses chlorine dioxide requires at least one generator. We receive revenue when a generator is sold to a mill and also receive royalties from the mill after start-up, generally over a ten-year period, based on the amount of chlorine dioxide produced by the generator. We have supplied approximately two-thirds of all existing modern pulp mill generators worldwide. The research and development group of ERCO works to develop new and more efficient generators. When pulp mills move to higher levels of substitution of chlorine dioxide for elemental chlorine, they are usually required to upgrade generator capacity or purchase new generator technology. Pulp mills may also convert to a newer generator to take advantage of efficiency advances and technological improvements. Each upgrade or conversion requires a licensing agreement, which generally provides for payment of an additional ten-year royalty. Sodium Chlorite. We have a rated annual production capacity of sodium chlorite of approximately 3,500 tons. For historical information presented on a segmented basis for our petrochemicals business and pulp chemicals business, see Note 8 of the Notes to Consolidated Financial Statements included in this Form 10-K. 7 10 SALES AND MARKETING We sell our petrochemicals products pursuant to: o multi-year contracts; o conversion agreements; and o spot transactions in both the domestic and export markets. We have certain long-term agreements that provide for the dedication of 100% of our production of acetic acid, plasticizers, TBA, 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. These agreements help us to: o optimize capacity utilization rates, which can lower our selling, general, and administrative expenses; o reduce our working capital requirements; and o insulate our operations to some extent from the effects of declining markets and changes in raw materials prices. We compete on the basis of: o product price; o quality; and o deliverability. Prices for our petrochemicals products are determined by market factors that are largely beyond our control and, except with respect to a number of our multi-year contracts, we generally sell these products at prevailing market prices. Some of our multi-year contracts for our petrochemicals products are structured as conversion agreements, pursuant to which the customer furnishes raw materials that we process into finished products. In exchange, we receive a fee typically designed to cover our fixed and variable costs of production and to generally provide an element of profit dependent on the existing market conditions for the product. These conversion agreements help us to maintain lower levels of working capital and, in some cases, to gain access to certain improvements in manufacturing process technology. We believe our conversion agreements help insulate us to some extent from the effects of declining markets and changes in raw materials prices, while allowing us to share in the benefits of favorable market conditions for most of the products sold under these arrangements. The balance of our petrochemicals products are sold by our direct sales force or through ANEXCO, LLC, our marketing alliance with BP Chemicals. Our acrylic fibers facility currently markets products in North America through our internal sales staff and to international customers through non-affiliated agents. Acrylic fibers are priced based upon market conditions, which include, but are not limited to, raw materials costs, prices of competing and alternative products, and type of end use. We sell sodium chlorate primarily in Canada and the United States, generally under one to five-year supply contracts, most of which provide for minimum and maximum volumes or a percentage of requirements at market prices. In addition, most of our sodium chlorate sales contracts contain certain "meet or release" pricing clauses and some contain restrictions on the amount and timing of future price increases. We market chlorine dioxide generators worldwide to the pulp and paper industry. We sell the technology and equipment, which we design and purchase from our strategic alliance partners. In addition to being paid for the technology and equipment, we receive royalties based on the amount of chlorine dioxide produced by the generator, generally over a ten-year period. 8 11 For information regarding our export sales and domestic and foreign operations, see Note 8 of the Notes to Consolidated Financial Statements included in this Form 10-K. CONTRACTS Our key multi-year contracts, which collectively accounted for 26% of our fiscal 1999 revenues, are described below. BP Chemicals accounted for approximately 10% and 12% of our revenues in fiscal 1999 and 1998, respectively. No other single customer accounted for more than 10% of our revenues in the last three fiscal years. Styrene-Bayer We are currently operating under a conversion agreement, effective through December 31, 2000, with Bayer Corporation, a subsidiary of Bayer AG. Under this agreement, we provide Bayer, subject to specified minimum and maximum quantities, with a major portion of Bayer's styrene requirements for its manufacture of styrene-containing polymers. This agreement permits Bayer to terminate its obligations upon twelve months' notice to us should Bayer sell its business that uses styrene or assign the agreement, subject to our consent, to any third-party purchaser of its business. During fiscal 1999, we delivered approximately 12% of our styrene production pursuant to this agreement. Acrylonitrile-Solutia We have a multi-year conversion agreement with Solutia, formerly the chemical business of Monsanto Company, pursuant to which we delivered approximately 25% of our fiscal 1999 acrylonitrile production. Solutia is constructing a new acrylonitrile production facility in Chocolate Bayou, Texas, which is expected to have a rated annual production capacity of approximately 500 million pounds and which is currently expected to begin production in the third calendar quarter of 2000. In anticipation of the start-up of such facility, Solutia has elected to terminate our conversion agreement, effective September 1, 2000. Acrylonitrile-Cytec In connection with the acquisition of our acrylic fibers facility from Cytec Industries Inc. on January 31, 1997, we assumed an existing supply contract for acrylonitrile pursuant to which our acrylic fibers facility purchases its requirements for acrylonitrile from Cytec. Upon the expiration of this supply contract on February 28, 2002, we expect to supply all of the acrylonitrile requirements of our acrylic fibers facility from our Texas City facility. Acrylonitrile-BP Chemicals In 1988, we entered into a long-term production agreement with BP Chemicals, under which BP Chemicals contributed the majority of the capital expenditures required for starting the third acrylonitrile reactor train at our Texas City acrylonitrile facility. Under this agreement, BP Chemicals has the option to take up to approximately one-sixth of our total acrylonitrile capacity. BP Chemicals furnishes the necessary raw materials and pays us a conversion fee for the amount of acrylonitrile it takes and reimburses us for a portion of the fixed costs related to acrylonitrile production at our Texas City facility. To protect BP Chemicals in the event we default under the production agreement, BP Chemicals has a first priority security interest in the third reactor and related equipment and in the first acrylonitrile produced in our three reactor units to the extent BP Chemicals is entitled to purchase acrylonitrile under this production agreement. This agreement was amended and restated during April of 1998 to, among other things, encourage increased manufacturing and technical cooperation. During fiscal 1999, we delivered approximately 11% of our acrylonitrile production to BP Chemicals pursuant to this agreement. The acrylonitrile reactor in which BP Chemicals invested capital incorporates certain BP Chemicals technological improvements under a separate license agreement. We have the right to incorporate these and any future improvements into our other two acrylonitrile reactors. In order to enhance the marketing of our acrylonitrile, we and BP Chemicals formed ANEXCO, LLC, an exclusive 50/50 joint venture to market acrylonitrile in Asia and South America. During fiscal 1999, we sold approximately 35% of our acrylonitrile production through ANEXCO. 9 12 Acetic Acid-BP Chemicals BP Chemicals has the exclusive right to purchase all of our acetic acid production until August of 2016. Under our agreement with BP Chemicals, which has been in effect since August of 1986, BP Chemicals is obligated to make certain unconditional monthly payments to us until August of 2006 and to reimburse us for our operating costs. In addition, we are entitled to receive a portion of the profits earned by BP Chemicals from the sale of the acetic acid we produce. Methanol-BP Chemicals In August of 1996, we entered into a long-term production and sales agreement with BP Chemicals, under which BP Chemicals contributed a significant portion of the capital expenditures required for the construction of our methanol production facility at our Texas City facility and obtained the right to receive a substantial portion of our methanol production. The initial term of this agreement expires July 31, 2016. A portion of the output of the methanol facility is used in our acetic acid unit and the remainder is marketed by BP Chemicals in the merchant market and in BP Chemicals' worldwide acetic acid business. In April of 1999, we restarted our methanol facility, which we had shut down in August of 1998 for economic reasons. A significant disparity between domestic and foreign prices for natural gas, one of the primary raw materials for methanol, has put us and other domestic methanol producers at a disadvantage when compared to foreign competitors. One of the primary uses of methanol is in the production of MTBE, which is used in reformulated gasolines. The State of California has recently announced that MTBE must be phased out of reformulated gasoline used in California by December 31, 2002. In addition, in July of 1999, the Environmental Protection Agency announced that it would ask Congress to develop legislation aimed at phasing out MTBE from the existing reformulated-gas program, and to give States the authority to ban MTBE completely. These developments are likely to negatively impact the domestic methanol market. We are currently evaluating the best use of our methanol facility given the current and projected market conditions. Plasticizers-BASF We sell all of our plasticizers production to BASF pursuant to a product sales agreement that has been in effect since August 1, 1986. In November of 1997, we signed a new agreement with BASF that expires at the end of 2007. BASF provides us with some of the required raw materials and markets the plasticizers we produce. BASF is obligated to make certain quarterly payments to us and reimburses us monthly for actual production costs. In addition, we are entitled to a share of the profits earned by BASF attributable to the plasticizers we produce. RAW MATERIALS FOR PRODUCTS AND ENERGY RESOURCES For most of our products, the cost of raw materials, including utilities in the case of pulp chemicals, is far greater than all other production costs combined. Thus, an adequate supply of raw materials and utilities at reasonable prices is critical to the success of our business. Most of the raw materials we use are global commodities which are made by a large number of producers. Prices for many of these raw materials are subject to wide fluctuations for a variety of reasons beyond our control. Although we believe that we will continue to be able to secure adequate supplies of our raw materials and energy at acceptable prices to meet our requirements, there can be no assurance that we will be able to do so. Petrochemicals Styrene. We manufacture styrene by converting ethylene and benzene into ethylbenzene, which we then process into styrene. Ethylene and benzene are both commodity petrochemicals. Prices for each can fluctuate widely due to significant changes in the availability of these products. We have had multi-year arrangements with three ethylene suppliers that provide our estimated requirements for purchased ethylene at generally prevailing and competitive market prices. Each of these arrangements expires between December of 1999 and February of 2000. However, we are currently negotiating to renew or replace these arrangements and expect to do so on terms that are, in the aggregate, at 10 13 least as favorable as the current arrangements, although we can give no assurances to that effect. Our conversion agreements require that the other parties to these agreements furnish us with the ethylene and benzene necessary to fulfill our conversion obligations. Approximately 15% of our fiscal 1999 benzene requirements and approximately 15% of our fiscal 1999 ethylene requirements were furnished by customers pursuant to conversion arrangements. Acrylonitrile. We produce acrylonitrile by reacting propylene and ammonia. Propylene and ammonia are both commodity chemicals and the price for each can fluctuate widely due to significant changes in the availability of these products. The requisite propylene and ammonia for the acrylonitrile we produce under conversion agreements is furnished to us by the customers. We purchase the rest of the propylene and ammonia we need for acrylonitrile production. Approximately 47% of our fiscal 1999 propylene requirements and approximately 42% of our fiscal 1999 ammonia requirements were furnished by customers pursuant to conversion agreements. If various customers for whom we now manufacture acrylonitrile under conversion agreements were to cease furnishing their own raw materials and seek only to purchase acrylonitrile from us without supplying their own raw materials, our requirements for purchased propylene and ammonia could significantly increase. Acrylic Fibers. Acrylonitrile is the most significant raw material used in the production of acrylic fibers, representing approximately 50% of the total cash cost of production. Pursuant to our supply agreement with Cytec, which we assumed in connection with our purchase of the acrylic fibers facility from Cytec, our acrylic fibers facility is required to purchase all of its acrylonitrile requirements from Cytec until February 28, 2002. After this agreement expires, we expect to supply the acrylonitrile requirements of our acrylic fibers facility from our Texas City acrylonitrile facility. Acetic Acid. Acetic acid is manufactured primarily from carbon monoxide and methanol. We normally produce all of the methanol required by our acetic acid unit. However, we are currently exploring other uses of our methanol facility which could include the purchase of our methanol requirements from third parties. In 1996, Praxair Hydrogen Supply, Inc. constructed a partial oxidation unit at our Texas City facility that supplies us with all of the carbon monoxide we require for the production of acetic acid. This unit was recently expanded in conjunction with the expansion of our acetic acid unit. Methanol. We produce methanol primarily from natural gas and steam. We obtain our natural gas under supply contracts and on the spot market, typically at prevailing market prices, and we produce our own steam. Plasticizers. The primary raw materials for plasticizers are alpha-olefins and orthoxylene, which are supplied by BASF under our long-term conversion agreement. TBA. We produce TBA from hydrogen cyanide, isobutylene, sulfuric acid, and caustic soda. We use hydrogen cyanide produced as a by-product of our acrylonitrile manufacturing process. Flexsys supplies the isobutylene, sulfuric acid, and caustic soda needed in our TBA operations under our long-term conversion agreement. Sodium Cyanide. Sodium cyanide is manufactured from hydrogen cyanide and caustic soda. We use hydrogen cyanide produced as a by-product of our acrylonitrile manufacturing process. DuPont supplies the caustic soda under our long-term conversion agreement. Pulp Chemicals Sodium Chlorate. Sodium chlorate is manufactured by passing an electric current through an undivided cell containing a solution of sodium chloride. The primary raw materials for the production of sodium chlorate are electricity, salt, and water. Of these, electric power typically represents approximately 65% of the variable cost of production of sodium chlorate. Consequently, the rates charged by local electric utilities are an important competitive factor among sodium chlorate producers. Electric power is purchased by each of our pulp chemicals facilities pursuant to contracts with local electric utilities. On average, we believe that our electrical power costs at our pulp chemical facilities are competitive with other producers in the areas in which we operate. We purchase most of the sodium chloride that we use in the manufacture of sodium chlorate under requirements contracts with major suppliers. 11 14 TECHNOLOGY AND LICENSING Petrochemicals In 1986, Monsanto granted us a non-exclusive, irrevocable, and perpetual right and license to use Monsanto's technology and other technology Monsanto acquired through third-party licenses in effect at the time of the acquisition of our Texas City facility from Monsanto. We use these licenses in the production of styrene, acrylonitrile, methanol, TBA, acetic acid, and plasticizers. During 1991, BP Chemicals Ltd. ("BPCL") purchased the acetic acid technology from Monsanto, subject to existing licenses. On December 30, 1997, we entered into an Acetic Acid Technology Agreement with BP Chemicals and BPCL, pursuant to which BPCL granted us a non-exclusive, irrevocable, and perpetual right and license to use BPCL's acetic acid technology at our Texas City facility, including any new acetic technology developed by BPCL at its acetic acid facilities in England during the term of such agreement or pursuant to the research and development program provided by BPCL under the terms of such agreement. This agreement was recently amended to encompass the acetic acid technology of some of BPCL's affiliates. BPCL has also granted us a non-exclusive, irrevocable, and perpetual royalty-free license to use its acrylonitrile technology at our Texas City facility as part of the 1988 acrylonitrile expansion project. This license automatically terminates upon the termination of our acrylonitrile production agreement with BP Chemicals. We have agreed with BPCL to cross-license any technology or improvements relating to the manufacture of acrylonitrile at our Texas City facility. We believe that the manufacturing processes we utilize at our Texas City facility are cost effective and competitive. Although we do not engage in alternative process research with respect to our Texas City facility, we do monitor new technology developments and, when we believe it is necessary, we typically seek to obtain licenses for process improvements. We own substantially all of the technology used in our acrylic fibers operations. We license certain of our acrylic fibers manufacturing technology to producers worldwide. We hope to capitalize on increasing demand for this technology as developing countries seek to increase acrylic fibers production capacity. Approximately 15% of the world's total acrylic fibers capacity is based on our technology. The competitiveness of our acrylic fibers business with respect to our specialty textiles and technical fibers products, which are our higher margin products, is maintained, to a significant extent, through the exclusive ownership or use of our product and manufacturing technology. If our competitors gain access to the use of similar technology, or render our technology obsolete through the introduction of superior technology, our ability to compete would be materially affected in an adverse manner. Pulp Chemicals We produce sodium chlorate using state-of-the-art metal cell technology. Our principal technology business is the design, sale, and technical service of custom-built patented chlorine dioxide generators. Our ERCO engineering group is involved in the technical support of our sales and marketing group through joint calling efforts which define the scope of a project, as well as producing technical schedules and cost estimates. We perform detailed design of chlorine dioxide generators, which are then fabricated by contractors. Plant installation, instrumentation testing, and generator start-up are supervised by our joint engineering/technical service team. Prior to 1996, we were involved in a number of patent disputes with Akzo Nobel, N.V. regarding chlorine dioxide technology. In 1996, we reached a settlement of these disputes that allows licensees of both companies to operate their respective chlorine dioxide generators within the broadest range of operating conditions. Our pulp chemicals research and development activities are carried out at our Toronto, Ontario laboratories. Activities include the development of new or improved chlorine dioxide generation processes and research into new technologies focusing on electrochemical and membrane technology related to chlorine dioxide, including improvement of quality and reduction of quantity of pulp mill effluents and treatment of municipal water supplies. COMPETITION The industries in which we operate are highly competitive. Many of our competitors, particularly in the petrochemicals industry, are larger and have substantially greater financial resources than we have. Among our competitors are some of the world's largest chemical companies that, in contrast to us, have their own raw materials resources. In addition, a significant portion of our business is based upon widely available technology. The entrance of new competitors into the industry and the addition by existing competitors of new capacity could have a negative 12 15 impact on our ability to maintain existing market share or maintain or increase profit margins, even during periods of increased demand for our products. You can find a list of our principal competitors in the "Product Summary" table. Historically, profitability of the petrochemicals industry has been affected by vigorous price competition, which may intensify due to, among other things, new domestic and foreign industry capacity. Our businesses are subject to changes in the world economy, including changes in currency exchange rates. In general, weak economic conditions, either in the United States or worldwide, tend to reduce demand and put pressure on the margins for our products. Beginning in fiscal 1997, economic events in various Asian countries negatively impacted the demand growth for our products and, along with increases in supply, had a negative impact on sales volumes, prices, and margins. Operations outside the United States are subject to the economic and political risks inherent in the countries in which they operate. Additionally, the export and domestic markets can be affected significantly by import laws and regulations. During fiscal 1999, our export sales were approximately 28% of our total revenues. It is not possible to predict accurately how changes in raw materials costs, market conditions, or other factors will affect future sales volumes, prices, and margins for our products. ENVIRONMENTAL MATTERS General 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 manufacture, handling, processing, distribution, and use of our chemical 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. We conduct environmental management programs designed to maintain compliance with applicable environmental requirements at all of our facilities. We routinely conduct inspection and surveillance programs designed to detect and respond to leaks or spills of regulated hazardous substances and to correct identified regulatory deficiencies. We believe that our procedures for waste handling are consistent with industry standards and applicable requirements. In addition, we believe that our operations are consistent with good industry practice through participation in the Responsible Care initiatives as a part of membership in the Chemical Manufacturers Association in the United States and the Canadian Chemical Producers Association. However, a business risk inherent with chemical operations is the potential for personal injury and property damage claims from employees, contractors and their employees, and nearby landowners and occupants. While we believe 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, and 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. Our operating expenditures for environmental matters, mostly waste management and compliance, were approximately $30 million for fiscal 1999 and $52 million for fiscal 1998. We also spent approximately $6 million for environmentally related capital projects in fiscal 1999 and $2 million for these types of capital projects in fiscal 1998. In fiscal 2000, we anticipate spending approximately $8 million for capital projects related to waste management and environmental compliance. There are no capital expenditures related to remediation of environmental conditions projected for fiscal 2000. In light of our historical expenditures and expected future results of operations, we believe we will have adequate resources to conduct our operations in compliance with applicable environmental and health and safety requirements. Nevertheless, we may be required to make significant site and operational modifications that are not currently contemplated in order to comply with changing facility permitting requirements and regulatory standards. Additionally, we have incurred and may continue to incur liability for investigation and cleanup of waste or contamination at our own facilities or at facilities operated by third parties where we have disposed of waste. We continually review all estimates of potential environmental liabilities but can give no assurances that all potential liabilities arising out of our past or 13 16 present operations have been identified or fully assessed or that the amount necessary to investigate and remediate such conditions will not be significant to us. We believe that we would be able to recover certain losses that may arise out of claims related to environmental conditions at each of our facilities that existed prior to their acquisition by us through contractual indemnities and/or statutory law and common law principles, although there can be no assurance that we would prevail against any prior owner of any of our facilities with respect to any such claim. Petrochemicals Air emissions from our Texas City facility and our acrylic fibers facility are subject to certain permit requirements and self-implementing emission limitations and standards under state and federal laws. Our Texas City facility is located in an area that the Environmental Protection Agency has classified as not having attained the ambient air quality standards for ozone, which is controlled by direct regulation of volatile organic compounds and nitrogen oxide. The Texas Natural Resource Conservation Commission has imposed strict requirements on regulated facilities, including our Texas City facility, to ensure that the air quality control region will achieve the ambient air quality standards for ozone. Our acrylic fibers facility is located in an area currently designated as being in attainment for ozone under the Clean Air Act. Our Texas City facility and our acrylic fibers facility are subject to the federal government's June 1997 National Ambient Air Quality Standards which lower the ozone and particulate matter threshold for attainment. Local authorities also may impose new ozone and particulate matter standards. Compliance with these stricter standards may substantially increase our future nitrogen oxide and particulate matter control costs, the amount and full impact of which cannot be determined at this time. To reduce the risk of offsite consequences from unanticipated events, we acquired a greenbelt buffer zone adjacent to our Texas City facility in 1991 and, in connection with the acquisition of our acrylic fibers facility, acquired a greenbelt area for our acrylic fibers facility. We also participate in a regional air monitoring network to monitor ambient air quality in the Texas City community. These programs are part of our commitment to the Responsible Care initiatives of the Chemical Manufacturers Association, Inc. A December 1994 Florida Department of Environmental Protection waiver for use of an onsite nonhazardous landfill applies to our acrylic fibers facility. This waiver was obtained in connection with Cytec's July 1994 petition for a rulemaking to avoid a January 1995 rule prohibiting disposal of industrial waste in other than a Class I landfill. Upon consummation of the acquisition of the acrylic fibers business, we succeeded to the rights of Cytec under that petition and waiver. Should the petition be denied or the waiver be revoked, there are administrative options available to us. However, we do not believe the additional cost of sending all of our waste to an offsite facility would have a material adverse impact on us if that were required. A settlement agreement entered into by the Environmental Protection Agency, the Florida Department of Environmental Protection, and an environmental group may also potentially apply to our acrylic fibers facility. This settlement agreement imposes a no-migration standard for injection wells in underground drinking water zones without regard to actual risk considerations. We and several similarly situated companies have been contesting this settlement. An April of 1999 ruling by the United States Court of Appeals for the 11th Circuit may reduce the likelihood that the no-migration rule becomes enforceable, although we can give you no assurance in that regard. In the event that the no-migration rule becomes enforceable, we may incur material costs in redesigning our waste water handling systems. One of the primary uses of methanol is in the production of MTBE used in reformulated gasolines. The State of California has recently announced that MTBE must be phased out of reformulated gasoline used in California by December 31, 2002. In addition, in July of 1999, the Environmental Protection Agency announced that it would ask Congress to develop legislation aimed at phasing out MTBE from the existing reformulated-gas program, and to give States the authority to ban MTBE completely. These developments are likely to negatively impact the domestic methanol market. Pulp Chemicals Our pulp chemicals business is sensitive to potential environmental regulations. On November 14, 1997, the Environmental Protection Agency enacted regulations that support substitution of chlorine dioxide for elemental chlorine in paper pulp bleaching processes to reduce the amount of absorbable organic halides and other chlorine derivatives in bleach plant effluent. Chlorine dioxide is produced from sodium chlorate, which is one of our pulp 14 17 chemicals products. Therefore, regulations restricting, but not altogether banning, absorbable organic halides and other chlorine derivatives in bleach plant effluent have a favorable effect on our business. Conversely, a significant ban on all chlorine containing compounds could have a materially adverse effect on us. 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. 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 this regulation will be changed. In the event such a regulation is implemented, we would seek to sell the products we manufacture at our British Columbia facility to customers in other markets. We are not aware of any other laws or regulations in place in North America that would restrict the use of such products for other purposes. We acquired four of our Canadian pulp chemicals facilities from Tenneco Canada, Inc. in 1992. Groundwater data obtained during the acquisition of these facilities indicated elevated concentrations of certain chemicals in the soil and groundwater. Prior to completion of the acquisition, we conducted a focused baseline sampling of groundwater conditions beneath the facilities and confirmed the previous data. We have addressed or are addressing elevated soil or groundwater concentrations of chemicals that we have encountered from time to time at these facilities. We also reviewed air emissions sources during the acquisition of these facilities and considered all available dustfall and vegetation stress studies. This review indicated emission excursion episodes at specific locations in the scrubber systems at the Thunder Bay, Buckingham, and Vancouver facilities. The conditions at these three sites have been addressed and satisfactorily resolved. We believe that all four of these facilities are otherwise in compliance in all material respects with all permit requirements under applicable provincial law. EMPLOYEES As of September 30, 1999, we had approximately 1,180 employees, including approximately 790 assigned to our petrochemicals operations and approximately 390 assigned to our pulp chemicals operations. Approximately 37% of our employees are covered by union agreements. The primary union agreement at our Texas City facility is with the Texas City, Texas Metal Trades Council, AFL-CIO, of Galveston County, Texas, which covers all hourly employees at our Texas City facility. This agreement was renegotiated as of December 28, 1998 and will expire on May 1, 2002. Employees at our Vancouver facility are represented by the Pulp, Paper, and Woodworkers Union. The Vancouver labor agreement was renegotiated in November of 1997 and is subject to further renegotiation in November of 2000. Employees at our Buckingham facility are represented by either the Communications, Energy, and Paperworkers Union or an office and professional workers union. Both Buckingham labor agreements were renegotiated in November of 1997 and are subject to renegotiation in November of 1999. We are currently negotiating new Buckingham labor agreements. Approximately 75% of the employees at our Saskatoon facility are represented by the Communications, Energy, and Paperworkers of Canada. Our collective agreement with this union expires September 30, 2001. In April of 1998, production and maintenance workers at our Valdosta facility voted to be represented by the United Paper Workers International Union. However, on October 1, 1999, these workers voted to decertify that union. Although we believe our relationship with our employees is generally good, a strike by one or more of the unions representing our employees could have a material adverse effect on us. INSURANCE We maintain full replacement value insurance coverage for property damage to all of our facilities and business interruption insurance. Nevertheless, a significant interruption in the operation of one or more of our facilities could have a material adverse effect on us. We also maintain other insurance coverages for various risks associated with our business. There can be no assurance that we will not incur losses beyond the limits of, or outside the coverage of, our insurance. From time to time various types of insurance for companies in the chemical industry have been very expensive or, in some cases, unavailable. There can be no assurance that in the future we will be able to maintain our existing coverage or that premiums will not increase substantially. ITEM 2. PROPERTIES Our Texas City facility is located approximately 45 miles south of Houston in Texas City, Texas, on a 290-acre site on Galveston Bay near many other chemical manufacturing complexes and refineries. We have facilities to load our products in trucks, railcars, barges, and ocean-going tankers for shipment to customers. The site offers room for future expansion and includes a greenbelt around the northern edge of the plant site. We own or lease all of the real property 15 18 which comprises our Texas City facility and all of the equipment and facilities located there, other than the sodium cyanide unit which is owned by DuPont, a cogeneration facility owned by a joint venture between us and Praxair Energy Resources, Inc., and the partial oxidation unit constructed at the site by Praxair Hydrogen Supply, Inc. In addition, Monsanto will own the DSIDA plant being constructed at our Texas City facility. We also own storage facilities, approximately 200 rail cars, and an acetic acid barge in connection with our petrochemicals business. Our acrylic fibers facility is located on 1,100 acres near Pensacola in Santa Rosa County, Florida. We own all of the real property on which our acrylic fibers facility is situated and own or lease all of the facilities and equipment located there. We have recently entered into an agreement for the construction of a co-generation facility at our acrylic fibers facility that will be owned by Polsky Energy Corporation. Our pulp chemicals business includes five manufacturing facilities in Canada and our Valdosta, Georgia facility. We own the property on which our Buckingham, Quebec and Vancouver, British Columbia manufacturing facilities are located, with each site comprising approximately 20 acres. We also own the property on which our Saskatoon manufacturing facility is located, which consists of approximately 270 acres. We lease the property for our Thunder Bay, Ontario, and Grande Prairie, Alberta manufacturing facilities. Our Valdosta facility was constructed in conjunction with, and is leased from, the Valdosta-Lowndes County Industrial Authority. We also lease approximately 487 rail cars in connection with our pulp chemicals business. Headquarters for our pulp chemicals operations are located in Toronto, Ontario in an office building that we lease. We lease our principal executive offices, located in Houston, Texas. We believe our properties and equipment are sufficient to conduct our business. 16 19 ITEM 3. LEGAL PROCEEDINGS Ammonia Release On May 8, 1994, an ammonia release occurred at our Texas City facility while a reactor in our acrylonitrile unit was being restarted after a shutdown for routine maintenance. Approximately 52 lawsuits and interventions involving approximately 6,000 plaintiffs were filed against us seeking an unspecified amount of money for alleged damages from the ammonia release. Many of these lawsuits were filed in April and early May of 1996. Approximately 2,600 of the plaintiffs agreed to submit their damage claims to binding arbitration. A two-week evidentiary hearing was conducted in July of 1996 before an arbitration panel to determine the amount of damages. On May 1, 1997, the panel awarded the plaintiffs an amount of damages which was well within the limits of our insurance coverage. Thirty-nine of the plaintiffs tried their cases to a jury in Harris County District Court. After approximately five months of trial, the jury returned a verdict on September 2, 1997. The total amount awarded for all 39 plaintiffs was well within the limits of our insurance coverage. Over 5,900 of these claims have now been resolved or are pending final resolution, and we continue to vigorously defend against the claims of the approximately 20 remaining plaintiffs. We are engaged in ongoing settlement discussions with the remaining plaintiffs. We believe that all or substantially all of our future out-of-pocket costs and expenses, including settlement payments and judgments, relating to these claims will be covered by our liability insurance policies. We do not believe 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. The following ammonia lawsuits are outstanding: 1. Otis Pointer Jr., individually and on behalf of all others similarly situated, v. Sterling Chemicals, Inc., Paul Saunders, and an unknown chemical operator; Cause No. 94CV0514; In the 56th Judicial District Court of Galveston County, Texas. 2. Lilly Gordon, et al. v. Sterling Chemicals, Inc.; Cause No. 95-36592; In the 281st Judicial District Court of Harris County, Texas. The following ammonia lawsuits were settled or dismissed after September 30, 1998: 1. Holly Benefiel, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV0246; In the 56th Judicial District Court of Galveston County, Texas. 2. Versell Allums, et al. v. Sterling Chemicals, Inc., Paul Saunders, and an unknown chemical operator; Cause No. 95CV1017; In the 10th Judicial District Court of Galveston County, Texas. 3. Lee Arvie, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0431; In the 56th Judicial District Court of Galveston County, Texas. 4. Nita Moore, et al. v. Sterling Chemicals, Inc.; Cause No. 96-22420; In the 270th Judicial District Court of Harris County, Texas. 5. Gloria Cotton, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0446; In the 122nd Judicial District Court of Galveston County, Texas. 6. Timothy McClurkin, Sr. v. Sterling Chemicals, Inc.; Cause No. 96CV0451; In the 56th Judicial District Court of Galveston County, Texas. 7. Allen E. Kitchens v. Sterling Chemicals, Inc., et al.; Cause No. 43,352; In the Galveston County Court, Galveston County, Texas. Nickel Carbonyl Release On July 30, 1997, as our methanol unit at our Texas City facility was being shut down for repair, nickel carbonyl was formed when carbon monoxide reacted with nickel catalyst in the unit's reformer. After isolating the nickel carbonyl within the methanol unit, we worked with the permission and guidance of the Texas Natural Resources Conservation Commission to destroy the nickel carbonyl by incineration on-site. 17 20 Prior to its incineration, several of our employees and contractor employees may have been exposed to nickel carbonyl in the methanol unit. Two lawsuits and two interventions involving approximately 306 plaintiffs were filed against us seeking an unspecified amount for alleged damages from the nickel carbonyl release. Since the filing of the lawsuits, approximately 14 plaintiffs' claims (including one intervenor) have been resolved, some of which are subject to the completion of documentation, and we continue to vigorously defend against the claims of the approximately 292 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 On April 1, 1998, a chemical leak occurred when a line failed in the ethylbenzene unit at our Texas City facility. The released chemicals included ethylbenzene, benzene, polyethylbenzene, and hydrochloric acid. We do not believe any serious injuries were sustained, although a number of citizens sought medical examinations at local hospitals after a precautionary alert was given to neighboring communities. There are no lawsuits 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 judgements, related to this incident in excess of the deductible. Other Claims We are subject to various other claims and legal actions that arise in the ordinary course of our business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 18 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for our common stock, par value $.01 per share, although our common stock is traded on the OTC Electronic Bulletin Board maintained by the National Association of Securities Dealers, Inc. under the symbol "STXX." The following table sets forth the high and low bid information of our common stock as reported on the OTC Electronic Bulletin Board for the fiscal years ended September 30, 1999 and 1998.
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1999 High $7 $7 1/4 $7 $5 3/4 Low $4 $3 1/2 $5 $2 5/8 1998 High $13 $12 $9 1/2 $9 1/8 Low $11 $8 $8 $7
As of December 6, 1999, there were approximately 481 record holders of our common stock. We have not paid dividends on our common stock in any of the last three fiscal years and do not anticipate paying dividends in the foreseeable future. Any future determination as to the payment of dividends will be made at the discretion of our Board of Directors and will depend upon our operating results, financial condition, capital requirements, general business conditions, and such other factors that our Board of Directors deems relevant. The payment of dividends on our common stock is also restricted by the terms of the indenture governing our 13 1/2% Senior Secured Discount Notes due 2008 and the terms of both series of our outstanding preferred stock. In addition, our subsidiaries (including Chemicals) are parties to various debt agreements that limit their ability to provide funds to us by way of dividends, distributions, and advances. 19 22 ITEM 6. SELECTED FINANCIAL DATA OF HOLDINGS The following table sets forth selected financial data with respect to our consolidated financial condition and consolidated results of operations and should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and related notes in Item 8 of this Form 10-K.
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------------------------------- 1999 1998 1997(1) 1996(2) 1995 ----------- ----------- ----------- ----------- ----------- OPERATING DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues $ 720,752 $ 822,590 $ 908,787 $ 790,465 $ 1,030,198 Gross profit 38,158 77,267 85,522 102,168 263,083 Net income (loss) attributable to common stockholders(3) (112,712) (48,579) (28,965) 31,604 150,049 Net cash provided by (used in) operating activities (13,890) 45,884 47,314 63,601 191,838 Net cash used in investing activities (25,957) (26,622) (196,351) (95,957) (53,962) Net cash provided by (used in) financing activities 43,274 (15,238) 151,610 7,190 (109,017) EBITDA(4) 54,134 88,753 107,318 121,200 281,480 PER SHARE DATA: Net income (loss) per common share (8.94) (3.99) (2.58) 0.62 2.70 Cash dividends -- -- -- -- -- BALANCE SHEET DATA: Working capital $ 102,478 $ 91,910 $ 120,104 $ 76,933 $ 74,620 Total assets 775,099 765,956 878,971 689,684 609,939 Long-term debt (excluding current maturities) 964,555 873,616 876,281 714,632 103,581 Redeemable preferred stock 20,932 18,249 15,793 -- -- Stockholders' equity (deficiency in assets) (455,387) (348,179) (288,528) (272,439) 239,318
(1) During fiscal 1997 we acquired our acrylic fibers facility and our Saskatoon facility. See Note 7 of Notes to Consolidated Financial Statements for a discussion of these acquisitions. (2) In August of 1996 we recapitalized. (3) During fiscal 1999, we recorded pre-tax charges of $4 million for costs associated with workforce reductions, $7 million related to early retirement programs and benefit changes, and $26 million related to the impairment of our methanol production assets. During fiscal 1998, we recorded a pre-tax charge of $6 million for costs associated with workforce reductions. (4) EBITDA (earnings before interest, taxes, depreciation, amortization, stock appreciation rights ("SARs"), certain merger-related expenses, impairment of assets, and certain non-cash charges related to an early retirement program and benefit changes) is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. It is not intended as an alternative measure of performance to net income (loss). Because EBITDA excludes some, but not all, items that affect net income (loss) and may vary among companies, the EBITDA calculation presented above may not be comparable to similarly titled measures of other companies. SARs expense (income) was 20 23 $8,540,000 and $(2,767,000) for the years ended September 30, 1996 and 1995, respectively. Certain merger-related expenses were $3,633,000 for the year ended September 30, 1996. Certain non-cash charges related to an early retirement program and benefit changes were $6,781,000 for the year ended September 30, 1999. Non-cash charges related to the impairment of our methanol production assets was $26,368,000 for the year ended September 30, 1999. SELECTED FINANCIAL DATA FOR CHEMICALS The following table sets forth selected financial data with respect to Chemicals' consolidated financial condition and consolidated results of operations and should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Chemicals' Consolidated Financial Statements and related notes in Item 8 of this Form 10-K. All issued and outstanding shares of Chemicals are held by Holdings, and accordingly, per share data is not presented.
PERIOD FROM YEAR ENDED SEPTEMBER 30, MAY 14, 1996 ------------------------------------------ (DATE OF INCEPTION) 1999 1998 1997(1) TO SEPTEMBER 30, 1996(2) ---------- ---------- ---------- ------------------------ OPERATING DATA: (Dollars in Thousands) Revenues $ 720,752 $ 822,590 $ 908,787 $ 83,410 Gross profit 38,158 77,267 85,522 (1,659) Net income (loss) (94,722) (33,669) (14,851) 174 BALANCE SHEET DATA: Working capital $ 104,006 $ 91,997 $ 119,829 $ 77,299 Total assets 752,106 762,503 875,317 685,451 Long-term debt (excluding current maturities) 816,927 745,709 768,870 619,875 Stockholder's equity (deficiency in assets) (309,590) (220,445) (175,587) (184,302)
(1) During fiscal 1997, we acquired our acrylic fibers facility and our Saskatoon facility. See Note 7 of Notes to Consolidated Financial Statements for a discussion of these acquisitions. (2) In August of 1996 we recapitalized. Prior to August 21, 1996, Chemicals had no operating activities, other than those related to merger activities. 21 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are a holding company whose only material asset is our investment in Chemicals, our primary operating subsidiary. Chemicals owns substantially all of our consolidated operating assets. Other than additional interest expense associated with our 13 1/2% Notes, our results of operations are essentially the same as Chemicals. The primary markets in which we compete, especially styrene and acrylonitrile, are cyclical and are sensitive to factors such as: o changes in the balance between supply and demand; o the price of raw materials; and o the level of general worldwide economic activity. Historically, these markets have experienced alternating periods of tight supply and rising prices and profit margins, followed by periods of large capacity additions resulting in overcapacity and declining prices and profit margins. Large global capacity additions of styrene and acrylonitrile were completed during 1997 and 1998. In addition, events in the financial markets in certain Asian countries impacted the demand growth for our products, particularly styrene and acrylonitrile, resulting in a negative impact on sales volumes, prices, and margins in fiscal 1998 and fiscal 1999. Styrene prices are cyclical and sensitive to overall supply relative to demand and the level of general business activity. During 1994 and the first half of 1995, the styrene industry ran at high utilization rates resulting from demand growth from worldwide economic expansion, which in turn resulted in high styrene prices and margins. During the second half of 1995, styrene prices decreased significantly as demand growth weakened. Increased capacity additions, particularly in Asia, resulted in lower styrene prices and margins beginning in 1996 and continuing to date. Economic events in various Asian countries in 1997 and 1998 reduced demand growth for styrene and contributed further to the declines. Global production capacity for styrene is estimated at approximately 45 billion pounds, including approximately eight billion pounds of net capacity which was added by competitors in 1997, 1998, and 1999. The average sales prices we received for our styrene declined by approximately 41% from fiscal 1995 to fiscal 1996, approximately 2% from fiscal 1996 to fiscal 1997, and approximately 17% from fiscal 1997 to fiscal 1998. However, the average prices we received for our styrene was approximately the same in fiscal 1998 and fiscal 1999. During the first quarter of fiscal 2000, styrene prices have increased significantly from levels experienced in fiscal 1999 due to a combination of increased demand from Asia and operating problems at several styrene plants. We cannot, however, be sure that these increases can be sustained or whether prices and margins will increase or decrease in the future. The acrylonitrile market exhibits characteristics in capacity utilization, selling prices, and profit margins similar to those of styrene. Moreover, as a result of our high percentage of export acrylonitrile sales, demand for our acrylonitrile is significantly influenced by export customers, particularly those that supply acrylic fibers to China. During 1995, strong demand for acrylic fibers and ABS resins, particularly in China, increased demand for acrylonitrile resulting in high prices and margins. Acrylonitrile demand began to weaken in late 1995 for the same reasons that caused the deterioration in the styrene market. Increased acrylonitrile capacity, primarily in Asia, and weakened demand growth in Asian markets resulted in lower acrylonitrile prices and margins beginning in fiscal 1996 and continuing through fiscal 1999. Global production capacity for acrylonitrile is estimated at over 12 billion pounds, including approximately one billion pounds which was added by competitors in 1997 and 1998. In addition, Solutia is constructing a new acrylonitrile production facility in Chocolate Bayou, Texas which is expected to have a rated annual production capacity of approximately 500 million pounds and is expected to begin production in the third calendar quarter of 2000. The average acrylonitrile sales prices we received declined by approximately 29% from fiscal 1995 to fiscal 1996, approximately 3% from fiscal 1996 to fiscal 1997, approximately 29% from fiscal 1997 to fiscal 1998, and approximately 32% from fiscal 1998 to fiscal 1999. The sodium chlorate market has historically experienced cycles in capacity utilization, selling prices, and profit margins. Since the mid-1980s, North American demand for sodium chlorate has grown at an average annual rate of approximately 9% as pulp mills have accelerated substitution of chlorine dioxide for elemental chlorine in bleaching applications. During fiscal 1998 and fiscal 1999, demand for sodium chlorate did not increase at historical rates as a result of weak market conditions and lower operating rates in the pulp and paper industry. Our average sodium chlorate 22 25 prices decreased by approximately 5% from fiscal 1996 to fiscal 1997, approximately 7% from fiscal 1997 to fiscal 1998, and approximately 8% from fiscal 1998 to fiscal 1999. We market substantial volumes of petrochemicals and generate substantial revenues under our conversion and long-term agreements. The approximate percentages of our total petrochemicals sales volumes and revenues from our conversion and long-term agreements in the last three fiscal years are shown in the following table:
1997 1998 1999 ----- ----- ----- Percentage of total sales volumes.................. 51% 52% 56% Percentage of total revenues....................... 33% 38% 41%
Under our conversion agreements, the customer furnishes some or all of the raw materials, which we process into other petrochemicals in exchange for a fee designed to cover our fixed and variable costs of production. These conversion agreements help us to maintain lower levels of working capital and, in some cases, to gain access to certain improvements in manufacturing process technology. We believe that our petrochemicals conversion agreements: o help us optimize capacity utilization rates; o help us lower our selling, general, and administrative expenses; and o insulate us to some extent from the effects of declining markets and increases in raw materials prices. LIQUIDITY AND CAPITAL RESOURCES Long-Term Debt As of September 30, 1999, our long-term debt, including current maturities, totaled approximately $969 million and consisted of: o Chemicals' two secured revolving credit facilities; o two secured term loans under a credit facility at our Saskatoon subsidiary; o Chemicals' 11 1/4% Senior Subordinated Notes, 11 3/4% Senior Subordinated Notes, and 12 3/8% Senior Secured Notes; and o Holdings' 13 1/2% Senior Secured Discount Notes. On July 23, 1999, Chemicals completed a refinancing of all senior debt outstanding under its old senior credit facility by issuing its 12 3/8% Notes and establishing a revolving credit facility secured by its and some of its subsidiaries' fixed assets and certain other assets and a revolving credit facility secured by its and some of its subsidiaries' working capital. The two revolving credit facilities provide an aggregate borrowing capacity of $155 million. All indebtedness under the old senior credit facility was repaid and the old senior credit facility was terminated upon consummation of the refinancing. The refinancing increased our liquidity by eliminating near-term debt amortization and financial covenants associated with the old senior credit facility, as well as by increasing revolving credit availability. Although no assurances can be given, we believe the additional liquidity provided by the refinancing, when combined with cash flows from operations and other sources of available capital, will be sufficient to enable us to operate through the current cyclical downturn in the markets for our primary petrochemicals products. This belief is largely based upon assumptions regarding the condition of the markets of our primary products over the next 18-24 months, which assumptions are based in part on published reports of industry experts. If these assumptions prove to be incorrect, there is a strong possibility that we would be unable to fund our operations and meet our debt service requirements over an extended period. Additional information regarding our liquidity, both short-term and long-term, appear below in "Certain Known Events, Trends, Uncertainties, and Risk Factors." The 12 3/8% Notes are senior secured obligations of Chemicals and rank equally in right of payment with all other existing and future senior indebtedness of Chemicals and senior in right of payment to all existing and future subordinated indebtedness of Chemicals. 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. Each subsidiary's guarantee ranks equally in right of payment with all of that subsidiary's existing and future senior indebtedness and senior in right of payment to all existing and future subordinated indebtedness of that subsidiary. 23 26 However, the 12 3/8% Notes, and each subsidiary's guarantee, is subordinated to the extent of the collateral securing our secured revolving credit facilities. The 12 3/8% Notes and the subsidiary guarantees are secured by: o a second priority lien on all of Chemicals' United States production facilities and related assets, o a second priority pledge of all of the capital stock of each subsidiary guarantor, and o a first priority pledge of 65% of the stock of certain of our subsidiaries incorporated outside of the United States. Under the secured revolving credit facilities, Chemicals and each of its direct and indirect United States subsidiaries, other than Sterling Chemicals Acquisitions, Inc., are co-borrowers and are jointly and severally liable for any indebtedness thereunder. The secured revolving credit facilities consist of: o a $70,000,000 revolving credit facility secured by a first priority lien on all of our United States production facilities and related assets, all of Chemicals' capital stock, and all of the capital stock of each co-borrower and a second priority lien on all accounts receivable, inventory, and other specified assets of Chemicals and each co-borrower; and o an $85,000,000 revolving credit facility secured by a first priority lien on all accounts receivable, inventory, and other specified assets of Chemicals and each co-borrower. Available credit under the current assets revolver is subject to a monthly borrowing base consisting of 85% of eligible accounts receivable and 65% of eligible inventory, with an inventory cap of $42,500,000. In addition, the borrowing base for the current assets revolver must exceed outstanding borrowings thereunder by $12,000,000 at all times. The commitments for each of the secured revolving credit facilities will be permanently reduced to the extent required under the credit agreement upon prepayments made out of specific sources of funds, including assets sales by Chemicals and the co-borrowers and certain equity issuances by Holdings. The indentures governing the 13 1/2% Notes, the 12 3/8% Notes, the 11 3/4% Notes, and the 11 1/4% Notes and our credit agreement contain numerous covenants, including, but not limited to, restrictions on our ability to incur indebtedness, pay dividends, create liens, sell assets, engage in mergers and acquisitions, and refinance existing indebtedness. In addition, these indentures and the credit agreement specify various circumstances that will constitute, upon occurrence and subject in certain cases to notice and grace periods, an event of default thereunder. However, none of these indentures or the credit agreement require us to satisfy any financial ratios or maintenance tests. The indentures governing the 12 3/8% Notes, the 11 1/4% Notes, and the 11 3/4% Notes and the credit agreement contain provisions which restrict the payment of advances, loans, and dividends from Chemicals to Holdings. The most restrictive of these covenants limits those payments during fiscal 2000 to approximately $2.0 million, plus any amounts due to Holdings from Chemicals under the intercompany tax sharing agreement. At September 30, 1999, the total credit available under the secured revolving credit facilities was $155 million and approximately $55 million was drawn under the fixed assets revolver. Therefore, at September 30, 1999, we had additional borrowing capacity of approximately $100 million. Standby Equity Commitments In December of 1998, we entered into separate Standby Purchase Agreements with each of Gordon A. Cain, William A. McMinn, James Crane, Frank P. Diassi, Frank J. Hevrdejs, and Koch Capital Services, Inc. Pursuant to the terms of the Standby Purchase Agreements, the purchasers committed to purchase up to 2.5 million shares of our common stock, at a price of $6.00 per share, if, as, and when requested by us at any time or from time to time prior to December 15, 2001. Under each of the Standby Purchase Agreements, we may only require the purchasers to purchase these shares if we believe that such capital is necessary to maintain, reestablish, or enhance our borrowing ability under our revolving credit facilities or to satisfy any requirement thereunder to raise additional equity. To induce the purchasers to enter into the Standby Purchase Agreements, we issued warrants to purchase an aggregate of 300,000 shares of our common stock to the purchasers at an exercise price of $6.00 per share. Under the Standby Purchase Agreements, we are obligated to issue additional warrants to purchase up to 300,000 additional shares of our common stock to the purchasers if, as, and when they purchase shares of our common stock under the Standby Purchase Agreements. 24 27 Saskatoon Facility In July of 1997, Sterling Pulp Chemicals (Sask) Ltd., our Canadian subsidiary that operates our Saskatoon facility, entered into a credit agreement with The Chase Manhattan Bank of Canada, individually and as administrative agent, and certain other financial institutions. The indebtedness under the Saskatoon credit agreement is secured by substantially all of the assets of this subsidiary, including the Saskatoon facility. The Saskatoon credit agreement requires that certain amounts of "Excess Cash Flow" be used to prepay amounts outstanding under the term portion of the credit facility. A mandatory prepayment in the amount of approximately Cdn. $2 million will be made in the first quarter of fiscal 2000 pursuant to this obligation. The Saskatoon credit agreement provides a revolving credit facility of Cdn. $8 million to be used by the Saskatoon subsidiary solely for its general corporate purposes. No borrowings were outstanding under the Saskatoon revolving credit facility as of September 30, 1999. We believe the credit available under the Saskatoon revolving credit facility, when added to internally generated funds and other sources of capital, will be sufficient to meet the Saskatoon subsidiary's liquidity needs for the reasonably foreseeable future, although we can give no assurances to that effect. Because of restrictions in the Saskatoon credit agreement, we will generally not have access to the cash flows of our Saskatoon subsidiary. In addition, because of its designation as an "Unrestricted Subsidiary" under the credit agreement and the indentures for the 13 1/2% Notes , the 12 3/8% Notes, the 11 3/4% Notes, and the 11 1/4% Notes, , the Saskatoon subsidiary's results are not considered in determining compliance with the covenants contained therein. The Saskatoon credit agreement contains provisions which restrict the payment of advances, loans, and dividends from our Saskatoon subsidiary to us or Chemicals. The most restrictive of these covenants limits such payments during fiscal 2000 to approximately $1 million, plus any amounts due to us from our Saskatoon subsidiary under the intercompany tax sharing agreement. Working Capital Working capital at September 30, 1999 was $102 million, an increase of $11 million from September 30, 1998. This increase was the result of the following changes:
Current Assets Current Liabilities -------------- ------------------- (In Millions) (In Millions) Cash and cash equivalents $ 4 Accounts payable $ (26) Inventories (3) Accrued liabilities (8) Accounts receivable 27 Current portion long-term debt 5 ------ Deferred income tax benefit 12 Other -- $ (29) ----- $ 40
( ) - Decrease in assets, increase in liabilities Cash Flow Net cash used in our operations was $14 million in fiscal 1999, a decrease of $60 million from the net cash provided from our operations in fiscal 1998. This decrease in net cash resulted primarily from a decrease in earnings between the same periods and slightly higher working capital requirements. Net cash flow used in our investing activities was $26 million in fiscal 1999 compared to $27 million in fiscal 1998. Net cash flow provided by our financing activities was $43 million in fiscal 1999 compared to net cash flows used in our financing activities of $15 million in fiscal 1998. This increase in cash provided by financing activities was primarily due to the increase in borrowings under our secured revolving credit facilities. Capital Expenditures Our capital expenditures were $30 million in fiscal 1999, $27 million in fiscal 1998, and $43 million in fiscal 1997. Our capital expenditures in 1999 were primarily related to the acetic acid expansion, our project to reduce the 25 28 levels of phenylacetylene, or "PA," in the styrene produced at our Texas City facility, and routine safety, environmental, and replacement capital. Our fiscal 1998 capital expenditures were primarily related to routine safety, environmental, and replacement capital. Our fiscal 1997 capital expenditures were primarily for construction costs related to our methanol unit and our Valdosta facility, along with the distributive control systems upgrades at our acrylonitrile unit. In addition, we incurred capital expenditures in fiscal 1997 for process modernization in styrene and acrylonitrile and for routine safety, environmental, and replacement capital. Capital expenditures are expected to be approximately $30 to $40 million in fiscal 2000, with about $20 to $25 million dedicated to our petrochemicals business and $10 to $15 million dedicated to our pulp chemicals business. These capital expenditures will be primarily for process enhancements for styrene, the DSIDA project, and routine safety, environmental, and replacement capital. Our capital expenditures for environmentally-related prevention, containment, and process improvements were $6 million and $2 million for fiscal years 1999 and 1998, respectively. We do not anticipate a material increase in these types of expenditures during fiscal 2000, although no assurances can be given to that effect. During fiscal years 1999 and 1998, we did not incur any other infrequent or non-recurring material environmental expenditures which were required under existing environmental regulations. See "Certain Known Events, Trends, Uncertainties, and Risk Factors - Environmental and Safety Matters." NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," established standards for reporting and displaying of comprehensive income and its components. Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information," establishes standards for the way that public business enterprises report information about operating segments in interim and annual financial statements. Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," establishes revisions to employers' disclosure about pension and other post retirement benefit plans. We adopted these statements as of October 1, 1998. 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 evaluating the accounting impact and disclosures that will be required when this statement is adopted in the first quarter of fiscal 2001. CERTAIN KNOWN EVENTS, TRENDS, UNCERTAINTIES, AND RISK FACTORS The amount of our outstanding indebtedness is substantial and may limit our ability to fund future working capital needs and increase our exposure during adverse economic conditions. Additionally, our debt level could prevent us from fulfilling our obligations under our indebtedness. Our substantial indebtedness of $969 million and deficiency in assets of $455 million at September 30, 1999 could have important negative consequences. For example, it could: o make it more difficult for us to satisfy our obligations with respect to all of our indebtedness; o make us more vulnerable to a continued downturn in our industry or a downturn in the economy in general; o require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, and other general corporate requirements; o limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate; o impact the availability of raw materials and financial terms of our business with suppliers; o place us at a competitive disadvantage compared to our competitors that have less debt; and o limit our ability to borrow additional funds. 26 29 The covenants in our debt instruments restrict our flexibility. The covenants in our indentures and the credit agreement restrict our ability to: o incur indebtedness; o pay dividends and make other restricted payments or investments; o sell assets; o engage in certain mergers and acquisitions; and o refinance existing indebtedness. Despite current indebtedness levels, we may still be able to incur substantially more debt, which could further exacerbate the risks described above. The terms of the agreements governing our indebtedness restrict but do not prohibit us from incurring more debt. As of September 30, 1999, we had additional borrowing capacity under our secured revolving credit facilities of up to approximately $100 million. If new debt is added to our current debt levels, the related risks that we now face could increase. Factors beyond our control may impact our ability to meet our debt service requirements. Our ability to meet our debt service requirements will depend on our future performance, which in turn is dependent upon conditions in the markets for our products, the economy generally, and other factors that are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our secured revolving credit facilities in amounts sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. Moreover, we may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. If we are unable to make scheduled debt payments or comply with the other provisions of our debt instruments, our various lenders will be permitted to accelerate the maturity of the indebtedness owing to them and exercise other remedies provided for in those instruments. Chemicals may be unable to pay dividends to Holdings, which may prevent Holdings from fulfilling its obligations under its 13 1/2% Notes and may lead to a change in control. The dividend restrictions in the indentures governing the 12 3/8% Notes, the 11 3/4% Notes, and the 11 1/4% Notes allow Chemicals to pay dividends to Holdings in connection with our required interest payments on the 13 1/2% Notes only if the ratio of the consolidated EBITDA of Chemicals and certain of its subsidiaries to their interest expense is 2.0 to 1.0 or greater, on a trailing four quarter basis, after giving pro-forma effect to the dividend. Holdings currently has no source of funds other than dividends and must make the first interest payment on the 13 1/2% Notes on February 15, 2002. For the four quarters ended September 30, 1999, the consolidated EBITDA coverage ratio under these indentures was 0.4 to 1.0, significantly below the required ratio. All of the capital stock of Chemicals is pledged to secure the 13 1/2% Notes and the new fixed assets revolver. An event of default under the indenture for the 13 1/2% Notes or the new fixed assets revolver may prompt those lenders to foreclose upon Chemicals' stock. Among other things, that foreclosure would likely constitute a change of control under the indenture for the 13 1/2% Notes and the credit agreement. In the event that the consolidated EBITDA coverage ratio is insufficient to make the required dividends, we would need to pursue other permissible methods of distributing cash to or otherwise acquiring cash for Holdings. However, the number of permissable methods is limited in scope and amount and no assurances can be given that any such permissible methods will be available or sufficient at that time. 27 30 We may be unable to repurchase the notes upon a change of control, and a change of control may trigger defaults under our debt instruments. Upon the occurrence of specific kinds of change of control events, Holdings and Chemicals are required to offer to repurchase all of their respective notes. It is possible that we will not have sufficient funds at the time of a change of control to make the required repurchases. In addition, provisions in the credit agreement prohibit these repurchases. Further, specific kinds of change of control events would constitute an event of default under the credit agreement. An event of default under the credit agreement, unless cured or waived, would also be an event of default under each of the indentures. Some important corporate events, such as leveraged recapitalizations that would increase the level of our indebtedness, would not constitute a change of control event and would not trigger the required offer to repurchase under these indentures. The industries in which we participate are cyclical and many of our major products are currently experiencing significantly depressed market conditions, which has negatively affected our business and may make it difficult for us to repay our debts. The markets for our petrochemicals and pulp chemicals products are cyclical, and prices typically vary in response to changes in overall supply relative to demand and the level of general business activity. As prices decline, our profit margins generally decrease, which adversely affects our business and our ability to pay interest and principal on our indebtedness. Large global capacity additions of styrene and acrylonitrile were completed in 1997 and 1998. For styrene, approximately five billion pounds of net new capacity was added and, for acrylonitrile, approximately one billion pounds of net new capacity was added. In addition, Solutia is constructing a new acrylonitrile production facility which is expected to have a rated annual production capacity of approximately 500 million pounds and begin production in the third calendar quarter of 2000. Further capacity additions for both styrene and acrylonitrile are planned in fiscal 2000 and later years. Further, reduced operating rates at pulp mills have reduced the rate of growth in demand for our pulp chemicals products and services. The resulting impact on prices and margins negatively impacted our results in fiscal 1997, 1998, and 1999, and could negatively impact our results in the future. Although recently there has been some improvement in the market for styrene, conditions can change quickly and we can give no assurances that this improvement can be sustained or whether it will improve or worsen in the future. If the markets for our primary products do not improve significantly, we may be unable to fulfill our obligations to repay the principal on our indebtedness when that indebtedness matures. We may need to refinance all or a portion of our indebtedness on or before maturity, but we may be unable to do so on commercially reasonable terms or at all. If market conditions for our products decline significantly from current levels, we may be unable to make scheduled interest payments on our indebtedness. The petrochemicals, acrylic fibers, and pulp chemicals industries are highly competitive. Many of our competitors, particularly in the petrochemicals industry, are larger and have substantially greater financial resources than we have. We compete with some of the world's largest chemical companies, many of whom, in contrast to us, supply much of their own raw materials requirements. In addition, a significant portion of our business is based upon widely available technology. The entrance of new competitors into the industry or the addition by existing competitors of new capacity may reduce our ability to maintain profit margins or preserve our market share, even during periods of increased demand for our products. Our business may be adversely affected if we are unable to obtain raw materials from third-party suppliers at reasonable prices. For most of our products, the combined cost of raw materials, including utilities in the case of pulp chemicals, is far greater than all other costs of production combined. Therefore, an adequate supply of raw materials at reasonable prices is critical to the success of our business. If we are unable to obtain raw materials at reasonable prices, our results of operations would be negatively impacted by an increase in our costs or a decrease in our capacity or both. Most of the raw materials we use are supplied by others, and many of them are subject to wide price fluctuations for a variety of reasons beyond our control. For example, changes in the availability of these products may result from major capacity additions or significant facility operating problems. We can give no assurances that we will continue to be able to secure adequate supplies of any of our raw materials at reasonable prices. Our industry is subject to extensive environmental regulation, which creates uncertainty regarding future environmental expenditures and liabilities. 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. This regulation, and the potential for further expanded regulation, may increase 28 31 our costs and thereby negatively affect our business. 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 and the potential for further expanded regulation may increase our costs and thereby negatively affect our business. Changing and increasingly strict environmental requirements can affect the manufacturing, handling, processing, distribution, and use of our products and, if so affected, our business and operations may be materially and adversely affected. In addition, changes in these requirements may 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. For these reasons, we are uncertain as to the amount of our future environmental expenditures and liabilities. The regulatory outlook for our pulp chemicals business is uncertain. Our 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 our pulp chemicals business. Several pending lawsuits are challenging an important group of these regulations known as the "Cluster Rules." Although we believe that the Cluster Rules will ultimately be upheld in this litigation, we 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 our pulp chemicals business. Conversely, any significant ban on all chlorine-containing compounds in the pulp bleaching process could have a material adverse effect on our financial condition and results of operations. British Columbia has adopted regulations that require the elimination of the use of all chlorine products, including chlorine dioxide, in the pulp bleaching process by the year 2002, although the pulp and paper industry is working to change this regulation. We are subject to many operating risks, some of which may not be covered by insurance. A business risk inherent in all chemical operations is the potential for personal injury and property damage claims from employees, contractors and their employees, and nearby landowners and occupants. While we attempt to operate our facilities responsibly and in compliance in all material respects with all applicable environmental and health and safety requirements, we may face expenses and liabilities as a result of our past or future operations. Some risk of environmental costs and liabilities is inherent in our operations and products, as it is with other companies engaged in similar businesses, and we maintain insurance at levels that we believe are typical for our industry. A major incident or other event at any of our facilities, however, could result in liabilities in excess of our insurance coverages or uncovered liabilities or claims beyond the financial ability of the insurance carrier to pay. Current and future legal proceedings may have unfavorable outcomes. We are currently a party to several legal proceedings, and additional legal proceedings could be filed against us in the future. We are not able to predict the final outcome of the current proceedings, and we cannot guarantee that the ultimate resolution of current or future proceedings will not have a material adverse effect on us. For more information, see Note 6 of the Notes to Consolidated Financial Statement included in this Form 10-K. We depend upon the continued operation of our Texas City facility. All of the petrochemicals we manufacture, including all of our styrene, acrylonitrile, and acetic acid, are produced at our Texas City facility. Significant unscheduled downtime at our Texas City facility could have a material adverse affect on our results. Downtime can occur for a variety of reasons, including equipment breakdowns, interruptions in the supply of raw materials, power failures, natural forces, or other normal hazards associated with the production of petrochemicals. Although we maintain business interruption insurance that we consider to be adequate under the circumstances, we cannot guarantee that a significant interruption in the operation of our Texas City facility would be covered by this insurance or would not otherwise have a material adverse effect on us. We may have difficulty forming strategic joint ventures. An element of our long-term business strategy is to pursue attractive strategic joint ventures. However, restrictions under the indentures and the credit agreement limit our ability to do so, such as restrictions on our ability to sell assets, incur indebtedness, create liens, and make investments and other restricted payments. 29 32 We depend upon our long-term contracts and significant customers. We sell significant portions of our acrylonitrile, methanol, and styrene production and all of our acetic acid and plasticizers production under long-term contracts. These contracts are intended to provide stability in the event that the demand for or prices of these products decline significantly, but also limit our ability to take full advantage of attractive market conditions during periods of higher prices for these products. During fiscal 1999, a significant portion of the production from our Texas City facility was dedicated to multi-year contracts with Solutia, Bayer AG, BP Chemicals, and BASF. If the markets for these products are depressed, the loss of one or more of these customers or a material reduction in the amount of product purchased by one or more of them could have a material adverse effect on us. Solutia is building an acrylonitrile manufacturing facility in Chocolate Bayou, Texas and, in anticipation of the completion of this facility, has elected to terminate its acrylonitrile purchase agreement with us effective September 1, 2000. We do not believe this termination will have a material adverse effect on us, although we can give no assurance to that effect. The success of our acrylic fibers business is dependent on our proprietary technology. The competitiveness of our acrylic fibers operations with respect to its specialty textiles and technical fibers products, our higher margin acrylic fibers products, is maintained, to a significant extent, through the exclusive ownership or use of certain product and manufacturing technology. If competitors of our acrylic fibers operations gain access to the use of similar technology, or render our technology obsolete through the introduction of superior technology, our acrylic fibers operations would be materially adversely affected. We face risks related to our foreign operations that may negatively affect our business. Approximately 26% of our fiscal 1999 revenues were derived from our Canadian-based pulp chemicals business and approximately 28% were derived from export sales of our products. Our international operations and exports to foreign markets make us subject to a number of special risks such as: o currency exchange rate fluctuations; o foreign economic conditions; o trade barriers; o exchange controls; o national and regional labor strikes; o political risks and risks of increases in duties; o taxes; o governmental royalties; and o changes in laws and policies governing operations of foreign-based companies. The occurrence of any one or a combination of these factors may increase our costs or have other negative effects on our business. In addition, earnings of foreign subsidiaries and intercompany payments are subject to foreign income tax rules that may reduce cash flow available to meet our required debt service and other obligations. As we derive most of our pulp chemicals revenues from production and sales by our subsidiaries within Canada, we have organized our subsidiary structure and our operations in part based on assumptions regarding various Canadian tax laws, currency exchange laws, capital repatriation laws, and other relevant laws. While we believe that these assumptions are correct, we cannot guarantee that Canadian taxing or other authorities will reach the same conclusion. If our assumptions are incorrect, or if the Canadian government changes or modifies such laws or the current interpretations thereof, we may suffer material adverse tax and financial consequences. A portion of our expenses and sales are denominated in Canadian dollars and, accordingly, our revenues, cash flows, and earnings may be affected by fluctuations in the exchange rate between the United States dollar and the Canadian dollar, which may also have material adverse tax consequences. These currency fluctuations could have a material adverse impact on us as increases in the value of the Canadian dollar relative to the United States dollar have 30 33 the effect of increasing the United States dollar equivalent of cost of goods sold and other expenses with respect to our Canadian production facilities. We have historically entered into forward foreign exchange contracts to hedge our exposure, although we do not engage in currency speculation. While these hedges limit our exposure to relative increases in the value of the Canadian dollar, they also limit the benefits that we may realize from relative decreases in that value. The last of our existing forward exchange contracts expires in March of 2000, and we do not currently intend to enter into any additional forward exchange contracts. Our right to directly participate in the earnings of our subsidiaries is limited by our organizational structure and our debt instruments. All of our operations are conducted, and all of our assets are owned, by our subsidiaries (including Chemicals). Our right, and thus the right of our stockholders, to participate in any distribution of earnings or assets of our subsidiaries is subject to the claims of creditors of our subsidiaries. In addition, our subsidiaries are parties to various debt documents and other agreements that limit their ability to incur additional indebtedness and to provide funds to us by way of dividends, distributions, and advances. A substantial portion of Chemicals' operations are conducted, and a substantial portion of Chemicals' assets are owned, by its subsidiaries. The right of Chemicals, and thus our right to participate in any distribution of earnings or assets of Chemicals' subsidiaries is subject to the claims of creditors of such subsidiaries. Chemicals' subsidiaries are parties to various debt documents and other agreements that limit their ability to incur additional indebtedness and to provide funds to Chemicals by way of dividends, distributions, and advances. We are subject to risks related to the Year 2000 that could negatively impact our business. Some computer systems and other equipment with computer chips store dates as two digits rather than four to define the applicable year. For example, these computer systems would store the year "1999" as "99." Any clock or date recording mechanism, including date sensitive software, which uses only two digits to represent the year may interpret the digits "00" as the Year 1900 rather than the Year 2000. This could result in a system failure or miscalculations causing serious disruption of operations. We went through the process of using both internal and external resources to address the Year 2000 issue. We recently completed a comprehensive project intended to upgrade our information technology systems, which include our computer systems and software, and our non-information technology systems, which include our process control systems and other equipment that utilize embedded chips to control various functions, to systems that will consistently and properly recognize the Year 2000 and subsequent years. We have conducted an inventory of our hardware and software and made a preliminary assessment of the Year 2000 compliance of our business and process control systems. We believe this assessment helped determine which of our business and process control systems are critical to our business, and those systems which we deemed to be critical were assigned a higher priority in our Year 2000 remediation effort. In this phase of the project, we discovered some Year 2000 deficiencies in our business systems and initiated plans to rectify these issues in the remediation and replacement phase of the project. The preliminary assessment of our process control systems did not detect any material Year 2000 difficulties. We then engaged a nationally recognized independent consultant to perform a more detailed survey of all of our business and process control systems, including critical and non-critical systems, to confirm the absence of any additional material Year 2000 deficiencies. This survey has been completed and did not reveal any additional material Year 2000 deficiencies. In the second phase of our Year 2000 project, we believe we have taken the necessary steps to rectify all material Year 2000 deficiencies. A major component of this effort involved the replacement of all critical business systems which may not be Year 2000 compliant with new business systems intended to be Year 2000 compliant. All of these projects were completed by October of 1999. If we determine that any additional systems under review have material Year 2000 deficiencies, we plan to take appropriate remedial action. At this time, the instrumentation in the laboratory at our Texas City facility requires significant remediation or replacement. However, this instrumentation can be successfully operated with minimal manual intervention. Even without remediation or replacement, this instrumentation would not jeopardize the successful operation of our Texas City facility. The final phase of our Year 2000 project involved testing all critical systems to confirm that these systems will react properly to the advent of the Year 2000. We have conducted tests on all of our current information technology and non-information technology systems that were not identified as having Year 2000 deficiencies. In addition, we conducted tests on all newly installed and updated systems to determine if they are Year 2000 compliant. All of this testing was recently completed and indicated no material problems. 31 34 The total estimated expense for our Year 2000 compliance projects is approximately $11 to $13 million, of which we have incurred approximately $9 million through September 30, 1999. We have been funding and will continue to fund this expense out of our operating cash flows or borrowings under our secured revolving credit facilities. Irrespective of our efforts, some Year 2000 problems, such as processing failures, error messages, or incorrect data may still occur in some of our computer systems if we receive programs or data from third parties who are not Year 2000 compliant. Moreover, our business may be disrupted in other ways by Year 2000 problems of third parties, which may affect, for example, our ability to obtain needed materials or deliver our products. We endeavored to determine whether our significant vendors, customers, and others with whom we deal are Year 2000 compliant and requested that such persons complete and return surveys with respect to their Year 2000 issues. We did not receive any survey response that indicated that any of these persons have any specific Year 2000 problems. However, we cannot be sure that a Year 2000 problem will not occur for us as a result of a Year 2000 problem of one of our vendors or customers or some other person with whom we deal. While our principal Year 2000 compliance projects have been completed, it is possible that our compliance efforts may be ineffective. A failure to properly and timely correct any Year 2000 deficiencies would affect us on several levels. If our Year 2000 remediation efforts were to prove unsuccessful, we might be unable to operate one or more of our manufacturing facilities, take orders, sell products, or otherwise generally conduct our business. Since our business is characterized by large volume sales to a relatively limited number of customers, we believe that, with the engagement of additional personnel, orders could be processed and deliveries completed through manual means. In preparation for this type of scenario, we have outlined a contingency plan to guide the hiring and training of additional personnel and the processing of paperwork manually. Although we believe that we have taken the appropriate courses of action to ensure that we are Year 2000 compliant, we cannot be sure that the actions discussed above will have the anticipated results or that Year 2000 problems will not have a material adverse effect on our financial condition or results of operations. Specific factors that might affect the success of our Year 2000 efforts and the occurrence of Year 2000 disruption or expense include: o our failure or the failure of our consultant to properly identify deficient systems; o the failure of the selected remedial action to adequately address any deficiencies; o unforeseen expenses related to the remediation of existing systems or the transition to replacement systems; and o the failure of third parties to become compliant or to adequately notify us of potential non-compliance. Labor Relations Approximately 37% of our employees are covered under various union contracts. Approximately 21% of our employees are covered by one union contract at our Texas City facility, which expires on May 1, 2002. Although we believe our relationship with our employees is generally good, a strike by one or more of the unions representing our employees could have a material adverse effect on our financial condition, results of operations, or cash flows. RESULTS OF OPERATIONS The following table sets forth revenues, gross profit, and operating income (loss) for our segments for the years ended September 30, 1999, 1998, and 1997.
YEAR ENDED SEPTEMBER 30, ----------------------------- 1999 1998 1997 -------- -------- -------- (Dollars in Millions) REVENUES: Petrochemicals........................... $ 531 $ 622 $ 728 Pulp Chemicals........................... 190 201 181 -------- -------- -------- $ 721 $ 823 $ 909 ======== ======== ======== GROSS PROFIT: Petrochemicals........................... $ -- $ 31 $ 33 Pulp Chemicals........................... 38 46 53 -------- -------- -------- $ 38 $ 77 $ 86 ======== ======== ======== OPERATING INCOME (LOSS): Petrochemicals........................... $ (64) $ (3) $ 11 Pulp Chemicals........................... 27 36 46 -------- -------- -------- $ (37) $ 33 $ 57 ======= ======== ========
32 35 COMPARISON OF FISCAL 1999 TO FISCAL 1998 Our revenues were approximately $721 million in fiscal 1999, a decrease of approximately 12% from our revenues of approximately $823 million in fiscal 1998. This decrease in our revenues resulted primarily from lower acrylonitrile, sodium chlorate, and methanol sales prices and reduced acrylonitrile sales volumes, partially offset by increased styrene sales volumes. We recorded a net loss of approximately $112.7 million, or $8.94 per share, for fiscal 1999 compared to a net loss of approximately $48.6 million, or $3.99 per share, that we recorded for fiscal 1998. This increase in net loss resulted primarily from: o reduced acrylonitrile, sodium chlorate, and methanol margins; o decreased acrylonitrile sales volumes; o turnarounds of our styrene and acetic acid facilities; o weak markets in acrylic fibers; o expense of $26.4 million related to the impairment of our methanol production assets; o increased costs associated with early retirement programs, benefit changes, and workforce reductions; and o an extraordinary loss related to unamortized debt issue costs as a result of the refinancing completed on July 23, 1999. Revenues, Gross Profit, and Operating Income (Loss) Petrochemicals. Revenues from our petrochemicals operations were approximately $531 million in fiscal 1999, a decrease of approximately 15% from our fiscal 1998 revenues from our petrochemicals operations of approximately $622 million. This decrease in revenues resulted primarily from reduced acrylonitrile, acrylic fibers, and methanol sales prices and decreased acrylonitrile sales volumes. The economic conditions in Asia negatively impacted market conditions in fiscal 1999, particularly for our styrene, acrylonitrile, and acrylic fibers products. Our petrochemicals operations recorded operating losses of approximately $64 million for fiscal 1999, compared to operating losses of approximately $3 million from our petrochemicals operations for fiscal 1998. The increased losses resulted primarily from weaker operational performance in acrylonitrile, acrylic fibers, and methanol and the expense related to the impairment of our methanol plant. Revenues from our styrene operations were approximately $246 million in fiscal 1999, an increase of approximately 4% from our fiscal 1998 revenues from our styrene operations of approximately $237 million. Sales prices for our styrene was approximately the same in fiscal 1999 and fiscal 1998. In addition, sales volume of our styrene increased approximately 3% for fiscal 1999 from sales volumes of our styrene for fiscal 1998. The increase in sales volumes of our styrene resulted primarily from improved market conditions in the fourth quarter of fiscal 1999, particularly in Asia. During fiscal 1999, prices for benzene, one of the primary raw materials for styrene, were approximately 7% lower than the prices we paid for benzene in fiscal 1998 and prices for ethylene, the other primary raw material for styrene, were approximately 6% higher than the prices we paid for ethylene in fiscal 1998. Margins on our styrene sales during fiscal 1999 increased from margins on our styrene sales during fiscal 1998, due to the aforementioned reasons. Revenues from our acrylonitrile and derivatives operations, including sodium cyanide and TBA, were approximately $93 million in fiscal 1999, a decrease of approximately 30% from our fiscal 1998 revenues from these operations of approximately $132 million. Sales prices for our acrylonitrile decreased approximately 32% in fiscal 1999 from sales prices for our acrylonitrile in fiscal 1998. This decrease in sales prices resulted primarily from weaker market conditions, particularly in Asia. Sales volume of our acrylonitrile decreased approximately 18% in fiscal 1999 from 33 36 sales volumes of our acrylonitrile in fiscal 1998. During fiscal 1999, prices for propylene, one of the primary raw materials for acrylonitrile, were approximately 25% lower than the prices we paid for propylene in fiscal 1998 and prices for ammonia, the other primary raw material for acrylonitrile, were approximately 9% lower than the prices we paid for ammonia in fiscal 1998. Margins on our acrylonitrile sales during fiscal 1999 decreased from the margins on our acrylonitrile sales during fiscal 1998, primarily as a result of lower acrylonitrile sales prices, which more than offset our lower raw materials costs. Revenues from our acrylic fibers operations in fiscal 1999 were approximately $67 million, a decrease of approximately 33% from our fiscal 1998 revenues from our acrylic fibers operations of approximately $100 million. Sales prices and volumes for our acrylic fibers decreased 10% and 25%, respectively, in fiscal 1999 compared to fiscal 1998. In addition, our acrylic fibers operations' performance in fiscal 1999 continued to be negatively impacted by weak market conditions and imports from European suppliers. Revenues from our other petrochemicals operations, including acetic acid, plasticizers, and methanol, were approximately $126 million for fiscal 1999, a decrease of approximately 17% from our fiscal 1998 revenues from our other petrochemicals operations of approximately $152 million. This decrease in revenues resulted primarily from a 24% decrease in methanol sales prices which resulted from overcapacity in the global methanol market. Our other petrochemicals products reported a decrease in operating earnings in fiscal 1999 compared to fiscal 1998. This decrease in operating earnings was primarily due to weaker margins in methanol. Pulp Chemicals. Revenues from our pulp chemicals operations were approximately $190 million for fiscal 1999, a decrease of approximately 5% from our fiscal 1998 revenues from our pulp chemicals operations of approximately $201 million. This decrease in revenues resulted primarily from the approximately 8% decrease in sales prices for our sodium chlorate in fiscal 1999 compared to sales prices for our sodium chlorate in fiscal 1998. This decrease in sales prices of sodium chlorate resulted primarily from the increase in North American sodium chlorate capacity and generally weak market conditions in the pulp and paper industry. Our pulp chemicals operations recorded operating earnings of approximately $27 million in fiscal 1999, a decrease of approximately 25% from our fiscal 1998 operating earnings from our pulp chemicals operations of approximately $36 million. This decrease in operating earnings resulted primarily from reduced sodium chlorate sales prices in fiscal 1999, which were partially offset by slightly increased sodium chlorate sales volumes. Selling, General, and Administrative Expenses Our SG&A expenses in fiscal 1999 and fiscal 1998 remained constant at approximately $38 million. Our SG&A expenses were impacted favorably in fiscal 1999 by cost reduction programs. However, these positive impacts were offset by increased costs in fiscal 1999 for upgrades of certain of our information technology systems, including year 2000 compliance activities. Other Expense We had other expense of approximately $11 million in fiscal 1999 from our one-time non-cash charges related to early retirement programs and benefit changes and workforce reductions. We had other expense of approximately $6 million in fiscal 1998 which was primarily related to the voluntary severance programs we offered in January and April of 1998 at our Texas City facility. Interest and Debt Related Expenses Our interest and debt related expenses for fiscal 1999 and fiscal 1998 remained constant at approximately $104 million. Benefit for Income Taxes Our benefit for income taxes in fiscal 1999 was approximately $35 million, with an effective tax rate of approximately 25%, whereas our benefit for income taxes was approximately $26 million, with an effective tax rate of approximately 36%, in fiscal 1998. This increase in our benefit for income taxes resulted primarily from our pre-tax 34 37 loss of approximately $141 million in fiscal 1999, compared to a pre-tax loss of approximately $72 million in fiscal 1998. Extraordinary Item We had a $4 million after-tax ($6 million pre-tax) extraordinary item in fiscal 1999 related to unamortized debt issue costs which were expensed in fiscal 1999 as a result of the refinancing completed in July of 1999. COMPARISON OF FISCAL 1998 TO FISCAL 1997 Our revenues were approximately $823 million in fiscal 1998, a decrease of approximately 9% from our revenues of approximately $909 million in fiscal 1997. This decrease in our revenues resulted primarily from lower styrene, acrylonitrile, and methanol sales prices and reduced styrene sales volumes, partially offset by a full year of operations from our acrylic fibers facility and our Saskatoon facility, each of which was acquired by us during fiscal 1997. Revenues excluding the impact of the acquisitions of our acrylic fibers facility and our Saskatoon facility would have been $676 million in fiscal 1998 and $807 million in 1997. We recorded a net loss of approximately $48.6 million, or $3.99 per share, for fiscal 1998, compared to a net loss of approximately $29.0 million, or $2.58 per share, that we recorded for fiscal 1997. This increase in net loss resulted primarily from: o reduced styrene, acrylonitrile, sodium chlorate, and methanol margins; o decreased styrene sales volumes; o weak markets in acrylic fibers; o increased interest expense resulting from financings related to the acquisitions of our acrylic fibers facility and our Saskatoon facility and the issuance of our 11 1/4% Senior Subordinated Notes, the proceeds of which were used to prepay outstanding indebtedness under our then existing senior credit facility; o increased SG&A expense; and o costs associated with workforce reductions. Revenues, Gross Profit, and Operating Income (Loss) Petrochemicals. Revenues from our petrochemicals operations were approximately $622 million in fiscal 1998, a decrease of approximately 15% from our fiscal 1997 revenues from our petrochemicals operations of approximately $728 million. This decrease in revenues resulted primarily from reduced styrene, acrylonitrile, and methanol sales prices and decreased styrene sales volumes. The economic conditions in Asia negatively impacted market conditions in the fiscal 1998 period, particularly for our styrene, acrylonitrile, and acrylic fibers products. Our petrochemicals operations recorded operating losses of approximately $3 million for fiscal 1998, whereas our petrochemicals operations recorded operating income of approximately $11 million for fiscal 1997. This difference resulted primarily from weaker operational performance in styrene, acrylonitrile, and methanol, partially offset by stronger performance in acetic acid. Revenues from our styrene operations were approximately $237 million in fiscal 1998, a decrease of approximately 24% from our fiscal 1997 revenues from our styrene operations of approximately $310 million. Sales prices for our styrene decreased approximately 17% in fiscal 1998 from sales prices for our styrene in fiscal 1997. In addition, sales volume of our styrene decreased approximately 16% for fiscal 1998 from sales volumes of our styrene for fiscal 1997. These decreases in sales prices and volumes of our styrene resulted primarily from weaker market conditions, particularly in Asia. During fiscal 1998, prices for benzene, one of the primary raw materials for styrene, were approximately 14% lower than the prices we paid for benzene in fiscal 1997 and prices for ethylene, the other primary raw material for styrene, were approximately 25% lower than the prices we paid for ethylene in fiscal 1997. Margins on our styrene sales during fiscal 1998 decreased from margins on our styrene sales during fiscal 1997, primarily as a result of lower sales prices, which more than offset our lower raw materials costs. Revenues from our acrylonitrile operations were approximately $112 million in fiscal 1998, a decrease of approximately 23% from our fiscal 1997 revenues from our acrylonitrile operations of approximately $146 million. 35 38 Sales prices for our acrylonitrile decreased approximately 29% in fiscal 1998 from sales prices for our acrylonitrile in fiscal 1997. This decrease in sales prices resulted primarily from weaker market conditions, particularly in Asia. Sales volume of our acrylonitrile increased approximately 2% in fiscal 1998 from sales volumes of our acrylonitrile in fiscal 1997. During fiscal 1998, prices for propylene, one of the primary raw materials for acrylonitrile, were approximately 28% lower than the prices we paid for propylene in fiscal 1997 and prices for ammonia, the other primary raw material for acrylonitrile, were approximately 25% lower than the prices we paid for ammonia in fiscal 1997. Margins on our acrylonitrile sales during fiscal 1998 decreased from the margins on our acrylonitrile sales during fiscal 1997, primarily as a result of lower acrylonitrile sales prices, which more than offset our lower raw materials costs. Revenues from our acrylic fibers operations in fiscal 1998 were approximately $100 million. We acquired the business on January 31, 1997 and recorded revenues of approximately $92 million in fiscal 1997. The performance of our acrylic fibers operation in fiscal 1998 was negatively impacted by weak market conditions, particularly in Asia, and imports from European suppliers. Revenues from our other petrochemicals operations, including acetic acid, plasticizers, methanol, TBA, and sodium cyanide, were approximately $173 million for fiscal 1998, a decrease of approximately 5% from our fiscal 1997 revenues from our other petrochemicals operations of approximately $181 million. This decrease in revenues resulted primarily from a 16% decrease in methanol sales prices which resulted from overcapacity in the global methanol market, which was partially offset by better operating performance of our acetic acid operations. Our other petrochemicals products reported an increase in operating earnings in fiscal 1998 compared to fiscal 1997. This increase in operating earnings was primarily due to better operating performance in acetic acid, partially offset by weaker pricing in methanol. Pulp Chemicals. Revenues from our pulp chemicals operations were approximately $201 million for fiscal 1998, an increase of approximately 11% from our fiscal 1997 revenues from our pulp chemicals operations of approximately $181 million. This increase in revenues resulted primarily from the approximately 12% increase in our sales volume of sodium chlorate in fiscal 1998 from our sales volume of sodium chlorate in fiscal 1997. Our increase in sales volume of sodium chlorate resulted primarily from the additional volumes we had available for sale after the acquisition of our Saskatoon facility in July of 1997 and the startup of our Valdosta facility in December of 1996. Average sales prices for our sodium chlorate declined approximately 7% in fiscal 1998 compared to the average sales prices for our sodium chlorate in fiscal 1997. This decline in our sodium chlorate sales prices was primarily due to decreased demand for sodium chlorate resulting from lower pulp mill operating rates, partially due to the economic environment in various countries in Asia. Our pulp chemicals operations recorded operating earnings of approximately $36 million in fiscal 1998, a decrease of approximately 22% from our fiscal 1997 operating earnings from our pulp chemicals operations of approximately $46 million. This decrease in operating earnings resulted primarily from reduced sodium chlorate sales prices and higher energy costs in fiscal 1998, which were partially offset by increased sodium chlorate sales volumes. Selling, General, and Administrative Expenses Our SG&A expenses in fiscal 1998 were approximately $39 million, whereas we had SG&A expenses of approximately $28 million in fiscal 1997. This increase in our SG&A expenses resulted primarily from the additional SG&A expenses associated with our new acrylic fibers facility, our new Saskatoon facility, increased corporate development activities, and costs associated with upgrades of certain of our information technology systems, including Year 2000 compliance activities. Other Expense We had other expense of approximately $6 million in fiscal 1998 which was primarily related to the voluntary severance programs we offered in January and April of 1998 at our Texas City facility. We did not have any other expense during fiscal 1997. Interest and Debt Related Expenses Our interest and debt related expenses for fiscal 1998 were approximately $16 million higher than our interest and debt related expenses for fiscal 1997. This increase in our interest and debt related expenses was primarily due to the acquisitions of our acrylic fibers business and our Saskatoon facility and the issuance of our 11 1/4% Senior Subordinated 36 39 Notes. The proceeds of the sale of our 11 1/4% Senior Subordinated Notes were used to prepay outstanding indebtedness under our then existing senior credit facility. Benefit for Income Taxes Our benefit for income taxes in fiscal 1998 was approximately $26 million, with an effective tax rate of approximately 36%, whereas our benefit for income taxes was approximately $7 million, with an effective tax rate of approximately 23%, in fiscal 1997. This increase in our benefit for income taxes resulted primarily from our pre-tax loss of approximately $72 million in fiscal 1998, compared to a pre-tax loss of approximately $31 million in fiscal 1997. Extraordinary Item We had a $4 million after-tax ($6 million pre-tax) extraordinary item in fiscal 1997 related to unamortized debt issue costs which were expensed in April of 1997 as a result of the partial prepayment of the indebtedness under our then existing senior credit facility. 37 40 ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The table below provides information about our market sensitive financial instruments and constitutes a "forward-looking statement." Our major financial market risk exposure is changing interest rates, primarily in the United States. Interest rate swaps may be used to adjust interest rate exposure, when appropriate, based upon market conditions. A portion of our borrowings and transactions are denominated in foreign currencies which exposes us to market risk associated with exchange rate movements. We have historically entered into forward foreign exchange contracts to hedge our exposure, although we do not engage in currency speculation. While these hedges limit our exposure to relative increases in the value of the Canadian dollar, they also limit the benefits that we may realize from relative decreases in that value. The last of our existing forward exchange contracts expires in March of 2000, and we do not currently intend to enter into any additional forward exchange contracts. These contracts are entered into with major financial institutions thereby minimizing the risk of credit loss. All items described are non-trading and are stated in United States dollars.
FAIR VALUE EXPECTED MATURITY DATES SEPTEMBER (IN THOUSANDS) 2000 2001 2002 2003 2004 THEREAFTER TOTAL 30, 1999 -------- -------- -------- -------- -------- ---------- -------- ---------- DEBT United States $ denominated $ 2,196 $ 583 $ 1,530 $ 23,317 $ 52,827 $ 877,063 $957,516 $ 671,302 Average interest rates - fixed -- -- -- -- -- 12.2% Average interest rates - variable (c) (c) (c) (a)(c) (a)(c) (a)(c) Interest rate swaps(b) $ 31,250 $ 13,393 $ -- -- -- -- $ 500 Canadian $ denominated $ 2,050 $ 2,040 $ 3,196 $ 3,999 $ -- $ -- $ 11,285 $ 11,285 Average interest rates - variable (c) (c) (c) (c) -- FIRM COMMITMENTS, FORWARD CONTRACTS Contract notional amount - United States $ sold(b) $ 6,000 $ -- -- -- -- -- $ 6,000 $ 300 Average contractual exchange rate 1.40 -- -- -- -- --
(a) Borrowings under our fixed assets revolver bear interest, at Chemicals' option, at an annual rate of either the "LIBOR Rate" plus 3.75% or the "Alternate Base Rate" plus 2.25%. Borrowings under our current assets revolver bear interest, at Chemicals' option, at an annual rate of either the LIBOR Rate plus 3.00% or the Alternate Base Rate plus 1.50%. The "Alternate Base Rate" is equal to the greater of the "Base Rate" as announced from time to time by The Chase Manhattan Bank in New York, New York or the "Federal Funds Effective Rate" plus 1/2%. At September 30, 1999, the weighted average interest rate in effect for our fixed assets revolver was 9.3%. (b) Expected maturity amounts represent notional amounts. Fair value of September 30, 1999 represents unrealized loss. (c) The Saskatoon tranche A term loan, which is denominated in Canadian dollars, and the Saskatoon revolver borrowings bear interest, at Saskatoon's option, at an annual rate of either the "Bankers Acceptance Rate" or the "Base Rate" plus an "Applicable Margin" ranging from 1% to 2.5% depending upon Saskatoon's "Leverage Ratio". The Saskatoon tranche B term loan, which is denominated in United States dollars, bears interest, at Saskatoon's option, at an annual rate of either the "Eurodollar Rate" or the "Base Rate" plus an Applicable Margin ranging from 0% to 2.5% depending upon Saskatoon's Leverage Ratio. The "Base Rate" for the tranche A term loan and the Saskatoon revolver is equal to the greater of the Prime Rate for Canadian Dollar commercial loans made in Canada, as announced from time to time by the agent bank, or the rate for Canadian Dollar Bankers Acceptances accepted by the agent with a term to maturity of 30 days plus 1%. The "Base Rate" for the tranche B term loan is equal to the greater of the Prime Rate as announced from time to time by the agent bank, the "Federal Funds Effective Rate" plus 1/2% or the "Base CD Rate" plus 1%. At September 30, 1999, the interest rates in effect for the Saskatoon tranche A and tranche B term loans were 7.5% and 8.5%, respectively. 38 41 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS STERLING CHEMICALS HOLDINGS, INC. AND STERLING CHEMICALS, INC. Sterling Chemicals Holdings, Inc. Consolidated Statements of Operations for the years ended September 30, 1999, 1998, and 1997................................................................................. 41 Sterling Chemicals Holdings, Inc. Consolidated Balance Sheets as of September 30, 1999 and 1998............. 42 Sterling Chemicals Holdings, Inc. Consolidated Statements of Changes in Stockholders' Equity (Deficiency in Assets) for the years ended September 30, 1999, 1998, and 1997............................ 43 Sterling Chemicals Holdings, Inc. Consolidated Statements of Cash Flows for the years ended September 30, 1999, 1998, and 1997....................................................................... 44 Sterling Chemicals, Inc. Consolidated Statements of Operations for the years ended September 30, 1999, 1998, and 1997......................................................................................... 45 Sterling Chemicals, Inc. Consolidated Balance Sheets as of September 30, 1999 and 1998...................... 46 Sterling Chemicals, Inc. Consolidated Statements of Changes in Stockholder's Equity (Deficiency in Assets) for the years ended September 30, 1999, 1998, and 1997 .......................................... 47 Sterling Chemicals, Inc. Consolidated Statements of Cash Flows for the years ended September 30, 1999, 1998, and 1997.......................................................................................... 48 Notes to Consolidated Financial Statements.................................................................. 49 Independent Auditors' Reports............................................................................... 73 STERLING CHEMICALS U.S. SUBSIDIARIES Sterling Chemicals U.S. Subsidiaries Combined Statements of Operations for the years ended September 30, 1999, 1998, and 1997....................................................................... 75 Sterling Chemicals U.S. Subsidiaries Combined Balance Sheets as of September 30, 1999 and 1998.............. 76 Sterling Chemicals U.S. Subsidiaries Combined Statements of Changes in Stockholder's Equity for the years ended September 30, 1999, 1998, and 1997........................................................... 77 Sterling Chemicals U.S. Subsidiaries Combined Statements of Cash Flows for the years ended September 30, 1999, 1998, and 1997....................................................................... 78
39 42 Notes to Combined Financial Statements...................................................................... 79 Independent Auditors' Report................................................................................ 90 STERLING PULP CHEMICALS, LTD. Sterling Pulp Chemicals, Ltd. Statements of Operations for the years ended September 30, 1999, 1998, and 1997................................................................................................. 91 Sterling Pulp Chemicals, Ltd. Balance Sheets as of September 30, 1999 and 1998.............................. 92 Sterling Pulp Chemicals, Ltd. Statements of Changes in Stockholder's Equity for the years ended September 30, 1999, 1998, and 1997....................................................................... 93 Sterling Pulp Chemicals, Ltd. Statements of Cash Flows for the years ended September 30, 1999, 1998, and 1997................................................................................................. 94 Notes to Financial Statements............................................................................... 95 Independent Auditors' Report................................................................................ 104 Report of Management....................................................................................... 105
40 43 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30, --------------------------------------- 1999 1998 1997 --------- --------- --------- Revenues ..................................................... $ 720,752 $ 822,590 $ 908,787 Cost of goods sold ........................................... 682,594 745,323 823,265 --------- --------- --------- Gross profit ................................................. 38,158 77,267 85,522 Selling, general, and administrative expenses ................ 37,649 38,515 28,053 Impairment of assets ......................................... 26,369 -- -- Other expense ................................................ 10,832 5,962 -- Interest and debt related expenses, net of interest income ... 104,061 104,455 88,901 --------- --------- --------- Loss before taxes and extraordinary item ..................... (140,753) (71,665) (31,432) Benefit for income taxes .................................... (34,936) (25,546) (7,296) --------- --------- --------- Loss before extraordinary item ............................... (105,817) (46,119) (24,136) Extraordinary item, loss on early extinguishment of debt, net of tax ............................................... 4,212 -- 3,924 --------- --------- --------- Net loss ..................................................... (110,029) (46,119) (28,060) Preferred stock dividends .................................... 2,683 2,460 905 --------- --------- --------- Net loss attributable to common stockholders ................. $(112,712) $ (48,579) $ (28,965) ========= ========= ========= Per share data: Loss before extraordinary item ............................... $ (8.60) $ (3.99) $ (2.23) Extraordinary item ........................................... (0.34) -- (0.35) --------- --------- --------- Loss per common share ........................................ $ (8.94) $ (3.99) $ (2.58) ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 41 44 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, ------------------------ 1999 1998 --------- --------- ASSETS Current assets: Cash and cash equivalents ............................................. $ 14,921 $ 11,168 Accounts receivable ................................................... 141,059 114,571 Inventories ........................................................... 70,464 73,225 Prepaid expenses ...................................................... 16,236 15,571 Deferred income tax benefit ........................................... 16,888 5,140 --------- --------- Total current assets ................................................ 259,568 219,675 Property, plant, and equipment, net ...................................... 402,723 450,315 Deferred income tax benefit .............................................. 26,158 -- Other assets ............................................................. 86,650 95,966 --------- --------- Total assets ........................................................ $ 775,099 $ 765,956 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) Current liabilities: Accounts payable ...................................................... $ 72,961 $ 46,983 Accrued liabilities ................................................... 79,883 71,873 Current portion of long-term debt ..................................... 4,246 8,909 --------- --------- Total current liabilities ........................................... 157,090 127,765 Long-term debt ........................................................... 964,555 873,616 Deferred income tax liability ............................................ 8,815 11,123 Deferred credits and other liabilities ................................... 76,893 80,289 Common stock held by ESOP ................................................ 2,946 5,938 Less: unearned compensation .............................................. (745) (2,845) Redeemable preferred stock ............................................... 20,932 18,249 Commitments and contingencies (Note 6) ................................... -- -- 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 September 30, 1999; and 12,273,000 shares issued and 12,073,000 outstanding at September 30, 1998 ........................ 123 123 Additional paid-in capital ............................................ (542,712) (542,701) Retained earnings ..................................................... 118,490 229,590 Accumulated other comprehensive income ................................ (28,768) (32,680) Deferred compensation ................................................. (58) (111) --------- --------- (452,925) (345,779) Treasury stock, at cost, 208,000 and 200,000 shares at September 30, 1999 and 1998, respectively ........................... (2,462) (2,400) --------- --------- Total stockholders' equity (deficiency in assets) ................. (455,387) (348,179) --------- --------- Total liabilities and stockholders' equity (deficiency in assets)........................................ $ 775,099 $ 765,956 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 42 45 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) (AMOUNTS IN THOUSANDS)
ACCUMULATED ADDITIONAL OTHER COMMON STOCK PAID-IN RETAINED COMPREHENSIVE DEFERRED TREASURY SHARES AMOUNT CAPITAL EARNINGS INCOME COMPENSATION STOCK TOTAL --------- --------- ---------- --------- ------------- ------------ --------- --------- Balance, September 30, 1996 ..... 10,599 $ 106 $(560,077) $ 306,656 $ (19,124) $ -- $ -- $(272,439) Comprehensive loss: Net loss ........................ -- -- -- (28,060) -- -- -- Other comprehensive loss, net of tax: Cumulative translation adjustments ................. -- -- -- -- (1,969) -- -- Pension adjustment ............ -- -- -- -- (31) -- -- Comprehensive loss ......... -- -- -- -- -- -- -- (30,060) Common stock issued in connection with AFB Acquisition, net .............. 778 8 9,331 -- -- -- -- 9,339 Preferred stock dividends ....... -- -- -- (905) -- -- -- (905) Employee stock purchase ......... (44) -- (531) -- -- -- -- (531) Treasury stock purchases ........ (228) -- -- -- -- -- (2,730) (2,730) Common stock issued in connection with the Saskatoon Acquisition, net ........................... 609 6 6,379 -- -- -- -- 6,385 Stock warrants .................. -- -- 2,413 -- -- -- -- 2,413 --------- --------- --------- --------- --------- --------- --------- --------- Balance, September 30, 1997 ..... 11,714 120 (542,485) 277,691 (21,124) -- (2,730) (288,528) Comprehensive loss: Net loss ........................ -- -- -- (46,119) -- -- -- Other comprehensive loss, net of tax: Cumulative translation adjustments ................. -- -- -- -- (11,466) -- -- Pension adjustment ............ -- -- -- -- (90) -- -- Comprehensive loss ......... -- -- -- -- -- -- -- (57,675) Common stock issued in connection with the exercise of warrants .......... 345 3 -- -- -- -- -- 3 Preferred stock dividends ....... -- -- -- (2,460) -- -- -- (2,460) Treasury shares issued as restricted stock .............. 23 -- (48) -- -- (222) 270 -- Treasury shares issued to ESOP... -- -- (168) -- -- -- 168 -- Revaluation of ESOP shares to independently appraised market value .................. -- -- -- 478 -- -- -- 478 Amortization of deferred compensation .................. -- -- -- -- -- 111 -- 111 Treasury stock purchases ........ (9) -- -- -- -- -- (108) (108) --------- --------- --------- --------- --------- --------- --------- --------- Balance, September 30, 1998 ..... 12,073 123 (542,701) 229,590 (32,680) (111) (2,400) (348,179) Comprehensive loss: Net loss ........................ -- -- -- (110,029) -- -- -- Other comprehensive income (loss), net of tax:............ Cumulative translation adjustments ................. -- -- -- -- 3,972 -- -- Pension adjustment ............ -- -- -- -- (60) -- -- Comprehensive loss ......... -- -- -- -- -- -- -- (106,117) Common stock issued in connection with the exercise of warrants .......... 32 -- -- -- -- -- -- -- Preferred stock dividends ....... -- -- -- (2,683) -- -- -- (2,683) Treasury shares issued as restricted stock ........... 1 -- (11) -- -- (7) 18 -- Revaluation of ESOP shares to independently appraised market value .................. -- -- -- 1,612 -- -- -- 1,612 Amortization of deferred compensation .................. -- -- -- -- -- 60 -- 60 Treasury stock purchases ........ (9) -- -- -- -- -- (80) (80) --------- --------- --------- --------- --------- --------- --------- --------- Balance, September 30, 1999 ..... 12,097 $ 123 $(542,712) $ 118,490 $ (28,768) $ (58) $ (2,462) $(455,387) ========= ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 43 46 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, --------------------------------------- 1999 1998 1997 --------- --------- --------- Cash flows from operating activities: Net loss ....................................................... $(110,029) $ (46,119) $ (28,060) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ............................. 57,677 55,963 49,849 Interest amortization ..................................... 3,105 4,376 4,163 Extraordinary item, loss on early extinguishment of debt .. 4,212 -- 3,924 Deferred tax benefit ...................................... (38,024) (19,722) (3,107) Early retirement programs and benefit changes ............. 6,781 -- -- Discount notes amortization ............................... 19,483 16,878 15,499 Impairment of assets ...................................... 26,369 -- -- Other ..................................................... 1,016 1,820 2,328 Change in assets/liabilities: Accounts receivable ....................................... (11,547) 44,419 (8,985) Inventories ............................................... 3,207 13,675 (6,674) Prepaid expenses .......................................... (10,760) (2,852) (7,767) Other assets .............................................. (1,477) 654 (1,754) Accounts payable .......................................... 19,137 (32,896) (1,424) Accrued liabilities ....................................... 4,619 (9,300) 27,305 Other liabilities ......................................... 12,341 18,988 2,017 --------- --------- --------- Net cash provided by (used in) operating activities ............ (13,890) 45,884 47,314 --------- --------- --------- Cash flows from investing activities: Capital expenditures ...................................... (29,540) (26,622) (43,428) Proceeds from sale of assets .............................. 3,583 -- -- Business acquisitions ..................................... -- -- (152,923) --------- --------- --------- Net cash used in investing activities .......................... (25,957) (26,622) (196,351) --------- --------- --------- Cash flows from financing activities: Proceeds from long-term debt .............................. 814,105 59,862 375,260 Repayment of long-term debt ............................... (751,001) (75,152) (236,104) Issuance of common stock .................................. -- 3 18,721 Sale of warrants .......................................... -- -- 2,413 Debt issuance costs ....................................... (16,480) -- (9,684) Issuance of preferred stock ............................... -- -- 4,887 Purchase of treasury stock ................................ (80) (105) (3,256) Other ..................................................... (3,270) 154 (627) --------- --------- --------- Net cash provided by (used in) financing activities ............ 43,274 (15,238) 151,610 Effect of United States /Canadian exchange rate on cash ........ 326 (814) (224) --------- --------- --------- Net increase in cash and cash equivalents ...................... 3,753 3,210 2,349 Cash and cash equivalents - beginning of year .................. 11,168 7,958 5,609 --------- --------- --------- Cash and cash equivalents - end of year ........................ $ 14,921 $ 11,168 $ 7,958 ========= ========= ========= Supplemental disclosures of cash flow information: Interest paid, net of interest income received ............ $ (83,167) $ (80,223) $ (60,387) Income taxes received ..................................... 4,750 6,653 3,116
The accompanying notes are an integral part of the consolidated financial statements. 44 47 STERLING CHEMICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, --------------------------------------- 1999 1998 1997 --------- --------- --------- Revenues .............................................. $ 720,752 $ 822,590 $ 908,787 Cost of goods sold .................................... 682,594 745,323 823,265 --------- --------- --------- Gross profit .......................................... 38,158 77,267 85,522 Selling, general, and administrative expenses ......... 36,980 37,319 27,358 Impairment of assets .................................. 26,369 -- -- Other expense ......................................... 10,832 5,962 -- Interest and debt related expenses .................... 83,897 86,618 72,931 Interest income from parent ........................... -- -- (1,692) --------- --------- --------- Loss before taxes and extraordinary item .............. (119,920) (52,632) (13,075) Benefit for income taxes .............................. (29,410) (18,963) (2,148) --------- --------- --------- Loss before extraordinary item ........................ (90,510) (33,669) (10,927) Extraordinary item, loss on early extinguishment of debt, net of tax ................................ 4,212 -- 3,924 --------- --------- --------- Net loss .............................................. $ (94,722) $ (33,669) $ (14,851) ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 45 48 STERLING CHEMICALS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, ------------------------ 1999 1998 --------- --------- ASSETS Current assets: Cash and cash equivalents .......................................... $ 14,899 $ 11,159 Accounts receivable ................................................ 143,556 116,398 Inventories ........................................................ 70,464 73,225 Prepaid expenses ................................................... 15,059 13,632 Deferred income tax benefit ........................................ 16,888 5,140 --------- --------- Total current assets ............................................. 260,866 219,554 Property, plant and equipment, net .................................... 402,723 450,315 Deferred income tax benefit ........................................... 8,384 -- Other assets .......................................................... 80,133 92,634 --------- --------- Total assets ..................................................... $ 752,106 $ 762,503 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS) Current liabilities: Accounts payable ................................................... $ 72,731 $ 46,775 Accrued liabilities ................................................ 79,883 71,873 Current portion of long-term debt .................................. 4,246 8,909 --------- --------- Total current liabilities .......................................... 156,860 127,557 Long-term debt ........................................................ 816,927 745,709 Deferred income tax liability ......................................... 8,815 23,301 Deferred credits and other liabilities ................................ 76,893 83,288 Common stock held by ESOP ............................................. 2,946 5,938 Less: unearned compensation .......................................... (745) (2,845) Commitments and contingencies ......................................... -- -- Stockholder's equity (deficiency in assets): Common stock, $.01 par value ....................................... -- -- Additional paid-in capital ......................................... (139,786) (139,786) Accumulated deficit ................................................ (140,978) (47,868) Accumulated other comprehensive income ............................. (28,768) (32,680) Deferred compensation .............................................. (58) (111) --------- --------- Total stockholder's equity (deficiency in assets) .................. (309,590) (220,445) --------- --------- Total liabilities and stockholder's equity (deficiency in assets) .. $ 752,106 $ 762,503 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 46 49 STERLING CHEMICALS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS) (AMOUNTS IN THOUSANDS)
RETAINED ACCUMULATED ADDITIONAL EARNINGS OTHER COMMON STOCK PAID-IN (ACCUMULATED COMPREHENSIVE DEFERRED SHARES AMOUNT CAPITAL DEFICIT) INCOME COMPENSATION TOTAL ------------ ------ ----------- ------------ ------------- ------------ --------- Balance, September 30, 1996 .... 1 $ -- $(165,352) $ 174 $ (19,124) $ -- $(184,302) Comprehensive loss: Net loss ....................... -- -- -- (14,851) -- -- Other comprehensive loss, net of tax: Cumulative translation adjustments ................ -- -- -- -- (1,969) -- Pension adjustment ........... -- -- -- -- (31) -- Comprehensive loss ........ -- -- -- -- -- -- (16,851) Earned ESOP shares ............. -- -- (2,118) -- -- -- (2,118) Contribution from parent ....... -- -- 27,684 -- -- -- 27,684 --------- ----- --------- --------- --------- --------- --------- Balance, September 30, 1997 .... 1 -- (139,786) (14,677) (21,124) -- (175,587) Comprehensive loss: Net loss ....................... -- -- -- (33,669) -- -- Other comprehensive loss, net of tax: Cumulative translation adjustments ................ -- -- -- -- (11,466) -- Pension adjustment ........... -- -- -- -- (90) -- Comprehensive loss ........ -- -- -- -- -- -- (45,225) Issuance of restricted stock ... -- -- -- -- -- (222) (222) Revaluation of ESOP shares to independently appraised market value ................. -- -- -- 478 -- -- 478 Amortization of deferred compensation ................. -- -- -- -- -- 111 111 --------- ----- --------- --------- --------- --------- --------- Balance, September 30, 1998 .... 1 -- (139,786) (47,868) (32,680) (111) (220,445) Comprehensive loss: Net loss ....................... -- -- -- (94,722) -- -- Other comprehensive income (loss), net of tax: Cumulative translation adjustments .................. -- -- -- -- 3,972 -- Pension adjustment ........... -- -- -- -- (60) -- Comprehensive loss ........ -- -- -- -- -- -- (90,810) Issuance of restricted stock ... -- -- -- -- -- (7) (7) Revaluation of ESOP shares to independently appraised market value ................. -- -- -- 1,612 -- -- 1,612 Amortization of deferred compensation ................. -- -- -- -- -- 60 60 --------- ----- --------- --------- --------- --------- --------- Balance, September 30, 1999 .... 1 $ -- $(139,786) $(140,978) $ (28,768) $ (58) $(309,590) ========= ===== ========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 47 50 STERLING CHEMICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, --------------------------------------- 1999 1998 1997 --------- --------- --------- Cash flows from operating activities: Net loss ..................................................... $ (94,722) $ (33,669) $ (14,851) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ............................. 60,349 59,151 53,680 Deferred tax expense (benefit) ............................ (32,498) (13,139) 1,869 Extraordinary item ........................................ 4,212 -- 3,924 Early retirement and benefit charges ...................... 6,781 -- -- Impairment of assets ...................................... 26,368 -- -- Other ..................................................... 1,016 2,020 2,173 Change in assets/liabilities: Accounts receivable ....................................... (10,877) 45,484 (13,510) Inventories ............................................... 3,207 13,675 (6,674) Prepaid expenses .......................................... (11,522) (1,838) (5,733) Other assets .............................................. 4,811 2,078 (2,271) Accounts payable .......................................... 17,797 (35,102) (1,288) Accrued liabilities ....................................... 4,619 (3,441) 27,218 Other liabilities ......................................... 6,556 10,654 2,037 --------- --------- --------- Net cash provided by (used in) operating activities .......... (13,903) 45,873 46,574 --------- --------- --------- Cash flows from investing activities: Capital expenditures ...................................... (29,540) (26,622) (43,428) Business acquisitions ..................................... -- -- (152,923) Proceeds from sale of assets .............................. 3,583 -- -- --------- --------- --------- Net cash used in investing activities ........................ (25,957) (26,622) (196,351) --------- --------- --------- Cash flows from financing activities: Proceeds from long-term debt .............................. 814,105 59,862 375,260 Repayment of long-term debt ............................... (751,001) (75,153) (236,104) Debt issuance costs ....................................... (16,480) -- (9,684) Intercompany financing .................................... -- 1 3,000 Contribution from parent .................................. -- -- 22,286 Other ..................................................... (3,350) 54 (2,380) --------- --------- --------- Net cash provided by (used in) financing activities .......... 43,274 (15,236) 152,378 Effect of United States/Canadian exchange rate on cash ....... 326 (814) (224) --------- --------- --------- Net increase in cash and cash equivalents .................... 3,740 3,201 2,377 Cash and cash equivalents - beginning of period .............. 11,159 7,958 5,581 --------- --------- --------- Cash and cash equivalents - end of year ...................... $ 14,899 $ 11,159 $ 7,958 ========= ========= ========= Supplement disclosures of cash flow information: Interest paid, net of interest income received ............ $ (83,180) $ (80,251) $ (60,402) Income taxes received ..................................... 4,750 6,653 3,116
The accompanying notes are an integral part of the consolidated financial statements. 48 51 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Sterling Chemicals Holdings, Inc. ("Holdings" and, together with its subsidiaries, the "Company") manufactures seven commodity petrochemicals at its Texas City, Texas plant (the "Texas City Plant"). Additionally, the Company manufactures chemicals for use primarily in the pulp and paper industry at five plants in Canada and one plant in Valdosta, Georgia (the "Valdosta Plant"), and manufactures acrylic fibers in a plant near Pensacola, Florida (the "Santa Rosa Plant"). At its Texas City Plant, the Company produces styrene, acrylonitrile, acetic acid, plasticizers, methanol, tertiary butylamine ("TBA"), and sodium cyanide. The Company generally sells its petrochemicals products to customers for use in the manufacture of other chemicals and products, which in turn are used in the production of a wide array of consumer goods and industrial products. 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. Sodium chlorate is produced at the Company's five plants in Canada and the Valdosta Plant. Sodium chlorite is produced at one of the Company's Canadian locations. In addition, chlor-alkali and calcium hypochlorite are produced at one of the Canadian locations. The Company 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. Holdings is a holding company whose only material asset is its investment in Sterling Chemicals, Inc. ("Chemicals"). Chemicals and its subsidiaries are substantially all of the consolidated operating assets. The significant accounting policies of the Company are described below. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of all wholly owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company's investment in a cogeneration joint venture of a 50% equity interest and a 50/50 acrylonitrile marketing joint venture are accounted for under the equity method with the Company's share of the operating results of the joint ventures recorded in its Statement of Operations. CASH EQUIVALENTS The Company considers all investments purchased with a remaining maturity of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market; cost is primarily determined on the first-in, first-out basis except for stores and supplies, which are valued at average cost. The Company enters into agreements with other companies to exchange chemical inventories in order to minimize working capital requirements and to facilitate distribution logistics. Balances related to quantities due to or payable by the Company are included in inventory. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost. Major renewals and improvements, which extend the useful lives of the equipment, are capitalized. Major planned maintenance expenses are accrued for during the periods prior to the maintenance, while routine repair and maintenance expenses are charged to operations as incurred. Disposals are removed at carrying cost less accumulated depreciation with any resulting gain or loss reflected in operations. Depreciation is provided using the straight-line method over estimated useful lives ranging from 5 to 25 years with the predominant life of the plant and equipment being 15 years. The Company capitalizes interest costs, which are incurred as part of the cost of constructing major facilities and equipment. The amount of interest capitalized for the fiscal years 1999, 1998, and 1997 was $1.4 million, $0.8 million, and $3.8 million, respectively. 49 52 IMPAIRMENT OF LONG-LIVED ASSETS Impairment tests of long-lived assets are made when conditions indicate their carrying cost may not be recoverable. Such impairment tests are based on a comparison of undiscounted future cash flows or the market value of similar assets to the carrying cost of the asset. If an impairment is indicated, the asset value is written down to its estimated fair value. During fiscal 1999, the Company incurred an impairment loss of $26.4 million related to its methanol production assets. PATENTS AND ROYALTIES The cost of patents is amortized on a straight-line basis over their estimated useful lives which approximates ten years. The Company capitalized the value of the chlorine dioxide generator technology acquired in fiscal 1992 based on the net present value of all estimated remaining royalty payments associated with the technology. The resulting intangible amount is included in other assets and is amortized over the average life for these royalty payments of ten years. DEBT ISSUE COSTS Debt issue costs relating to long-term debt are amortized over the term of the related debt instrument using the effective interest method and are included in other assets. INCOME TAXES Deferred income taxes are recorded to reflect the tax effect of the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted rates. REVENUE RECOGNITION The Company generates revenues through sales in the open market, raw material conversion agreements, and long-term supply contracts. In addition, the Company has entered into shared profit arrangements with respect to certain petrochemicals products. The Company recognizes revenue from sales in the open market, raw material conversion agreements, and long-term supply contracts when the products are shipped. Revenues from shared profit arrangements are estimated and accrued monthly. Deferred credits are amortized over the life of the contract which gave rise to them. The Company also generates revenues from the construction and sale of chlorine dioxide generators, which are recognized using the percentage of completion method. The Company also receives prepaid royalties, which are recognized over a period, which is typically ten years. In addition, the Company generates revenues from the sale of acrylic fibers manufacturing technology to producers worldwide, which are recognized as earned. FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE The Company's Canadian subsidiaries use the Canadian dollar as their functional currency. For financial reporting purposes, assets and liabilities of these subsidiaries denominated in Canadian dollars are translated into United States dollars at year-end exchange rates and revenues and expenses are translated at the average monthly exchange rates. Translation adjustments are reported as a separate component of stockholders' equity, while transaction gains and losses are included in operations when incurred. The Company's Canadian subsidiaries enter into forward foreign exchange contracts to minimize the short-term impact of Canadian dollar fluctuations on certain of its Canadian dollar denominated commitments. Gains or losses on these contracts are deferred and are included in operations in the same period in which the related transactions are settled. HEDGING The Company periodically enters into contracts to hedge against the volatility in the price of natural gas, which is used in the production of styrene and methanol. These transactions generally take the form of price collars, and are placed with major financial institutions and industrial companies. The results of the hedging transactions are included in Cost of Goods Sold as the related production of styrene and methanol occurs. 50 53 EARNINGS PER SHARE 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 of Released Shares (as hereinafter defined) at the end of the period, minus the sum of the amount previously recognized as compensation expense with respect to Released Shares and the amount of depreciation/appreciation in value of Released Shares in prior periods. This reduction results from the Company being required, under certain circumstances, to purchase for cash common stock distributed to participants by the Sterling Chemicals ESOP (the "ESOP"). "Released Shares" are shares held by the ESOP but allocated to employees. The weighted average number of outstanding shares and computation of the net income (loss) per common share is as follows (in thousands, except per share data):
YEAR ENDED SEPTEMBER 30, --------------------------------------- 1999 1998 1997 --------- --------- --------- Net loss attributable to common stockholders .................... $(112,712) $ (48,579) $ (28,965) Plus depreciation in value of Released Shares ................... 1,048 298 -- --------- --------- --------- Net loss for purpose of computing net income (loss) per share ... $(111,664) $ (48,281) $ (28,965) ========= ========= ========= Net loss per common share ....................................... $ (8.94) $ (3.99) $ (2.58) ========= ========= ========= Weighted average shares outstanding ............................. 12,495 12,104 11,237 ========= ========= =========
As losses were incurred in fiscal 1999, 1998, and 1997, basic and diluted EPS are the same amount for these periods. COMPREHENSIVE INCOME (LOSS) As of October 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for the reporting and displaying of comprehensive net income and its components. Accumulated Other Comprehensive Income consists of the following (in thousands):
CUMULATIVE TRANSLATION ADJUSTMENT PENSION ADJUSTMENT TOTAL ---------------- ------------------ --------------- Balance, September 30, 1996 $ (19, 124) $ -- $ (19,124) Changes (1,969) (31) (2,000) ---------------- --------------- --------------- Balance, September 30, 1997 (21,093) (31) (21,124) Changes (11,466) (90) (11,556) ---------------- --------------- --------------- Balance, September 30, 1998 (32,559) (121) (32,680) Changes 3,972 (60) 3,912 ---------------- --------------- --------------- Balance, September 30, 1999 $ (28,587) $ (181) $ (28,768) ================ =============== ===============
There is no tax expense or benefit associated with the cumulative translation adjustment amounts above. The pension adjustment amounts are net of tax benefit of $32,000, $49,000, and $17,000 for the fiscal years ended September 30, 1999, 1998, and 1997, respectively. ENVIRONMENTAL COSTS Environmental costs are expensed unless the expenditures extend the economic useful life of the assets. Costs that extend the economic life of the assets are capitalized and depreciated over the remaining life of such assets. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In preparing disclosures about the fair value of financial instruments, the Company has assumed that the carrying amount approximates fair value for cash and cash equivalents, receivables, short-term borrowings, accounts payable, and certain accrued expenses because of the short maturities of those instruments. The fair values of long-term debt instruments are estimated based upon quoted market values (if applicable) or on the current interest rates available to the Company for debt with similar terms and remaining maturities. Considerable judgment is required in developing 51 54 these estimates and, accordingly, no assurance can be given that the estimated values presented herein are indicative of the amounts that would be realized in a free market exchange. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Significant estimates include environmental reserves, litigation contingencies, maintenance costs related to shut downs, taxes, and revenues. Actual results could differ from these estimates. RECLASSIFICATION Certain amounts reported in the financial statements for the prior periods have been reclassified to conform with the current financial statement presentation with no effect on net income (loss) or stockholders' equity (deficiency in assets). 52 55 2. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
SEPTEMBER 30, ------------------------ 1999 1998 --------- --------- (Dollars in Thousands) Inventories: Finished products ....................................... $ 37,484 $ 42,436 Raw materials ........................................... 10,355 8,089 --------- --------- Inventories at cost ........................................ 47,839 50,525 --------- --------- Inventories under exchange agreements ................... 2,562 3,031 Stores and supplies ..................................... 20,063 19,669 --------- --------- $ 70,464 $ 73,225 ========= ========= Property, plant, and equipment: Land .................................................... $ 10,274 $ 12,897 Buildings ............................................... 56,728 51,362 Plant and equipment ..................................... 673,108 652,872 Construction in progress ................................ 39,388 30,506 Less: accumulated depreciation ......................... (376,775) (297,322) --------- --------- $ 402,723 $ 450,315 ========= ========= Other assets: Patents and technology, net ............................. $ 21,630 $ 26,821 Debt issue costs ........................................ 34,055 28,248 Other ................................................... 30,965 40,897 --------- --------- $ 86,650 $ 95,966 ========= ========= Accrued liabilities: Repairs ................................................. $ 9,635 $ 16,890 Interest ................................................ 20,778 14,433 Compensation ............................................ 18,174 5,489 Property taxes .......................................... 8,243 7,754 Other ................................................... 23,053 27,307 --------- --------- $ 79,883 $ 71,873 ========= ========= Deferred credits and other liabilities: Deferred revenue ........................................ $ 7,667 $ 15,168 Accrued postretirement benefits ......................... 54,084 37,663 Other ................................................... 15,142 27,458 --------- --------- $ 76,893 $ 80,289 ========= =========
3. LONG-TERM DEBT: Long-term debt consisted of the following:
SEPTEMBER 30, ------------------------ 1999 1998 --------- --------- (Dollars in Thousands) Revolving credit facilities ........................... $ 54,643 $ -- Term loans ............................................ -- 274,000 Saskatoon term loans .................................. 44,045 49,552 ESOP term loan ........................................ -- 3,250 11 1/4% notes ......................................... 152,485 152,816 11 3/4% notes ......................................... 275,000 275,000 12 3/8% notes ......................................... 295,000 -- --------- --------- Total Chemicals' debt outstanding .................. 821,173 754,618 13 1/2% notes ......................................... 147,628 127,907 --------- --------- Total Holdings' debt outstanding ................... 968,801 882,525 ========= ========= Less: Current maturities ................................. (4,246) (8,909) --------- --------- Total long-term debt .................................. $ 964,555 $ 873,616 ========= =========
53 56 On July 23, 1999, Chemicals completed a private offering (the "12 3/8% Notes 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 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 senior secured obligations of Chemicals and rank equally in right of payment with all other existing and future senior indebtedness of Chemicals and senior in right of payment to all existing and future subordinated indebtedness of Chemicals. 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. Each subsidiary's guarantee ranks equally in right of payment with all of such subsidiary's existing and future senior indebtedness and senior in right of payment to all existing and future subordinated indebtedness of such subsidiary. However, the 12 3/8% Notes, and each subsidiary's guarantee, is subordinated to the extent of the collateral securing Chemicals' new secured revolving credit facilities described below. The 12 3/8% Notes and the subsidiary guarantees are secured by (i) a second priority lien on all of Chemicals' and the subsidiary guarantors' United States production facilities and related assets, (ii) a second priority pledge of all of the capital stock of each subsidiary guarantor, and (iii) a first priority pledge of 65% of the stock of certain of the Company's subsidiaries incorporated outside of the United States. The 12 3/8% Notes bear interest at the annual rate of 12 3/8%, payable semi-annually on January 15 and July 15 of each year commencing January 15, 2000. Except as otherwise provided below, the 12 3/8% Notes may not be redeemed by Chemicals prior to July 15, 2003. From that date until July 15, 2004, the 12 3/8% Notes may be redeemed at a premium of the principal amount thereof at maturity of 106.188% and from July 15, 2004 until July 15, 2005, the 12 3/8% Notes may be redeemed at a premium of the principal amount thereof at maturity of 103.094%. Thereafter, Chemicals may redeem the 12 3/8% Notes at their face value plus accrued and unpaid interest. Prior to July 15, 2002, Chemicals may redeem in the aggregate up to 35% of the original principal amount of the 12 3/8% Notes with the proceeds of one or more Public Equity Offerings, as defined. Such redemptions may be made at a redemption price of 112.375 of the face value plus accrued and unpaid interest to the redemption date. After such redemption, at least $191.75 million aggregate principal amount of the 12 3/8% Notes must remain outstanding. In addition, on July 23, 1999, Chemicals established two new secured revolving credit facilities providing up to $155,000,000 in revolving credit loans (the "New Revolvers") under a single Revolving Credit Agreement (the "New Credit Agreement"). Under the New Credit Agreement, Chemicals and each of its direct and indirect United States subsidiaries (other than Sterling Chemicals Acquisitions, Inc.) are co-borrowers and are jointly and severally liable for any indebtedness thereunder. The New Revolvers consist of (i) a $70,000,000 revolving credit facility (the "Fixed Assets Revolver") secured by a first priority lien on all United States production facilities and related assets of Chemicals and the other co-borrowers, all of the capital stock of Chemicals and all of the capital stock of each co-borrower and a second priority lien on all accounts receivable, inventory, and other specified assets of Chemicals and the other co-borrowers, and (ii) an $85,000,000 revolving credit facility (the "Current Assets Revolver") secured by a first priority lien on all accounts receivable, inventory, and other specified assets of Chemicals and the other co-borrowers. Funding under the 12 3/8% Notes Offering and the New Revolvers occurred on July 23, 1999. The proceeds of the 12 3/8% Notes Offering and the initial borrowings under the New Revolvers were used to completely repay all outstanding indebtedness under Chemicals existing senior credit facility. Approximately $54.6 million was drawn under the Fixed Assets Revolver at September 30, 1999. Borrowings under the Fixed Assets Revolver bear interest, at Chemicals' option, at an annual rate of either the "LIBOR Rate" (as defined in the New Credit Agreement) plus 3.75% or the Alternate Base Rate plus 2.25%. Borrowings under the Current Assets Revolver bear interest, at Chemicals' option, at an annual rate of either the LIBOR Rate plus 3.00% or the Alternate Base Rate plus 1.50%. The "Alternate Base Rate" is equal to the greater of the Base Rate as announced from time to time by The Chase Manhattan Bank in New York, New York or the "Federal Funds Effective Rate" plus 1/2% (as such terms are defined in the New Credit Agreement.). At September 30, 1999, the weighted average interest rate in effect was 9.3%. The New Credit Agreement also requires Chemicals and the co-borrowers to pay an aggregate commitment fee ranging from 0.75% to 1.25% on the unused portion of the commitment for the Fixed Assets Revolver, depending on the amount drawn, and an aggregate commitment fee of 0.5% on the unused portion of the commitment for the Current Assets Revolver. Available credit under the Current Assets Revolver is subject to a monthly borrowing base consisting of 85% of eligible accounts receivable and 65% of eligible inventory with an inventory cap of $42,500,000. In addition, the borrowing base for the Current Assets Revolver must exceed outstanding borrowings thereunder by $12,000,000 at all times. The Fixed Assets Revolver matures in five years, with quarterly commitment reductions totaling 28% of the total commitment in year four and the balance in year five. The Current Assets Revolver matures in five years, with no scheduled commitment reductions prior to that time. However, the commitments for each of the Fixed Assets Revolver 54 57 and the Current Assets Revolver will be permanently reduced to the extent required under the New Credit Agreement upon prepayments made out of specific sources of funds, including asset sales and certain equity issuances by Holdings. On July 10, 1997, Sterling Pulp Chemicals (Sask) Ltd. ("Sterling Sask"), an indirect wholly owned subsidiary of Holdings and Chemicals, acquired substantially all of the assets of Saskatoon Chemicals Ltd. ("Saskatoon Chemicals"), a subsidiary of Weyerhaeuser Canada Ltd. (the "Saskatoon Acquisition"). In connection with the Saskatoon Acquisition, Sterling Sask entered into a credit agreement (the "Saskatoon Credit Agreement") with The Chase Manhattan Bank of Canada, individually and as administrative agent. Funding under the Saskatoon Credit Agreement occurred July 10, 1997, upon consummation of the Saskatoon Acquisition. The Saskatoon Credit Agreement provides for a revolving credit facility of Cdn. $8.0 million (the "Saskatoon Revolver"), and a term loan facility consisting of Cdn. $21.2 million Tranche A term loan due June 30, 2003, and $36.4 million Tranche B term loan due June 30, 2005 (the "Saskatoon Term Loans"). Advances under the Saskatoon Revolver are subject to a borrowing base consisting of 85% of eligible accounts receivable and 65% of eligible inventory with an inventory cap of 50% of the borrowing base. At September 30, 1999, the borrowing base did not limit such available credit and there were no borrowings outstanding under the Saskatoon Revolver. Sterling Sasks' obligations under the Saskatoon Credit Agreement are secured by substantially all of the assets of Sterling Sask. The Saskatoon Credit Agreement requires Sterling Sask to satisfy certain financial covenants and tests. In addition, the Saskatoon Credit Agreement requires that certain amounts of Excess Cash Flow (as defined therein) be used to prepay amounts outstanding under the Saskatoon Term Loans. A mandatory prepayment of Cdn. $2 million will be required in fiscal 2000. The Sterling Sask Tranche A term loan and the Saskatoon Revolver borrowings bear interest, at Sterling Sask's option, at an annual rate of either the Bankers Acceptance Rate or the Base Rate plus an Applicable Margin ranging from 1% to 2.5% depending upon Sterling Sask's Leverage Ratio (as defined in the Saskatoon Credit Agreement). The Tranche B term loan bears interest, at Sterling Sask's option, at an annual rate of either the Eurodollar Rate or the Base Rate plus an Applicable Margin ranging from 0% to 2.5% depending upon Sterling Sask's Leverage Ratio. The "Base Rate" for the Tranche A term loan and the Saskatoon Revolver is equal to the greater of the Prime Rate for Canadian Dollar commercial loans made in Canada, as announced from time to time by the agent bank, or the rate for Canadian Dollar Bankers Acceptances accepted by the agent with a term to maturity of 30 days plus 1% (as such terms are defined in the Saskatoon Credit Agreement). The "Base Rate" for the Tranche B term loan is equal to the greater of the Prime Rate as announced from time to time by the agent bank, the "Federal Funds Effective Rate" plus 1/2% or the "Base CD Rate" plus 1% (as such terms are defined in the Saskatoon Credit Agreement). At September 30, 1999, the interest rates in effect for the Tranche A and Tranche B term loans were 7.5% and 8.5%, respectively. The Saskatoon Credit Agreement also requires Sterling Sask to pay a commitment fee in the amount of 1/2% of the unused commitment under the Saskatoon Revolver. As part of the recapitalization of the Company in August of 1996, Chemicals also issued $275.0 million of its 11 3/4% Senior Subordinated Notes due 2006 (the "11 3/4% Notes") and Holdings issued $191.8 million of discount notes ($100 million initial proceeds) representing 191,751 Units, with each Unit consisting of one 13 1/2% Senior Secured Discount Note due 2008 (collectively, the "13 1/2% Notes") and one warrant to purchase three shares of the common stock, par value $0.01 per share, of Holdings ("Holdings Common Stock") for $0.01 per share. The 11 3/4% Notes are unsecured senior subordinated obligations of Chemicals, ranking subordinate in right of payment to all existing and future senior debt of Chemicals, but pari passu with the 11 1/4% Notes and all future senior subordinated indebtedness. The 11 3/4% Notes bear interest at the annual rate of 11 3/4%, payable semi-annually on February 15 and August 15 of each year commencing February 15, 1997. The 13 1/2% Notes are senior secured obligations of Holdings and rank equally in right of payment with all other senior indebtedness of Holdings and senior in right of payment to all subordinated indebtedness of Holdings. The 13 1/2% Notes will accrete interest until August 15, 2001, with no interest payable in cash until February 15, 2002, at an annual rate of 13 1/2%, compounded semi-annually. Commencing in 2002, interest will be payable semi-annually on February 15 and August 15 of each year until maturity. Except as otherwise provided below, the 11 3/4% Notes may not be redeemed by Chemicals prior to August 15, 2001. From that date through August 15, 2004, the 11 3/4% Notes may be redeemed at a premium of the principal amount thereof at maturity varying between 105.875% and 101.958%. Subsequent to August 15, 2004, Chemicals may redeem the 11 3/4% Notes at their face value plus accrued and unpaid interest. Except as otherwise provided below, the 13 1/2% Notes may not be redeemed by Holdings prior to August 15, 2001. From that date through August 15, 2006, the 13 1/2% Notes may be redeemed at a premium of the principal amount thereof at maturity varying between 106.75% and 101.35%. Subsequent to August 15, 2006, Holdings may redeem the 13 1/2% Notes at their principal amount plus accrued interest. 55 58 On April 7, 1997, Chemicals issued $150.0 million of its 11 1/4% Senior Subordinated Notes due 2007 (the "11 1/4% Notes"). The 11 1/4% Notes are unsecured senior subordinated obligations of Chemicals, ranking subordinate in right of payment to all existing and future senior debt of Chemicals, but pari passu with the 11 3/4% Notes and all future senior subordinated indebtedness of Chemicals. The 11 1/4% Notes bear interest at the annual rate of 11 1/4%, payable semi-annually on April 1 and October 1 of each year commencing October 1, 1997. Except as otherwise provided below, the 11 1/4% Notes may not be redeemed by Chemicals prior to April 1, 2002. From that date through April 1, 2005, the 11 1/4% Notes may be redeemed at a premium of the principal amount thereof at maturity varying between 105.625% and 101.875%. Subsequent to April 1, 2005, Chemicals may redeem the 11 1/4% Notes at their face value plus accrued and unpaid interest. Prior to April 1, 2000, Chemicals may redeem in the aggregate up to 35% of the original principal amount of the 11 1/4% Notes with the proceeds of one or more public equity offerings, as defined. Such redemptions may be made at a redemption price of 111.25% of the face value plus accrued and unpaid interest to the redemption date. After such redemption, at least $97.5 million aggregate principal amount of the 11 1/4% Notes must remain outstanding. Under the terms of our New Credit Agreement, we cannot redeem all or any portion of Chemicals' 12 3/8% Notes, 11 3/4% Notes, or 11 1/4% Notes at any time unless expressly required to do so under the relevant indentures. In addition, our ability to redeem all of any portion of Chemicals' 11 3/4% Notes or 11 1/4% Notes is restricted under the indenture governing the 12 3/8% Notes. The indentures governing the 12 3/8% Notes, 11 1/4% Notes, 11 3/4% Notes, and 13 1/2% Notes (the "Indentures") contain numerous financial and operating covenants, including, but not limited to, restrictions on Chemicals' or Holdings' ability to incur indebtedness, pay dividends, create liens, sell assets, engage in mergers and acquisitions, and refinance existing indebtedness. In addition, the Indentures include various circumstances that will constitute, upon occurrence and subject in certain cases to notice and grace periods, an event of default thereunder. However, neither the Indentures nor the New Credit Agreement requires the Company or Chemicals to satisfy any financial ratios or maintenance tests. The indentures governing the 11 1/4% Notes, the 11 3/4% Notes, and the 12 3/8% Notes and the New Credit Agreement contain provisions which restrict the payment of advances, loans and dividends from Chemicals to Holdings. The most restrictive of the covenants limits such payments during fiscal 2000 to approximately $2.0 million, plus any amounts due Holdings from Chemicals under the intercompany tax sharing agreement. The Saskatoon Credit Agreement contains provisions, which restrict the payment of advances, loans and dividends from Sterling Sask to Chemicals. The most restrictive of the covenants limits such payments during fiscal 2000 to approximately $1.0 million, plus any amounts due to Chemicals or Holdings from Sterling Sask under the intercompany tax sharing agreement. DEBT MATURITIES The estimated remaining principal payments on the outstanding debt follows:
YEAR ENDING PRINCIPAL SEPTEMBER 30, PAYMENTS - ------------- -------- (Dollars in Thousands) 2000 ................................................ $ 4,246 2001 ................................................ 2,623 2002 ................................................ 4,726 2003 ................................................ 27,316 2004 ................................................ 52,827 Thereafter .......................................... 877,063 --------- Total Debt................................... $ 968,801 =========
56 59 4. INCOME TAXES A reconciliation of federal statutory income taxes to the Company's effective tax benefit before extraordinary item follows:
YEAR ENDED SEPTEMBER 30, ------------------------------------ 1999 1998 1997 -------- -------- -------- (Dollars in Thousands) Benefit for income taxes at statutory rates ................... $(51,526) $(26,968) $(11,001) Taxable foreign dividends ..................................... 4,295 -- -- Change in valuation allowance ................................. 1,514 -- -- Non-deductible expenses ....................................... 815 -- -- State and foreign income taxes ................................ 550 1,422 3,782 Other ......................................................... 9,416 -- (77) -------- -------- -------- Effective tax benefit ......................................... $(34,936) $(25,546) $ (7,296) ======== ======== ========
The benefit for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30, ------------------------------------ 1999 1998 1997 -------- -------- -------- (Dollars in Thousands) From operations: Current federal .................... $ 2,246 $ (5,900) $ (6,131) Deferred federal ................... (36,724) (21,854) (9,211) Deferred foreign ................... (1,300) 2,132 6,104 Current state ...................... 842 76 1,942 -------- -------- -------- Total tax benefit ....................... $(34,936) $(25,546) $ (7,296) ======== ======== ========
The components of the Company's deferred income tax assets and liabilities are summarized below:
YEAR ENDED SEPTEMBER 30, ------------------------ 1999 1998 --------- --------- (Dollars in Thousands) Deferred tax assets: Accrued liabilities ................................... $ 12,050 $ 12,074 Accrued postretirement cost ........................... 11,991 10,010 Tax loss and credit carry forwards .................... 64,044 24,783 Discount note interest ................................ 17,393 11,103 Other ................................................. 1,628 17,980 --------- --------- Total deferred tax assets ............................. 107,106 75,950 --------- --------- Deferred tax liabilities: Property, plant and equipment ......................... $ (68,732) $ (78,113) Other ................................................. (2,629) (3,820) --------- --------- Total deferred tax liabilities ........................ (71,361) (81,933) Valuation allowance ................................... (1,514) -- --------- --------- Net deferred tax assets (liabilities) ................. 34,231 (5,983) Less: current deferred tax assets ..................... (16,888) (5,140) --------- --------- Long-term deferred tax assets (liabilities) ........... $ 17,343 $ (11,123) ========= =========
The Company has approximately $155 million in United States net operating losses which will be carried forward and if not utilized in future years, will expire from fiscal 2018 to 2019. The Company also has approximately Cdn. $6.6 million in Canadian non-capital loss carryforwards and Cdn. $6.5 million of investment tax credits which will expire from 2000 through 2006. 57 60 5. EMPLOYEE BENEFITS The Company has established the following benefit plans: RETIREMENT BENEFIT PLANS The Company has non-contributory pension plans in the United States and employer and employee contributory plans in Canada which cover all salaried and wage employees. The benefits under these plans are based primarily on years of service and employees' pay near retirement. For those Company employees who were employed by the Company as of September 30, 1986, and were previously employed by Monsanto, the Company recognizes their Monsanto pension years of service for purposes of determining benefits under the Company's plans. For those Company employees who were employed by the Company on August 21, 1992, and were previously employed by Tenneco Inc., the Company recognizes their Tenneco Inc. pension years of service for purposes of determining benefits under the Company's plans. The Company's funding policy is consistent with the funding requirements of federal law and regulations. Plan assets consist principally of common stocks and government and corporate securities. For those Company employees as of January 31, 1997, who: (i) were previously employed by Cytec Industries Inc. and (ii) elect to retire from the Company on or before January 31, 1999, the Company supplements the standard pension payable such that the employee's total combined pension from the Company and from the Cytec Nonbargaining Employees' Retirement Plan equals the amount the employee would have received had he or she remained an employee of Cytec until retirement. The estimated liability for such supplements as of September 30, 1999 and 1998 is immaterial. The Company adopted SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits", which is effective for the Company for the year ended September 30, 1999 and revises the required disclosures about pensions and postretirement benefits other than pensions. 58 61 Information concerning the pension obligation, plan assets, amounts recognized in the Company's financial statements, and underlying actuarial assumptions is stated below.
AUGUST 31, ------------------------ 1999 1998 --------- --------- (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year ............... $ 96,327 $ 82,971 Currency rate conversion .............................. 556 (1,314) Service cost .......................................... 5,198 5,093 Interest cost ......................................... 6,735 6,153 Plan amendments ....................................... 2,878 -- FAS 88 additional benefits ............................ 10,765 -- Actuarial loss (gain) ................................. (1,205) 7,534 Benefits paid ......................................... (6,864) (4,110) --------- --------- Benefit obligation at end of year ..................... $ 114,390 $ 96,327 ========= ========= Change in plan assets: Fair value at beginning of year ....................... $ 86,187 $ 84,598 Currency rate conversion .............................. 498 (1,463) Actual return on plan assets .......................... 18,705 13 Employer contributions ................................ 765 7,070 Participants' contributions ........................... -- 79 Benefits paid ......................................... (6,864) (4,110) --------- --------- Fair value at end of year ............................. $ 99,291 $ 86,187 ========= ========= Development of net amount recognized: Funded status ......................................... $ (15,100) $ (10,140) Unrecognized cost: Actuarial loss (gain) .............................. (4,197) 8,145 Prior service cost ................................. 7,561 5,867 Transition liability ............................... 1,354 1,737 --------- --------- Net amount recognized ................................. $ (10,382) $ 5,609 ========= ========= Amounts recognized in the statement of financial position: Prepaid pension cost .................................. $ 529 $ 8,855 Accrued pension cost .................................. (13,531) (3,620) Intangible asset ...................................... 2,341 189 Accumulated other comprehensive income (pre-tax) ...... 279 185 --------- --------- Net amount recognized ................................. $ (10,382) $ 5,609 ========= =========
Net periodic pension costs (income) consist of the following components:
AUGUST 31, -------------------------------------- 1999 1998 1997 -------- -------- -------- (Dollars in Thousands) Components of net pension costs: Service cost-benefits earned during the year ...................... $ 5,198 $ 5,093 $ 4,857 Interest on prior year's projected benefit obligation ............. 6,735 6,153 5,941 Expected return on plan assets .................................... (7,538) (7,411) (6,009) Net amortization: Actuarial loss (gain) .......................................... 634 (130) (207) Prior service cost ............................................. 73 658 660 Transition liability ........................................... 376 378 378 Settlement/Curtailment loss ....................................... 11,337 -- -- -------- -------- -------- Net pension costs ................................................. $ 16,815 $ 4,741 $ 5,620 ======== ======== ======== Weighted-average assumptions: Discount Rate ..................................................... 7.50% 7.00% 7.75% Rates of increase in salary compensation level .................... 5.38% 4.75% 5.25% Expected long-term rate of return on plan assets .................. 8.77% 8.00% 8.50%
59 62 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides certain health care benefits and life insurance benefits for retired employees. Substantially all of the Company's employees become eligible for these benefits at normal retirement age. The Company accrues the cost of these benefits during the period in which the employee renders the necessary service. Health care benefits are provided to employees who retire from the Company with ten or more years of service credit except for Canadian employees covered by collective bargaining agreements. All of the Company's employees are eligible for postretirement life insurance. Postretirement health care benefits for United States plans are non-contributory. Benefit provisions for most hourly and some salaried employees are subject to collective bargaining. In general, the plans stipulate that retiree health care benefits are paid as covered expenses are incurred. For United States employees, postretirement medical plan deductibles are assumed to increase at the rate of the long-term consumer price index. As previously discussed, SFAS No. 132 revises the required disclosures about postretirement benefit plans. Information concerning the plan obligation, the funded status, amounts recognized in the Company's financial statements, and underlying actuarial assumptions is stated below.
AUGUST 31, ---------------------- 1999 1998 -------- -------- (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year .......................................... $ 43,131 $ 38,617 Service cost ..................................................................... 1,200 1,466 Interest cost .................................................................... 3,005 2,818 Plan amendments, curtailments, and special termination benefit ................... (2,472) -- Actuarial loss ................................................................... 3,124 1,602 Benefits paid .................................................................... (2,314) (1,372) -------- -------- Benefit obligation at end of year ................................................ $ 45,674 $ 43,131 ======== ======== Development of net amount recognized: Funded status .................................................................... $(45,674) $(43,131) Unrecognized cost: Actuarial loss ................................................................ 11,380 3,578 Prior service cost ............................................................ (5,943) 165 -------- -------- Net amount recognized ............................................................ $(40,237) $(39,388) ======== ========
Net periodic plan costs (income) consist of the following components:
AUGUST 31, ----------------------------------- 1999 1998 1997 ------- ------- ------- (Dollars in Thousands) Components of net plan costs: Service cost ................................................. $ 1,200 $ 1,466 $ 1,343 Interest cost ................................................ 3,005 2,818 2,494 Expected return on plan assets ............................... -- -- -- Net amortization: Actuarial loss (gain) ..................................... 340 (3) 29 Prior service cost ........................................ (233) 29 -- Curtailment and special termination benefit .................. (1,150) -- -- ------- ------- ------- Net plan costs ............................................... $ 3,162 $ 4,310 $ 3,866 ======= ======= ======= Weighted-average assumptions: Discount Rate ................................................ 6.75% 7.50% 7.50%
60 63 The weighted average annual assumed health care trend rate is assumed to be 7.5% for 1999. The rate is assumed to decrease gradually to 5.8% in 2027 and remain level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care trend rates would have the following effects:
1% Increase 1% Decrease ------------- ------------ (Dollars in Thousands) Effect on total of service and interest cost components............... $ 232 $ (201) Effect on post-retirement benefit obligation.......................... 2,257 (1,959)
The Company recorded a $10.2 million charge, included in Other Expense, increasing its pension liability and other postretirement benefits liability in the second quarter of fiscal 1999 as a result of an early retirement program for employees at the Texas City, Texas plant and certain benefit changes for all U.S. employees. The early retirement program resulted in curtailment expense for the pension plan and special termination benefits expenses for both the pension and the other postretirement benefits plans, partially offset by the curtailment gain from the reduction of postretirement life insurance benefits for currently active U.S. employees. EMPLOYEE STOCK OWNERSHIP TRUST In connection with the recapitalization of the Company in August of 1996, an Employee Stock Ownership Trust (the "ESOT") was established which covers substantially all United States employees. Allocations of shares of common stock are made annually to participants. The ESOT primarily invests in shares of Holdings Common Stock and borrowed $6.5 million from Chemicals to purchase approximately 542,000 shares of Holdings Common Stock. This ESOP loan is payable in 16 quarterly installments during the period beginning December 31, 1996, and ending September 30, 2000. The shares of Holdings Common Stock purchased by the ESOT have been pledged as security for the ESOP loan and such shares are released and allocated to the ESOT participants' accounts as the ESOP Loan is discharged. Until the ESOP loan is paid in full, contributions to the ESOT will be used to pay the outstanding principal and interest on the ESOP loan. In addition, during fiscal 1998 and 1997, the ESOT purchased 14,000 and 99,000, respectively, shares of Holdings Common Stock. In fiscal 1999, 1998, and 1997, 160,000, 172,000, and 49,000, respectively, ESOT shares had been allocated to employees. The Company recorded $0.7 million, $1.4 million, and $1.6 million of expense related to the ESOT in fiscal 1999, 1998, and 1997, respectively. SAVINGS AND INVESTMENT PLAN The Company's Amended and Restated Savings and Investment Plan (the "Savings Plan") covers substantially all United States employees, including executive officers. The Savings Plan is qualified under Section 401(k) of the Internal Revenue Code (the "Code"). Each participant has the option to defer taxation of a portion of his or her earnings by directing the Company to contribute a percentage of such earnings to the Savings Plan. A participant may direct up to a maximum of 15% of eligible earnings to the Savings Plan, subject to certain limitations set forth in the Code for "highly compensated" participants. A participant's contributions become distributable upon the termination of his or her employment. The Company does not make any contribution to the Savings Plan. PROFIT SHARING AND BONUS PLANS In January 1997, the Board of Directors, upon recommendation of the Compensation Committee, approved the establishment of a Profit Sharing Plan that is designed to benefit all qualified employees, and a Bonus Plan that will provide for bonuses to certain exempt salaried employees based on the Company's annual financial performance. No expenses for profit sharing or bonuses were incurred in fiscal 1999, 1998, or 1997. OMNIBUS STOCK AWARDS AND INCENTIVE PLAN In April 1997, the Board of Directors approved the establishment of the Omnibus Stock Awards and Incentive Plan (as amended, the "Omnibus Plan"). Under the Omnibus Plan, the Company may grant to key employees incentive and nonqualified stock options, SARs, restricted stock awards, performance awards, and phantom stock awards. One million shares of the Company's stock are reserved for issuance under the Omnibus Plan. The terms and amounts of the awards (including vesting schedule) are determined by the Compensation Committee of the Board of Directors. Generally, outstanding stock options become exercisable (vest) in equal annual installments beginning a year from date of grant and ending five years from date of grant. In the event of a specified change of control of the Company or a qualified public offering of Holdings Common Stock, all awards will immediately vest and become exercisable. 61 64 During fiscal 1999 and 1998, the Company issued 1,500 and 23,000, respectively, restricted stock awards to certain employees. These restricted stock awards vested 25% immediately and 25% per year over the next three years. NONQUALIFIED STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS Also in April 1997, the Board of Directors approved the establishment of the Nonqualified Stock Option Plan for Non-Employee Directors (the "Nonqualified Plan"). Each non-employee director of the Company is eligible to participate in the Nonqualified Plan. Each eligible director on the date of adoption of the Nonqualified Plan was granted an option to acquire 2,000 shares of Holdings Common Stock (4,000 shares for the Vice-Chairman), and each eligible director who is serving on the Board of Directors on each subsequent October 1st is automatically granted an option to acquire 1,000 shares of Holdings Common Stock (2,000 shares for the Vice-Chairman). All options expire ten years from date of grant. All options are granted with an exercise price at or above the fair market value of a share of Holdings Common Stock on the date of grant (as determined by the Board of Directors) and vest and are exercisable immediately. A total of 160,000 shares of Holdings Common Stock are reserved for issuance under the Nonqualified Plan. OUTSTANDING STOCK OPTIONS A summary of the status of the Company's outstanding stock options as of September 30, 1999 and 1998, and changes during the years then ended is presented below:
1999 1998 1997 --------------------------- --------------------------- --------------------------- SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE (IN EXERCISE (IN EXERCISE (IN EXERCISE THOUSANDS) PRICE(1) THOUSANDS) PRICE THOUSANDS) PRICE ------------ --------------- ----------- -------------- ----------- ------------- Outstanding at beginning of year 692 $ 11.74 241 $ 12.00 -- -- Granted 95 $ 6.08 489 $ 11.62 274 $ 12.00 Exercised -- -- -- -- Forfeited (105) $ 6.00 (38) $ 11.94 (33) $ 12.00 -------- ------ ------ -------- Outstanding at end of year 682 $ 6.14 692 $ 11.74 241 $ 12.00 ======== ======== ====== ======== ====== ======== Options exercisable at end of year 178 86 14 ======== ====== ======
(1) On December 14, 1998, the Company issued to all of its employees who held stock options on that date new options with an exercise price of $6.00 per share. The new options were issued in exchange for and cancellation of stock options previously issued to those employees for the same number of shares and with the same vesting schedules. The range of exercise prices for options outstanding at September 30, 1999, was $6.00 - $12.00, with all exercisable options having an exercise price range of $6.00 - $12.00. During fiscal 1998, Holdings granted certain employees rights to purchase an aggregate of 230,000 shares of Holdings Common Stock, at then current market prices. These rights expired without being exercised. All stock options are granted with an exercise price at or above fair market value of a share of Holdings Common Stock at the grant date. The weighted average fair value of the stock options granted during fiscal 1999, 1998, and 1997 was $0.6 million, $1.9 million, and $0.5 million, respectively. The fair value of each such stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for the grants in fiscal 1999, 1998, and 1997: risk free interest rate of 5.9%, 4.4% and 6.1%, respectively; expected dividend yield of 0.0% for all years; expected life of ten years for all years; and expected volatility of 59%, 29%, and 44%, respectively. Stock options generally expire ten years from the date of grant and fully vest after five years. The outstanding stock options at September 30, 1999 have a weighted average contractual life of approximately 8 years. In accordance with SFAS 123, "Accounting for Stock-Based Compensation", the Company utilizes the intrinsic value method of accounting for stock-based compensation, and no compensation costs have been recognized for stock option awards described above. Had compensation cost for all option issuances been determined consistent with SFAS No. 123, it would not have had a material impact on the Company's pro forma net loss and loss per share for fiscal 1999, 1998, and 1997. 62 65 6. COMMITMENTS AND CONTINGENCIES PRODUCT CONTRACTS The Company has certain long-term agreements, which provide for the dedication of 100% of the Company's production of acetic acid, plasticizers, TBA, sodium cyanide, and calcium hypochlorite each to one customer. The Company also has various sales and conversion agreements, which dedicate significant portions of the Company's production of styrene, acrylonitrile, and methanol to various customers. Some of these agreements generally provide for cost recovery plus an agreed margin or element of profit based upon market price. LEASE COMMITMENTS The Company has entered into various long-term noncancellable operating leases. Future minimum lease commitments at September 30, 1999, are as follows: fiscal 2000 -- $5.3 million; fiscal 2001 -- $4.9 million; fiscal 2002 -- $4.8 million; fiscal 2003 -- $4.1 million; fiscal 2004 -- $3.7 million; and $7.6 million thereafter. 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 manufacture, handling, processing, distribution, and use of the Company's chemical products and, if so, the Company's business and operations may be materially and adversely affected. In addition, changes in affected 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. The Company conducts environmental management programs designed to maintain compliance with applicable environmental requirements at all of its facilities. The Company routinely conducts inspection and surveillance programs designed to detect and respond to leaks or spills of regulated hazardous substances and to correct identified regulatory deficiencies. The Company believes that its procedures for waste handling are consistent with industry standards and applicable requirements. In addition, the Company believes that its operations are consistent with good industry practice through participation in the Responsible Care initiatives as a part of membership in the Chemical Manufacturers Association in the United States and the Canadian Chemical Producers Association. However, a business risk inherent in chemical operations is the potential for personal injury and property damage claims from employees, contractors and their employees, and nearby landowners and occupants. While the Company believes its business operations and facilities generally are operated in compliance in all material respects with all applicable environmental and health and safety requirements, it 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, and the public. Some risk of environmental costs and liabilities is inherent in the Company's operations and products, as it is with other companies engaged in similar businesses. The Company's operating expenditures for environmental matters, mostly waste management and compliance, were approximately $30 million, $52 million, and $50 million for fiscal 1999, 1998, and 1997, respectively. The Company also spent approximately $6 million and $2 million for environmentally related capital projects in fiscal 1999 and 1998 respectively. 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 this 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 that would restrict the use of such products for other purposes. 63 66 LEGAL PROCEEDINGS Ammonia Release On May 8, 1994, an ammonia release occurred at the Texas City Plant while a reactor in the acrylonitrile unit was being restarted after a shutdown for routine maintenance. Approximately 52 lawsuits and interventions involving approximately 6,000 plaintiffs were filed against the Company seeking an unspecified amount of money for alleged damages from the ammonia release. Approximately 2,600 of the plaintiffs agreed to submit their damage claims to binding arbitration. A two-week evidentiary hearing was conducted in July 1996 before a three-judge panel to determine the amount of damages. On May 1, 1997, the three-judge panel awarded the plaintiffs an amount of damages which was well within the limits of the Company's insurance coverage. Thirty-nine of the plaintiffs tried their cases to a jury in Harris County District Court. After approximately five months of trial, the jury returned a verdict on September 2, 1997. The total amount awarded for all 39 plaintiffs was well within the limits of the Company's insurance coverage. Approximately 5,980 of the claims in litigation have now been resolved or are pending final resolution and the Company continues to vigorously defend against the claims of the approximately 20 remaining plaintiffs. Nickel Carbonyl Release On July 30, 1997, as the Company's methanol unit at the Texas City Plant was being shut down for repair, nickel carbonyl was formed when carbon monoxide reacted with nickel catalyst in the unit's reformer. After isolating the nickel carbonyl within the methanol unit, the Company worked with the permission and guidance of the Texas Natural Resources Conservation Commission to destroy the nickel carbonyl by incineration on-site. Prior to its incineration, several Company employees and contractor employees may have been exposed to nickel carbonyl in the methanol unit. Two lawsuits and two interventions involving approximately 306 plaintiffs were filed against the Company seeking an unspecified amount for alleged damages from the nickel carbonyl release. Since the filing of the lawsuits, approximately 14 plaintiffs' claims (including one intervenor) have been resolved, some of which are subject to the completion of documentation. The Company continues to vigorously defend against the claims of the approximately 292 remaining plaintiffs. Additional claims and litigation against the Company relating to this incident may ensue. Ethylbenzene Release On April 1, 1998, a chemical leak occurred when a line failed in the ethylbenzene unit at the Texas City Plant. The released chemicals included ethylbenzene, benzene, polyethylbenzene, and hydrochloric acid. The Company does not believe any serious injuries were sustained, although a number of citizens sought medical examinations at local hospitals after a precautionary alert was given to neighboring communities. There is no lawsuit pending against the Company based on this release, but the Company has received, and in some instances resolved, claims from individuals for alleged damage from this incident. Other Claims The Company is subject to various other claims and legal actions that arise in the ordinary course of its business. LITIGATION CONTINGENCY The Company has made estimates of the reasonably possible range of liability with regard to its outstanding litigation for which it may incur liability. These estimates are based on the Company's judgments using currently available information as well as consultation with the Company's insurance carriers and outside legal counsel. A number of the claims in these litigation matters are covered by the Company's insurance policies or by third-party indemnification of the Company. The Company, therefore, has also made estimates of its probable recoveries under insurance policies or from third-party indemnitors based on its understanding of its insurance policies and indemnifications, discussions with its insurers and indemnitors, and consultation with outside legal counsel, in addition to the Company's judgments. Based on the foregoing, as of September 30, 1999, the Company has accrued approximately $2.8 million as its estimate of aggregate contingent liability for these matters and has also recorded 64 67 aggregate receivables from its insurers and third-party indemnitors of approximately $2.2 million. At September 30, 1999, management estimates that the aggregate reasonably possible range of loss for all litigation combined, in addition to the amount accrued, is from $0 to $5 million. The Company believes that this additional reasonably possible loss is substantially covered by insurance. While the Company has based its estimates on its evaluation of available information to date and the other matters described above, much of the litigation remains in the discovery stage and it is impossible to predict with certainty the ultimate outcome. The Company will adjust its estimates as necessary as additional information is developed and evaluated. However, the Company believes that the final resolution of these contingencies will not have a material adverse impact on the financial position, results of operations, or cash flows of the Company. In addition, the timing of probable insurance and indemnity recoveries, and payment of liabilities, if any, is not expected to have a material adverse effect on the financial position, results of operations, or cash flows of the Company. 7. BUSINESS ACQUISITIONS On January 31, 1997, the Company acquired the acrylic fibers business (the "AFB") from Cytec (the "AFB Acquisition"). The AFB, now owned by two wholly owned subsidiaries of the Company (collectively "Sterling Fibers"), recorded sales of approximately $92 million during the eight months of operations in fiscal 1997 and consists of an acrylic fibers plant located near Pensacola, Florida, and several associated marketing and research offices. Sterling Fibers is one of two acrylic fibers manufacturers in the United States. Cytec supplies acrylonitrile to Sterling Fibers through a five-year supply agreement ending in 2002. The acquisition was financed through the incurrence of $81 million of term debt and the issuance of $10 million (liquidation value) of Series A "pay in kind" mandatory redeemable preferred stock ("Series A Preferred") to Cytec, and the sale of $10 million of Holdings Common Stock in a private placement. The Company used the purchase method to account for the acquisition, and operating results of Sterling Fibers, beginning February 1, 1997, are included with those of the Company. On July 10, 1997, Sterling Sask acquired substantially all of the assets of Saskatoon Chemicals (the "Saskatoon Acquisition"). The acquired assets include a manufacturing plant near Saskatoon, Saskatchewan, which manufactures sodium chlorate, caustic soda, calcium hypochlorite, chlorine, and hydrochloric acid. Total consideration of $69.2 million was financed with: (i) approximately $54.6 million under a new credit facility established by Sterling Sask with a group of lenders, (ii) approximately $7.3 million pursuant to a private placement of Holdings Common Stock, and (iii) approximately $7.3 million pursuant to a private placement of Units, each Unit consisting of shares of Holdings' Series B "pay in kind" mandatory Cumulative Redeemable Preferred Stock ("Series B Preferred") and warrants to purchase shares of Holdings Common Stock. The Saskatoon Acquisition was accounted for under the purchase method, and operating results of Sterling Sask, beginning July 10, 1997, are included with those of the Company. The following table presents the unaudited pro forma results of operations of the Company as if the AFB Acquistion and the Saskatoon Acquisition had occurred on October 1, 1996. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the AFB Acquistion and the Saskatoon Acquisition been made at the beginning of the fiscal year 1997 or of results which may occur in the future (in thousands, except per share amounts).
Pro Forma Twelve Months Ended September 30, 1997 --------------- Revenues................................................................... $ 988,000 Income (loss) before extraordinary items................................... $ (27,300) Net income (loss) attributable to common stockholders...................... $ (34,200) Net income (loss) per common share......................................... $ (2.85)
65 68 8. SEGMENT AND GEOGRAPHIC INFORMATION: Effective October 1, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" and has restated its segment disclosures for all reporting periods. The Company's 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 for 1999, 1998, and 1997 is presented below.
YEAR ENDED SEPTEMBER 30, --------------------------------------- 1999 1998 1997 --------- --------- --------- (Dollars in Thousands) Segment Information (1) Revenues: Petrochemicals $ 530,927 $ 621,605 $ 728,215 Pulp chemicals 189,825 200,985 180,572 --------- --------- --------- Total $ 720,752 $ 822,590 $ 908,787 Operating income (loss): Petrochemicals $ (63,710) $ (3,442) $ 11,524 Pulp chemicals 27,018 36,232 45,945 --------- --------- --------- Total $ (36,692) $ 32,790 $ 57,469 Depreciation and amortization expenses: Petrochemicals $ 34,001 $ 31,894 $ 31,504 Pulp chemicals 23,676 24,069 18,345 --------- --------- --------- Total $ 57,677 $ 55,963 $ 49,849 Interest expenses: Petrochemicals $ 65,426 $ 59,617 $ 53,814 Pulp chemicals 38,635 44,838 35,087 --------- --------- --------- Total $ 104,061 $ 104,455 $ 88,901 Capital expenditures: Petrochemicals $ 21,252 $ 16,768 $ 22,664 Pulp chemicals 8,288 9,854 20,764 --------- --------- --------- Total $ 29,540 $ 26,622 $ 43,428 Property, plant, and equipment, net: Petrochemicals $ 223,519 $ 263,692 $ 282,630 Pulp chemicals 179,204 186,623 209,406 --------- --------- --------- Total $ 402,723 $ 450,315 $ 492,036
(1) The petrochemicals segment is based in the United States. The pulp chemicals segment is primarily based in Canada. Sales to individual customers constituting 10% or more of total revenues and sales by segment were as follows:
YEAR ENDED SEPTEMBER 30, --------------------------------------------- 1999 1998 1997 --------- ----------- ----------- (Dollars in Thousands) Major Customers: British Petroleum plc and subsidiaries $ 71,803 $ 100,610 * Export Sales: Export revenues $ 200,448 $ 233,165 $ 274,139 Percentage of total revenues 28% 28% 30%
*DOES NOT COMPRISE 10% OF TOTAL REVENUE FOR FISCAL 1997, THEREFORE NOT REPORTED. 9. FINANCIAL INSTRUMENTS FOREIGN EXCHANGE The Company enters into forward foreign exchange contracts to hedge Canadian dollar currency transactions on a continuing basis for periods consistent with its committed exposures. The forward foreign exchange contracts have 66 69 varying maturities with none exceeding 18 months. The Company makes net settlements of United States dollars for Canadian dollars at rates agreed to at inception of the contracts. The Company enters into forward foreign exchange contracts to reduce risk due to Canadian dollar exchange rate movements. The Company does not engage in currency speculation. The Company had a notional amount of approximately $6 million and $54 million of forward foreign exchange contracts outstanding to buy Canadian dollars at September 30, 1999 and 1998, respectively. The deferred loss on these forward foreign exchange contracts at September 30, 1999 and 1998 was $0.3 million and $4.7 million, respectively. The last of the Company's existing forward exchange contracts expires in March of 2000, and it does not intend to enter into any additional forward exchange contracts. GAS HEDGE The Company hedged a portion of its natural gas to be used in the production of styrene and methanol during fiscal 1999, 1998, and 1997. At September 30, 1999, there were no outstanding natural gas hedges. The Company had a net loss of $1.5 million, $1.0 million, and $0.1 million due to natural gas hedging contracts in fiscal 1999, 1998, and 1997. INTEREST RATE SWAPS The Company has entered into a declining balance interest rate swap contract to hedge a portion of its interest rate risk that expires in January 2002. At September 30, 1999, the Company had a contractual notional amount of $49.1 million outstanding with a fixed rate of 6.66% and a floating rate based on LIBOR. The Company's interest rate swap is settled on a quarterly basis, with the interest rate differential received or paid by the Company recognized as adjustments to interest expense. CONCENTRATION OF RISK The Company sells its products primarily to companies involved in the petrochemicals, acrylic fibers, and pulp and paper manufacturing industries. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. However, letters of credit are required by the Company on many of its export sales. Historically, the Company's credit losses have been minimal. The Company maintains cash deposits with major banks, which from time to time may exceed federally insured limits. The Company periodically assesses the financial condition of the institutions and believes that the likelihood of any possible loss is minimal. Approximately 37% of the Company's employees are covered by union agreements. Approximately 5% of the Company's employees are covered by union agreements which could expire within one year. INVESTMENTS It is the policy of the Company to invest its excess cash in investment instruments or securities whose value is not subject to market fluctuations, such as certificates of deposit, repurchase agreements, or Eurodollar deposits with domestic or foreign banks or other financial institutions. Other permitted investments include commercial paper of major United States corporations with ratings of A1 by Standard & Poor's Ratings Group or P1 by Moody's Investor Services, Inc., loan participations of major United States corporations with a short term credit rating of A1/P1 and direct obligations of the United States Government or its agencies. In addition, not more than $5 million will be invested by the Company with any single bank, financial institution, or United States corporation. 67 70 FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reflected in the consolidated balance sheet for cash and cash equivalents, receivables, payables, and certain accrued expenses approximate fair value due to the short maturities. The following table presents the carrying values and fair values of the Company's long-term debt at September 30, 1999.
CARRYING VALUE FAIR VALUE -------------- ------------- (Dollars in Thousands) Revolving credit facilities $ 54,643 $ 54,643 Saskatoon Term Loans 44,045 44,045 11 1/4% Notes 152,485 85,500 11 3/4% Notes 275,000 170,500 12 3/8% Notes 295,000 295,000 13 1/2% Notes 147,628 32,598
The fair values of the 13 1/2% Notes, 11 1/4 % Notes, and 11 3/4% Notes are based on quoted market prices. Due to the 12 3/8% Notes being issued near the Company's September 30, 1999 fiscal year-end, the fair value approximates the carrying value. In addition, due to the New Revolvers and the Saskatoon Term Loans having variable interest rates, the fair value equals their carrying value. At September 30, 1999, the foreign exchange contracts had a fair value of $0.3 million loss based on then current exchange rates. In addition, the interest rate swaps had a fair market value of $0.5 million loss, based on the Company's estimate of what it would have to pay to terminate the swap at September 30, 1999. 10. RELATED PARTY TRANSACTIONS In May of 1999, the Company engaged Credit Suisse First Boston Corporation ("CSFB") and Donaldson Lufkin & Jenrette Securities Corporation ("DLJ") as Joint-Book Running Managers in connection with the issuance by Chemicals of the 12 3/8% Notes. CSFB and DLJ also underwrote the New Credit Agreement with The CIT Group/Business Credit, Inc. The Company paid CSFB a total of $5,218,750 under these arrangement in fiscal 1999. John L. Garcia, one of the Company's directors, was a Managing Director and the Head of the Global Chemical Investment Banking Group of CSFB from 1994 until April of 1999. Since October 1, 1991, the Company has had ongoing commercial relationships in the ordinary course of business with certain affiliates of Koch Industries, Inc., including agreements for the supply of raw materials, sales of petrochemicals, and transportation of natural gas. During the fiscal years of the Company ended September 30, 1999, 1998, and 1997: o the Company made product sales to and purchased raw materials from Koch Chemical, an indirect wholly owned subsidiary of Koch Industries, Inc.; o the Company made payments to John Zink Company, an indirect wholly owned subsidiary of Koch Industries, Inc., in consideration for certain contracting and construction services performed at the Texas City Plant; and o the Company made payments to Koch Gateway Pipeline Company for the transportation of natural gas to the Santa Rosa Plant through a pipeline in which it is a partner. Each of these relationships represented less than 5% of the Company's revenues in each of such fiscal years. In addition, in 1998 the Company filed a lawsuit against John Zink Company seeking recovery for certain types of damages sustained in connection with a release of nickel carbonyl from the Company's methanol unit on July 30, 1997. This lawsuit has been voluntarily dismissed but, under a tolling agreement between the parties, may be refiled at any time. Koch Capital Services, Inc., an affiliate of Koch Industries, Inc., is a significant stockholder of the Company and, under the Voting Agreement described below, has the right to designate a member of the Board of Directors of the Company. In connection with the Saskatoon Acquisition, the Company paid a one-time fee of $100,000 to Clipper Capital Associates, Inc. ("Clipper") and Olympus Partners ("Olympus") to act as placement agents for the Series B Preferred Stock. Rolf H. Towe, a director of the Company, and Robert Calhoun, a former director of the Company, are officers of Clipper and affiliates of Clipper. Affiliates of Clipper and Olympus are significant stockholders of the Company. In 68 71 addition, under the Voting Agreement described below, an affiliate of Clipper has the right to designate a member of the Board of Directors of the Company. The holders of 6,654,963 shares of Holdings Common Stock, representing approximately 52% of Holdings outstanding shares, are parties to a Third Amended and Restated Voting Agreement dated as of February 1, 1999 (the "Voting Agreement"). Four directors of the Company, Frank P. Diassi, Frank J. Hevrdejs, T. Hunter Nelson and William A. McMinn, are parties to the Voting Agreement. Other parties to the Voting Agreement include Koch Capital Services, Inc. (an affiliate of Koch Industries), affiliates of Clipper ("The Clipper Group"), affiliates of Olympus, CSFB, and Gordon A. Cain. The parties to the Voting Agreement are required to vote any shares of Holdings Common Stock owned by them in favor of three nominees to the Board of Directors of Holdings, one to be designated by each of Koch Capital Services, Inc., The Clipper Group, and Mr. Cain. George J. Damiris is the current designee of Koch Capital Services, Inc., Rolf H. Towe is the current designee of The Clipper Group, and William A. McMinn is the current designee of Mr. Cain. The rights of each of Koch Capital Services, Inc. and The Clipper Group to designate nominees under the Voting Agreement terminates on the earlier of August 21, 2006 or the time at which they beneficial own less than 5% of the outstanding shares of Holdings Common Stock, respectively. The right of Mr. Cain to designate a nominee terminates upon the earlier of (i) December 15, 2008 and (ii) the later of (a) the expiration of the Standby Purchase Agreement to which he is a party (described below) and (b) the time at which Mr. Cain beneficial owns less than 5% of the outstanding shares of Holdings Common Stock. The Company paid The Sterling Group, Inc. ("TSG") a one-time transaction fee of approximately $1.1 million in connection with the AFB Acquisition and a one-time fee of approximately $0.7 million in connection with the Saskatoon Acquisition. In addition, the Company paid TSG approximately $12,782 in fiscal 1999 in advisory fees and reimbursement of expenses. Two directors of the Company, Frank J. Hevrdejs and T. Hunter Nelson, are principals of TSG, with Mr. Hevrdejs also serving as the President of TSG. Frank P. Diassi, Chairman of the Board of the Company, Peter W. De Leeuw, President and Chief Executive Officer of the Company, Robert W. Roten, Vice Chairman of the Board of the Company and former President and Chief Executive Officer of the Company, William A. McMinn, a director of the Company, Gary M. Spitz, Chief Financial Officer and a Vice President of the Company, Richard K. Crump, Vice President--Strategic Planning of the Company, and David G. Elkins, Vice President, General Counsel and Secretary of the Company, have all previously co-invested with principals of TSG in various transactions unrelated to the Company. Under engagement letters dated April 15, 1998 and April 27, 1998, the Company engaged Chem Systems, an IBM company, to perform certain consulting services related to the Company's styrene monomer business. In addition, on August 10, 1998, the Company engaged Chem Systems to conduct a site study of the Texas City Plant and to benchmark the Company's best practices and organizational structures against top quartile performers in the industry. Finally, in connection with the refinancing in July of 1999, the Company paid Chem Systems amounts owed to them by DLJ related to the performance of an appraisal of some of the Company's assets required for the refinancing. During fiscal 1999, the Company paid Chem Systems an aggregate of $421,164 pursuant to these arrangements. Peter Spitz, who is the father of Gary M. Spitz (Chief Financial Officer and a Vice President of the Company), was the Director of Chem Systems until August of 1999. Peter Spitz did not personally perform any direct services under any of these arrangements. As of December 15, 1998, Holdings entered into separate Standby Purchase Agreements with each of Gordon A. Cain, William A. McMinn, James Crane, Frank P. Diassi, Frank J. Hevrdejs, and Koch Capital Services, Inc. as described below in Footnote 11. 11. CAPITAL STOCK On January 31, 1997, the Company issued 778,232 shares of Holdings Common Stock in connection with the AFB Acquisition. In addition, on July 10, 1997, the Company issued 608,334 shares of Holdings Common Stock in connection with the Saskatoon Acquisition. In connection with the issuance of the 13 1/2% Notes (see Note 3), Holdings issued 191,751 warrants to purchase three shares of Holdings Common Stock for $0.01, exercisable beginning in August 1998 until August 2008. During fiscal 1999 and 1998, 32,460 and 345,123 shares, respectively, of Holdings Common Stock were issued as a result of 10,820 and 115,041, respectively, of these warrants being exercised. In connection with the Saskatoon Acquisition, Holdings also issued to holders of the Series B Preferred Stock warrants to purchase 201,048 shares of Holdings Common Stock for $0.01, exercisable beginning in July 1997 until December 2007. In December 1998, the Company entered into separate Standby Purchase Agreements (collectively, the "Purchase Agreements") with each of Gordon A. Cain, William A. McMinn, James Crane, Mr. Diassi, Mr. Hevrdejs, and Koch Capital Services, Inc. (collectively, the "Purchasers"). Pursuant to the terms of the Purchase Agreements, the Purchase 69 72 committed to purchase up to 2.5 million shares of Common Stock, at a price of $6.00 per share, if, as, and when requested by the Company at any time or from time to time prior to December 15, 2001. Under each of the Purchase Agreements, the Company may only require the Purchasers to purchase such shares if it believes that such capital is necessary to maintain, reestablish, or enhance its borrowing ability under the Company's revolving credit facilities or to satisfy any requirement thereunder to raise additional equity. To induce the Purchasers to enter into the Purchase Agreements, the Company issued to them warrants to purchase an aggregate of 300,000 shares of Common Stock at an exercise price of $6.00 per share. Pursuant to the Purchase Agreements, the Company agreed to issue to the Purchasers additional warrants to purchase up to 300,000 additional shares of Common Stock if, as, and when they purchase shares of Common Stock under the Purchase Agreements. Any shares of Common Stock purchased under the Purchase Agreement and the warrants issued to the Purchasers as contemplated by the Purchase Agreements will be subject to the terms of the Third Amended and Restated Voting Agreement dated as of February 1, 1999, the Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, as amended, and the Tag-Along Agreement dated as of August 21, 1996. At September 30, 1999, warrants to purchase an aggregate of 698,718 shares Holdings Common Stock were outstanding. 12. MANDATORY REDEEMABLE PREFERRED STOCK In connection with the AFB Acquisition, the Company authorized 350,000 shares and issued 104,110 shares of non-voting Series A Preferred Stock with a fair value and carrying value of $10.0 million. The Series A Preferred Stock has a cumulative dividend rate of 10%, payable in kind semi-annually on January 1 and July 1 of each year commencing July 1, 1997. The Company may redeem all or any number of shares of Series A Preferred Stock at any time with proper written notice at a price of $100 per share plus accrued dividends. The holders of Series A Preferred Stock may elect to have the Company redeem shares on any dividend payment date after June 30, 2009 with proper written notice at a price of $100 per share plus accrued dividends. The carrying value of the Series A Preferred Stock at September 30, 1999 and 1998, was $13.0 million and $11.8 million, respectively (liquidation value of $100 per share). In connection with the Saskatoon Acquisition, the Company authorized 58,000 shares and issued approximately 7,532 shares of non-voting Series B Preferred Stock with a fair value of $4.9 million. The Series B Preferred Stock has a 14% dividend rate through July 10, 2002, and thereafter a variable rate between 14% and 18% depending on payment terms until redeemed. The dividend is payable in kind on January 1, April 1, July 1, and October 1 of each year, commencing October 1, 1997. The Company may redeem all or any number of shares of Series B Preferred Stock at any time with proper written notice at a price of $1,000 per share plus a premium ranging from 5% to 1% depending on the date of redemption plus accrued dividends. The holders of Series B Preferred Stock may elect to have the Company redeem shares on any dividend payment date after June 30, 2009, with proper written notice at a price of $1,000 per share plus accrued dividends. The carrying value of the Series B Preferred Stock at September 30, 1999 and 1998, was $7.9 million and $6.5 million, respectively (liquidation value of $1,000 per share). The difference in the carrying value and the redemption amount will be accreted as a charge to retained earnings over the holding period using the effective interest rate method. 13. NEW ACCOUNTING STANDARDS SFAS 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. 70 73 STERLING CHEMICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Except as modified below, the Notes to the Company's Consolidated Financial Statements are incorporated herein by reference insofar as they relate to Chemicals. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INCOME TAXES Chemicals is included in the consolidated federal tax return filed by its parent, Holdings. A tax sharing agreement between Holdings and Chemicals defines the computation of Chemicals' obligations to Holdings. Chemicals' provision for income taxes is computed as if Chemicals and its subsidiaries file their annual tax return on a separate company basis. Deferred income taxes are recorded to reflect the tax effect of the temporary differences between the financial reporting basis and the tax basis of Chemicals' assets and liabilities at enacted rates. EARNINGS PER SHARE All issued and outstanding shares of Chemicals are held by Holdings, and accordingly, earnings per share are not presented. 2. INCOME TAXES A reconciliation of federal statutory income taxes to Chemicals' effective tax benefit before extraordinary item follows:
YEAR ENDED SEPTEMBER 30, ------------------------------------- 1999 1998 1997 --------- --------- --------- (Dollars in Thousands) Benefit for income taxes at statutory rates................... $ (44,235) $ (20,385) $ (4,576) Taxable foreign dividends..................................... 4,295 -- -- Change in valuation allowance................................. 1,514 -- -- Non-deductible expenses....................................... 195 -- -- State and foreign income taxes................................ 550 1,422 3,782 Other......................................................... 8,271 -- (1,354) ---------- ---------- ---------- Effective tax benefit......................................... $ (29,410) $ (18,963) $ (2,148) ========== ========== ==========
The benefit for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30, -------------------------------------- 1999 1998 1997 --------- --------- ---------- (Dollars in Thousands) From operations: Current federal............................................... $ 2,246 $ (5,900) $ (5,959) Deferred federal.............................................. (31,198) (15,271) (4,235) Deferred foreign.............................................. (1,300) 2,132 6,104 Current state................................................. 842 76 1,942 --------- ---------- ---------- Total tax provision (benefit)................................. $ (29,410) $ (18,963) $ (2,148) ========= ========== ==========
71 74 The components of Chemicals' deferred income tax assets and liabilities are summarized below:
SEPTEMBER 30, ---------------------- 1999 1998 -------- -------- (Dollars in Thousands) Deferred tax assets: Accrued liabilities ......................... $ 12,050 $ 12,074 Accrued postretirement cost ................. 11,991 10,010 Tax loss and credit carryforward and other .. 63,663 24,783 Other ....................................... 1,628 17,980 -------- -------- Total deferred tax assets ................... 89,332 64,847 ======== ======== Deferred tax liabilities: Property, plant and equipment ............... $(68,732) $(78,113) Other ....................................... (2,629) (4,895) -------- -------- Total deferred tax liabilities .............. (71,361) (83,008) Valuation allowance ......................... (1,514) -- -------- -------- Net deferred tax assets (liabilities) ....... 16,457 (18,161) Less current deferred tax assets ............ (16,888) (5,140) -------- -------- Long-term deferred tax liabilities .......... $ (431) $(23,301) ======== ========
72 75 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Sterling Chemicals Holdings, Inc. We have audited the accompanying consolidated balance sheets of Sterling Chemicals Holdings, Inc. and subsidiaries as of September 30, 1999 and 1998, and the related consolidated statements of operations, changes in stockholders' equity (deficiency in assets), and cash flows for each of the three years in the period ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sterling Chemicals Holdings, Inc. and subsidiaries as of September 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Houston, Texas December 9, 1999 73 76 INDEPENDENT AUDITORS' REPORT To the Stockholder of Sterling Chemicals, Inc. We have audited the accompanying consolidated balance sheets of Sterling Chemicals, Inc. and subsidiaries as of September 30, 1999 and 1998, and the related consolidated statements of operations, changes in stockholder's equity (deficiency in assets), and cash flows for each of the three years in the period ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sterling Chemicals, Inc. and subsidiaries as of September 30, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the period ended September 30, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Houston, Texas December 9, 1999 74 77 STERLING CHEMICALS UNITED STATES SUBSIDIARIES COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, --------------------------------------- 1999 1998 1997 --------- --------- --------- Revenues ............................................. $ 222,353 $ 261,990 $ 262,256 Cost of goods sold ................................... 188,296 209,883 197,555 --------- --------- --------- Gross profit ......................................... 34,057 52,107 64,701 Selling, general and administrative expenses ......... 19,280 22,098 15,637 Interest and debt related expenses ................... 38,877 36,366 35,165 --------- --------- --------- Net income (loss) before income taxes ................ (24,100) (6,357) 13,899 Provision (benefit) for income taxes ................. (3,727) (2,217) 6,290 --------- --------- --------- Net income (loss) .................................... $ (20,373) $ (4,140) $ 7,609 ========= ========= =========
The accompanying notes are an integral part of the combined financial statements. 75 78 STERLING CHEMICALS UNITED STATES SUBSIDIARIES COMBINED BALANCE SHEETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, ------------------------ 1999 1998 --------- --------- ASSETS Current assets: Cash and cash equivalents ............................... $ 9,323 $ 4,093 Accounts receivable ..................................... 45,139 38,562 Inventories ............................................. 29,207 32,532 Prepaid expenses ........................................ 12,748 6,090 --------- --------- Total current assets .................................. 96,417 81,277 Property, plant and equipment, net ......................... 196,877 207,177 Due from affiliates ........................................ 121,506 131,771 Other assets ............................................... 40,275 51,635 --------- --------- Total assets .......................................... $ 455,075 $ 471,860 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable ........................................ $ 22,399 $ 20,432 Accrued liabilities ..................................... 16,515 16,277 --------- --------- Total current liabilities ............................. 38,914 36,709 Long-term debt due to parent ............................... 325,402 323,303 Deferred income taxes ...................................... 7,272 6,509 Deferred credits and other liabilities ..................... 7,227 12,019 Commitments and contingencies (Note 7) ..................... -- -- Stockholder's equity: Common stock ............................................ -- -- Additional paid-in capital .............................. 92,734 92,734 Retained earnings ....................................... 11,026 31,399 Accumulated other comprehensive income .................. (27,500) (30,813) --------- --------- Total stockholder's equity ............................ 76,260 93,320 --------- --------- Total liabilities and stockholder's equity ......... $ 455,075 $ 471,860 ========= =========
The accompanying notes are an integral part of the combined financial statements. 76 79 STERLING CHEMICALS UNITED STATES SUBSIDIARIES COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (AMOUNTS IN THOUSANDS)
ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED COMPREHENSIVE STOCK CAPITAL EARNINGS INCOME TOTAL ------ --------- --------- --------- --------- Balance, September 30, 1996 .......... -- $ 83,395 $ 27,930 $ (19,124) $ 92,201 Acquisition of acrylic fibers business -- 9,339 -- -- 9,339 Comprehensive income: Net income ........................ -- -- 7,609 -- Translation adjustment ............ -- -- -- (1,648) Comprehensive income ........... -- -- -- -- 5,961 ------ --------- --------- --------- --------- Balance, September 30, 1997 .......... -- 92,734 35,539 (20,772) 107,501 Comprehensive income: Net loss .......................... -- -- (4,140) -- Translation adjustment ............ -- -- -- (10,041) Comprehensive loss ............. -- -- -- -- (14,181) ------ --------- --------- --------- --------- Balance, September 30, 1998 .......... -- 92,734 31,399 (30,813) 93,320 Comprehensive income: Net loss .......................... -- -- (20,373) -- Translation adjustment ............ -- -- -- 3,313 Comprehensive loss ............. -- -- -- -- (17,060) ------ --------- --------- --------- --------- Balance, September 30, 1999 .......... -- $ 92,734 $ 11,026 $ (27,500) $ 76,260 ====== ========= ========= ========= =========
The accompanying notes are an integral part of the combined financial statements. 77 80 STERLING CHEMICALS UNITED STATES SUBSIDIARIES COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ------------------------------------ 1999 1998 1997 -------- -------- -------- Cash flows from operating activities: Net income (loss)............................................................... $(20,373) $ (4,140) $ 7,609 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ............................................... 24,153 23,502 20,537 Deferred tax expense (benefit) .............................................. (2,404) (2,479) 5,894 Other ....................................................................... (233) 447 74 Change in assets/liabilities: Accounts receivable ......................................................... (6,577) 14,331 10,824 Inventories ................................................................. 3,325 (77) (24,897) Prepaid expenses ............................................................ (6,658) (3,291) 570 Due from affiliates ......................................................... 14,135 1,174 66,042 Other assets ................................................................ 5,189 (613) (11,909) Accounts payable ............................................................ 1,966 665 6,509 Accrued liabilities ......................................................... 238 (531) 4,266 Other liabilities ........................................................... (2,182) 298 (2,221) -------- -------- -------- Net cash flows provided by operating activities ................................ 10,579 29,286 83,298 -------- -------- -------- Cash flows from investing activities: Capital expenditures ........................................................ (7,682) (10,550) (24,065) -------- -------- -------- Net cash used in investing activities .......................................... (7,682) (10,550) (24,065) -------- -------- -------- Cash flows from financing activities: Net change in long-term debt due to Parent .................................. 2,099 (20,411) (57,156) -------- -------- -------- Net cash provided by (used in) financing activities ............................ 2,099 (20,411) (57,156) Effect of United States/Canadian exchange rate on cash ......................... 234 (447) (205) -------- -------- -------- Net increase (decrease) in cash and cash equivalents ........................... 5,230 (2,122) 1,872 Cash and cash equivalents--beginning of year ................................... 4,093 6,215 4,343 -------- -------- -------- Cash and cash equivalents--end of year.......................................... $ 9,323 $ 4,093 $ 6,215 ======== ======== ======== Supplemental disclosures of cash flow information: Income taxes paid............................................................ $ (749) $ (541) $ (766)
The accompanying notes are an integral part of the combined financial statements. 78 81 STERLING CHEMICALS UNITED STATES SUBSIDIARIES NOTES TO COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS On July 23, 1999, Sterling Chemicals, Inc. ("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 all of Chemicals' existing direct and indirect United States ("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 United States subsidiaries. These United States subsidiaries consist of Sterling Canada, Inc. and its United States 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 of the Company. Sterling Canada, Inc. (including its United States and Canadian subsidiaries), Sterling Chemicals International, Inc., and Sterling Fibers, Inc. are hereinafter collectively referred to as "Sterling Chemicals United States Subsidiaries" or the "Company". The Company manufactures chemicals for use primarily in the pulp and paper industry at four plants in Canada and one plant in Valdosta, Georgia (the "Valdosta Plant"), and manufactures acrylic fibers in a plant near Pensacola, Florida (the "Santa Rosa Plant"). 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 licenses, engineers, and overseas construction of large-scale chlorine dioxide generators for the pulp and paper industry as part of the pulp chemical 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 (collectively, the "acrylic fibers business" or "AFB"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies of the Company are described below. PRINCIPLES OF COMBINATION The combined financial statements include the accounts of all wholly owned and majority-owned subsidiaries of the combined entities. All significant intercompany accounts and transactions among entities included in the combined financial statements have been eliminated. CASH EQUIVALENTS The Company considers all investments purchased with a remaining maturity of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market; cost is primarily determined on the first-in, first-out basis except for stores and supplies, which are valued at average cost. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost. Major renewals and improvements, which extend the useful lives of the equipment, are capitalized. Major planned maintenance expenses are accrued for during the periods prior to the maintenance, while routine repair and maintenance expenses are charged to operations as incurred. Disposals are removed at carrying cost less accumulated depreciation with any resulting gain or loss reflected in operations. Depreciation is provided using the straight-line method over estimated useful lives ranging from 5 to 25 years with the 79 82 predominant life of the plant and equipment being 15 years. The Company capitalizes interest costs, which are incurred as part of the cost of constructing major facilities and equipment. The amount of interest capitalized for the fiscal years 1999, 1998, and 1997 was $0 million, $0 million, and $2.7 million, respectively. IMPAIRMENT OF LONG-LIVED ASSETS Impairment tests of long-lived assets are made when conditions indicate their carrying cost may not be recoverable. Such impairment tests are based on a comparison of undiscounted future cash flows or the market value of similar assets to the carrying cost of the asset. If an impairment is indicated, the asset value is written down to its estimated fair value. PATENTS AND ROYALTIES The cost of patents is amortized on a straight-line basis over their estimated useful lives which approximates ten years. The Company capitalized the value of the chlorine dioxide generator technology acquired in fiscal 1992 based on the net present value of all estimated remaining royalty payments associated with the technology. The resulting intangible amount is included in other assets and is amortized over an average life for these royalty payments of ten years. INCOME TAXES The Company is included in the consolidated United States federal income tax return filed by Chemicals' parent, Sterling Chemicals Holdings, Inc. ("Holdings"). The Company's provision (benefit) for United States income taxes has been allocated by Chemicals as if the Company filed their annual tax returns on a separate return basis. The Company's Canadian subsidiaries file separate federal Canadian tax returns as well as returns in the provinces in which they operate. For these Canadian subsidiaries, deferred income taxes are recorded to reflect the tax effect of the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. REVENUE RECOGNITION The Company generates revenues through sales in the open market and long-term supply contracts and recognizes these revenues as the products are shipped. Deferred credits are amortized over the life of the contract which gave rise to them. The Company also generates revenues from the construction and sale of chlorine dioxide generators, which are recognized using the percentage of completion method. The Company also receives prepaid royalties, which are typically recognized over a period of ten years. In addition, the Company generates revenues from the sale of acrylic fibers manufacturing technology to producers worldwide, which are recognized as earned. FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE Assets and liabilities denominated in Canadian dollars are translated into United States dollars at year-end exchange rates and revenues and expenses are translated at the average monthly exchange rates. Translation adjustments are reported as a separate component of stockholders' equity, while transaction gains and losses are included in operations when incurred. The Company's Canadian subsidiaries enter into forward foreign exchange contracts to minimize the short-term impact of Canadian dollar fluctuations on certain of its Canadian dollar denominated commitments. Gains or losses on these contracts are deferred and are included in operations in the same period in which the related transactions are settled. EARNINGS PER SHARE All issued and outstanding shares of the entities included in the Company's financial statements are held directly or indirectly by Chemicals, and accordingly, earnings per share information is not presented. 80 83 ENVIRONMENTAL COSTS Environmental costs are expensed unless the expenditures extend the economic useful life of the assets. Costs that extend the economic life of the assets are capitalized and depreciated over the remaining life of such assets. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In preparing disclosures about the fair value of financial instruments, the Company has assumed that the carrying amount approximates fair value for cash and cash equivalents, receivables, short-term borrowings, accounts payable, and certain accrued expenses because of the short maturities of those instruments. The fair values of long-term debt instruments are estimated based upon quoted market values (if applicable) or on the current interest rates available for debt with similar terms and remaining maturities. Considerable judgment is required in developing these estimates and, accordingly, no assurance can be given that the estimated values presented herein are indicative of the amounts that would be realized in a free market exchange. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Significant estimates include environmental reserves, litigation contingencies, maintenance costs related to shut downs, and taxes. Actual results could differ from these estimates. ALLOCATIONS The Company is wholly owned by Chemicals, which incurs certain direct and indirect expenses for the benefit and support of the Company. These services include, among others, tax planning, treasury, legal, risk management, and the maintenance of insurance coverage for the Company. Chemicals allocated $3.5 million, $4.1 million, and $2.7 million of such expenses to the Company in fiscal years 1999, 1998, and 1997, respectively, which are included in selling, general, and administrative expenses. Allocations are based on the Company's proportionate share of the respective amount and are determined using various criteria including headcount, payroll, number of vehicles, and revenue. In addition, the Company is dependent on Chemicals for financing. NEW ACCOUNTING STANDARDS Effective October 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying of comprehensive income and its components and SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which establishes revisions to employers' disclosure about pension and other post retirement benefit plans. Adoption of these statements in fiscal 1999 had no effect on net income (loss). The only item of accumulated other comprehensive income is the Company's foreign currency translation adjustment. SFAS 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. RECLASSIFICATION Certain amounts reported in the financial statements for the prior periods have been reclassified to conform with the current financial statement presentation with no effect on net income (loss) or stockholder's equity (deficiency in assets). 81 84 3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
SEPTEMBER 30, ------------------------ 1999 1998 --------- --------- (Dollars in Thousands) Inventories: Finished products ......................... $ 17,513 $ 20,198 Raw materials ............................. 2,235 2,784 --------- --------- Inventories at cost ............................ 19,748 22,982 --------- --------- Inventories under exchange agreements ..... 170 34 Stores and supplies ....................... 9,289 9,516 --------- --------- $ 29,207 $ 32,532 ========= ========= Property, plant and equipment: Land ...................................... $ 2,808 $ 5,440 Buildings ................................. 34,919 30,822 Plant and equipment ....................... 222,528 215,739 Construction in progress .................. 13,073 13,342 --------- --------- Property, plant and equipment at cost ..... 273,328 265,343 Less: accumulated depreciation ............ (76,451) (58,166) --------- --------- $ 196,877 $ 207,177 ========= ========= Other assets: Patents and technology, net ............... $ 20,718 $ 27,017 Other ..................................... 19,557 24,618 --------- --------- $ 40,275 $ 51,635 ========= ========= Accrued liabilities: Accrued compensation ...................... $ 4,988 $ 927 Billings in excess of costs incurred ...... 3,135 2,593 Other ..................................... 8,392 12,757 --------- --------- $ 16,515 $ 16,277 ========= =========
4. LONG-TERM DEBT In August 1996 in connection with a recapitalization transaction, Chemicals allocated $276.8 million of debt to the Company. In addition, debt of $81 million incurred at the time Chemicals acquired the acrylic fibers business (see Note 8) was allocated to the Company. Principal payments are allocated to the Company by Chemicals as scheduled principal payments are made on a basis consistent with the original allocation. In addition, the Company makes principal payments, from time to time, out of available cash. Interest expense is allocated based on the terms of Chemicals' debt agreements. At September 30, 1999, interest rates ranged from 11.25% to 12.375%. Debt issue costs relating to long-term debt have been allocated to the Company by Chemicals on a basis consistent with long-term debt and are included in other assets. On July 23, 1999, Chemicals completed a private offering of $295,000,000 of its 12 3/8% Notes due 2006 which were subsequently exchanged for the 12 3/8% Notes. 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. Each subsidiary's guarantee ranks equally in right of payment with all of such subsidiary's existing and future senior indebtedness and senior in right of payment to all existing and future subordinated indebtedness of such subsidiary. However, the 12 3/8% Notes and each subsidiary's guarantee, is subordinated to the extent of the collateral securing Chemicals' new secured revolving credit facilities described below. The 12 3/8% Notes and the subsidiary guarantees are secured by (i) a second priority lien on all of Chemicals' and the subsidiary guarantors' United States production facilities and related assets, (ii) a second priority pledge of all of the capital stock of each subsidiary guarantor, and (iii) a first priority pledge of 65% of the stock of certain of the Chemicals' subsidiaries incorporated outside of the United States. The proceeds of the offering of the 12 3/8% Notes were used to fully repay and terminate Chemicals' three outstanding term loans. Upon consummation of the offering of the 12 3/8% Notes, the debt allocated to the Company by Chemicals increased to $325.4 million. In addition, on July 23, 1999, Chemicals established two new secured revolving credit facilities providing for up to $155,000,000 in revolving credit loans (the "New Revolvers") under a single Revolving Credit Agreement (the "New 82 85 Credit Agreement"). Under the New Credit Agreement, Chemicals and the Company are co-borrowers and are jointly and severally liable for any indebtedness thereunder. The New Revolvers consist of (i) a $70,000,000 revolving credit facility (the "Fixed Assets Revolver") secured by a first priority lien on all United States production facilities and related assets of Chemicals and the Company, all of the capital stock of Chemicals and the Company and a second priority lien on all accounts receivable, inventory, and other specified assets of Chemicals and the Company, and (ii) an $85,000,000 revolving credit facility (the "Current Assets Revolver") secured by a first priority lien on all accounts receivable, inventory, and other specified assets of Chemicals and the Company. Funding under the 12 3/8% Notes and the New Revolvers occurred on July 23, 1999. The proceeds of the 12 3/8% Notes and the initial borrowings under the New Revolvers were used to completely repay all outstanding indebtedness under Chemicals then existing senior credit facility. Approximately $54.6 million was drawn by Chemicals under the Fixed Assets Revolver at September 30, 1999, of which no amounts were allocated to the Company. Borrowings under the Fixed Assets Revolver bear interest, at Chemicals' option, at an annual rate of either the "LIBOR Rate" (as defined in the New Credit Agreement) plus 3.75% or the "Alternate Base Rate" plus 2.25%. Borrowings under the Current Assets Revolver bear interest, at Chemicals' option, at an annual rate of either the LIBOR Rate plus 3.00% or the "Alternate Base Rate" plus 1.50%. The "Alternate Base Rate" is equal to the greater of the "Base Rate" as announced from time to time by The Chase Manhattan Bank in New York, New York or the "Federal Funds Effective Rate" plus 1/2% (as such terms are defined in the New Credit Agreement). The New Credit Agreement also requires Chemicals and the Company to pay an aggregate commitment fee ranging from 0.75% to 1.25% on the unused portion of the commitment for the Fixed Assets Revolver, depending on the amount drawn, and an aggregate commitment fee of 0.5% on the unused portion of the commitment for the Current Assets Revolver. Available credit under the Current Assets Revolver is subject to a monthly borrowing base consisting of 85% of eligible accounts receivable and 65% of eligible inventory with an inventory cap of $42,500,000. In addition, the borrowing base for the Current Assets Revolver must exceed outstanding borrowings thereunder by $12,000,000 at all times. The Fixed Assets Revolver matures in five years, with quarterly commitment reductions totaling 28% of the total commitment in year four and the balance in year five. The Current Assets Revolver matures in five years, with no scheduled commitment reductions prior to that time. However, the commitments for each of the Fixed Assets Revolver and the Current Assets Revolver will be permanently reduced to the extent required under the New Credit Agreement upon prepayments made out of specific sources of funds, including asset sales and certain equity issuances by Holdings. 5. INCOME TAXES The Company is included in the consolidated federal United States tax return filed by Holdings. The Company's provision (benefit) for United States income taxes has been allocated as if the Company filed their annual federal United States tax returns on a separate return basis. As of September 30, 1999 and 1998, $14.6 million and $10.5 million, respectively, of deferred income tax assets were included in Due from Affiliates. For the years ended September 30, 1999, 1998, and 1997 the Company recorded $4.0 million, $4.0 million, and $1.8 million, respectively, of United States income tax benefit in the provision (benefit) for income taxes. Canadian deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and the financial reporting amounts at each year-end (the liability method). A reconciliation of the Canadian income taxes to the Canadian effective tax provision follows:
YEAR ENDED SEPTEMBER 30, ---------------------------- 1999 1998 1997 -------- -------- -------- (Dollars in Thousands) Provision for federal income tax at the statutory rate ............ $ 259 $ 1,367 $ 5,798 Provincial income taxes at the statutory rate ..................... 88 563 2,672 Federal and provincial manufacturing and processing tax credits ... (50) (286) (889) Other ............................................................. 16 156 600 -------- -------- -------- Total Canadian tax provision ...................................... $ 313 $ 1,800 $ 8,181 ======== ======== ========
83 86 The provision for Canadian income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30, --------------------------------- 1999 1998 1997 ------- ------- ------- (Dollars in Thousands) Current federal .............................. $ 2,098 $ 2,852 $ 1,489 Deferred federal ............................. (1,859) (1,611) 3,717 Current provincial ........................... 619 1,427 798 Deferred provincial .......................... (545) (868) 2,177 ------- ------- ------- Total Canadian tax provision ................. $ 313 $ 1,800 $ 8,181 ======= ======= =======
The components of the Company's Canadian deferred income tax assets and liabilities are summarized below:
SEPTEMBER 30, ---------------------- 1999 1998 -------- -------- (Dollars in Thousands) Deferred tax assets: Accrued liabilities .......................... $ 318 $ 299 Accrued postretirement cost .................. 1,236 966 Investment tax credits ....................... 4,767 6,806 -------- -------- 6,321 8,071 -------- -------- Deferred tax liabilities: Property, plant, and equipment ............... (13,593) (14,459) Other ........................................ -- (121) -------- -------- (13,593) (14,580) -------- -------- Net deferred tax liabilities .................... $ (7,272) $ (6,509) ======== ========
6. EMPLOYEE BENEFITS The Company's United States employees participate in various employee benefit plans of Chemicals. Costs, assets, and liabilities associated with United States employees participating in these various plans are allocated to the Company by Chemicals based on the number of employees. In addition, the Company sponsors various employee benefit plans in Canada. RETIREMENT BENEFIT PLANS Chemicals has non-contributory pension plans in the United States which cover all salaried and wage employees. The benefits under these plans are based primarily on years of service and employees' pay near retirement. Chemicals' funding policy is consistent with the funding requirements of federal law and regulations. Plan assets consist principally of common stocks and government and corporate securities. The liability relating to United States employees allocated to the Company by Chemicals for the retirement benefit plans and included in Due from Affiliates was $3.6 million and $2.5 million at September 30, 1999 and 1998, respectively. The total pension expense relating to United States employees allocated to the Company was $1.1 million, $1.1 million, and $0.9 million for the years ended September 30, 1999, 1998, and 1997, respectively. 84 87 The Company has employer and employee contributor plans in Canada which cover all salaried and wage employees. Information for Canadian benefit plans concerning the pension obligation, plan assets, amounts recognized in the Company's financial statements, and underlying actuarial assumptions is stated below.
AUGUST 31, ---------------------- 1999 1998 -------- -------- (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year ........................... $ 14,577 $ 13,348 Currency rate conversion .......................................... 556 (1,314) Service cost ...................................................... 919 748 Interest cost ..................................................... 1,112 1,016 Actuarial loss (gain) ............................................. (124) 1,008 Benefits paid ..................................................... (757) (229) -------- -------- Benefit obligation at end of year ................................. $ 16,283 $ 14,577 ======== ======== Change in plan assets: Fair value at beginning of year ................................... $ 13,062 $ 14,859 Currency rate conversion .......................................... 498 (1,463) Actual return on plan assets ...................................... 1,858 (882) Employer contributions ............................................ 669 698 Participants' contributions ....................................... -- 79 Benefits paid ..................................................... (757) (229) -------- -------- Fair value at end of year ......................................... $ 15,330 $ 13,062 ======== ======== Development of net amount recognized: Funded status ..................................................... $ (953) $ (1,515) Unrecognized cost: Actuarial loss (gain) .......................................... (22) 962 Prior service cost ............................................. 333 348 -------- -------- Net amount recognized ............................................. $ (642) $ (205) ======== ======== Amounts recognized in the statement of financial position: Prepaid pension cost .............................................. $ 529 $ 655 Accrued pension cost .............................................. (1,198) (1,054) Intangible asset .................................................. 27 175 Accumulated other comprehensive income ............................ -- 19 -------- -------- Net amount recognized ............................................. $ (642) $ (205) ======== ========
Net periodic pension costs (income) for the Canadian pension plan consist of the following components:
AUGUST 31, ----------------------------------- 1999 1998 1997 ------- ------- ------- (Dollars in Thousands) Components of net pension costs: Service cost-benefits earned during the year ................. $ 919 $ 748 $ 830 Interest on prior year's projected benefit obligation ........ 1,112 1,016 1,127 Expected return on plan assets ............................... (963) (1,092) (1,212) Net amortization: Actuarial loss (gain) ..................................... 68 (130) (144) Prior service cost ........................................ 29 15 16 ------- ------- ------- Net pension costs ............................................ $ 1,165 $ 557 $ 617 ======= ======= ======= Weighted-average assumptions: Discount Rate ................................................ 7.50% 7.00% 8.00% Rates of increase in salary compensation level ............... 4.50% 4.00% 5.00% Expected long-term rate of return on plan assets ............. 7.50% 7.00% 8.00%
85 88 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Chemicals and the Company provide certain health care benefits and life insurance benefits for retired employees. Substantially all employees become eligible for these benefits at normal retirement age. The cost of these benefits are accrued during the period in which the employee renders the necessary service. Health care benefits are provided to employees who retire with ten or more years of service except for Canadian employees covered by collective bargaining agreements. All employees are eligible for postretirement life insurance. Postretirement health care benefits for United States. Plans are non-contributory. Benefit provisions for most hourly and some salaried employees are subject to collective bargaining. In general, the plans stipulate that retiree health care benefits are paid as covered expenses are incurred. The liability relating to United States employees allocated to the Company by Chemicals for the postretirement benefits other than pensions and included in Due from Affiliates was $7.3 million and $7.2 million at September 30, 1999 and 1998, respectively. The total postretirement benefits other than pensions expense for United States employees allocated to the Company was $0.8 million, $0.8 million, and $0.8 million for the years ended September 30, 1999, 1998, and 1997, respectively. In addition, a curtailment gain of $0.8 million was allocated during fiscal 1999 related to the reduction of postretirement life insurance benefits for currently active U.S. employees. Information for Canadian benefit plans concerning the plan obligation, the funded status, amounts recognized in the Company's financial statements, and underlying actuarial assumptions is stated below.
AUGUST 31, -------------------- 1999 1998 ------- ------- (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year ............ $ 4,306 $ 3,831 Service cost ....................................... 307 264 Interest cost ...................................... 299 286 Actuarial loss (gain) .............................. -- (50) Benefits paid ...................................... (26) (25) ------- ------- Benefit obligation at end of year .................. $ 4,886 $ 4,306 ======= ======= Development of net amount recognized: Funded status ...................................... $(4,886) $(4,306) Unrecognized cost: Actuarial loss (gain) ........................... 637 669 Prior service cost .............................. -- -- ------- ------- Net amount recognized .............................. $(4,249) $(3,637) ======= =======
Net periodic plan costs (income) for the Canadian postretirement benefit consist of the following components:
AUGUST 31, -------------------------- 1999 1998 1997 ------ ------ ------ (Dollars in Thousands) Components of net plan costs: Service cost ............................ $ 307 $264 $ 208 Interest cost ........................... 299 286 202 Net amortization Actuarial loss (gain) ................ 32 -- -- ------ ------ ------ Net plan costs (income) ................. $ 638 $ 550 $ 410 ====== ====== ====== Weighted-average assumptions: Discount Rate ........................... 6.75% 7.5% 7.5%
The weighted average annual assumed health care trend rate is assumed to be 7.5% for 1999. The rate is assumed to decrease gradually to 5.8% in 2027 and remain level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in assumed health care trend rates would have the following effects:
1% INCREASE 1% DECREASE ----------- ----------- (Dollars in Thousands) Effect on total of service and interest cost components............... $ 33 $ (29) Effect on post-retirement benefit obligation........................ 230 (200)
86 89 SAVINGS AND INVESTMENT PLAN Chemicals' Amended and Restated Savings and Investment Plan (the "Savings Plan") covers substantially all United States employees of the Company, including executive officers. The Savings Plan is qualified under Section 401(k) of the Internal Revenue Code (the "Code"). Each participant has the option to defer taxation of a portion of his or her earnings by directing the Company to contribute a percentage of such earnings to the Savings Plan. A participant may direct up to a maximum of 15% of eligible earnings to the Savings Plan, subject to certain limitations set forth in the Code for "highly compensated" participants. A participant's contributions become distributable upon the termination of his or her employment. The Company does not make any contributions to the Savings Plan. PROFIT SHARING AND BONUS PLANS In January 1997, the Board of Directors of Holdings, upon recommendation of its Compensation Committee, approved the establishment of a Profit Sharing Plan that is designed to benefit all qualified employees, and a Bonus Plan that will provide for bonuses to exempt salaried employees based on the annual financial performance of Holdings. No expenses for profit sharing or bonuses were incurred by Chemicals or allocated to the Company in fiscal 1999, 1998, or 1997. PHANTOM STOCK PLAN The Company introduced a phantom stock plan to all eligible full-time Canadian employees. The effective date of the plan was August 21, 1996. At the end of each plan year, the plan administrator establishes a "determined percentage" for the preceding plan year. This percentage is then multiplied be each participant's compensation for the plan year to determine the award amount. The award amount is then divided be the fair market value of one share of the common stock of 'Holdings, as of December 31 of that plan year, to determine the number of rights to be credited to participants. Upon termination of employment, the benefit amount becomes payable to the participant. The benefit amount will be the number of vested rights in the participant's account, multiplied by the fair market value of one share of common stock of Holdings as of the most recent valuation date. The Company has recorded expense of $248,000, $238,000, and $346,000 related to the phantom stock plan for the years ended September 30, 1999, 1998, or 1997. 7. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company has entered into various long-term non-cancelable operating leases. Future minimum lease commitments at September 30, 1999, are as follows: fiscal 2000 -- $4.5 million; fiscal 2001 -- $4.2 million; fiscal 2002 -- $4.1 million; fiscal 2003 -- $3.9 million; fiscal 2004 -- $3.7 million; and $7.6 million thereafter. 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 and regulations. 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 laws or permit requirements are implemented. Changing and increasingly strict environmental laws, regulations, and permit requirements can affect the manufacturing, handling, processing, distribution, and use of the Company's products and, if so, the Company's business and operations may be materially and adversely affected. In addition, changes in the law, regulations, and permit 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. 87 90 While the Company believes that its business operations and facilities generally are operated in compliance with all material aspects of applicable environmental and health and safety laws, regulations, and disclosure requirements, there can be no assurance that past practices and future operations will not result in material claims or regulatory action, require material environmental expenditures, or result in exposure or injury claims by employees and 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 indebtedness under the Fixed Assets Revolver, a first priority pledge of 100% of the common stock of each of the United States entities included in these financial statements was granted by the holders of such stock. In order to secure the repayment of the 123/8% Notes, a second priority pledge of 100% of the common stock of each of the United States entities included in these financial statements was granted by the holders of such stock. In addition, a first priority pledge of 65% of the common stock of each of the Company's non-United States entities was given by the holders of such stock. 8. BUSINESS ACQUISITION On January 31, 1997, the Company acquired the AFB from Cytec Industries Inc. ("Cytec"). The AFB, or Sterling Fibers, recorded sales of approximately $92 million during the eight months of operations in fiscal 1997 and consists of an acrylic fibers plant located near Pensacola, Florida, and several associated marketing and research offices. Sterling Fibers is one of two acrylic fibers manufacturers in the United States. Cytec supplies acrylonitrile to Sterling Fibers through a five-year supply agreement ending in 2002. The acquisition was financed through the issuance of $81 million of debt by Chemicals, the issuance of $10 million (liquidation value) of Series A "pay in kind" mandatory redeemable preferred stock of Holdings ("Series A Preferred") to Cytec, and the sale of $10 million of Holdings' common stock in a private placement. At the acquisition date, the debt and amounts related to the Series A Preferred Stock were allocated to the Company as long-term debt due to Holdings and amounts related to Holdings' common stock were recorded as contributed capital. The Company used the purchase method to account for the acquisition, and operating results of Sterling Fibers beginning February 1, 1997, are included with those of the Company. 88 91 The following table presents the unaudited pro forma results of operations of the Company as if the AFB acquisition had occurred on October 1, 1996. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the AFB Acquisition been made at the beginning of the fiscal year 1996 or of results which may occur in the future (in thousands).
PRO FORMA TWELVE MONTHS ENDED SEPTEMBER 30, 1997 ----------------- Revenues..................... $ 306,756 Net income................... $ 5,408
9. FINANCIAL INSTRUMENTS FOREIGN EXCHANGE The Company enters into forward foreign exchange contracts to hedge Canadian dollar currency transactions on a continuing basis for periods consistent with its committed exposures. The forward foreign exchange contracts have varying maturities with none exceeding 18 months. The Company makes net settlements of United States dollars for Canadian dollars at rates agreed to at inception of the contracts. The Company enters into forward foreign exchange contracts to reduce risk due to Canadian dollar exchange rate movements. The Company does not engage in currency speculation. The Company had a notional amount of approximately $6 million and $54 million of forward foreign exchange contracts outstanding to buy Canadian dollars at September 30, 1999 and 1998, respectively. The deferred loss on these forward foreign exchange contracts at September 30, 1999 and 1998 was $0.3 million and $4.7 million, respectively. The last of the Company's existing forward exchange contracts expired in March of 2000, and it does not intend to enter into any additional forward exchange contracts. CONCENTRATION OF RISK The Company sells its products primarily to companies involved in the acrylic fiber and pulp and paper manufacturing industries. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. However, letters of credit are required by the Company on many of its export sales. Historically, the Company's credit losses have been minimal. The Company maintains cash deposits with major banks, which from time to time may exceed federally insured limits. The Company periodically assesses the financial condition of the institutions and believes that any possible loss is minimal. Approximately 36% of the Company's employees are covered by union agreements. Approximately 8% of the Company's employees are covered by union agreements which could expire within one year. INVESTMENTS It is the policy of the Company to invest its excess cash in investment instruments or securities whose value is not subject to market fluctuations such as certificates of deposit, repurchase agreements, or Eurodollar deposits with domestic or foreign banks or other financial institutions. Other permitted investments include commercial paper of major United States corporations with ratings of A1 by Standard & Poor's Ratings Group or P1 by Moody's Investor Services, Inc., loan participations of major United States corporations with a short term credit rating of A1/P1, and direct obligations of the United States Government or its agencies. In addition, not more than $5 million will be invested by the Company with any single bank, financial institution, or United States corporation. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reflected in the consolidated balance sheet for cash and cash equivalents, receivables, payables, and certain accrued expenses approximate fair value due to the short maturities. Based on the Company's allocated portion of Chemicals' debt at September 30, 1999, the carrying value is $325.4 million, and the fair value is $246.9 million. 89 92 INDEPENDENT AUDITORS' REPORT To the Stockholder of Sterling Canada, Inc. Sterling Fibers, Inc. Sterling Chemicals International, Inc. We have audited the accompanying combined balance sheets of Sterling Chemicals U.S. Subsidiaries (as defined in Note 1--the "Company") as of September 30, 1999 and 1998, and the related combined statements of operations, changes in stockholder's equity, and cash flows for each of the three years in the period ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Houston, Texas December 9, 1999 90 93 STERLING PULP CHEMICALS, LTD. STATEMENTS OF OPERATIONS (U.S. DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ---------------------------------- 1999 1998 1997 -------- -------- -------- Revenues ........................................ $109,510 $112,750 $130,114 Cost of goods sold .............................. 90,656 86,403 91,752 -------- -------- -------- Gross profit .................................... 18,854 26,347 38,362 Selling, general and administrative expenses .... 12,740 16,650 14,468 Interest and debt related expenses .............. 5,548 4,997 4,122 -------- -------- -------- Net income before income taxes .................. 566 4,700 19,772 Provision for income taxes (Note 5) ............. 313 1,800 8,181 -------- -------- -------- Net income ...................................... $ 253 $ 2,900 $ 11,591 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 91 94 STERLING PULP CHEMICALS, LTD. BALANCE SHEETS (U.S. DOLLARS IN THOUSANDS)
SEPTEMBER 30, SEPTEMBER 30, 1999 1998 ------------- ------------- ASSETS Current Cash and cash equivalents ................................................ $ 8,481 $ 3,426 Accounts receivable (net of allowance for doubtful accounts of $205; 1998--$153) ........................................................... 16,840 14,015 Due from related parties (Note 8) ........................................ 1,369 954 Other receivables ........................................................ 2,254 1,744 Inventories (Note 2) ..................................................... 5,146 6,660 Prepaid expenses ......................................................... 633 592 ------------- ------------- 34,723 27,391 Property, plant and equipment, net (Note 3) ................................... 75,531 80,038 Other assets .................................................................. 440 4,878 ------------- ------------- Total assets ............................................................. $ 110,694 $ 112,307 ============= ============= LIABILITIES AND STOCKHOLDER'S EQUITY Current Accounts payable ......................................................... $ 8,978 $ 13,400 Accrued generator construction costs ..................................... 2,967 1,175 Other accrued liabilities ................................................ 7,093 5,213 Due to related parties (Note 8) .......................................... 1,241 7,400 Current portion of long-term debt ........................................ -- 4,527 ------------- ------------- 20,279 31,715 Note payable (Note 4) ......................................................... 56,667 54,095 Deferred income taxes (Note 5) ................................................ 7,272 6,509 Deferred credits and other liabilities ........................................ 3,972 3,681 Commitments and contingencies (Note 7) ........................................ -- -- Stockholder's equity: Common stock ............................................................. 1 1 Additional paid-in capital ............................................... 16,871 -- Retained earnings ........................................................ 14,470 25,296 Accumulated other comprehensive income ................................... (8,838) (8,990) ------------- ------------- Total stockholder's equity ............................................ 22,504 16,307 ------------- ------------- Total liabilities and stockholder's equity .......................... $ 110,694 $ 112,307 ============= =============
The accompanying notes are an integral part of these financial statements. 92 95 STERLING PULP CHEMICALS, LTD. STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (U.S. DOLLARS IN THOUSANDS)
ACCUMULATED COMMON STOCK ADDITIONAL OTHER --------------------- PAID-IN RETAINED COMPREHENSIVE SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL --------------------- ----------- -------- ------------- -------- Balance, September 30, 1996 .... 1 $ 1 $ 36,968 $ 21,471 $ (5,277) $ 53,163 Net capital distributions ...... -- -- (29,630) -- -- (29,630) Comprehensive income: Net income .................. -- -- -- 11,591 -- Translation adjustment ...... -- -- -- -- (715) Comprehensive income ..... -- -- -- -- -- 10,876 -------- -------- ----------- -------- ------------- -------- Balance, September 30, 1997 .... 1 1 7,338 33,062 (5,992) 34,409 Net capital distributions ...... -- -- (7,338) -- -- (7,338) Dividends ...................... -- -- -- (10,666) -- (10,666) Comprehensive income: Net income .................. -- -- -- 2,900 -- Translation adjustment ...... -- -- -- -- (2,998) Comprehensive loss ....... -- -- -- -- -- (98) -------- -------- ----------- -------- ------------- -------- Balance, September 30, 1998 .... 1 1 -- 25,296 (8,990) 16,307 Net capital contributions ...... -- -- 16,871 -- -- 16,871 Dividends ...................... -- -- -- (11,079) -- (11,079) Comprehensive income: Net income .................. -- -- -- 253 -- Translation adjustment ...... -- -- -- -- 152 Comprehensive income ..... -- -- -- -- -- 405 -------- -------- ----------- -------- ------------- -------- Balance, September 30, 1999 .... 1 $ 1 $ 16,871 $ 14,470 $ (8,838) $ 22,504 ======== ======== =========== ======== ============= ========
The accompanying notes are an integral part of these financial statements. 93 96 STERLING PULP CHEMICALS, LTD. STATEMENTS OF CASH FLOWS (U.S. DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ------------------------------------ 1999 1998 1997 -------- -------- -------- Cash flows from operating activities: Net income ..................................................... $ 253 $ 2,900 $ 11,591 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................. 7,757 7,700 8,359 Loss on disposal/write off of assets ...................... 50 70 -- Deferred tax expense/(benefit) ............................ (539) (2,479) 5,894 Other ..................................................... (31) 505 (170) Changes in assets/liabilities: Accounts receivable ....................................... (2,156) 6,036 3,803 Due from related parties .................................. (377) 2,216 1,482 Other receivables ......................................... (436) 4,136 1,504 Inventories ............................................... 1,791 (1,113) 434 Prepaid expenses .......................................... (21) 117 (1) Other assets--net ......................................... 4,530 846 1,339 Accounts payable .......................................... (607) 5,496 (1,336) Accrued generator construction costs ...................... 2,450 (4,414) 1,298 Other accrued liabilities ................................. (2,467) (1,252) 869 Due to related parties .................................... (6,505) 3,702 2,133 Other liabilities ......................................... 299 (4,240) (814) -------- -------- -------- Net cash provided by operating activities ........................... 3,991 20,226 36,385 -------- -------- -------- Cash flows from investing activities: Proceeds on disposal of fixed assets ........................... 3,578 -- -- Capital expenditures ........................................... (3,465) (4,381) (3,336) -------- -------- -------- Net cash provided by (used in) investing activities ................. 113 (4,381) (3,336) -------- -------- -------- Cash flows from financing activities: Repayment of long term debt .................................... (4,527) -- -- Contribution from parent ....................................... 16,871 -- -- Distribution to parent ......................................... -- (7,338) (29,630) Dividends ...................................................... (11,079) (10,666) -- -------- -------- -------- Net cash provided by (used in) financing activities ................. 1,265 (18,004) (29,630) Effect of exchange rate on cash ..................................... (314) 405 (1,469) -------- -------- -------- Net increase (decrease) in cash and cash equivalents ................ 5,055 (1,754) 1,950 Cash and cash equivalents, beginning of year ........................ 3,426 5,180 3,230 -------- -------- -------- Cash and cash equivalents, end of year .............................. $ 8,481 $ 3,426 $ 5,180 ======== ======== ======== Supplemental disclosures of cash flow information: Interest paid, net of interest income received ................. $(11,608) $ (92) $ (1,076) Income taxes paid .............................................. (749) (541) (766)
The accompanying notes are an integral part of these financial statements. 94 97 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND OPERATIONS 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 sells sodium chlorate to customers in Canada and the United States. 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"). The financial statements of the Company are presented in accordance with generally accepted accounting principles in the United States of America ("U.S.") and have been translated from Canadian dollars, the Company's functional currency to U.S. dollars, the reporting currency of the Parent, following the guidelines established by SFAS No. 52 "Foreign Currency Translation". CASH EQUIVALENTS The Company considers all investments purchased with a remaining maturity of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost and market; cost is primarily determined on the first-in, first-out basis except for stores and supplies, which are valued at average cost. The Company enters into agreements with other companies to exchange chemical inventories in order to minimize working capital requirements and to facilitate distribution logistics. Balances related to quantities due to or payable by the Company are included in inventory. IMPAIRMENT OF LONG-LIVED ASSETS Impairment tests of long-lived assets are made when conditions indicate their carrying costs may not be recoverable. Such impairment tests are based on a comparison of undiscounted future cash flows or the market value of similar assets to the carrying cost of the asset. If an impairment is indicated, the asset value is written down to its estimated fair value. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost. Major renewals and improvements which extend the useful lives of the equipment are capitalized, while repair and maintenance expenses are charged to operations as incurred. Disposals are removed at carrying costs less accumulated depreciation with any resulting gain or loss reflected in operations. Depreciation is provided using the straight-line method over estimated useful lives ranging from 5 to 25 years with the predominant life of the plant and equipment being 15 years. INCOME TAXES The Company files a federal Canadian tax return as well as returns in the provinces in which it operates. 95 98 Deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and the financial reporting amounts at each year-end (the liability method). REVENUE RECOGNITION The Company generates revenues through sales in the open market pursuant to short-term and long-term contracts with its customers. The Company recognizes revenue from sales as the products are shipped. Revenues associated with the constructing of chlorine dioxide generators are recognized using the percentage of completion method based on cost incurred compared to total estimated cost. FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE The Company's functional currency is the Canadian dollar. The Parent's reporting currency is the U.S. dollar. For financial reporting purposes, assets and liabilities denominated in Canadian dollars are translated into U.S. dollars at year-end rates of exchange and revenues and expenses are translated at the average monthly exchange rates. Translation adjustments are reported as a separate component of stockholder's equity while transaction gains and losses are included in operations. ENVIRONMENTAL COSTS Environmental costs are expensed unless the expenditures extend the economic useful life of the assets. Costs that extend the economic life of the assets are capitalized and depreciated over the remaining life of such assets. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the cost can be reasonably estimated. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In preparing disclosures about the fair value of financial instruments, the Company has assumed that the carrying amount approximates fair value for cash and cash equivalents, receivables, short-term borrowings, accounts payable, and certain accrued expenses because of the short maturities of those instruments. The fair values of long-term debt instruments are estimated based upon quoted market values (if applicable) or on the current interest rates available to the Company for debt with similar terms and remaining maturities. Considerable judgement is required in developing these estimates and, accordingly, no assurances can be given that the estimated values presented herein are indicative of the amounts that would be realized in a free market exchange. ACCOUNTING ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. EARNINGS PER SHARE All issued and outstanding shares of the Company are held by the Parent. Accordingly, earnings per share information is not presented. NEW ACCOUNTING STANDARDS Effective October 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying of comprehensive income and its components and SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which establishes revisions to employers' disclosure about pension and other post retirement benefit plans. Adoption of these statements in fiscal 1999 had no 96 99 effect on net income (loss). The only item of accumulated other comprehensive income is the Company's foreign currency translation adjustment. SFAS 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. 2. INVENTORIES
SEPTEMBER 30, ------------------------ 1999 1998 ------------ ---------- (Dollars in Thousands) Inventories: Finished products........................ $ 1,872 $ 3,455 Raw materials............................ 209 253 ------------ ---------- Inventories at cost........................... 2,081 3,708 Inventories under exchange agreements......... 77 78 Stores and supplies........................... 2,988 2,874 ------------ ---------- $ 5,146 $ 6,660 ============ ==========
3. PROPERTY, PLANT, AND EQUIPMENT
SEPTEMBER 30, ------------------------- 1999 1998 ------------ ------------ (Dollars in Thousands) Property, plant, and equipment: Land..................................... $ 1,448 $ 4,079 Buildings................................ 13,808 11,864 Plant and equipment...................... 110,711 106,408 ------------ ----------- Property, plant, and equipment at cost... 125,967 122,351 Less accumulated depreciation............ (50,436) (42,313) ------------ ----------- $ 75,531 $ 80,038 ============ ===========
4. NOTE PAYABLE On August 20, 1992, the Company entered into an agreement for a $109.1 million demand note facility with Sterling NRO, Ltd. ("Sterling NRO"). Sterling NRO is also owned by the Parent and is therefore related 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. Interest expensed for the years ended September 30, 1999, 1998, and 1997 were $5.5 million, $4.9 million and $4.2 million, respectively. Principal repayments for the years ended September 30, 1999 and 1998 were $4.5 million and nil, respectively. 5. INCOME TAXES A reconciliation of federal statutory income taxes to the Company's effective tax provision follows:
YEAR ENDED SEPTEMBER 30, ------------------------------------ 1999 1998 1997 ----------- ----------- ----------- (Dollars in Thousands) Provision for federal income tax at the statutory rate.............. 259 $ 1,367 $ 5,798 Provincial income taxes at the statutory rate....................... 88 563 2,672 Federal and provincial manufacturing and processing tax credits..... (50) (286) (889) Other............................................................... 16 156 600 ----------- ----------- ----------- $ 313 $ 1,800 $ 8,181 =========== =========== ===========
97 100 The provision for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30, --------------------------------- 1999 1998 1997 ------- ------- ------- (Dollars in Thousands) Current federal .................. $ 2,098 $ 2,852 $ 1,489 Deferred federal ................. (1,859) (1,611) 3,717 Current provincial ............... 619 1,427 798 Deferred provincial .............. (545) (868) 2,177 ------- ------- ------- Total tax provision ......... $ 313 $ 1,800 $ 8,181 ======= ======= =======
The components of the Company's deferred income tax assets and liabilities are summarized below:
SEPTEMBER 30, ---------------------- 1999 1998 -------- -------- (Dollars in Thousands) Deferred tax assets Accrued liabilities ............... $ 318 $ 299 Accrued postretirement cost ....... 1,236 966 Investment tax credits ............ 4,767 6,806 -------- -------- $ 6,321 $ 8,071 -------- -------- Deferred tax liabilities Property, plant and equipment ..... (13,593) (14,459) Other ............................. -- (121) -------- -------- (13,593) (14,580) -------- -------- Net deferred tax liabilities ........... $ (7,272) $ (6,509) ======== ========
6. EMPLOYEE BENEFITS The Company has established the following benefit plans: RETIREMENT BENEFIT PLANS The Company has employer and employee contributory plans which cover all salaried and wage employees. The benefits under these plans are based primarily on years of service and/or employee's pay near retirement. The Company's funding policy is consistent with the funding requirements of Canadian federal and provincial laws and regulations. Plan assets consist principally of common stocks and government and corporate securities. 98 101 Information concerning the pension obligation, plan assets, amounts recognized in the Company's financial statements, and underlying actuarial assumptions is stated below.
AUGUST 31, ---------------------- 1999 1998 -------- -------- (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year ......................... $ 14,577 $ 13,348 Currency rate conversion ........................................ 556 (1,314) Service cost .................................................... 919 748 Interest cost ................................................... 1,112 1,016 Actuarial loss (gain) ........................................... (124) 1,008 Benefits paid ................................................... (757) (229) -------- -------- Benefit obligation at end of year ............................... $ 16,283 $ 14,577 ======== ======== Change in plan assets: Fair value at beginning of year ................................. $ 13,062 $ 14,859 Currency rate conversion ........................................ 498 (1,463) Actual return on plan assets .................................... 1,858 (882) Employer contributions .......................................... 669 698 Participants' contributions ..................................... -- 79 Benefits paid ................................................... (757) (229) -------- -------- Fair value at end of year ....................................... $ 15,330 $ 13,062 ======== ======== Development of net amount recognized: Funded status ................................................... $ (953) $ (1,515) Unrecognized cost: Actuarial loss (gain) ........................................ (22) 962 Prior service cost ........................................... 333 348 -------- -------- Net amount recognized ........................................... $ (642) $ (205) ======== ======== Amounts recognized in the statement of financial position: Prepaid pension cost ............................................ $ 529 $ 655 Accrued pension cost ............................................ (1,198) (1,054) Intangible asset ................................................ 27 175 Accumulated other comprehensive income .......................... -- 19 -------- -------- Net amount recognized ........................................... $ (642) $ (205) ======== ========
Net periodic pension costs (income) consist of the following components:
AUGUST 31, ----------------------------------- 1999 1998 1997 ------- ------- ------- (Dollars in Thousands) Components of net pension costs: Service cost-benefits earned during the year .............. $ 919 $ 748 $ 830 Interest on prior year's projected benefit obligation ..... 1,112 1,016 1,127 Expected return on plan assets ............................ (963) (1,092) (1,212) Net amortization: Actuarial loss (gain) .................................. 68 (130) (144) Prior service cost ..................................... 29 15 16 ------- ------- ------- Net pension costs ......................................... $ 1,165 $ 557 $ 617 ======= ======= ======= Weighted-average assumptions: Discount Rate ............................................. 7.50% 7.00% 8.00% Rates of increase in salary compensation level ............ 4.50% 4.00% 5.00% Expected long-term rate of return on plan assets .......... 7.50% 7.00% 8.00%
99 102 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides certain health care and life insurance benefits for retired employees. Employees become eligible for these benefits at normal retirement age. Retiree insurance plans provide health and life insurance benefits to employees who retire from the Company with ten or more years of service. All of the Company's employees are eligible for postretirement life insurance and, except for collectively bargained employees, are eligible for postretirement medical insurance. Postretirement medical insurance is a non-contributory plan. Benefit provisions for most hourly and some salaried employees are subject to collective bargaining. Information concerning the plan obligation, the funded status, amounts recognized in the Company's financial statements, and underlying actuarial assumptions is stated below.
AUGUST 31, -------------------- 1999 1998 ------- ------- (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year ... $ 4,306 $ 3,831 Service cost .............................. 307 264 Interest cost ............................. 299 286 Actuarial loss (gain) ..................... -- (50) Benefits paid ............................. (26) (25) ------- ------- Benefit obligation at end of year ......... $ 4,886 $ 4,306 ======= ======= Development of net amount recognized: Funded status ............................. $(4,886) $(4,306) Unrecognized cost: Actuarial loss ......................... 637 669 ------- ------- Net amount recognized ..................... $(4,249) $(3,637) ======= =======
Net periodic plan costs (income) consist of the following components:
AUGUST 31, --------------------------------------------- 1999 1998 1997 ------------ ------------- ------------ (Dollars in Thousands) Components of net plan costs: Service cost..................... $ 307 $ 264 $ 208 Interest cost.................... 299 286 202 Net amortization: Actuarial loss................ 32 -- -- ------------ ------------- ------------ Net plan costs................... $ 638 $ 550 $ 410 ============ ============= ============ Weighted-average assumptions: Discount Rate.................... 6.75% 7.50% 7.50%
The weighted average annual assumed health care trend rate is assumed to be 7.5% for 1999. The rate is assumed to decrease gradually to 5.8% in 2027 and remain level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care trend rates would have the following effects:
1% INCREASE 1% DECREASE ----------- ----------- (Dollars in Thousands) Effect on total of service and interest cost components............... $ 33 $ (29) Effect on post-retirement benefit obligation........................ 230 (200)
100 103 PROFIT SHARING PLANS The Company established profit sharing plans for the benefit of salaried and hourly employees meeting certain eligibility requirements. The Company distributes a specified percentage of its earnings before interest, taxes, depreciation, and amortization above a specified level to eligible employees on a yearly basis. The amount of each eligible employee's quarterly distribution is related to a specified percentage of each such employee's base salary or wages, with the percentage determined by the employee's position in the Company. The profit sharing for each of the fiscal years ended September 30, 1999, 1998, and 1997 was nil. PHANTOM STOCK PLAN The Company introduced a phantom stock plan to all eligible full-time Canadian employees effective August 21, 1996. At the end of each plan year, the plan administrator establishes a "determined percentage" for the preceding plan year. This percentage is then multiplied by each participant's compensation for the plan year to determine the award amount. The award amount is then divided by the fair market value of one share of the common stock of Sterling Chemicals Holdings, Inc. ("Holdings"), as of December 31 of that plan year, to determine the number of rights to be credited to participants. Upon termination of employment, the benefit amount becomes payable to the participant. The benefit amount will be the number of vested rights in the participant's account, multiplied by the fair market value of one share of common stock of Holdings as of the most recent valuation date. The Company has recorded expense of $0.2 million, $0.2 million, and $0.3 million related to the phantom stock plan for the years ended September 30, 1999, 1998, and 1997, respectively. 7. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company has entered into various long-term noncancellable rail car and other operating leases. Future minimum lease commitments are as follows: fiscal 2000--$4.4 million, fiscal 2001--$4.1 million, fiscal 2002--$4.1 million, fiscal 2003--$3.9 million, fiscal 2004--$3.7 million, and thereafter--$7.6 million. 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 and regulations. 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 laws or permit requirements are implemented. Changing and increasingly strict environmental laws, regulations, and permit requirements can affect the manufacturing, handling, processing, distribution, and use of the Company's products and, if so, the Company's business and operations may be materially and adversely affected. In addition, changes in the law, regulations, and permit 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 with all material aspects of applicable environmental and health and safety laws, regulations, and disclosure requirements, there can be no assurance that past practices and future operations will not result in material claims or regulatory action, require material environmental expenditures, or result in exposure or injury claims by employees and 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 the Company's primary pulp chemicals product. The pulp 101 104 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 12 3/8% Senior Secured Notes due 2006 by Chemicals, Parent granted the note holders a first priority pledge of 65% of the Company's common stock. 8. RELATED PARTY TRANSACTIONS In the normal course of operations of the Company, the following represents significant transactions with related parties for the fiscal years ended September 30, 1999, 1998, and 1997:
YEAR ENDED SEPTEMBER 30, ---------------------------- 1999 1998 1997 ------ ------ ------ (Dollars in Thousands) Chemicals: Management fees ......................... $ 869 $ 795 $ 848 Parent: Services, marketing and R&D revenue ..... $ 921 $ 833 $ 617 Commonly controlled companies: Sale of goods ........................... $9,295 $4,867 $ 347 Purchase of goods ....................... 6,401 4,580 -- Supply agreement revenue ................ -- -- 585 Administration fee revenue .............. 335 323 361 Interest expense ........................ 5,630 4,860 4,199
The amounts due from and to related parties for the years ended September 30, 1999 and 1998 are as follows:
SEPTEMBER 30, --------------------- 1999 1998 ---------- -------- (Dollars in Thousands) Due from related parties: Parent............................... $ 12 $ 305 Commonly controlled companies........ 1,357 649 ---------- -------- $ 1,369 $ 954 ========== ======== Due to related parties: Parent .............................. $ 132 $ 128 Commonly controlled companies........ 1,109 7,272 ---------- -------- $ 1,241 $ 7,400 ========== ========
9. EXPORT SALES The Company is engaged in the sale of products for export into the United States. These were primarily sodium chlorate sales and represented 47%, 46%, and 41% of revenues for fiscal 1999, 1998, and 1997, respectively. 102 105 10. FINANCIAL INSTRUMENTS FORWARD EXCHANGE CONTRACTS The Company enters into forward exchange contracts to hedge foreign currency transactions on a continuing basis for periods consistent with its committed exposures. The Company does not engage in currency speculation. The effect of this practice is to minimize the impact of foreign exchange rate movements on the Company's operating results. As of September 30, 1999 and 1998, the Company had a notional amount of approximately $6.0 million and $54.0 million, respectively, of forward foreign exchange contracts outstanding to buy Canadian dollars. The Company makes net settlements of Canadian dollars for U.S. dollars at maturity, at rates agreed to at inception of the contracts. The deferred loss on these forward foreign exchange contracts at September 30, 1999 and 1998 were $0.3 million and $4.7 million, respectively. The last of the Company's existing forward exchange contracts expires in March of 2000, and it does not intend to enter into any additional forward exchange contracts. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value approximated the carrying value of financial instruments included in current assets and current liabilities on the balance sheet at September 30, 1999 due to the short maturities. The fair value of the notes payable on the balance sheet at September 30, 1999 approximated their carrying value, as the interest rate fluctuates with changes in market rates. CONCENTRATIONS OF CREDIT RISK The Company sells its products primarily to companies involved in the pulp and paper industry. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. The Company maintains cash deposits with major banks which from time to time may exceed federally insured limits. Management periodically assesses the financial condition of the institutions and believes that any possible credit loss is minimal. Approximately 50% of the Company's employees are covered by union agreements. 103 106 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of Sterling Pulp Chemicals, Ltd. We have audited the accompanying balance sheets of Sterling Pulp Chemicals, Ltd. (an indirect wholly-owned subsidiary of Sterling Chemicals, Inc.) as at September 30, 1999 and 1998 and the related statements of operations, changes in stockholder's equity and cash flows for each of the years ended September 30, 1999, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial positions of Sterling Pulp Chemicals, Ltd. as at September 30, 1999 and 1998, and the results of its operations and its cash flows for each of the three years ended September 30, 1999, 1998 and 1997, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Chartered Accountants Mississauga, Canada December 9, 1999 104 107 REPORT OF MANAGEMENT Management is responsible for the preparation and content of the financial statements and other information included in this annual report. The financial statements have been prepared in conformity with generally accepted accounting principles appropriate under the circumstances to reflect, in all material respects, the substance of events and transactions that should be included. The financial statements reflect management's judgments and estimates as to the effects of events and transactions that are accounted for or disclosed. Management maintains accounting systems which are supported by internal accounting controls that provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. The concept of reasonable assurance is based on the recognition that the cost of a system of internal accounting controls should not exceed the benefits. Deloitte & Touche LLP performed an independent audit of the Company's financial statements for fiscal years 1999, 1998, and 1997, for the purpose of determining that the statements are presented fairly and in accordance with generally accepted accounting principles. The independent auditors are appointed by the Board of Directors and meet regularly with the Audit and Compliance Committee of the Board of Directors, which is comprised solely of outside directors. The Audit and Compliance Committee meets periodically with the Company's senior officers and independent accountants to review the adequacy and reliability of the Company's accounting, financial reporting, and internal controls. Peter W. De Leeuw President and Chief Executive Officer Paul G. Vanderhoven Controller - Principal Accounting Officer December 16, 1999 105 108 STERLING CHEMICALS HOLDINGS, INC. SUPPLEMENTAL FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL FIRST SECOND THIRD FOURTH YEAR QUARTER QUARTER QUARTER QUARTER ------ ----------- ----------- ----------- ----------- Revenues 1999 $ 171,929 $ 152,472 $ 181,729 $ 214,622 1998 230,236 204,504 205,414 182,436 Gross Profit 1999 16,717 4,312 12,198 4,931 1998 19,299 11,359 22,528 24,081 Loss before extraordinary item(1) 1999 (13,100) (24,820) (16,415) (51,482) 1998 (10,145) (16,288) (13,118) (6,568) Net loss (1) 1999 (13,100) (24,820) (16,415) (55,694) 1998 (10,145) (16,288) (13,118) (6,568) Per Share Data: Loss before extraordinary item 1999 $ (1.11) $ (1.96) $ (1.37) $ (4.15) 1998 (0.91) (1.37) (1.13) (0.60) Net loss attributable to common stockholders 1999 (1.11) (1.96) (1.37) (4.49) 1998 (0.91) (1.37) (1.13) (0.60)
(1) During the first and third quarters of fiscal 1999, the Company recorded $2.3 million and $1.7 million, respectively, of expense related to workforce reductions in the petrochemicals and pulp chemicals businesses. In addition, during the second quarter of fiscal 1999, the Company recorded a one-time non-cash pretax charge of $6.8 million related to early retirement programs and benefit changes. During the fourth quarter of fiscal 1999, the Company recorded a $4.2 million after-tax ($6.5 million pre-tax) extraordinary item related to unamortized debt issue costs as a result of the prepayment of certain term loans. The Company also recorded non-cash expense related to the impairment of its methanol production assets of $26.4 million in the fourth quarter of fiscal 1999. During the second and third quarters of fiscal 1998, the Company recorded $3.0 million and $3.0 million, respectively, of expense related to voluntary severance programs offered by the Company at the Company's Texas City plant. 106 109 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Proxy Statement for Holdings' 2000 Annual Meeting of Stockholders under the headings "Election of Directors" and "Executive Officers of the Company" are incorporated herein by reference in response to this item. ITEM 11. EXECUTIVE COMPENSATION The Proxy Statement for Holdings' 2000 Annual Meeting of Stockholders under the heading "Executive Compensation and Other Information" is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Proxy Statement for Holdings' 2000 Annual Meeting of Stockholders under the heading "Amount and Nature of Shares Beneficially Owned" is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Proxy Statement for Holdings' 2000 Annual Meeting of Stockholders under the headings "Election of Directors" and "Certain Transactions" are incorporated herein by reference in response to this item. 107 110 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial Statements, Financial Statement Schedules and Exhibits 1. Consolidated Financial Statements See "Item 8. Financial Statements and Supplementary Data - Index to Financial Statements." 2. All schedules for which provision is made in Regulation S-X of the Securities and Exchange Commission are not required under the related instruction or are inapplicable and, therefore, have been omitted. 3. Exhibits The following exhibits are filed as part of this Form 10-K:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 2.1 - Amended and Restated Agreement and Plan of Merger between STX Acquisition Corp. and Sterling Chemicals, Inc. dated as of April 24, 1996, incorporated by reference from the Company's Current Report on Form 8-K dated April 24, 1996, as amended by Form 8-K/A. 3.1 - Restated Certificate of Incorporation of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. 3.2 - Certificate of Incorporation of Sterling Chemicals, Inc., as amended, incorporated by reference from Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 3.3 - Restated Bylaws of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 3.4 - Restated Bylaws of Sterling Chemicals, Inc., incorporated by reference from Exhibit 3.2 to the Registration Statement on Form S-4 of Sterling Chemicals, Inc. (Registration No. 333-87471). 4.1 - Warrant Agreement (including form of Warrant) dated as of August 15, 1996 between Sterling Chemicals Holdings, Inc. and KeyCorp Shareholder Services, Inc., as Warrant Agent, incorporated by reference from Exhibit 4.4 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.2 - Warrant Agreement dated as of July 10, 1997 between Sterling Chemicals Holdings, Inc. and Harris Trust and Savings Bank, as Warrant Agent, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. 4.3 - Warrant Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Harris Trust and Savings Bank, as Warrant Agent. 4.4 - Registration Rights Agreement, incorporated by reference from Exhibit 4.11 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.5 - Indenture dated as of August 15, 1996 between Sterling Chemicals Holdings, Inc. and Fleet National Bank governing the 13 1/2 % Senior Secured Discount Notes due 2008 of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 4.5 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.5(a) - First Supplemental Indenture dated October 1, 1997 governing the 13 1/2% Senior Secured Discount Notes due 2008 of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998.
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 4.5(b) - Second Supplemental Indenture dated March 16, 1998 governing the 13 1/2% Senior Secured Discount Notes due 2008 of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.6 - Indenture dated as of August 15, 1996 between Sterling Chemicals, Inc. and Fleet National Bank governing the 11 3/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.7 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.6(a) - First Supplemental Indenture dated October 1, 1997 governing the 11 3/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.6(b) - Second Supplemental Indenture dated March 16, 1998 governing the 11 3/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.7 - Indenture dated as of April 7, 1997 between Sterling Chemicals, Inc. and Fleet National Bank governing the 11 1/4% Senior Subordinated Notes due 2007 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997. 4.7(a) - First Supplemental Indenture dated March 16, 1998 governing the 11 1/4% Senior Subordinated Notes due 2007 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.8 - Indenture dated as of July 23, 1999 among Sterling Chemicals, Inc., as Issuer, Sterling Canada Inc., Sterling Chemicals Energy, Inc., Sterling Chemicals International, Inc., Sterling Fibers, Inc., Sterling Pulp Chemicals US, Inc., and Sterling Pulp Chemicals, Inc., as Guarantors, and Harris Trust Company of New York, as Trustee, incorporated by reference from Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.9 - Second Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 by Sterling Chemicals, Inc., Trustor, to John Dorris, Trustee for the benefit of Harris Trust Company of New York, Beneficiary, incorporated by reference from Exhibit 4.10 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.10 - Second Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 between Sterling Fibers, Inc., Mortgagor, and The CIT Group/Business Credit, Inc., Mortgage, incorporated by reference from Exhibit 4.11 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.11 - Second Leasehold Deed to Secure Debt, Assignment and Security Agreement dated as of July 23, 1999 by Sterling Pulp Chemicals, Inc., Grantor, to Harris Trust Company of New York, as Collateral Agent, and U.S. Bank Trust National Association, as Georgia co-agent, incorporated by reference from Exhibit 4.12 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.12 - Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals, Inc., Sterling Pulp Chemicals US, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc., and Sterling Chemicals International, Inc., as Assignors, and Harris Trust Company of New York, as Collateral Agent, incorporated by reference from Exhibit 4.13 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.13 - Stock Pledge and Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., and Sterling Pulp Chemicals US, Inc., as Pledgors, and Harris Trust Company of New York, as Collateral Agent, incorporated by reference from Exhibit 4.14 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.14 - Stock Pledge and Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc. and Sterling Canada, Inc., as Pledgors, and Harris Trust Company of New York, as Collateral Agent, incorporated by reference from Exhibit 4.15 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999.
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 4.15 - Senior Debt Intercreditor Agreement dated as of July 23, 1999 among Harris Trust Company of New York, as Trustee, The CIT Group/Business Credit, Inc., as Administrative Agent, and Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.17 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.16 - Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, incorporated by reference from Exhibit 4.10 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.16(a) - First Amendment to Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of December 31, 1997, incorporated by reference from Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.16(b) - Second Amendment to Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of May 1, 1998, incorporated by reference from Exhibit 4.9(b) of the Company's Annual Report on Form 10-K for the fiscal year ending September 30, 1998. 4.17 - Third Amended and Restated Voting Agreement dated as of February 1, 1999, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. 4.18 - Tag-Along Agreement dated as of August 21, 1996, incorporated by reference from Exhibit 4.13 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.19 - Intercreditor Agreement dated as of August 21, 1996 between Texas Commerce Bank National Association and Fleet National Bank, incorporated by reference from Exhibit 4.14 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No.333-04343). 4.19(a) - Amendment of Intercreditor Agreement dated as of July 23, 1999 among Sterling Chemicals Holdings, Inc., Chase Bank of Texas, N.A. (formerly known as Texas Commerce Bank National Association), as Administrative Agent, and State Street Bank and Trust Company, as Trustee, incorporated by reference from Exhibit 4.18 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.20 - Revolving Credit Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, Credit Suisse First Boston, as the Documentation Agent, DLJ Capital Funding, Inc., as the Syndication Agent, and various financial institutions, as the Lenders, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. **4.20(a) - First Amendment to Revolving Credit Agreement dated effective as of December 17, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, Credit Suisse First Boston, as the Documentation Agent, DLJ Capital Funding, Inc., as the Syndication Agent, and various financial institutions, as the Lenders. 4.21 - Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 by Sterling Chemicals, Inc., Trustor, to Linda H. Earle, Trustee for the benefit of The CIT Group/Business Credit, Inc., as Administrative and Collateral Agent, Beneficiary, incorporated by reference from Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.22 - Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 by Sterling Fibers, Inc., Mortgagor, to The CIT Group/Business Credit, Inc., Mortgagee, incorporated by reference from Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.23 - Leasehold Deed to Secure Debt, Assignment and Security Agreement dated as of July 23, 1999 by Sterling Pulp Chemicals, Inc. to The CIT Group/Business Credit, Inc., as Administrative Agent, and U.S. Bank Trust National Association, as Georgia co-agent, incorporated by reference from Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999.
110 113
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 4.24 - Fixed Assets Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Grantors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.25 - Current Assets Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Grantors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Current Assets Secured Parties, incorporated by reference from Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.26 - Parent Pledge Agreement dated as of July 23, 1999 between Sterling Chemicals Holdings, Inc. and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.27 - Obligor Pledge Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc. and Sterling Pulp Chemicals US, Inc., as the Pledgors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.8 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 10.1 - Sterling Chemicals, Inc. Salaried Employees' Pension Plan (Restated as of October 1, 1993), incorporated by reference from Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993. 10.1(a) - Supplement to the Sterling Chemicals, Inc. Salaried Employee's Pension Plan (Restated as of January 1, 1994), incorporated by reference from Exhibit 10.6(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.1(b) - First and Second Amendments to the Sterling Chemicals, Inc. Salaried Employees' Pension Plan dated April 27, 1994 and September 23, 1994, respectively, incorporated by reference from Exhibit 10.6(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.2 - Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (Effective as of May 1, 1996), incorporated by reference from Exhibit 10.3(c) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.3 - Sterling Chemicals, Inc. Amended and Restated Savings and Investment Plan, incorporated by reference from Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993. 10.3(a) - Supplements to the Sterling Chemicals, Inc. Amended and Restated Savings and Investment Plan, incorporated by reference from Exhibit 10.10(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.3(b) - First and Second Amendments to the Sterling Chemicals, Inc. Amended and Restated Savings and Investment Plan dated April 27, 1994 and October 26, 1994, respectively, incorporated by reference from Exhibit 10.10(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.4 - Sterling Chemicals, Inc. Pension Benefit Equalization Plan, incorporated by reference from Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020). 10.5 - Sterling Chemicals Employee Stock Ownership Plan (ESOP), incorporated by reference from Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.6 - Sterling Chemicals, Inc. Amended and Restated Supplemental Employee Retirement Plan, incorporated by reference from Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1989 (Commission File Number 1-10059).
111 114
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 10.7 - Sterling Chemicals, Inc. Deferred Compensation Plan, incorporated by reference from Exhibit 10.35 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1989 (Commission File Number 1-10059). 10.8 - Sterling Chemicals Holdings, Inc. Omnibus Stock Awards and Incentive Plan effective April 23, 1997, as amended, incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 10.9 - Form of Indemnity Agreement executed between the Company and each of its officers and directors, incorporated by reference from Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.10 - Form of Indemnity Agreement executed between the Company and each of its officers and directors, incorporated by reference from Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. +10.11 - Amended and Restated Production Agreement dated March 31, 1998 between BP Chemicals, Inc. and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.12 - Second Amended and Restated Production Agreement dated effective as of August 1, 1996 between BP Chemicals Inc. and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.13 - Amended and Restated Product Sales Agreement dated January 1, 1997 between BASF Corporation and Sterling Chemicals, Inc., incorporated by referenced from Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997. 10.14 - License Agreement dated August 1, 1986 between Monsanto Company and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.25 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020). +10.15 - Methanol Production Agreement dated September 26, 1996 between BP Chemicals Inc. and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. +10.16 - Joint Venture Agreement dated March 31, 1998 between Sterling Chemicals, Inc. and BP Chemicals, Inc., incorporated by reference from Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.16(a) - First Amendment to Joint Venture Agreement dated effective as of March 31, 1998 between Sterling Chemicals, Inc. and BP Chemicals Inc., incorporated by reference from Exhibit 10.26(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 10.17 - Articles of Agreement between Sterling Chemicals, Inc., its successors and assigns, and Texas City, Texas Metal Trades Council, AFL-CIO Texas City, Texas, December 18, 1998 to May 1, 2002, incorporated by reference from Exhibit 10.23 to the Registration Statement on Form S-4 of Sterling Chemicals, Inc. (Registration No. 333-87471). 10.18 - Agreement between Sterling Pulp Chemicals Ltd., North Vancouver, British Columbia, and Pulp, Paper and Woodworkers of Canada Local 5 British Columbia effective December 1, 1994 to November 30, 1998, incorporated by reference from Exhibit 10.50 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.19 - Employment Agreement dated as of March 16, 1998 between Peter W. De Leeuw and the Company, incorporated by reference from Exhibit 10.27 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 10.20 - Employment Agreement dated as of January 19, 1998 between Gary M. Spitz and the Company, incorporated by reference from Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. **10.21 - Employment Agreement dated as of November 12, 1997 between David G. Elkins and the Company. 10.22 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Frank P. Diassi, incorporated by reference from Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998.
112 115
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 10.23 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Frank J. Hevrdejs, incorporated by reference from Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 10.24 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Koch Capital Services, Inc., incorporated by reference from Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. **10.25 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals, Holdings, Inc. and William A. McMinn. **21.1 - Subsidiaries of Sterling Chemicals Holdings, Inc. **23.1 - Consent of Deloitte & Touche LLP **27.1 - Financial Data Schedule - Sterling Chemicals Holdings, Inc. **27.2 - Financial Data Schedule - Sterling Chemicals, Inc.
** Filed herewith. + Confidential treatment has been requested with respect to portions of this Exhibit, and such request has been granted. (b) Reports on Form 8-K. None. 113 116 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, 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) By /s/ PETER W. DE LEEUW --------------------------------------- (Peter W. De Leeuw) President and Chief Executive Officer DATE: DECEMBER 16, 1999 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF EACH OF THE REGISTRANTS AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ FRANK P. DIASSI Chairman of the Board of December 16, 1999 - -------------------------------------------- Directors (Frank P. Diassi) /s/ PETER W. DE LEEUW President, Chief Executive December 16, 1999 - -------------------------------------------- Officer and Director (Peter W. De Leeuw) (principal executive officer) /s/ GARY M. SPITZ Vice President-Finance and December 16, 1999 - -------------------------------------------- Chief Financial Officer (Gary M. Spitz) (principal finance officer) /s/ PAUL G. VANDERHOVEN Controller December 16, 1999 - -------------------------------------------- (principal accounting officer) (Paul G. Vanderhoven) /s/ ROBERT W. ROTEN Vice Chairman of the Board of December 16, 1999 - -------------------------------------------- Directors (Robert W. Roten) /s/ FRANK J. HEVRDEJS Director December 16, 1999 - -------------------------------------------- (Frank J. Hevrdejs) /s/ T. HUNTER NELSON Director December 16, 1999 - -------------------------------------------- (T. Hunter Nelson) /s/ JOHN L. GARCIA Director December 16, 1999 - -------------------------------------------- (John L. Garcia) /s/ ALLAN R. DRAGONE Director December 16, 1999 - -------------------------------------------- (Allan R. Dragone) /s/ GEORGE J. DAMIRIS Director December 16, 1999 - -------------------------------------------- (George J. Damiris ) /s/ ROLF H. TOWE Director December 16, 1999 - -------------------------------------------- (Rolf H. Towe) /s/ WILLIAM A. MCMINN Director December 16, 1999 - -------------------------------------------- (William A. McMinn)
114 EX-4.20.A 2 FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT 1 EXHIBIT 4.20(a) FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT THIS FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT (this "Amendment") dated as of the Amendment Effective Date (as defined in Section 4 of this Amendment) is by and among STERLING CHEMICALS, INC., a Delaware corporation ("Sterling"), STERLING CANADA, INC., a Delaware corporation, STERLING CHEMICALS ENERGY, INC., a Delaware corporation, STERLING CHEMICALS INTERNATIONAL, INC., a Delaware corporation, STERLING FIBERS, INC., a Delaware corporation, STERLING PULP CHEMICALS, INC., a Georgia corporation, and STERLING PULP CHEMICALS US, INC., a Delaware corporation (each such entity, together with Sterling, each individually a "Borrower" and collectively the "Borrowers"), THE CIT GROUP/BUSINESS CREDIT, INC. ("CIT"), individually and as the Administrative Agent (in such capacity, the "Administrative Agent"), CREDIT SUISSE FIRST BOSTON, as the documentation agent (in such capacity, the "Documentation Agent"), DLJ CAPITAL FUNDING, INC., as the syndication agent (in such capacity, the Syndication Agent" and, together with the Administrative Agent, individually, a "Agent" and collectively, the "Agents"), and the Lenders signatory hereto. PRELIMINARY STATEMENTS 1. Each of the Borrowers entered into that certain Revolving Credit Agreement dated as of July 23, 1999, among the Borrowers, the Administrative Agent, the Documentation Agent, the Syndication Agent and the other financial institutions that are a signatory thereto (the "Existing Credit Agreement"). Capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Existing Credit Agreement. 2. The Borrowers have requested that certain provisions of the Existing Credit Agreement be modified and amended. 3. The Borrowers, the Agents, the Documentation Agent and the Required Lenders have agreed to amend the Existing Credit Agreement on the terms and conditions contained herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and in the Existing Credit Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: Section 1. Amendment of Article X of the Existing Credit Agreement. Article X of the Existing Credit Agreement is hereby amended by adding a new Section 10.17 thereto, to read as follows: SECTION 10.17. ANEXCO Information. (a) Each of the Agents and each of the Lenders agrees that (i) it shall hold all non-public information of 2 ANEXCO obtained pursuant to this Agreement (the "ANEXCO Information"), including account obligor information with respect to the accounts receivable of ANEXCO, in strict confidence, (ii) it will not disclose any of the ANEXCO Information to any Person other than (A) either of the Agents or any Lender, (B) its employees who need to know the ANEXCO Information in connection with the transactions contemplated by this Agreement, who are informed of the confidential nature of the ANEXCO Information and who agree to abide by and act in accordance with the terms of this Section to the same extent as if they were parties hereto, (C) its examiners, outside auditors, counsel and other professional advisors in connection with this Agreement, (D) any Person that has become, in accordance with the requirements of this Agreement, a bona fide transferee, participant or assignee of the interests of any Lender under this Agreement and (E) any governmental agency or representative thereof as required or requested pursuant to legal process, and (iii) it shall use the ANEXCO Information only in connection with this Agreement and not for any other purpose; provided, however, this Section shall not apply (A) if any of the ANEXCO Information (x) was or becomes generally available to the public other than by disclosure by the Agents or any Lender or any of their respective employees, agents, examiners, outside auditors, counsel, other professional advisors, transferees, participants or assignees or (y) was or becomes available on a non-confidential basis from a source other than the Borrowers, ANEXCO or BP, or (B) to the extent reasonably required in connection with the enforcement of any Loan Document (collectively "Excluded Information"). (b) Each of the Agents and each of the Lenders agrees that: (i) it will cause its employees, outside auditors, counsel and other professional advisors to observe the terms of this Section and will be responsible for any breach of this Section; (ii) any outside auditor, counsel or professional advisor (other than those outside auditors, counsel or professional advisors regularly providing such services to such Lender or to the Administrative Agent) to whom it proposes to disclose any ANEXCO Information other than the Excluded Information must be approved by BP or ANEXCO prior to such disclosure, such approval not to be unreasonably withheld or delayed; (iii) prior to disclosing any information to a transferee, participant or assignee pursuant to this Section, it will require such transferee, participant or assignee to agree to be bound by this Section; and -2- 3 (iv) unless specifically prohibited by applicable law or court order, it will (A) notify BP and ANEXCO of any request by any governmental agency or representative thereof (other than any such request in connection with a routine examination of its financial condition by such governmental agency) for disclosure of any ANEXCO Information other than Excluded Information at least five business days prior to disclosure of such ANEXCO Information other than Excluded Information (or if prior notification of such length is not reasonably practicable under the circumstances, as soon as is reasonably practicable under the circumstances but in any event prior to such disclosure) and (B) permit BP and ANEXCO to file or otherwise make an objection with the relevant governmental agency or representative thereof to the disclosure of such ANEXCO Information. (c) Each of the Agents, the Documentation Agent and each of the Lenders acknowledges that the ANEXCO Information other than the Excluded Information may be of a competitively sensitive nature and agrees to hold all of the ANEXCO Information other than the Excluded Information in accordance with its customary procedures for handling confidential information of that nature and in accordance with safe and sound banking practices. (d) Notwithstanding anything to the contrary contained in this Agreement, each of BP and ANEXCO (i) shall be a third party beneficiary of this Section and shall be entitled to rights and privileges hereof to the extent that (A) any ANEXCO Information other than the Excluded Information was obtained by Sterling from BP or ANEXCO and disclosed to either of the Agents or any of the Lenders or (B) any ANEXCO Information other than the Excluded Information is otherwise obtained by either of the Agents or any of the Lenders from BP or ANEXCO, and (ii) shall be entitled to enforce this Section 10.17 against the Agents and the Lenders to the same extent as if BP and ANEXCO were parties hereto. (e) Notwithstanding anything to the contrary contained in this Agreement, no amendment, modification or restatement of, or waiver under, this Section 10.17 which would adversely affect BP or ANEXCO shall be or become effective without the prior written consent of BP and ANEXCO. (f) All notices, requests and other communications provided to BP or ANEXCO under this Agreement shall be in writing and addressed, delivered or transmitted to the following address or facsimile number: BP Chemicals Inc. Manager, Planning, Control & Development Nitriles Business Unit Bldg. 605-1, N-3 1561 -3- 4 150 West Warrenville Road Naperville, Illinois 60563-8460 Facsimile Number: (630) 961-7676 or at such other address or facsimile number as may be designated by BP or ANEXCO in a notice to the Administrative Agent. Any notice, (i) if mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when it has been received or (ii) if transmitted by facsimile, shall be deemed given when transmitted (and telephonic confirmation of receipt thereof has been received). Section 2. Effect of This Amendment. The Existing Credit Agreement and this Amendment shall be read, taken and construed as one and the same instrument. Except as expressly modified hereby or by express written amendments thereof, each of the Loan Documents and each of the other documents and instruments executed in connection with any of the foregoing are and shall remain in full force and effect. In the event of a conflict between this Amendment and any of the foregoing documents, the terms of this Amendment shall be controlling. Upon the effectiveness of this Amendment, each reference in the Existing Credit Agreement to "this Agreement" and each reference in each of the other Loan Documents to "the Credit Agreement" shall mean and be a reference to the Existing Credit Agreement as amended hereby. Section 3. Limitations. The amendments set forth herein are limited precisely as written and shall not (a) be deemed to be a consent to, or a waiver or modification of, any other term or condition of any of the Loan Documents or (b) except as expressly set forth herein, prejudice any right or rights which the Agents or the Lenders may now have or may have in the future under or in connection with any of the Loan Documents or any of the other documents or instruments referred to therein. Section 4. Conditions Precedent and Effectiveness. This Amendment shall not be effective unless and until (a) counterparts hereof executed on behalf of each Borrower and the Required Lenders (or notice thereof satisfactory to the Agents) shall have been received by the Syndication Agent and, upon receipt of such counterparts or notice by the Syndication Agent, shall be and become effective as of December 17, 1999 (the "Amendment Effective Date") and (b) the Agents shall have received for the account of each Lender, all fees, costs and expenses due and payable pursuant to Sections 3.3 and 10.3 of the Credit Agreement or payable hereunder, if then invoiced. Section 5. Representations and Warranties. Each of the Borrowers hereby represents and warrants to the Agents and the Lenders that (a) except as affected by the transactions contemplated in the Existing Credit Agreement and this Amendment, each of the representations and warranties made by the Borrowers in or pursuant to each of the Loan Documents is true and correct in all material respects as of the Amendment Effective Date, as if made on and as of such date, except for any representations and warranties made as of a specified date, which are true and correct in all material respects as of such specified date, and (b) no Default or Event of Default has occurred and is continuing as of the Amendment Effective Date. -4- 5 Section 6. Adoption, Ratification and Confirmation of Existing Credit Agreement. Each of the Borrowers, each of the Agents, the Documentation Agent and each of the Lenders signatories hereto hereby adopts, ratifies and confirms the Existing Credit Agreement, as amended hereby, and acknowledges and agrees that the Existing Credit Agreement, as amended hereby, is and remains in full force and effect. Section 7. Payment of Costs and Expenses. Each Borrower, jointly and severally, agrees to pay on demand all reasonable expenses of each Agent (including the reasonable fees and out-of-pocket expenses of Mayer, Brown & Platt, counsel to the Agents) in connection with (a) the negotiation, preparation, execution and delivery of this Amendment, whether or not the transactions contemplated hereby are consummated, and (b) the preparation and review of the form of any document or instrument relevant to this Amendment. Each Borrower further jointly and severally agrees to pay, and to save the Agents, the Documentation Agent and the Lenders harmless from all liability for, any stamp or other similar Taxes which may be payable in connection with the execution or delivery of this Amendment. Section 8. Severability. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Amendment or affecting the validity or enforceability of such provision in any other jurisdiction. Section 9. Headings. The various headings of this Amendment are inserted for convenience only and shall not affect the meaning or interpretation of this Amendment or any provisions hereof. Section 10. Execution in Counterparts. This Amendment may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original (whether such counterpart is originally executed or an electronic copy of an original and each party hereto other than the Agents and Sterling expressly waives its rights to receive originally executed documents) and all of which shall constitute together but one and the same agreement. Section 11. Governing Law; Entire Agreement. THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK, EXCLUDING THE LAW OF CONFLICTS BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. This Amendment, the Existing Credit Agreement and the other Loan Documents constitute the entire understanding among the parties hereto and thereto with respect to the subject matter hereof and thereof and supersede any prior agreements, written or oral, with respect thereto. Section 12. Loan Document Pursuant to Existing Credit Agreement. This Amendment is a Loan Document pursuant to the Existing Credit Agreement and shall be construed, administered and applied in accordance with all of the terms and provisions of the Existing Credit Agreement. -5- 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective duly authorized officers as of the Amendment Effective Date. THE BORROWERS: STERLING CHEMICALS, INC. By: -------------------------------------------- Gary M. Spitz, Vice President - Finance and Chief Financial Officer STERLING CANADA, INC. By: -------------------------------------------- Gary M. Spitz, Vice President - Finance STERLING CHEMICALS ENERGY, INC. By: -------------------------------------------- Gary M. Spitz, Vice President STERLING CHEMICALS INTERNATIONAL, INC. By: -------------------------------------------- Gary M. Spitz, Vice President STERLING FIBERS, INC. By: -------------------------------------------- Gary M. Spitz, Vice President STERLING PULP CHEMICALS, INC. By: -------------------------------------------- Gary M. Spitz, Vice President - Finance -6- 7 STERLING PULP CHEMICALS US, INC. By: -------------------------------------------- Gary M. Spitz, Vice President - Finance AGENTS AND LENDERS: THE CIT GROUP/BUSINESS CREDIT, INC., As Administrative Agent and a Lender By: -------------------------------------------- Printed Name: ---------------------------------- Title: ----------------------------------------- DLJ CAPITAL FUNDING, INC., As Syndication Agent By: -------------------------------------------- Printed Name: ---------------------------------- Title: ----------------------------------------- CREDIT SUISSE FIRST BOSTON, As Documentation Agent By: -------------------------------------------- Printed Name: ---------------------------------- Title: ----------------------------------------- By: -------------------------------------------- Printed Name: ---------------------------------- Title: ----------------------------------------- -7- 8 IBJ WHITEHALL BUSINESS CREDIT CORPORATION By: -------------------------------------------- Printed Name: ---------------------------------- Title: ----------------------------------------- FLEET CAPITAL CORPORATION By: -------------------------------------------- Printed Name: ---------------------------------- Title: ----------------------------------------- COAST BUSINESS CREDIT, A Division Of Southern Pacific Bank By: -------------------------------------------- Printed Name: ---------------------------------- Title: ----------------------------------------- FINOVA CAPITAL CORPORATION By: -------------------------------------------- Printed Name: ---------------------------------- Title: ----------------------------------------- TEXTRON FINANCIAL CORP. By: -------------------------------------------- Printed Name: ---------------------------------- Title: ----------------------------------------- -8- 9 GREEN TREE FINANCIAL SERVICING CORPORATION By: -------------------------------------------- Printed Name: ---------------------------------- Title: ----------------------------------------- GMAC BUSINESS CREDIT, LLC By: -------------------------------------------- Printed Name: ---------------------------------- Title: ----------------------------------------- THE PROVIDENT BANK By: -------------------------------------------- Printed Name: ---------------------------------- Title: ----------------------------------------- GPSF SECURITIES, INC. By: -------------------------------------------- Printed Name: ---------------------------------- Title: ----------------------------------------- FOOTHILL CAPITAL CORPORATION By: -------------------------------------------- Printed Name: ---------------------------------- Title: ----------------------------------------- -9- 10 CONGRESS FINANCIAL CORPORATION (SOUTHWEST) By: -------------------------------------------- Printed Name: ---------------------------------- Title: ----------------------------------------- COMERICA BANK By: -------------------------------------------- Printed Name: ---------------------------------- Title: ----------------------------------------- KZH STERLING, LLC By: -------------------------------------------- Printed Name: ---------------------------------- Title: ----------------------------------------- -10- EX-10.21 3 EMPLOYMENT AGREEMENT - DATED NOVEMBER 12, 1997 1 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement"), dated as of November 12, 1997, by and among STERLING CHEMICALS HOLDINGS CORPORATION, a Delaware corporation ("Holdings"), STERLING CHEMICALS, INC., a Delaware corporation and a wholly-owned subsidiary of Holdings ("Sterling" and, together with Holdings, "Employers"), and David G. Elkins ("Employee"). WHEREAS, Employers desire to employ Employee as a senior officer and Employee desires to serve in such capacity, in each case on the terms and conditions, and for the consideration, set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I Definitions and Interpretations 1.01. Definitions For purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires, the following terms shall have the following respective meanings: "Base Salary" shall have the meaning specified in Section 3.01. "Board" shall mean the Board of Directors of Holdings. "Bonus Plan" has the meaning specified in Section 3.02. "Chairman" shall mean the Chairman of the Board of Holdings "Change of Control" shall have the meaning specified in the Incentive Plan. "Code" shall mean the Internal Revenue Code of 1986, as in effect from time to time. "Confidential Information" shall have the meaning specified in Section 5.02. "Constituent Companies" shall mean, collectively, Holdings, Sterling and all other direct or indirect subsidiaries of Holdings. "Disability" shall mean a physical or mental condition of Employee that (i) prevents 1 2 Employee from being able to perform the services required under this Agreement, (ii) has continued for a period of at least 180 days during any period of twelve consecutive months and (iii) is reasonably expected to continue. "Dispute" shall have the meaning specified in Section 6.01. "Employment Period" shall have the meaning specified in Section 2.01. "Fair Market Value" shall have the meaning specified in the Incentive Plan. "Forfeiture Contingency" shall have the meaning specified in Section 3.03(b). "Good Reason" shall mean (a) a material alteration by either Employer in the nature or status of Employee's positions, functions, duties or responsibilities from those he had on January 1, 1998 or from those described in Section 2.02(a), including any change which would (i) alter Employee's reporting responsibilities described in Section 2.02(a) or (ii) cause Employee's positions and functions with Employers to become of less dignity or importance than those described in Section 2.02(a); (b) the failure of Employers to maintain plans and programs entitling Employee to benefits that, in the aggregate, are at least as favorable to Employee as those available to Employee as of January 1, 1998; (c) the failure of either Employer to observe or perform any provision contained in Article III, Article VI, Section 7.03, 7.05 or Section 7.06; (d) the failure of either Employer to observe or perform any other provision of this Agreement or any provision of any indemnification agreement between Employee and Employers (or either of them), but only if such failure shall continue unremedied for more than 30 days after written notice thereof is given by Employee to Employers; (e) the failure of either Employer to elect or re-elect, or to appoint or re-appoint, Employee to the offices described in Section 2.02(a); (f) the failure of Employers to maintain in full force and effect an insurance policy (having a scope and containing terms and conditions at least as favorable as those in effect on the date thereof) insuring their respective directors and officers against personal liability for acts or omissions in connection with service as a director or officer of any Constituent Company or service in other capacities at the request of either Employer; or (g) any act or omission of any Constituent Company which is contrary to any advice, opinion or instruction given by Employee in the performance of services hereunder and which constitutes a violation of any law (whether statutory. administrative, judicial and other) applicable to such Constituent Company or any of its properties, assets, securities, business or employees. "Holdings" shall have the meaning specified in the recitals of this Agreement. "Incentive Plan" shall mean the Sterling Chemicals Holdings, Inc. Omnibus Stock Awards and Incentive Plan, as amended from time to time. "IPO" shall have the meaning specified in the Incentive Plan. "Legal Department" shall mean the in-house legal department serving Employers and 2 3 all other Constituent Companies. "Miscellaneous Benefits" shall have the meaning specified in Section 3.16(a). "Misconduct" shall mean (a) the willful commission by Employee of acts that are both dishonest and demonstrably injurious to the Constituent Companies (monetarily or otherwise), taken as a whole, in any material respect; (b) the violation of the Company's drug and alcohol policy (c) the conviction of Employee for a felony offense; or (d) the failure by Employee to perform of any of his obligations under this Agreement, but only if such failure was not caused by disability or incapacity and shall have continued unremedied for more than 30 days after written notice thereof is given to Employee by Employers. For purposes of the foregoing, no act or failure to act on the part of Employee shall be considered "willful" unless such act or failure to act was not in good faith and was without reasonable belief that his action or failure to act was in the best interest of Employers, and no act or failure to act on the part of Employee shall be considered "willful" if it is solely the result of his bad judgment or negligence. "Notice of Termination" shall mean, as appropriate, (a) a notice from Employee to Employers purporting to terminate Employee's employment in accordance with Section 4.01, which notice shall be dated the date it is given, specify the Termination Date, state whether or not such termination is for Good Reason or Disability and, if so, set forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination or (b) a notice from Employers to Employee purporting to terminate Employee's employment in accordance with Section 4.02, which notice shall be dated the date it is given, specify the Termination Date, state whether or not such termination is for Misconduct or Disability and, if so, set forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination. Any Notice of Termination which is not in compliance with the foregoing requirements shall be invalid and ineffective. Any Notice of Termination given by Employers after the death of Employee shall be invalid and ineffective. Any Notice of Termination given by Employers after Employee has given a valid Notice of Termination shall be ineffective and vice versa. "Pension Plan" shall mean the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of May 1, 1996), as amended from time to time. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a limited liability company, a trust and an unincorporated organization. "Restricted Shares" shall have the meaning specified in Section 3.03(b). "Stock Grant" shall have the meaning specified in Section 3.03(a). "Stock Option" shall have the meaning specified in Section 3.04(a). "Stockholders Agreement" shall mean the Sterling Chemicals Holdings, Inc. Stockholders Agreement effective as of August 21, 1996, as amended from time to time. 3 4 "Termination Date" shall mean the termination date specified in a Notice of Termination delivered in accordance with Article IV, provided that in no event shall such termination date be less than 30 nor more than 60 days after the date such Notice of Termination is given. "Transfer Restriction" shall have the meaning specified in Section 3.03(c). 1.02. Interpretation In this Agreement, unless a clear contrary intention appears, (i) the words "herein," "hereof' and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision, (ii) reference to any Article or Section, means such Article or Section hereof, (iii) the words "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term, and (iv) where any provision of this Agreement refers to action to be taken by any party, or which such party is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such party. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. No provision of this Agreement shall be interpreted or construed against any party solely because that party or its legal representative drafted such provision. ARTICLE II Employment: Term, Positions and Duties 2.01. Employment: Term Each Employer hereby employees Employee in a senior executive capacity and Employee hereby accepts employment by each Employer, in each case on the terms and conditions, and for the consideration, set forth in this Agreement. Employee's employment hereunder shall begin on January 1, 1998 and shall continue until terminated in accordance with Article IV (the "Employment Period"). 2.01. Positions and Duties (a) While employed hereunder, Employee shall serve as Vice President, General Counsel and Secretary of each Employer and shall have and may exercise all of the powers, functions, duties and responsibilities normally attributable to such positions, including any such duties and responsibilities as are set forth with respect to such positions in the Employers' respective certificates of incorporation and bylaws, as from time to time in effect. Without limitation of the foregoing, Employee shall be the principal legal officer of the Constituent Companies and, as such, shall be in charge of the Legal Department. All officers and employees assigned to the Legal Department (other than Employee) shall report directly to 4 5 Employee. Employee's standing in the job classification scheme for senior officers of the Employers shall be no less than the third highest tier or level. During the Employment Period, Employee shall report directly to the Chairman. (b) While employed hereunder, Employee shall observe and comply with all lawful policies, directions instructions of the Chairman and/or the Board which are consistent with paragraph (a) above and shall devote substantially all of his business time, attention, skill and efforts to the faithful and efficient performance of his duties hereunder. Notwithstanding the foregoing. Employee may engage in the following activities so long as they do not interfere in any material respect with the performance of Employee's duties hereunder: (i) serve on corporate, bar association, civic, religious or charitable board or committee, (ii) serve as a Representative under the Contingent Stock Agreement executed by The Rouse Company as of January 1, 1996, (iii) deliver lectures and fulfill speaking engagements and (iv) manage his personal investments. (c) While employed hereunder, Employee shall at all times conduct himself in such a manner as not to knowingly prejudice, in any material respect, the reputation of any Constituent Company in the fields of business in which it engaged or with the investment community or the public at large. ARTICLE III Compensation and Benefits 3.01. Base Salary For services rendered by Employee under this Agreement, Employers shall pay to Employee an annual cash base salary ("Base Salary") in the amount of $200,000. The Board shall review the Base Salary at least annually and may increase the amount of the Base Salary at any time as the Board may deem appropriate in its sole discretion. If the Base Salary is increased, it may not thereafter be decreased unless a proportionally similar decrease is made to the base salaries of all other senior executives of Employers; provided that in no event may the Base Salary be decreased below $200,000. The Base Salary shall be proportionally increased in the event there is a general increase in the base salaries of other senior executives of either Employer. The Base Salary shall be paid at regular intervals in accordance with Holdings' payroll policies for senior executives as from time to time in effect. 3.02. Bonuses During the Employment Period, Employee shall be entitled to participate in the bonus/incentive compensation plan for executive officers of Employers in general, as from time to time amended by the Board (the "Bonus Plan"). Employee's annual target bonus under the Bonus Plan for each fiscal year (or fraction thereof) during the Employment Period shall be not less than 65% of the Base Salary for such fiscal year. Each bonus shall be paid to Employee at such time or times provided in the Bonus Plan. 5 6 3.03. Stock Grant (a) As soon as practicable after January 1, 1998, Holdings shall issue and deliver to Employee pursuant to the Incentive Plan 5,000 shares of Common Stock of Holdings in consideration of Employee's agreement to become an employee of Employers and to enter into this Agreement (the "Stock Grant"). The following provisions of this Section 3.03 constitute the Restricted Stock Agreement required with respect to the Stock Grant under Paragraph IX(e) of the Incentive Plan. (b) 3,750 of the shares included in the Stock Grant (the "Restricted Shares") shall be subject to automatic forfeiture in the event Employee's employment is terminated by Employee pursuant to Section 4.01 other than for Good Reason or Disability or by Employers pursuant to Section 4.02 for Misconduct; provided, however, that such forfeiture contingency (the "Forfeiture Contingency") shall automatically lapse (i) as to one-third of the Restricted Shares on January 1, 1999 if Employee's employment is not so terminated by such date, (ii) as to an additional one-third of the Restricted Shares on January 1, 2000 if Employee's employment is not so terminated by such date and (iii) as to an additional one-third of the Restricted Shares on January 1, 2001 if Employee's employment is not so terminated by such date and, provided further, that the Forfeiture Contingency shall automatically lapse as all Restricted Shares which have not been previously forfeited as aforesaid (A) upon the occurrence of a Change of Control or an IPO, (B) in the event of Employee's death, (C) upon Employee's retirement or (D) in the event Employee's employment is terminated by Employee for Good Reason or Disability or by Employers for any reason other than Misconduct. If any of the Restricted Shares are forfeited pursuant to this paragraph (b), Employee shall be obligated, for no consideration, to promptly surrender such Restricted Shares to Holdings. Holdings may require Employee to execute and deliver stock powers in the event of forfeiture. (c) Employee will not sell, transfer or otherwise dispose of any of the Restricted Shares which remain subject to the Forfeiture Contingency except for transfers by will or by laws of descent and distribution. The foregoing transfer restriction is hereinafter referred to as the "Transfer Restriction". The Transfer Restriction shall automatically terminate with respect to each Restricted Share when the Forfeiture Contingency lapses with respect to such Restricted Share. (d) Except as expressly set forth above in this Section 3.03, (i) the Stock Grant shall be irrevocable and unconditional and (ii) none of the shares included in the Stock Grant shall be subject to forfeiture or surrender for any reason nor shall they be subject to any transfer restriction of any kind except that such shares shall be subject to the provisions of the Stockholders Agreement and to the transfer restrictions imposed by applicable securities laws. (e) Certificates evidencing the Restricted Shares will be issued in the Employee's name. Holdings may cause such certificates to bear a legend setting forth or incorporating the Forfeiture Contingency and the Transfer Restriction, and Holdings may cause 6 7 such certificates to be delivered upon issuance to an officer of Holdings as a depository for safekeeping until the Forfeiture Contingency and the Transfer Restriction lapse with respect thereto or until forfeiture occurs with respect thereto pursuant to paragraph (b) above. If the Forfeiture Contingency lapses as to any Restricted Shares evidenced by a certificate bearing a legend setting forth or incorporating the Forfeiture Contingency and the Transfer Restriction, then, if requested by Employee, Holdings will promptly cause a new certificate to be issued in the name of Employee without such legend. (f) Employee shall be entitled to receive all dividends and distributions in respect of the Restricted Shares (subject to applicable tax withholding), to vote the Restricted Shares and to give consents, waivers and ratification with respect to the Restricted Shares; provided, however, that dividends and distributions applicable to any Restricted Shares may be held by Holdings until (i) the Forfeiture Contingency lapses with respect to such Restricted Shares, at which time such distributions shall be paid to Employee or his designee without interest or (ii) forfeiture occurs with respect to such Restricted Shares pursuant to paragraph (b) above, at which time such distributions shall be forfeited. 3.04. Stock Option (a) Effective as of January 1, 1998, Employee is hereby granted pursuant to the Inventive Plan an option (the "Stock Option") to purchase 60,000 shares of Common Stock of Holdings, with an exercise price per share equal to $12.00, subject to adjustment as provided in Paragraph XII of the Incentive Plan. The following provisions of this Section 3.04 constitute the Option Agreement required with respect to the Stock Option under Paragraph VII(d) of the Incentive Plan. (b) The Stock Option shall become exercisable as to 25% of the shares covered thereby on January 1 in each of the years 1999, 2000, 2001 and 2002, so that the Stock Option will be exercisable in full on January 1, 2002. The Stock Option may be exercised in whole or in part or in two or more successive parts. In no event shall the Stock Option be exercisable after January 1, 2008. (c) Upon the exercise of the Stock Option, Employee shall pay to Holdings an amount equal to the exercise price, such amount to be paid, at the election of Employee, (i) in cash, (ii) by delivering to Holdings issued and outstanding shares of Holdings' Common Stock which have an aggregate Fair Market Value at the date of exercise equal to the exercise price, (iii) by directly Holdings to sell a sufficient number of shares to be acquired on exercise of the Stock Option through a broker approved by Holdings, in which event the proceeds of such sale shall be applied by Holdings to the payment of the exercise price, with any surplus then remaining to be paid to Employee or his designee or (iv) by any combination of the foregoing. (d) The Stock Option shall become automatically vested in full upon Employee's death or retirement, upon the occurrence of a Change of Control or an IPO or in the event Employee's employment is terminated by Employee or Employers for Disability or by 7 8 Employee for Good Reason. (e) The Stock Option shall not be transferable by Employee except for transfers permitted by the Incentive Plan, transfers by will or by laws of descent and distribution and transfers to (A) the spouse, children or grandchildren of Employee ("Immediate Family Members"), (B) a trust or trusts for the exclusive benefit of one or more of the Immediate Family Members and, if applicable, Employee, (C) a partnership in which one or more of the Immediate Family Members and, if applicable, Employee are the only partners or (D) organizations which are exempt from taxation under section 501(a) of the Code as an organization described in section 501(c)(3) of the Code. During the lifetime of Employee, the Stock Option may not be exercised to anyone other than Employee or the Person to whom such Stock Option has been transferred in accordance with this Section 3.04. (f) The Stock Option may be exercised from time to time by a notice in writing which identifies the Stock Option and specifies the number of shares in respect of which it is being exercised. Such notice shall be delivered to the Treasurer of Holdings or addressed to such Treasurer at the principal corporate offices of Holdings. The date of exercise of the Stock Option shall be the date the exercise notice is hand delivered or mailed (as the case may be) to the Treasurer of Holdings. An election to exercise the Stock Option shall be irrevocable. 3.05. Right to Purchase Additional Shares of Common Stock Holdings agrees that Employee shave have the right, at his option, to purchase up to 80,000 shares of Common Stock of Holdings for $12 per share, payable in cash. Such shares are in addition to the shares referred to in Sections 3.03 and 3.04. In order to purchase any shares under this Section 3.05, Employee must notify Holdings in writing on or before April 30, 1998, which notice shall (i) refer to this Section 3.05, (ii) specify the number of shares which Employee desires to purchase, (iii) specify the closing date for such purchase (not later than 15 days after the giving of such notice or April 30, 1998, whichever is later) and (iv) be delivered to the Treasurer of Holdings or addressed to such Treasurer at the principal corporate offices of Holdings. No shares of stock purchased under this Section 3.05 shall be subject to vesting, forfeiture, surrender or restriction of any kind except that such shares shall be subject to the provisions of the Stockholders Agreement and to the transfer restrictions imposed by applicable securities laws. 3.06. Registration of Employee Shares The parties recognize that, from time to time after the date hereof, Holdings may register shares or units of its equity securities under the Securities Act of 1933, as amended, for sale or distribution to the public and that Employee may desire to include in such registration all or a portion of the shares of Common Stock of Holdings then owned by Employee (collectively, the "Employee Shares"), including shares acquired by Employee pursuant to the Stock Grant, shares purchased by Employee pursuant to Section 3.05 and shares purchased by Employee upon exercise of the Stock Option. Accordingly, if Holdings decides to effect a registration of any of 8 9 its equity securities (other than a registration on Form S-4 or Form S-8 or any successor or similar form) for sale or distribution to the public during the Employment Period, then Holdings will consult with Employee regarding Employee's desire to include all or a portion of the Employee Shares in such registration. If Employee requests the inclusion of any of the Employee Shares in such registration. Holdings shall accommodate such request, subject to customary terms and conditions; provided, however, that in no event shall Holdings be obligated to include any Employee Shares in any registration if (i) such registration is to be effected in a form and in a manner that, in the sole discretion of Holdings, would not permit the inclusion of the Employee Shares in such registration without having a material adverse effect on such registration or (ii) Holdings determines that the inclusion of such Employee Shares would materially interfere with or infringe upon the demand or "piggyback" registration rights of other holders of equity securities of Holdings. 3.07. Insurance (a) At all times during the Employment Period, Employers will maintain or cause to be maintained, without cost to Employee, a term life insurance policy on the life of Employee in the amount of $2,000,000, the proceeds of which, in the event of Employee's death, shall be payable to one or more beneficiaries designed by Employee or, in the absence of any such designation, to his estate. Notwithstanding the forgoing, if Employee fails to qualify for such insurance policy during any period within the Employment Period, Holdings shall not be required to provide such coverage but, instead, shall pay to Employee a lump sum cash payment equal to the premiums Employers would have otherwise paid in order to maintain such policy for such period. (b) During the Employment Period, Employers shall pay for the cost (not to exceed $l,000 per year) of a $5,000,000 excess liability insurance policy for the benefit of Employee. (c) The insurance benefits described in this Section 3.07 are in addition to those available to Employee under the benefit plans and programs provided to senior executives of Employers in general. 3.08. Vacation During the Employment Period, Employee shall be entitled to not less than four weeks of paid vacation per year or such greater number of vacation days as may be permitted in accordance with Holdings' vacation policy (as from time to time amended) for senior executives in general. Employee shall not be entitled to accumulate or carryover unused vacation time or pay from year to year except to the extent permitted in accordance with such vacation policy (as from time to time amended). 3.09. Annual Physical Examination: Parking During the Employment Period, Employers shall (a) pay for the cost of an annual 9 10 physical examination of Employee to be conducted by a doctor or clinic selected by Employee and (b) provide, at no cost to Employee, a parking space for Employee that is convenient to Employee's office. 3.10. Professional Fees Employers shall reimburse Employee for up to $5,000 (such greater amount as may be offered to senior executives in general or approved by the Board) per year for financial advisory, legal, accounting and tax planning fees and expenses paid or incurred by Employee during the Employment Period. 3.11. Luncheon Club Membership Employers shall reimburse Employee for the membership fee and the monthly dues paid or incurred by Employee during the Employment Period with respect to one luncheon club located in Houston, Texas to be selected by Employee. 3.12. Business Expenses Each Employer shall, in accordance with the rules and policies that it may establish from time to time for senior executives, reimburse Employee for business expenses reasonable incurred in the performance of Employee's duties hereunder, including dues and fees to industry and professional organizations. It is understood that Employee is authorized, during the Employment Period, to incur reasonable business expenses for promoting the businesses and reputations of the Constituent Companies, including reasonable expenditures for travel, lodging, meals and client and/or business associate entertainment. Requests for reimbursement for such expenses must be accompanied by appropriate documentation. 3.13. Cellular Telephone: Pager: Computer During the Employment Period, Employers shall provide, at no cost to Employee, a first-class cellular telephone for Employee and pay all charges and other costs relating to Employee's use thereof in connection with his powers, authority and duties hereunder. During the Employment Period, Employers shall provide, at no cost to Employee, a first-class pager and laptop computer for Employee and pay all charges and other costs relating to the use thereof. 3.14. Bar Association Dues, etc. During the Employment Period, Employers shall pay or reimburse Employee for (i) all dues and reasonable expenses relating to his membership in the American Bar Association, the Texas Bar Association, the Houston Bar Association, the American Bar Foundation, The Texas Business Law Foundation, the Society of Corporate Secretaries and other professional organizations, (ii) all reasonable continuing legal education expenses incurred by Employee and (iii) all attorney occupation taxes imposed on Employee by the State of Texas. 10 11 3.15. Retirement Income If Employee retires, he shall be entitled to receive from Employers a monthly payment for life in the form of a single life annuity commencing on the effective date of his retirement (the "Retirement Date"). The amount of each such monthly payment shall be determined by multiplying 1.2% times the Average Monthly Earnings times Years of Service. As used herein, "Average Monthly Earnings" means (i) if the Retirement Date occurs prior to January 1, 2001, the average of Employee's monthly earnings during the period commencing on January 1, 1998 and ending on the Retirement Date and (ii) if the Retirement Date occurs on or after January 1, 2001, the average of Employee's monthly earnings during the 36 months immediately prior to the Retirement Date; provided, however, if the Retirement Date occurs before Employee attains age 65, then Average Monthly Earnings shall be reduced by one-fourth of one percent for each whole calendar month by which the Retirement Date precedes the date on which Employee will attain age 65. As used herein, "Years of Service" means the number of calendar years (or fractions thereof) during the period commencing on January 1, 1993 and ending on the Retirement Date. For purposes of this Section 3.15, Employee's monthly earnings during any period shall be determined in accordance with the Pension Plan. If Employee has a spouse on the Retirement Date, then Employee shall receive all monthly payments under this Section 3.15 in the form of a joint and survivor annuity and such payments shall be actuarially equivalent to the amounts otherwise payable to Employee in accordance with this Section 3.15. The benefits described in this Section 3.15 are in addition to those available to Employee under the benefit plans and programs provided to senior executives of Employers in general. 3.16 Other Benefits: Service Credit (a) Employee shall be entitled to receive all fringe benefits and other perquisites that may be offered by each Employer from time to time to its other senior executives on terms no less favorable to Employee than the terms offered to such other executives (collectively, the "Miscellaneous Benefits"), including (i) participation in all life, healthcare, medical, retiree medical, dental and disability insurance plans and programs, (ii) participation in the Pension Plan, Holdings' Pension Benefit Equalization Plan, Holdings' Supplemental Employee Retirement Plan, Holdings' Profit Sharing Plan, Holding's Salaried Disability Income Plan and Holdings' Employee Stock Ownership Plan, (iii) participation in all bonus, profit sharing and incentive compensation plans, programs and arrangements, (iv) participation in all change in control/severance pay/separation pay plans, programs and practices, (v) automobile allowances, (vi) club memberships and (vii) participation in all other employee benefit plans, programs or arrangements provided to senior executives of Employers (or either of them) in general, subject, in each case, to meeting the applicable eligibility requirements. However, nothing in this Section 3.16 shall be deemed to prohibit Employers from making any changes in any of the plans, programs or benefits described in the foregoing sentence, provided the change similarly affects all senior executives of Employers similarly situated. If and to the extent a particular benefit of other perquisite is provided to Employee by two or more provisions of this Agreement, unless a clear contrary intention appears, the provision which is most favorable to Employee shall govern and control to the exclusion of the other provisions. 11 12 (b) For purposes of this Section 3.16, Employee shall be deemed to have been continuously employed by the Employers since January 1, 1993 and, accordingly, Employee shall be credited with five years of service as of January 1, 1998 for purposes of determining Employee's eligibility, benefits and vesting under all the plans, programs and benefits referred to in paragraph (a) above other than the Pension Plan and any other plan which is a "qualified plan" within the meaning of section 401(a) of the Code. ARTICLE IV Termination of Employment 4.01. Employee's Right of Termination Employees may, at any time, terminate his employment hereunder for any reason by delivering a Notice of Termination to Employers. 4.02. Employers' Right of Termination Employers may, at any time, terminate Employee's employment hereunder for any reason by delivery a Notice of Termination to Employee. 4.03. Termination by Employers for any Reason other than Misconduct or Disability and Termination by Employee for Good Reason The following provisions shall apply if Employee terminates his employment in accordance with Section 4.01 for a Good Reason or if Employers terminate Employee's employment in accordance with Section 4.02 for any reason other than Misconduct or Disability: (a) Severance Payment. Employers shall promptly pay to Employee a lump sum cash payment equal to the sum of (i) 300% of the Base Salary as in effect on the date of the Notice of Termination plus (ii) the projected bonus for Employee under the Bonus Plan (or any replacement or substitute plan) for the fiscal year that includes the date of the Notice of Termination, and the succeeding two fiscal years (such projection to be based on Holdings' reasonable estimate of the financial performance of Holdings and its subsidiaries for such fiscal years) plus (iii) all unused vacation time accrued by Employee as of the Termination Date in accordance with this Agreement and Employers' vacation policies for senior executives plus (iv) all unpaid vested Miscellaneous Benefits earned or accrued as of the Termination Date plus (v) all amounts owing to Employee under Sections 3.09, 3.10, 3.11, 3.12, 3.13, 3.14 and 3.16 plus (vi) all amounts forfeited by Employee as a result of such termination under employee benefit plans or programs maintained or sponsored by either Employer plus (vii) any additional amounts or benefits which may be required by applicable law, including the Employee Retirement Income Security Act of 1974, as amended from time to time, minus (viii) the total amount of any separation or severance pay actually paid in cash by Employers to Employee under any 12 13 plan, program or practice of Employers (other than this Agreement). Notwithstanding the foregoing, if the relevant Notice of Termination is given after December 31, 1999, then the amount of the lump sum payment due under this paragraph (a) shall be determined in accordance with Section 4.04. (b) Insurance Coverage. During the 36-month period following the Termination Date, Employers, at their cost, shall maintain in full force and effect for the continued benefit of Employee and Employee's dependents all benefits available to Employee and Employee's dependents on the date of the Notice of Termination under all medical (including dental and vision plans), life insurance and disability insurance plans and programs of such Employer, provided that (i) Employee's continued participation is possible under the terms and provisions of such plans and programs and (ii) Employee pays the regular employee premium, if any, required by such plans and programs. In the event that participation by Employee (or his dependents) in any such plan or program after the Termination Date is barred pursuant to the terms thereof, or in the event either Employer shall terminate any such plan or program, such Employer shall either (x) obtain for Employee (and/or his dependents) comparable coverage from other sources or (y) pay to Employee a lump sum cash payment equal to the value of such participation (and related benefits) for such 36-month period or the remaining portion thereof, as the case may be. Notwithstanding the foregoing, the obligations of Employers under this paragraph (b) to maintain or arrange for the benefits described above shall cease if and when Employee becomes employed on a full-time basis by a third party which provides Employee and his dependents with substantially similar benefits. Notwithstanding the foregoing, if the relevant Notice of Termination is given after December 31, 1999, then this clause (b) shall not apply. (c) Outplacement Counseling. Employers shall pay for outplacement counseling with a Person mutually agreeable to Employee and Holdings to begin one month following the date of the Notice of Termination and continuing for a period of eighteen consecutive months. (d) Acceleration of Vesting. Notwithstanding any provision herein or elsewhere to the contrary, any vesting, lapse of time or similar requirement under any plan (other than the Pension Plan and any other plan which is a "qualified plan" within the meaning of section 401(a) of the Code) or program in which Employee may participate shall be accelerated to the date of the Notice of Termination and any conditions to Employee's entitlement to any benefits under any of such plans or programs shall be deemed to have been satisfied. Without limitation of the foregoing, (i) all stock options (including the Stock Option) granted to Employee by either Employer shall become and be fully vested and immediately exercisable in accordance with the otherwise applicable terms thereof and shall remain fully exercisable for the remainder of the particular option period and (ii) the Forfeiture Contingency and the Transfer Restriction shall immediately lapse in their entirety. No acceleration under this paragraph (d) shall be deemed to constitute severance or separation pay. 13 14 4.04. Termination for other Reasons or upon Death If Employee dies before his employment is terminated in accordance with Section 4.01 or 4.02 or if Employee's employment is terminated in accordance with Section 4.01 or 4.02 for any reason not covered by Section 4.03, Employers shall pay to Employee as soon as practicable a lump sum cash payment for (i) any unpaid Base Salary earned hereunder as of the date of death or termination, (ii) all unused vacation time accrued by Employee as of the date of death or termination in accordance with this Agreement and Employers' vacation policies for senior executives, (iii) all unpaid vested Miscellaneous Benefits earned or accrued as of the date of death or termination, (iv) all amounts owing to Employee under Sections 3.09, 3.10, 3.11, 3.12, 3.13, 3.14 and 3.16, (v) the annual target bonus for Employee under the Bonus Plan (or any replacement or substitute plan) for the fiscal year that includes the date of death or termination, prorated as of such date, and (vi) any additional amounts or benefits which may be required by applicable law, including the Employee Retirement Income Security Act of 1974, as amended from time to time. 4.05. Payment of Benefits During Pendency of Dispute. etc. (a) Neither Employee's death nor the termination of his employment hereunder shall alter or impair (i) any of Employee's rights or benefits in respect of the Stock Grant except as provided in Section 3.03, (ii) any of Employee's rights or benefits under the Stock Option except as provided in Section 3.04, (iii) any of the Miscellaneous Benefits earned or accrued as of the date of death or termination or (iv) any employee benefits, rights, privileges or claims accruing to Employee, whether under this Agreement or otherwise, prior to or as a result of such death or termination. (b) Holdings may, within 10 business days after its receipt of a Notice of Termination given by Employee, provide notice to Employee, that a dispute exists concerning the facts and circumstances claimed to be the basis for such termination, in which event such dispute shall be resolved in accordance with Article VI. Employee may, within 10 business days after his receipt of a Notice of Termination given by Holdings, provide notice to Holdings that a dispute exists concerning the facts and circumstances claimed to be the basis for such termination, in which event such dispute shall be resolved in accordance with Article VI. No dispute may be raised with respect to any of such facts or circumstances after such 10-day period has lapsed. (c) Notwithstanding the pendency of any such dispute and notwithstanding any provision herein to the contrary, Employers will (i) make the Stock Grant (if not already made) in accordance with Section 3.03 and (ii) continue to pay Employee the Base Salary in effect when the notice giving rise to the dispute was given and continue Employee as a participant in all compensation and benefit plans in which Employee was participating when the notice giving rise to the dispute was given, in each case until the dispute is finally resolved or until 180 days after the date of such notice, whichever is sooner. If (i) Holdings gives a Notice of 14 15 Termination to Employee, (ii) Employee disputes the termination as contemplated by this Section 4.05 and (iii) such dispute is finally resolved in favor of Employers in accordance with Article VI, then Employee shall be required to refund to Employers any amounts paid to Employee under this Section 4.05 but only if, and then only to the extent, Employee is not otherwise entitled to receive such amounts under this Agreement. Employee agrees to pay interest to Employers on any amount required to be refunded to Employers pursuant to the preceding sentence, such interest to accrue for the period from the due date until paid at the rate of 6% per annum. ARTICLE V Confidential Information 5.01. Restriction on Use Employee recognizes that the services to be performed by him hereunder are special, unique and extraordinary and that, by reason of his employment with Employers and the positions described in Section 2.02(a), he may acquire Confidential Information (defined below) concerning one or more Constituent Companies, the use or disclosure of which might cause the Constituent Companies substantial loss and damages which could not be readily calculated and for which no remedy at law would be adequate. Accordingly, Employee agrees that he will not (directly or indirectly) at any time, whether during or after his employment hereunder, disclose any such Confidential Information to any Person except (i) as required by applicable law, (ii) in connection with the performance of his duties and the rendering of services hereunder, (iii) in connection with the enforcement of his rights under this Agreement or any other instrument. (iv) in connection with the defense or settlement of any claim, suit or action asserted or threatened against Employee by or in the right of any Constituent Company or (v) with the prior written consent of the Chairman of the Board. 5.02. Definition As used herein, "Confidential Information" means information with respect to the products, services, strategies, facilities, trade secrets and other intellectual property, pricing systems, patents and patent applications, procedures, manuals, confidential reports, financial information, business plans, prospects or opportunities of any Constituent Company; provided, however, that such term shall not include (i) any information that is or becomes generally known or available other than as a result of a disclosure by Employee, (ii) any information that is or becomes known or available to Employee on a nonconfidential basis from a source (other than the Constituent Companies) which, to Employee's knowledge, is not prohibited from disclosing such information to Employee by a legal, contractual, fiduciary or other obligation to any Constituent Company or (iii) any general knowledge, skill or experience acquired by Employee. 15 16 5.03. Ownership; Return to Employers Employee confirms that all Confidential Information is the exclusive property of the relevant Constituent Company. All business records, papers and documents kept or made by Employee (whether electronically or otherwise) while employed hereunder relating to the business of any Constituent Company shall be and remain the property of such Constituent Company at all times. Upon the request of Holdings at any time, Employee shall promptly deliver to Holdings, and shall retain no copies of, any electronic media or written materials, records and documents made by Employee or coming into his possession while employed hereunder concerning the business or affairs of any Constituent Company other than personal materials, records and documents (including notes and correspondence) of Employee not containing proprietary information relating to such business or affairs. Notwithstanding the foregoing, Employee shall be permitted to retain copies of, or have access to, all such materials, records and documents relating to any rights, privileges or benefits of Employee or any disagreement, dispute or litigation between Employee and any Constituent Company. 5.04. Injunctive Relief, etc. Employee acknowledges that the covenants contained in this Article V are intended for the benefit of, and may be enforced by, Employers and their respective successors and assigns. Employee further acknowledges that a breach of any of the covenants contained in this Article V may result in material irreparable injury to the Constituent Companies for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach, any payments remaining under the terms of this Agreement shall cease and Employers (or either of them) shall be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining Employee from engaging in activities prohibited by this Article V or such other relief as may be required to specifically enforce any of the covenants contained in this Article V. Employee agrees to and hereby does submit to in personam jurisdiction before each and every such court for that purpose. 5.05. Limitation on Personal Liability Employee shall not be personally liable to any Constituent Company or its stockholders for monetary damages for any breach of this Article V if Employee acted in good faith and in a manner Employee reasonably believed to be in or not opposed to the best interest of Employers. Employee shall be deemed to have met the standard of conduct required by the foregoing defense unless the contrary is conclusively established by a court of competent jurisdiction. The provisions of this Article V shall survive the termination of Employee's employment hereunder. ARTICLE VI Dispute Resolution 6.01. As used herein, "Dispute" means any and all questions, claims, controversies or disputes arising out of or relating to this Agreement, including the 16 17 construction, meaning, performance, effect or breach of this Agreement. In the event a dispute shall arise between Employee, on the one hand, and Holdings or Sterling, on the other hand, the parties agree to resolve such Dispute in accordance with the following procedure: (1) A meeting shall be held promptly between Employee and Holdings, attended (in the case of Holdings) by one or more individuals with decision-making authority regarding the Dispute, to attempt in good faith to negotiate a resolution of the Dispute. (2) If, within 10 days after such meeting, Employee and Holdings have not succeeded in negotiating a resolution of the Dispute, the Dispute shall be submitted to mediation in accordance with the Commercial Mediation Rules of the American Arbitration Association. (3) Employee and Holdings will jointly appoint a mutually acceptable mediator seeking assistance in such regard from the American Arbitration Association if they have been unable to agree upon such appointment within 10 days following the 10-day period referred to in clause (2) above. (4) Upon appointment of the mediator, Employee and Holdings agree to participate in good faith in the mediation and negotiations relating thereto for 15 days. (5) If Employee and Holdings are not successful in resolving the Dispute through mediation within such 15-day period, the Dispute shall be settled by arbitration in accordance with the Expedited Procedures of the Commercial Arbitration Rules of the American Arbitration Association. (6) The fees and expenses of the mediator/arbitrators shall be borne solely by the non-prevailing party or, in the even there is no clear prevailing party, as the mediator/arbitrators deem appropriate. (7) If any dispute shall arise under this Agreement involving termination of Employee's employment with Employers or involving the failure or refusal of Employers to fully perform in accordance with the terms hereof, Employers shall reimburse Employee (without duplication), on a current basis, for all reasonable legal fees and expenses, if any, incurred by Employee in connection with such dispute, together with interest thereon at the rate of 6% per annum, such interest to accrue from the date Holdings received Employee's statement for such fees and expenses through the date of payment thereof provided, however, that in the event the resolution of such dispute in accordance with this Article VI includes a finding denying, in all material respects, Employee's claims in such dispute, Employee shall be required to reimburse Employers, within 30 days after the date of such resolution, for all sums advanced to Employee with respect to such dispute pursuant to this paragraph (7). 17 18 (8) Except as provided above, each of Employee and Holdings shall pay its own costs and expenses (including, without limitation, attorneys' fees) relating to any mediation/arbitration proceeding conducted under this Article VI. (9) All mediation/arbitration conferences and hearing will be held in Houston, Texas. 6.02. In the event there is any disputed question of law involved in any arbitration proceeding, such as the proper legal interpretation of any provision of this Agreement, the arbitrators shall make separate and distinct findings of all facts material to the disputed questions of law to be decided and, on the basis of the facts so found, express their conclusion of the question of law. The facts so found shall be conclusive and binding on the parties to the extent permitted by law, but any legal conclusion reached by the arbitrators from such facts may be submitted by either Employee or Holdings to a court of law for final determination by initiation of a civil action in the manner provided by law. Such action, to be valid, must be commenced within 20 days after receipt of the arbitrators' decision. If no such civil action is commenced within such 20-day period, the legal conclusion reached by the arbitrators shall be conclusive and binding on the parties. Any such civil action shall be submitted, heard and determined solely on the basis of the facts found by the arbitrators. Neither of Employee or Holdings shall, or shall be entitled to, submit any additional or different facts for consideration by the court. In the event any civil action is commenced under this Section 6.02 and if Employee is the party who prevails or substantially prevails (as determined by the court) in such civil action, Employee shall be entitled to recover from Employers all costs, expenses and reasonable attorneys' fees incurred by Employee in connection with such action and on appeal. In the event any civil action is commenced under this Section 6.02 and if Holdings is the party who prevails or substantially prevails (as determined by the court) in such civil action, Holdings shall be entitled to recover from Employee all costs, expenses and reasonable attorneys' fees incurred by Employers in connection with such action and on appeal. 6.03. Except as limited by Section 6.02, the parties agree that judgment upon the award rendered by the arbitrators may be entered in any court of competent jurisdiction. In the event legal proceedings are commenced to enforce the rights awarded in an arbitration proceeding and if Employee is the party who prevails or substantially prevails in such legal proceeding, Employee shall be entitled to recover from Employers all costs, expenses and reasonable attorneys' fees incurred by Employee in connection with such legal proceeding and on appeal. In the event legal proceedings are commenced to enforce the rights awarded in an arbitration proceeding and if Holdings is the party who prevails or substantially prevails in such legal proceeding, Holdings shall be entitled to recover from Employee all costs, expenses and reasonable attorneys' fees incurred by Employers in connection with such legal proceeding and on appeal. 6.04. Al decisions and actions by Holdings under this Article VI shall be binding on Sterling and each other Constituent Company. Except as provided above, (i) no legal 18 19 action may be brought by any party with respect to any Dispute and (ii) all Disputes shall be determined only in accordance with the procedures set forth above. ARTICLE VII Miscellaneous 7.01. Notices All notices and all other communications provided for in the Agreement shall be in writing and shall be sent, delivered or mailed, addressed as follows: (i) if to Employers (or either of them), at Holdings' principal office address or such other address as Holdings may have designated by written notice to Employee for purposes hereof, directed (except as otherwise provided herein) to the attention of the Chairman and (ii) if to Employee, at his residence address on the records of Holdings or to such other address as he may have designated to Holdings in writing for purposes hereof. Each such notice or other communication shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid. except that any notice of change of address shall be effective only upon receipt. 7.02. Assignability The obligations of Employee hereunder are personal and may not be assigned or delegated by Employee or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment or transfer. Each Employer shall have the right to assign this Agreement and to delegate all of its rights, duties and obligations hereunder as provided in Section 7.03, but not otherwise; provided however, that no such assignment shall relieve or discharge either Employer of or from any of its obligations under this Agreement. 7.03. Successors: Binding Agreement (a) Each Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of such Employer, by written agreement in form and substance reasonable acceptable to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that such Employer would be required to perform it if no such succession had taken place. Such agreement shall become effective concurrently with the consummation of the transaction requiring the same. A copy of such agreement shall promptly be provided to Employee. As used herein, (1) the term "Holdings" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 7.03 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law and (ii) the term "Sterling" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 7.03 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. 19 20 (b) This Agreement and all rights of Employee hereunder shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors. administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts would be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisees, legatees or other designees or, if there be no such designees, legatees or other designees, to Employee's estate. This Agreement and all rights of Employers hereunder shall inure to the benefit of and be enforceable by Employers and their respective successors and assigns. 7.04. Tax Withholdings Each Employer shall withhold from all payments hereunder all applicable taxes (federal, state or other) which it is required to withhold therefrom unless Employee has otherwise paid to such Employer the amount of such taxes. 7.05. Gross-Up Payments (a) Anything in this Agreement to the contrary notwithstanding, in the event any income is imputed to Employee on account of any payment, distribution or benefit provided under Sections 3.05 through 3.16, then Employee shall be entitled to receive from Employers an additional payment in an amount equal to all income taxes (including any interest or penalties imposed with respect to such taxes) attributable to such imputed income. (b) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution to or for the benefit of Employee in connection with his employment hereunder (a "Payment") would be subject to the excise tax imposed by section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, being collectively referred to below as the "Excise Tax"), then Employee shall be entitled to receive from Employers an additional payment (the "Gross-Up Payment") in an amount such that after payment by Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. All determinations required to be made under this paragraph (b) shall be made by the independent accounting firm then retained by Holdings in the ordinary course of business. 7.06. Indemnification Without the prior written consent of Employee, neither Employer will amend, modify or repeal any provision of its certificate of incorporation or bylaws if such amendment, modification or repeal would materially adversely affect Employee's rights to indemnification by such Employer. 20 21 7.07. Amendments and Waivers No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by any party hereto at any time of any breach by any other party hereto of, or in compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 7.08. Obligations Absolute Employers' obligations to make the payments and arrangements provided for in this Agreement and to otherwise perform their obligations under this Agreement shall be absolute and unconditional and, except as specifically provided in this Agreement, shall not be affected by any circumstances, including any set-off, counterclaim, recoupment. defense or other claim, right or action which Employers (or either of them) may have against Employee or any other Person. Each payment made by Employers pursuant to the Agreement shall be final, and Employers shall not seek to recover all or any part of such payment from Employee (or from any other Person entitled thereto) for any reason whatsoever. In no event shall Employee be obligated to seek other employment or take any other action in mitigation of the amounts payable pursuant to any provision of this Agreement, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by Employee as the result of employment by another employer or otherwise. 7.09. Governing Law THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO ITS CONFLICT OF LAWS PRINCIPLES. 7.10. Counterparts, Severability, etc. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. No right, power or remedy granted under this Agreement is intended to be exclusive, but each shall be cumulative and in addition to any other rights, powers or remedies referred to in this Agreement or otherwise available at law or in equity. The obligations of Employers hereunder shall be joint and several. 21 22 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. STERLING CHEMICALS HOLDINGS, INC. By: -------------------------------------- Chairman of the Board STERLING CHEMICALS, INC. By: -------------------------------------- Chairman of the Board EMPLOYEE: ----------------------------------------- David G. Elkins 22 EX-10.25 4 STANDBY PURCHASE AGREEMENT - DATED 12/15/1998 1 EXHIBIT 10.25 ================================================================================ STANDBY PURCHASE AGREEMENT BY AND BETWEEN STERLING CHEMICALS HOLDINGS, INC. AND WILLIAM A. MCMINN ================================================================================ DATED AS OF DECEMBER 15, 1998 ================================================================================ 2 IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THE SECURITIES PURCHASED HEREUNDER HAVE NOT BEEN RECOMMENDED OR APPROVED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SECURITIES PURCHASED HEREUNDER ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. 3 TABLE OF CONTENTS
Page ---- Section 1 Definitions and Interpretation............................................................ 2 Section 2 Standby Commitment........................................................................ 5 Section 3 Closings.................................................................................. 6 Section 4 Simultaneous Closings Under Other Purchase Agreements..................................... 7 Section 5 Use of Proceeds........................................................................... 7 Section 6 Representations and Warranties of the Company............................................. 7 Section 7 Representations and Warranties of the Purchaser........................................... 9 Section 8 Compliance with Securities Laws and Agreements............................................ 10 Section 9 Changes in Capital Structure.............................................................. 12 Section 10 Specific Performance...................................................................... 12 Section 11 Notices................................................................................... 12 Section 12 Survival.................................................................................. 12 Section 13 Benefit and Burden........................................................................ 13 Section 14 No Third Party Rights..................................................................... 13 Section 15 Amendments and Waiver..................................................................... 13 Section 16 Severability.............................................................................. 13 Section 17 Expenses.................................................................................. 13 Section 18 Governing Law............................................................................. 13 Section 19 Entire Agreement.......................................................................... 13 Schedule I Purchasers
4 MCMINN STANDBY PURCHASE AGREEMENT THIS STANDBY PURCHASE AGREEMENT (this "Agreement") is made and entered into as of December 15, 1998 by and between STERLING CHEMICALS HOLDINGS, INC., a Delaware corporation (the "Company"), and WILLIAM A. MCMINN (the "Purchaser"). PRELIMINARY STATEMENTS A. The Company and the Purchaser are entering into this Agreement to evidence the Purchaser's agreement to purchase up to 333,333 shares of common stock, par value $0.01 per share, of the Company ("Common Stock"). B. Simultaneously with the execution and delivery of this Agreement, the Company and Harris Trust and Savings Bank, as agent, entered into a Warrant Agreement dated as of the date hereof (the "Warrant Agreement"). In order to induce the Purchaser to enter into this Agreement, the Company has issued to the Purchaser on the date hereof warrants to purchase 40,000 shares of Common Stock (the "Initial Warrants"). The Initial Warrants are evidenced by a certificate in the form attached as Exhibit A to the Warrant Agreement and are subject to the terms and conditions set forth in the Warrant Agreement and such certificate. C. In connection with the issuance of the Initial Warrants, the Company and the Purchaser entered into an Adoption Agreement dated as of the date hereof (the "Adoption Agreement") whereby the Purchaser became a party to the Stockholders Agreement, the Registration Rights Agreement and the Tag-Along Agreement (as such terms are defined below). D. In connection with the issuance of the Initial Warrants, the Company, the Purchaser and certain other parties entered into an Amended and Restated Voting Agreement dated as of the date hereof (the "Voting Agreement"). E. Simultaneously with the execution and delivery of this Agreement, the Company is entering into separate Standby Purchase Agreements, substantially identical to this Agreement, with the other purchasers named in Schedule I (the "Other Purchasers") to evidence the Other Purchasers' agreement to purchase up to the number of shares of Common Stock set opposite their respective names in Schedule I. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 5 Section 1. Definitions and Interpretation. Capitalized terms used in this Agreement shall, except where the context otherwise requires, have the following respective meanings: "Acts" has the meaning specified in Section 7(e). "Adoption Agreement" has the meaning specified in the Preliminary Statements of this Agreement. "Agreement" means this Standby Purchase Agreement, as from time to time amended in accordance with the terms hereof. "Bankruptcy Event" means that: (i) the Company or any Subsidiary has (A) made a general assignment for the benefit of creditors, (B) filed a voluntary bankruptcy petition, (C) become the subject of an order for relief or been declared insolvent in any federal or state bankruptcy or insolvency proceeding, (D) instituted a proceeding or filed an answer in a proceeding seeking to adjudicate itself insolvent or seeking reorganization, arrangement, composition, readjustment, protection, liquidation, winding-up, dissolution or similar relief of it or its debts under any Debtor Relief Law, (E) filed an answer or other pleading admitting or failing to contest the material allegations of a petition filed against it in a proceeding of the type described in subclauses (A) through (D) of this clause (i), (F) sought, consented to or acquiesced in an order for relief or the appointment of a trustee, receiver, liquidator or similar official for it or for any substantial part of such its assets or (G) taken any action in furtherance of any such actions; or (ii) any proceeding of the type referred to in clause (i) above has been filed or commenced against the Company or any Subsidiary or the Company or any Subsidiary by any act has indicated its approval thereof, consented thereto or acquiesced therein, or an order for relief has been entered in an involuntary case under any Debtor Relief Law, or an order, judgment or decree has been entered appointing a trustee, receiver, custodian, liquidator or similar official or adjudicating it insolvent, or approving the petition in any such proceedings. "Business Day" means any day which is neither a Saturday or Sunday nor a legal holiday on which banks are authorized or required to be closed in New York, New York, or Houston, Texas. "Closing" has the meaning specified in Section 3(a). "Closing Date" has the meaning specified in Section 2(b). "Common Shares" means the shares of Common Stock issuable to the Purchaser under this Agreement. -2- 6 "Common Stock" has the meaning specified in the Preliminary Statements of this Agreement. "Company" has the meaning specified in the opening paragraph hereof. "Debtor Relief Laws" means the Bankruptcy Code of the United States, and any successor statute of similar import, and all other applicable dissolution, liquidation, conservatorship, bankruptcy, moratorium, readjustment of debt, compromise, rearrangement, receivership, insolvency, fraudulent transfer or conveyance, reorganization or similar debtor relief laws from time to time in effect affecting the rights of creditors generally. "Election Notice" has the meaning specified in Section 2(a). "Exchange Act" means the Securities Exchange Act of 1934. "Form 10-K Report" has the meaning specified in Section 6(d). "Governmental Authority" means (i) any nation or government, (ii) any federal, state, county, province, city, town, municipality, local or other political subdivision thereof or thereto, (iii) any court, tribunal, department, commission, board, bureau, instrumentality, agency, council, arbitrator or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and (iv) any other governmental entity, agency or authority having or exercising jurisdiction over any relevant Person, item or matter. "Initial Warrants" has the meaning specified in the Preliminary Statements of this Agreement. "Laws" means all laws, statutes, rules, regulations, ordinances, orders, writs, injunctions or decrees and other pronouncements having the effect of law of any Governmental Authority. "Material Adverse Effect" means a material adverse effect on the business, properties, assets, financial condition or results of operations of the Company and the Subsidiaries, taken as a whole. "Other Purchasers" has the meaning specified in the Preliminary Statements of this Agreement. "Person" means any individual, corporation, partnership, limited liability company, firm, association, joint venture, Governmental Authority or other entity or enterprise. "Purchaser" has the meaning specified in the opening paragraph hereof. -3- 7 "Registration Rights Agreement" means the Registration Rights Agreement dated as of August 21, 1996, as amended, among the Company and the Persons named therein. "SEC" means the Securities and Exchange Commission. "Securities" means the Common Shares, the Warrants and the Warrant Shares. "Securities Act" means the Securities Act of 1933. "Stockholders Agreement" means the Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, as amended, among the Company and the stockholders of the Company parties thereto. "Subsequent Warrants" has the meaning specified in Section 3(f). "Subsidiary" means any subsidiary of the Company of which greater than 50% of the outstanding shares of capital stock having ordinary voting power for the election of directors is owned directly or indirectly by the Company. "Tag-Along Agreement" means the Tag-Along Agreement dated effective as of August 21, 1996, among the Company and the stockholders of the Company parties thereto. "Transaction Documents" means, collectively, this Agreement, the Adoption Agreement, the Registration Rights Agreement, the Voting Agreement, the Tag-Along Agreement, the Warrant Agreement and the Stockholders Agreement. "Voting Agreement" means an Amended and Restated Voting Agreement dated as of the date hereof among the Company and the Persons named therein. "Warrants" means the Initial Warrants and the Subsequent Warrants. "Warrant Agreement" has the meaning specified in the Preliminary Statements of this Agreement. "Warrant Shares" means the shares of Common Stock issuable to the Purchaser upon exercise of the Warrants. (b) In this Agreement, unless a clear contrary intention appears: (i) the words "hereof," "herein" and "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular provision of this Agreement; (ii) reference to any gender includes each other gender and the neuter; -4- 8 (iii) all terms defined in the singular shall have the same meanings in the plural and vice versa; (iv) reference to any Person includes such Person's heirs, executors, personal representatives, administrators, successors and assigns; provided, however, that nothing contained in this clause (iv) is intended to authorize any assignment not otherwise permitted by this Agreement; (v) reference to a Person in a particular capacity or capacities excludes such Person in any other capacity; (vi) reference to any contract or agreement means such contract or agreement as amended, supplemented or modified from time to time in accordance with the terms thereof; (vii) all references to Sections shall be deemed to be references to the Sections of this Agreement; (viii) all references to Exhibits and Schedules shall be deemed to be references to the Exhibits and Schedules attached hereto which are made a part hereof and incorporated herein by reference; (ix) the word "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term; (x) with respect to the determination of any period of time, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding"; (xi) the captions and headings contained in this Agreement shall not be considered or given any effect in construing the provisions hereof if any question of intent should arise; (xii) reference to any Law means such Law as amended, modified, codified, reenacted, supplemented or superseded in whole or in part, and in effect from time to time; and (xiii) no provision of this Agreement shall be interpreted or construed against any party solely because that party or its legal representative drafted such provision. Section 2. Standby Commitment. (a) Upon the terms and subject to the satisfaction or waiver of the conditions set forth herein, the Purchaser agrees to purchase from the Company such number of shares of Common Stock (not to exceed 333,333 in the aggregate) as the Company may, in its sole discretion, specify at any time or from time to time, in each case at a price per share, payable in cash, of $6.00. If the Company desires to require the Purchaser to purchase shares of Common Stock as aforesaid, the Company must give the Purchaser not less than 15 -5- 9 days' prior written notice (an "Election Notice"). Each Election Notice shall (i) be given in accordance with Section 11, (ii) refer to this Agreement, (iii) specify the number of shares to be purchased, (iv) specify the applicable Closing Date (as defined below), which may not be later than the third anniversary of the date hereof, and (v) state that, in the good faith judgement of the Company, the sale of the Common Shares referred to in such Election Notice is necessary in order for the Company to maintain, reestablish or enhance its borrowing rights under its revolving credit facilities and/or to satisfy any obligation under the documentation governing its revolving credit facilities to raise additional equity capital. Notwithstanding anything to the contrary contained herein, in no event shall the Company be required to sell or issue any Common Shares unless the Company has given to the Purchaser an Election Notice with respect to such Common Shares pursuant to this paragraph (a) and then only the number of Common Shares specified in such Election Notice. The Company may not revoke any Election Notice given by it as aforesaid. (b) For purposes of this Agreement, "Closing Date" means, when used with reference to any purchase of Common Shares, the date on which such purchase is to be consummated; provided, however, that if such date is not a Business Day, then the Closing Date for such purchase shall be automatically extended to the next succeeding Business Day and, provided further, that each Closing Date shall be at least 30 days after the immediately preceding Closing Date, if any. Section 3. Closings. (a) The consummation of each purchase of Common Stock pursuant to this Agreement (a "Closing) shall take place on the applicable Closing Date at 10:00 a.m. (Houston time) unless a different time is specified in the applicable Election Notice. Each Closing shall be held at the corporate offices of the Company or at such other place as may be agreed upon by the Company and the Purchaser. (b) At each Closing, the Company shall deliver to the Purchaser (i) a duly executed certificate evidencing the Common Shares being purchased at such Closing and (ii) a duly executed certificate of the chief executive officer, the chief financial officer or the treasurer of the Company, dated the applicable Closing Date, stating that the representations and warranties of the Company contained in Section 6 are true and correct on and as of such Closing Date with the same force and effect as though made on and as of such Closing Date, except for any representations and warranties made as of a specified date, which shall be true and correct in all material respects as of such specified date, and stating that (A) no Bankruptcy Event has occurred and is continuing, (B) the Company is generally paying its debts as they become due, (C) the Company owns property having a value greater than the amount required to pay the probable liability on its debts and (D) the Company has no plans or intentions to initiate a Bankruptcy Event nor is it aware that any creditor of the Company plans or intends to initiate a Bankruptcy Event. (c) If the first Closing occurs before March 1, 1999, then the Company shall issue and deliver to the Purchaser at the first Closing, for no additional consideration, a certificate (in the form attached as Exhibit A to the Warrant Agreement) evidencing warrants to purchase that number of shares of Common Stock (rounded to the nearest whole number) equal to the number of Common Shares purchased by the Purchaser at the first Closing divided by 8.3333. -6- 10 (d) If the first Closing occurs before March 1, 1999, then the Company shall issue and deliver to the Purchaser at the second Closing, for no additional consideration, a certificate (in the form attached as Exhibit A to the Warrant Agreement) evidencing warrants to purchase 40,000 shares of Common Stock minus the number of Common Shares covered by the warrants issued to the Purchaser at the first Closing. (e) If the first Closing occurs after February 28, 1999, then the Company shall issue and deliver to the Purchaser at the first Closing, for no additional consideration, a certificate (in the form attached as Exhibit A to the Warrant Agreement) evidencing warrants to purchase 40,000 shares of Common Stock. (f) All warrants issued to the Purchaser pursuant to this Section 3 are collectively referred to herein as the "Subsequent Warrants". The Subsequent Warrants shall be subject to the terms and conditions set forth in the Warrant Agreement and the certificates evidencing the same. (g) At each Closing, the Purchaser shall deliver to the Company (i) an amount (in immediately available funds) equal to the number of Common Shares being purchased by the Purchaser times $6.00 and (ii) a duly executed certificate of the Purchaser, dated the applicable Closing Date, stating that the representations and warranties of the Purchaser contained in Section 7 are true and correct on and as of such Closing Date with the same force and effect as though made on and as of such Closing Date, except for any representations and warranties made as of a specified date, which shall be true and correct in all material respects as of such specified date. Section 4. Simultaneous Closings under Other Purchase Agreements. In no event shall the Purchaser be obligated to consummate any Closing unless simultaneously with such Closing (a) the Company shall sell to the Other Purchasers shares of Common Stock numbering, in the aggregate, not less than the amount (rounded to the nearest whole number) determined by multiplying the number of Common Shares being purchased by the Purchaser at such Closing times 6.5 and (b) the Company shall have received from the Other Purchasers payments (in immediately available funds) of the purchase price for such shares, which shall not be less than $6.00 per share. Section 5. Use of Proceeds. The Company shall use the proceeds from the sale of Common Shares at each Closing and the proceeds from each sale of Common Stock to the Other Purchasers as contemplated by Section 4 solely for general corporate purposes. Section 6. Representations and Warranties of the Company. The Company represents and warrants to the Purchaser as follows: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the corporate power to own its property and to carry on its business as now being conducted. -7- 11 (b) The Company has all requisite corporate power to enter into and perform its obligations under the Transaction Documents and the Warrants and to consummate the transactions contemplated thereby. The Company has taken all corporate actions necessary to authorize it to enter into and perform its obligations under the Transaction Documents and the Warrants and to consummate the transactions contemplated thereby. The Transaction Documents have been duly executed and delivered by the Company and constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights generally and general equitable principles. Upon issuance in accordance with this Agreement and the Warrant Agreement, the Warrants will have been duly executed and delivered by the Company and will constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights generally and general equitable principles. The Common Shares have been duly authorized and, when issued and paid for in accordance with this Agreement, will be validly issued, fully paid and nonassessable. The Warrant Shares have been duly authorized and reserved for issuance and, when issued and paid for upon proper exercise of the Warrants, will be validly issued, fully paid and nonassessable. (c) Neither the execution, delivery or performance of any of the Transaction Documents by the Company, nor the consummation by the Company of the transactions contemplated thereby, will violate, or result in a breach of the terms of, or constitute a default under, the charter or bylaws of the Company or any agreement, instrument or other arrangement or obligation to which the Company is subject, except for such violations, breaches or defaults that would not have a Material Adverse Effect. (d) The Company has delivered to the Purchaser true and complete copies of (i) the Stockholders Agreement, the Registration Rights Agreement, the Tag-Along Agreement, the Warrant Agreement and the Company's charter and bylaws, in each case as in effect on the date hereof, and (ii) the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 (the "Form 10-K Report"). As of the date hereof, the Form 10-K Report complies in all material respects with all applicable requirements of the Exchange Act and the applicable rules and regulations promulgated thereunder and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of the date hereof, the consolidated financial statements of the Company included in the Form 10-K Report comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements were prepared in accordance with applicable generally accepted accounting principles applied on a consistent basis during the periods involved. -8- 12 Section 7. Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants to the Company as follows: (a) The Purchaser has all requisite power, authority and capacity to execute and deliver the Transaction Documents to which the Purchaser is a party (the "Purchaser Transaction Documents"), to consummate the transactions contemplated thereby and to perform its obligations thereunder. Each of the Purchaser Transaction Documents has been executed and delivered by the Purchaser and constitutes the legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights generally and general equitable principles. (b) Neither the execution, delivery and performance by the Purchaser of the Purchaser Transaction Documents, nor the consummation by the Purchaser of the transactions contemplated thereby, will violate, result in a breach of the terms of or constitute a default under, any material agreement, instrument or other arrangement or obligation to which the Purchaser is subject. (c) The Purchaser has read and understands this Agreement, including the Schedules and Exhibits hereto, and acknowledges and understands that execution and delivery of this Agreement by the Purchaser creates an irrevocable obligation of the Purchaser, subject to the terms and conditions contained in this Agreement, to purchase the Warrant Shares. (d) The Purchaser is an "accredited investor" within the meaning of Regulation D under the Securities Act. (e) The acquisition of the Securities by the Purchaser is for the Purchaser's own account, is for investment purposes and is not with a view to, or for offer or sale for the Company in connection with, the distribution of any Securities in violation of the Securities Act, the Exchange Act or any state securities laws (collectively, the "Acts"). The Purchaser is not participating and does not have a participation in any such distribution or the underwriting of any such distribution, and has no present intention of selling or otherwise disposing of any of the Securities in violation of the Acts. (f) The Purchaser is aware that neither the SEC nor any state securities commission has approved or disapproved the Securities or passed upon the accuracy or adequacy of this Agreement or any of the other Transaction Documents. (g) The Purchaser (i) recognizes that an investment in the Securities involves a high degree of risk, (ii) has such knowledge and experience in financial and business matters as to be capable of evaluating the risks and merits of this investment and protecting the Purchaser's interests in connection with this investment and (iii) is able to bear the economic risk of an investment in the Securities, including the risk of the total loss of such investment. -9- 13 (h) The Purchaser has received copies of the Transactions Documents, the Form 10-K Report and the Company's charter and bylaws. The Purchaser has received all the information the Purchaser considers necessary or appropriate for deciding whether to enter into this Agreement or to acquire the Securities, and the Purchaser has had an opportunity to ask questions of and receive answers from the Company regarding the Company and the terms and conditions of the Securities. (i) The Purchaser understands that the Securities have not been registered under the Securities Act on the basis that the issuance or sale of the Securities is exempt from the registration provisions thereof, and that the Company's reliance on the exemption is predicated upon the representations of the Purchaser herein. (j) The Purchaser has read and understands the terms and provisions of the Transaction Documents and understands that, by executing the Adoption Agreement and the Voting Agreement, all Common Shares and all Warrant Shares issued to the Purchaser will automatically become subject to the terms and provisions of the Stockholders Agreement, the Tag-Along Agreement and the Voting Agreement. The Purchaser understands that other shares of Common Stock currently held or subsequently acquired by the Purchaser may also become subject to the terms and provisions of the Stockholders Agreement, the Tag-Along Agreement and the Voting Agreement pursuant to the terms thereof. Section 8. Compliance with Securities Laws and Agreements. The Purchaser acknowledges, understands and agrees that the following limitations and restrictions are applicable to the purchase, resale and distribution of the Securities: (a) The Purchaser must bear the economic risk of its investment in the Company for an indefinite period of time because the Securities have not been registered under the Acts and, therefore, may not be subsequently offered, sold, transferred, pledged or otherwise disposed of unless and until they have been registered under the Acts or exemptions from registration thereunder are available, and the Purchaser further understands that only the Company can take action to register the Securities. (b) The Purchaser has been advised that the Company does not expect that Rule 144 under the Securities Act will be available to the Purchaser with respect to any of the Securities unless the Purchaser is a non-affiliate of the Company (and has not been an affiliate of the Company for at least three months) and has held such Securities for at least one year from the later of the date that they were issued by the Company or the date that they were acquired from an affiliate of the Company. (c) The certificates representing the Warrants issued pursuant to this Agreement will bear the legend provided in the Warrant Agreement. The certificates representing the Securities issued pursuant to this Agreement (other than the Warrants) will bear a legend in substantially the following form: -10- 14 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW (COLLECTIVELY, THE "ACTS") AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS MADE PURSUANT TO A REGISTRATION STATEMENT UNDER THE ACTS OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF. FURTHER, SUCH SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS AND UNTIL (1) SUCH SECURITIES HAVE BEEN REGISTERED UNDER THE ACTS OR (2) THE HOLDER OF SUCH SECURITIES PROVIDES THE COMPANY WITH (A) AN UNQUALIFIED WRITTEN OPINION OF LEGAL COUNSEL, WHICH COUNSEL AND OPINION (IN FORM AND SUBSTANCE) SHALL BE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT THE PROPOSED DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACTS OR (B) SUCH OTHER EVIDENCE AS MAY BE REASONABLY SATISFACTORY TO THE COMPANY THAT THE PROPOSED DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACTS. (d) In addition to the legends provided in paragraph (c) above, the certificates evidencing the Common Shares and the Warrant Shares will bear legends in substantially the following forms: BY THE TERMS OF THE STOCKHOLDERS AGREEMENT AND THE TAG-ALONG AGREEMENT, CERTAIN RESTRICTIONS HAVE BEEN PLACED UPON THE TRANSFERABILITY OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE. THE COMPANY WILL FURNISH A COPY OF THE STOCKHOLDERS AGREEMENT AND THE TAG-ALONG AGREEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. NO REGISTRATION OR TRANSFER OF ANY SECURITIES REPRESENTED BY THIS CERTIFICATE WILL BE MADE ON THE BOOKS OF THE COMPANY UNLESS AND UNTIL SUCH RESTRICTIONS HAVE BEEN COMPLIED WITH. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF AN AMENDED AND RESTATED VOTING AGREEMENT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY, AND ARE HELD AND MAY BE SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF ONLY IN ACCORDANCE WITH SUCH AGREEMENT. -11- 15 (e) Stop Transfer Instructions. The Company's stock transfer records will contain stop transfer instructions with respect to the Common Shares and the Warrant Shares to provide notice of the restrictions on the resale or distribution thereof imposed by the Acts and the Stockholders Agreement, the Tag-Along Agreement and the Voting Agreement. Section 9. Changes in Capital Structure. In the event of any change after the date hereof in the number of issued shares of Common Stock by reason of any stock dividend, split-up, recapitalization, merger, combination, conversion, exchange of shares or other change in the corporate or capital structure of the Company, then there shall be appropriate and equitable adjustments made in the number and kind of shares of stock or other securities of the Company thereafter issued to the Purchaser pursuant to this Agreement. Section 10. Specific Performance. The parties agree that the covenants and obligations contained in this Agreement relate to special, unique and extraordinary matters and that a violation of any of the terms hereof would cause irreparable injury in an amount which would be impossible to estimate or determine and for which any remedy at law would be inadequate. As such, the parties agree that if either party fails or refuses to fulfill any of such party's obligations under this Agreement or to make any payment or deliver any instrument required hereunder, then the other party shall have the remedy of specific performance, which remedy shall be cumulative and nonexclusive and shall be in addition to any other rights and remedies otherwise available under any other contract or at law or in equity and to which such party might be entitled. Section 11. Notices. Any and all notices, requests or other communications hereunder shall be given in writing and delivered by (a) regular, overnight or registered or certified mail (return receipt requested), with first class postage prepaid, (b) hand delivery, (c) facsimile or electronic mail transmission or (d) overnight courier service, to the parties at addresses or facsimile numbers set forth below their respective names on the signature pages hereof, or at such other address or number as shall be designated by either party in a notice to the other party given in accordance with this Section 11. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given, (i) in the case of a notice sent by regular mail, on the date actually received by the addressee, (ii) in the case of a notice sent by registered or certified mail, on the date receipted for (or refused) on the return receipt, (iii) in the case of a notice delivered by hand, when personally delivered, (iv) in the case of a notice sent by facsimile or electronic mail, upon transmission subject to telephone confirmation of receipt, and (v) in the case of a notice sent by overnight mail or overnight courier service, the date delivered at the designated address, in each case given or addressed as aforesaid. Section 12. Survival. All representations, warranties and covenants contained in this Agreement shall survive the execution and delivery of this Agreement, the Closings, the delivery of any Securities to the Purchaser and the death or disability of the Purchaser. -12- 16 Section 13. Benefit and Burden. This Agreement shall inure to the benefit of, and shall be binding upon, the Company and its successors and assigns and the Purchaser and the Purchaser's heirs, executors, personal representatives, administrators, successors and assigns. Section 14. No Third Party Rights. Nothing in this Agreement shall be deemed to create any right in any creditor or other Person not a party hereto, and this Agreement shall not be construed in any respect to be a contract in whole or in part for the benefit of any third party. Section 15. Amendments and Waiver. No amendment, modification, restatement or supplement of this Agreement shall be valid unless the same is in writing and signed by the parties. No waiver of any provision of this Agreement shall be valid unless in writing and signed by the party against whom that waiver is sought to be enforced. No failure or delay on the part of any of the parties in exercising any right, power or privilege hereunder, and no course of dealing between or among the parties, shall operate as a waiver of any right, power or privilege hereunder. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. No notice to or demand on either party in any case shall entitle such party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of any party to any other or further action in any circumstances without notice or demand. Section 16. Severability. Should any clause, sentence, paragraph, subsection or Section of this Agreement be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Agreement, and the parties agree that the part or parts of this Agreement so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom as if such stricken part or parts had never been included herein. Section 17. Expenses. The Company will pay, or reimburse the Purchaser for the payment of, all reasonable expenses incurred by the Purchaser prior to the date hereof in connection with this Agreement, including all legal and accounting fees and disbursements. Except as aforesaid, each of the parties shall pay its own expenses incident to this Agreement, including all legal and accounting fees and disbursements. Section 18. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED UNDER, AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO THE CONFLICT-OF-LAWS PROVISIONS THEREOF. Section 19. Entire Agreement. This Agreement sets forth all of the promises, agreements, conditions, understandings, warranties and representations of the parties with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings between the parties, whether written, oral or otherwise, with respect to the subject matter hereof. There are no promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, between the parties concerning the subject matter hereof except as set forth herein. -13- 17 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. STERLING CHEMICALS HOLDINGS, INC. By: ------------------------------------------ Printed Name: ------------------------------ Title: -------------------------------------- Address: Sterling Chemicals Holdings, Inc. 1200 Smith, Suite 1900 Houston, Texas 77002 Attention: General Counsel Facsimile No.: (713) 654-9577 E-Mail: Delkins@sterlingchemicals.com PURCHASER: ---------------------------------------------- William A. McMinn Address: ------------------------------------ ------------------------------------ ------------------------------------ Facsimile No.: ----------------------------- E-Mail: ------------------------------------ -14- 18 SCHEDULE I PURCHASERS
PURCHASER NUMBER OF SHARES PERCENTAGE ALLOCATION - --------- ---------------- --------------------- Gordon A. Cain.................................................. 1,333,333 53.33% William A. McMinn............................................... 333,333 13.33% James Crane..................................................... 250,000 10.00% Frank P. Diassi................................................. 166,667 6.67% Frank J. Hevrdejs............................................... 166,667 6.67% Koch Capital Services, Inc...................................... 250,000 10.00% --------- ------ Total.................................................. 2,500,000 100.00%
-15- EX-21.1 5 SUBSIDIARIES OF STERLING CHEMICALS HOLDINGS, INC. 1 Exhibit 21.1 Subsidiaries of STERLING CHEMICALS HOLDINGS, INC. As of September 30, 1999 Owns 100% of: Sterling Chemicals, Inc., a Delaware corporation Owns 100% of: Sterling Fibers, Inc., a Delaware corporation Sterling Chemicals Acquisitions, Inc., a Delaware corporation Owns 100% of: Sterling Pulp Chemicals Fuzhou, Ltd., an Ontario corporation Sterling (Sask) Holdings Ltd., an Ontario corporation Owns 100% of: Sterling Pulp Chemicals (Sask) Ltd., an Ontario corporation Owns 100% of 619220 Saskatchewan Ltd., a Saskatchewan corporation Sterling Chemicals International, Inc., a Delaware corporation Sterling Chemicals Energy, Inc., a Delaware corporation Sterling Chemicals Marketing, Inc., a Barbados corporation Sterling Canada, Inc., a Delaware corporation Owns 100% of: Sterling Pulp Chemicals US, Inc., a Delaware corporation Owns 100% of: Sterling Pulp Chemicals, Inc., a Georgia corporation Sterling NRO, Ltd., an Ontario corporation Sterling Pulp Chemicals, Ltd., an Ontario corporation EX-23.1 6 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-30917 of Sterling Chemicals Holdings, Inc. on Form S-3 and Registration Statement No. 333-52795 of Sterling Chemicals Holdings, Inc. on Form S-8 of our report dated December 9, 1999 appearing in this Annual Report on Form 10-K of Sterling Chemicals Holdings, Inc. for the year ended September 30, 1999. DELOITTE & TOUCHE LLP Houston, Texas December 15, 1999 EX-27.1 7 FDS FOR STERLING CHEMICALS HOLDINGS, INC.
5 0000795662 STERLING CHEMICALS HOLDINGS, INC. 1,000 YEAR SEP-30-1999 OCT-01-1998 SEP-30-1999 14,921 0 142,400 (1,341) 70,464 259,568 779,498 376,775 775,099 157,090 964,555 20,932 0 123 (455,510) 775,099 720,752 720,752 682,594 682,594 74,850 0 104,061 (140,753) (34,936) (105,817) 0 (4,212) 0 (110,029) (8.94) (8.94)
EX-27.2 8 FDS FOR STERLING CHEMICALS, INC.
5 0001014669 STERLING CHEMICALS, INC. 1,000 YEAR SEP-30-1999 OCT-01-1998 SEP-30-1999 14,899 0 144,897 (1,341) 70,464 260,866 779,498 376,775 752,106 156,860 816,927 0 0 0 (309,590) 752,106 720,752 720,752 682,594 682,594 74,180 0 83,897 (119,920) (29,410) (90,510) 0 (4,212) 0 (94,722) 0.0 0.0
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