Back to GetFilings.com
================================================================================
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 [FEE REQUIRED] For the fiscal year ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from
to
COMMISSION FILE NUMBER 1-10059
STERLING CHEMICALS HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0185186
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1200 SMITH STREET, SUITE 1900
HOUSTON, TEXAS 77002-4312 (713) 650-3700
(ADDRESS OF PRINCIPAL EXECUTIVE (REGISTRANT'S TELEPHONE NUMBER,
OFFICES) INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
COMMISSION FILE NUMBER 333-04343-01
STERLING CHEMICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0502785
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1200 SMITH STREET, SUITE 1900
HOUSTON, TEXAS 77002-4312 (713) 650-3700
(ADDRESS OF PRINCIPAL EXECUTIVE (REGISTRANT'S TELEPHONE NUMBER,
OFFICES) INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
STERLING CHEMICALS, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
J(1)(A) AND (B) OF FORM 10-K, AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT PROVIDED FOR BY GENERAL INSTRUCTION J(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. __
As of December 13, 1996, Sterling Chemicals Holdings, Inc. had 11,140,837
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 $128
million. As of December 13, 1996, all outstanding equity securities of Sterling
Chemicals, Inc. were owned by Sterling Chemicals Holdings, Inc.
Portions of the definitive Proxy Statement relating to the 1997 Annual
Meeting of Stockholders of Sterling Chemicals Holdings, Inc. are incorporated by
reference in Part III of this Form 10-K.
================================================================================
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.............................................. 1
Item 2. Properties............................................ 15
Item 3. Legal Proceedings..................................... 16
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
Item 8. Financial Statements and Supplementary Data........... 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 66
PART III
Item 10. Directors and Executive Officers of the Registrant.... 67
Item 11. Executive Compensation................................ 67
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................ 67
Item 13. Certain Relationships and Related Transactions........ 67
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules
and Reports on Form 8-K............................... 68
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-K, including without
limitation the statements under "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the
cyclicality of the Company's industry, current and future industry conditions
and the potential effects of such matters on the Company's business strategy,
results of operations and financial position, are forward-looking statements.
Although the Company believes 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 ("Cautionary Statements") are stated herein 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
the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
i
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".
ITEM 1. BUSINESS
The Company was organized as a Delaware corporation in 1986 and has its
principal executive offices in Houston, Texas. In connection with the
Company's August 1996 merger with STX Acquisition Corp. (the "Merger"), the
Company recapitalized and reorganized into a holding company whose only
material asset is the capital stock of Chemicals, its wholly owned operating
subsidiary. Through Chemicals and 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 four plants in Canada and is
currently constructing a fifth plant in Valdosta, Georgia. 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 petrochemical 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.
Sodium chlorate is produced at the four plants in Canada and by the end of
1996 will be produced at the plant in Valdosta, Georgia as well. Sodium
chlorite is 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 chemical
business. These generators convert sodium chlorate into chlorine dioxide at
pulp mills.
The Company's business strategy is to capitalize on its market position to
take advantage of periods of tight supply and high prices and margins for its
primary products, which historically have occurred on a cyclical basis, and
to expand its production capacity to capture future growth opportunities in
the petrochemical and pulp chemical industries. Key elements of this
strategy are to: (i) maintain a competitive cost position in petrochemicals
by investing in new technology and equipment; (ii) pursue low cost expansions
in petrochemicals, such as its recent 30% expansion of acetic acid capacity
and construction of a 150 million gallon per year methanol unit; (iii) pursue
growth opportunities in pulp chemicals through the construction of additional
capacity; (iv) continue to build strong industry partnerships in
petrochemicals through securing long-term supply contracts with key
customers; and (v) implement a focused acquisition strategy, targeting
chemical businesses and assets which will strengthen the Company's existing
market positions, provide upstream or downstream integration or produce
complementary chemical products. The cyclicality of the markets for the
Company's primary products, however, also subjects the Company to periods of
overcapacity accompanied by lower prices and profit margins for such
products. In addition, the instruments governing the debt incurred by the
Company to finance the Merger limit the Company's ability to incur additional
debt to finance acquisitions and other expenditures. These and other factors
may limit the Company's ability to successfully implement its business
strategy.
RECENT DEVELOPMENTS
In fiscal 1995, the Company initiated a three-year, $200 million capital
spending program which is approximately 75% complete. The program includes
modernization of the Company's Texas City Plant, construction of a methanol
unit at the Texas City Plant, a substantial expansion of the Company's acetic
acid capacity, construction of a sodium chlorate plant at Valdosta, Georgia,
debottlenecking projects to add incremental capacity at the Company's
existing sodium chlorate facilities and various other projects. The plant
modernization effort at the Texas City Plant includes a significant capital
commitment for replacing the older control technology in the styrene,
acrylonitrile and acetic acid units with state-of-the-art distributive
control systems, which should result in increased efficiencies and stronger
operating fundamentals.
In August 1996, the Company completed construction of a world-scale, 150
million gallon per year methanol unit at the Texas City Plant as part of its
capital program. During the demonstration period, problems in the unit's
1
reformer burners developed. The burners were replaced in October 1996 and
the methanol unit achieved full production in late October 1996. Capital
investment in the unit and production capacity are shared by the Company and
BP Chemicals Inc. ("BP"). Approximately 50% of the methanol production is
used as a raw material in the Company's acetic acid unit, replacing methanol
that was previously purchased from third parties. The remaining methanol
production is available for the merchant market and for BP's worldwide acetic
acid business. The unit was constructed at significantly less than normal
replacement cost because available equipment already at the Company's Texas
City Plant was refurbished and used in the project.
During fiscal 1996, the Company and BP expanded the acetic acid unit's
capacity to nearly 800 million pounds annually, an increase of approximately
30% or 200 million pounds. BP continues to market all of the Company's
acetic acid production.
In a project related to the expanded acetic acid capacity, Praxair Hydrogen
Supply, Inc. ("Praxair") completed in June 1996 a new partial oxidation unit
at the Company's Texas City Plant. The unit supplies carbon monoxide and
hydrogen under a long-term contract to the Company for use in the production
of acetic acid and plasticizers. The unit is owned by Praxair, but
constructed on land owned by the Company and leased to Praxair.
The Company is currently constructing a 110,000 ton per year sodium
chlorate plant in Valdosta, Georgia. The new facility, which will cost
approximately $55 million, will increase the Company's total annual sodium
chlorate capacity by more than 30% to nearly 460,000 tons. Valdosta, Georgia
was selected because of its proximity to existing customers which are
currently being supplied from the Company's Canadian plants, and its
proximity to reliable, competitively priced electricity, the most important
variable in sodium chlorate production costs. The new facility is intended
to meet the growing market demand from the pulp and paper industry in the
Southeastern U.S. and is expected to be on stream by January 1, 1997.
SALES AND MARKETING
The Company primarily sells its petrochemical products pursuant to multi-
year contracts and spot transactions in both the domestic and export markets
through its commercial organization and sales force. This long-term, high
volume focus allows the Company to maintain relatively low selling, general
and administrative expenses related to the marketing of its petrochemical
products. The Company competes on the basis of product price, quality and
deliverability. Prices for the Company's commodity chemicals are determined
by market factors that are largely beyond the Company's control, and, except
with respect to a number of its multi-year contracts, the Company generally
sells its products at prevailing market prices.
Some of the Company's multi-year contracts for its petrochemical products
are structured as conversion agreements, pursuant to which the customer
furnishes raw materials that the Company processes. In exchange, the Company
receives a fee typically designed to cover its 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
allow the Company to maintain lower levels of working capital and, in some
cases, to gain access to certain improvements in manufacturing process
technology. The Company believes its conversion agreements help insulate the
Company to some extent from the effects of declining markets and changes in
raw material prices while allowing it to share in the benefits of favorable
market conditions for most of the products sold under these arrangements.
The balance of the Company's products are sold by its direct sales force,
which concentrates on the styrene, acrylonitrile, and pulp chemical markets.
The Company sells sodium chlorate primarily in Canada and the U.S.
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 sales contracts contain certain "meet or release" pricing
clauses and some contain restrictions on the amount of future price
increases. Certain contracts are evergreen and require advance notice before
termination.
2
CONTRACTS
The Company's key multi-year contracts and conversion agreements, which
collectively accounted for 30% of the Company's fiscal 1996 revenues are
described below:
Styrene-Bayer
The Company and Bayer Corporation ("Bayer"), a subsidiary of Bayer AG, are
currently operating under a conversion agreement effective through December
21, 2000. Under this agreement, the Company provides Bayer, subject to
specified minimum and maximum quantities, a major portion of Bayer's styrene
requirements for its manufacture of styrene-containing polymers. The
agreement permits Bayer to terminate its obligations upon twelve months'
notice to the Company should Bayer sell its business that uses styrene or
assign the agreement (subject to the Company's consent) to a third-party
purchaser of the business. During fiscal 1996, the Company delivered
approximately 10% of its styrene production pursuant to this agreement.
Styrene-BP Chemicals
Effective April 1, 1994, the Company and BP entered into a styrene sales
and purchase agreement. The term of the agreement initially expires in
December 1996. The Company and BP are currently negotiating an extension of
this agreement. Although the likelihood and terms of any extension are
impossible to predict, at this time management has no reason to believe that
the agreement will not be extended. During fiscal 1996, the Company
delivered approximately 10% of its styrene production to BP pursuant to this
agreement.
Acrylonitrile-Monsanto
The Company and Monsanto Company ("Monsanto") entered into a multi-year
conversion agreement effective January 1, 1994, which superseded a prior
agreement that had been in place since 1986. The initial term of this
agreement will expire at the end of 1998, at which time the agreement will
convert to an "evergreen" contract with successive two-year terms if not
terminated. During fiscal 1996, the Company delivered approximately 25% of
its acrylonitrile production to Monsanto pursuant to this agreement.
Acrylonitrile-BP Chemicals
In 1988, the Company entered into a long-term conversion agreement with BP,
under which BP contributed the majority of the capital expenditures required
for starting the third acrylonitrile reactor train at the Texas City Plant
and has the option to take up to approximately one-sixth of the Company's
total acrylonitrile capacity. BP furnishes the necessary raw materials and
pays the Company a conversion fee for the amount of acrylonitrile it takes.
During fiscal 1996, the Company delivered approximately 15% of its
acrylonitrile production to BP pursuant to this agreement. The acrylonitrile
reactor in which BP invested capital incorporates certain BP technological
improvements under a separate license agreement. The Company has the right
to incorporate these and any future improvements into its other existing
acrylonitrile reactors. BP has a first security interest in the third
reactor and related equipment and in the first acrylonitrile produced in the
three reactor units to the extent of the acrylonitrile which BP is entitled
to purchase under the production agreement. These rights are only to be
exercised upon an event of default by the Company.
Acetic Acid-BP Chemicals
An agreement with BP that has been in effect since August 1986 currently
gives BP the exclusive right to purchase all of the Company's acetic acid
production until August 2016. In exchange for that exclusive right, BP is
obligated to make certain unconditional monthly payments to the Company until
August 2006. BP reimburses the Company for operating costs. In addition,
the Company is entitled to receive annually a portion of the profits earned
by BP from the sale of acetic acid produced by the Company.
3
Methanol-BP Chemicals
In fiscal 1996, the Company entered into a long-term production and sales
agreement with BP, under which BP contributed a significant portion of the
capital expenditures required for the reconstruction and capacity increase of
the Company's idle methanol production facility and obtained the right to
receive a substantial portion of the Company's methanol production. During
fiscal 1996, the Company delivered a substantial portion of its methanol
production to BP pursuant to this agreement. The initial term of this
agreement expires July 31, 2016. The output of the methanol facility is
marketed by BP to the Company's acetic acid unit, the merchant market and
BP's worldwide acetic acid business.
Plasticizers-BASF
A product sales agreement has been in effect with BASF Corporation ("BASF")
since August 1, 1986, pursuant to which the Company sells all of its
plasticizers production to BASF. The agreement expires at the end of 1999.
BASF provides certain raw materials to the Company and markets the
plasticizers produced by the Company. BASF pays fees to the Company on a
formula basis designed to reimburse the Company's direct and allocated costs.
In addition, the Company is entitled to a share of profits earned by BASF
attributable to the plasticizers supplied by the Company. BASF retains title
to and has a security interest in the raw materials furnished by it and in
the finished inventory of plasticizers produced by the Company for delivery
to BASF.
No individual customer of the Company's petrochemical or pulp chemical
business accounted for more than 10% of the Company's revenues in fiscal
1996.
For information regarding the Company's export sales and domestic and
foreign operations, see Note 8 of Item 8, ''Notes to Consolidated Financial
Statements'' which is hereby incorporated by reference.
PRODUCTS
At its Texas City Plant, the Company manufactures seven commodity
petrochemicals which are used in the manufacture of other goods or in other
chemical processes. At its four Canadian plants, and by the end of 1996 at
its Valdosta, Georgia plant, the Company manufactures chemicals used
primarily in the bleaching of kraft pulp for paper manufacturing. The
Company also is a supplier of patented and proprietary technology for
chlorine dioxide generators used by certain mills in the kraft pulp bleaching
process.
4
PRODUCT SUMMARY
The Company's principal products and their primary end uses and raw
materials are set forth below.
INTERMEDIATE PRIMARY END
COMPANY PRODUCT PRODUCTS PRODUCTS RAW MATERIALS
- - --------------- -------------- ------------- ----------------
Petrochemicals
Styrene Polystyrene Building Ethylene and
ABS/SAN resins products, boat Benzene
Styrene and automotive
butadiene components,
latex disposable cups
Polyester and trays,
resins packaging and
containers,
housewares,
tires, audio and
video cassettes,
luggage,
children's toys,
paper coating,
appliance
parts and carpet
backing
Acrylonitrile Acrylic fibers Apparel, Ammonia, Air
ABS/SAN resins furnishings, and Propylene
upholstery,
household
appliances,
carpets;
plastics for
automotive parts
using ABS and
SAN polymers
Acetic Acid Vinyl acetate Adhesives, Methanol and
monomer cigarette Carbon Monoxide
filters and
surface coatings
Methanol Acetic acid Adhesives, Natural Gas
MTBE cigarette
Formaldehyde filters and
surface
coatings;
gasoline
oxygenate and
octane enhancer;
plywood adhesives
Plasticizers Polyvinyl Flexible Alpha-Olefins,
chloride (PVC) plastics such as Carbon
shower curtains Monoxide,
and liners, Hydrogen,
floor coverings, Orthoxylene and
cable Air
insulation,
upholstery and
plastic molding
TBA NA Pesticides, Isobutylene and
solvents, the
pharmaceuticals acrylonitrile
and synthetic by-product
rubber Hydrogen
Cyanide ("HCN")
Sodium Cyanide NA Electroplating Sodium
and precious Hydroxide and
metals recovery by-product HCN
Pulp Chemicals
Sodium Chlorate Chlorine Bleaching agent Salt, Water and
dioxide for pulp Electricity
production;
Downstream
products include
high quality
office and
coated papers
Sodium Chlorite Chlorine Antimicrobial Sodium Chlorate
dioxide agent for and
municipal water Hydrochloric
treatment, Acid
disinfectant for
fresh produce
Chlorine Dioxide NA Chlorine dioxide NA
Generators for use in the
bleaching of pulp
PETROCHEMICALS
Styrene. The Company manufactures styrene from ethylene and benzene.
Styrene is principally used in the manufacture of intermediate products such
as polystyrene, acrylonitrile butadiene styrene ("ABS") resins, synthetic
rubbers, SBLatex, unsaturated polyester resins and styrene acrylonitrile
resins ("SAN"). These intermediate products are used to produce various
consumer products, including building products, boat and automotive
components, disposable cups and trays, packaging and containers, housewares,
tires, audio and video cassettes, luggage, children's toys, paper coating,
appliance parts and carpet backing.
5
The Company is the third largest North American producer of styrene. The
Company's styrene unit is one of the largest in the world and has an annual
rated production capacity of 1.7 billion pounds, following a recent
debottlenecking, which represents approximately 12% of total North American
capacity. The Company sold approximately 20% of its styrene sales volumes
pursuant to long-term conversion contracts during fiscal 1996. Approximately
40% of the Company's styrene sales volumes were exported in fiscal 1996,
principally to the Far East, either directly or pursuant to arrangements with
large international trading companies.
Acrylonitrile. The Company manufactures acrylonitrile by propylene
ammoxidation. Acrylonitrile is used primarily in the manufacture of
intermediate products such as acrylic fiber and ABS resins. The principal
end uses for acrylonitrile include apparel, furnishings, upholstery,
household appliances, carpets, and plastics for automotive parts.
The Company is the second largest global producer of acrylonitrile. The
Company's acrylonitrile unit has an annual rated production capacity of 740
million pounds, which represents approximately 21% of total North American
capacity. The Company sold approximately 40% of its acrylonitrile sales
volumes pursuant to long-term conversion agreements during fiscal 1996.
Approximately 60% of the Company's acrylonitrile production in fiscal 1996
was exported, principally to the Far East, either directly or pursuant to
arrangements with large international trading companies.
Hydrogen cyanide is a by-product of acrylonitrile manufacturing and is used
by the Company as a raw material for the production of TBA and sodium cyanide
and is also burned as fuel.
Acetic Acid. The Company produces acetic acid from carbon monoxide and
methanol. Acetic acid is primarily used in the manufacture of intermediate
products such as vinyl acetate monomer. These intermediate products are used
to produce various consumer products, including pharmaceuticals, adhesives,
glue, cigarette filters, and surface coatings.
The Company is the third largest North American producer of acetic acid.
Following a 200 million pound capacity expansion completed in June 1996, the
Company's acetic acid unit has an annual rated production capacity of nearly
800 million pounds, which represents approximately 17% of total North
American capacity. All of the Company's production is sold to BP pursuant to
a long-term contract through 2016.
Methanol. In August 1996, the Company completed construction of a world-
scale, 150 million gallon per year methanol unit at the Texas City Plant as
part of its capital program. During the demonstration period, problems in
the unit's reformer burners developed. The burners were replaced in October
1996 and the methanol unit attained full production in late October 1996.
Capital investment in the unit and production capacity are shared by the
Company and BP. Approximately 50% of the methanol production is used as a
raw material in the Company's acetic acid unit, replacing methanol that was
previously purchased from third parties. The remaining methanol is available
for the merchant market and for BP's worldwide acetic acid business. The
methanol unit was constructed at significantly less than normal replacement
cost because available equipment already at the Company's Texas City Plant
was refurbished and used in the project.
In a project related to the expanded acetic acid capacity, Praxair has
constructed a new partial oxidation unit at the Company's Texas City Plant
that will supply carbon monoxide and hydrogen to the Company for use in the
production of acetic acid and plasticizers. The partial oxidation unit began
production in June 1996. The Company's synthesis gas reformer, which was
previously being used to provide feedstock to the acetic acid and
plasticizers units at the Texas City Plant, is currently being used in the
methanol unit.
Plasticizers. The Company manufactures plasticizers employing a series of
processes using alpha-olefins and orthoxylene as the primary raw materials.
Major end-uses for plasticizers include flexible plastics used in shower
curtains and liners, floor coverings, cable insulation, upholstery and
plastic molding. The Company has an agreement with BASF pursuant to which
the Company sells all of its plasticizers production to BASF through 1999.
The Company's plasticizers capacity is 280 million pounds per year.
6
TBA. TBA is produced by the addition of hydrogen cyanide to isobutylene in
an acid catalyst reaction. The Company uses a portion of its by-product
hydrogen cyanide from acrylonitrile production in this process. Major end
uses for TBA include pesticides, solvents and synthetic rubber. The Company
sells all of its TBA production to Flexsys America L.P. ("Flexsys") pursuant
to a long-term conversion agreement. The Company's capacity for TBA is
currently 21 million pounds per year.
Sodium Cyanide. At the Texas City Plant, the Company operates a sodium
cyanide unit which is owned by E.I. DuPont de Nemours and Company ("DuPont").
The Company and DuPont have an agreement whereby the Company receives a fee
for operating the facility. The facility uses, as a raw material, hydrogen
cyanide by-product generated by the Company's acrylonitrile manufacturing
process. The capacity of this unit is 100 million pounds per year.
PULP CHEMICALS
Sodium Chlorate. Sodium chlorate is used primarily in the production of
chlorine dioxide which is used chiefly by pulp and paper manufacturers as a
bleaching chemical in the pulp manufacturing process. Bleached pulp is used
to make uncoated paper for commercial printing and for office copiers and
printers, and coated paper for magazines, catalogues, promotional printed
products, packing, tissue and other products. Sodium chlorate is also used
as a raw material to produce sodium chlorite.
Sodium chlorate is manufactured by passing an electric current through an
undivided cell containing a solution of sodium chloride (salt). Electric
power costs typically represent approximately 65% of the variable cost of
production of sodium chlorate. Electric power is purchased by each of the
Company's facilities pursuant to contracts with local electric utilities.
Consequently, the rates charged by local electric utilities are an important
competitive factor among sodium chlorate producers. The Company's electrical
power costs are believed to be competitive with other producers in the areas
in which it operates.
Upon completion of the Valdosta, Georgia plant, the Company will become the
second largest producer of sodium chlorate in North America. The Company's
four Canadian sodium chlorate plants have an aggregate annual rated
production capacity of 350,000 tons. The Valdosta plant will increase the
Company's total annual capacity by 30% to nearly 460,000 tons, representing
approximately 22% of North American sodium chlorate capacity. Valdosta,
Georgia was selected because of its proximity to existing customers currently
being supplied from the Company's Canadian plants and its proximity to
reliable, competitively priced electricity. The new facility is intended to
meet the growing market demand from the pulp and paper industry in the
Southeastern U.S.
Chlorine Dioxide Generators. Through its ERCO Systems Group ("ERCO"), the
Company is the largest worldwide supplier of patented technology for the
generators which certain pulp mills use to convert sodium chlorate into
chlorine dioxide. Each mill that uses chlorine dioxide requires at least one
generator. The Company receives revenue when a generator is sold to a mill
and also receives royalties from the mill after start-up, generally over the
next ten-year period, based on the amount of chlorine dioxide produced by the
generator. The Company has 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. Mills may
also convert to a newer generator to take advantage of efficiency advances
and technological improvements. Each upgrade or conversion results in a
licensing agreement which generally provides for payment of an additional
ten-year royalty.
The Company has a representative office in Beijing, China. This office
focuses on the development of opportunities for future sales and licensing of
chlorine dioxide generators. The first generator in China to convert sodium
chlorate to chlorine dioxide was sold by ERCO and commenced operation in
fiscal 1994, and since then several more generators have been sold by ERCO
for use in China.
7
Sodium Chlorite. The Company manufactures sodium chlorite at its
Buckingham, Quebec facility. Sodium chlorite is a specialty product used
primarily to produce chlorine dioxide for water treatment and as a
disinfectant for fresh produce. The Company has a rated annual capacity of
approximately 3,500 tons, which represents approximately 40% of total North
American capacity.
RAW MATERIALS FOR PRODUCTS AND ENERGY RESOURCES
For each of the Company's products, the combined cost of raw materials and
utilities is far greater than all other production costs combined. Thus, an
adequate supply of these materials at reasonable prices is critical to the
success of the Company's business. With the exception of methanol, the
Company does not currently produce any of its major raw materials, benzene,
ethylene, propylene, ammonia or natural gas at the Texas City Plant, or
electricity at its pulp chemical facilities. Moreover some of the Company's
competitors are integrated and produce their own raw materials. Although the
Company believes that it will continue to be able to secure adequate supplies
of its raw materials at acceptable prices to meet its requirements, there can
be no assurance that it will be able to do so.
PETROCHEMICALS
Styrene. Styrene is a clear liquid that the Company manufactures from
ethylene and benzene. The Company's conversion agreements require that other
parties furnish the Company with the ethylene and/or benzene necessary to
fulfill its conversion obligations. Approximately 20% of the Company's
fiscal 1996 benzene and ethylene requirements were furnished by customers
pursuant to conversion arrangements. The Company purchases benzene and
ethylene for use in the remainder of its production of styrene for sale to
others. Benzene and ethylene are both commodity petrochemicals and the price
for each can fluctuate widely due to significant changes in the availability
of these products, such as major capacity additions or significant plant
operating problems, and due to variations in the economy and commodity
chemical markets in general. The Company has multi-year arrangements with
several ethylene suppliers that provide for its estimated requirements for
purchased ethylene at generally prevailing and competitive market prices.
Acrylonitrile. The Company produces acrylonitrile by reacting propylene
and ammonia over a solid-fluidized catalyst at low pressure. The Company's
conversion agreements require that other parties furnish to the Company the
propylene and/or ammonia necessary to fulfill its conversion obligations.
Approximately 40% of the Company's fiscal 1996 propylene and ammonia
requirements were furnished by customers pursuant to conversion arrangements.
The Company purchases propylene and ammonia for use in the remainder of its
production of acrylonitrile for sale to others. Propylene and ammonia are
both commodity petrochemicals and the price for each can fluctuate widely due
to significant changes in the availability of these products such as major
capacity additions or significant plant operating problems, and due to
variations in the economy and commodity chemical markets in general. If
various customers for whom the Company now manufactures acrylonitrile under
conversion arrangements were to cease furnishing their own raw materials and
seek only to purchase acrylonitrile from the Company, the Company's
requirements for purchased propylene and ammonia could significantly
increase. The Company believes that both ammonia and propylene will, for the
foreseeable future, remain in adequate supply to meet demand.
Hydrogen cyanide is a by-product of the acrylonitrile manufacturing process
and is used by the Company as a raw material for the production of TBA and
sodium cyanide and is also burned as fuel.
Acetic Acid. Acetic acid is manufactured by the Company primarily from
carbon monoxide and methanol. The acetic acid unit's methanol needs will be
supplied by the Company's methanol unit. In a project related to the
expanded acetic acid capacity, Praxair constructed a partial oxidation unit
at the Company's Texas City Plant in fiscal 1996 that supplies carbon
monoxide to the Company for production of acetic acid.
Methanol. The Company produces methanol by steam reforming of natural gas
to form synthesis gas. The synthesis gas is then converted to methanol under
elevated pressures in the presence of a catalyst. The Company
8
obtains its natural gas under various supply contracts and believes that
adequate supplies will be available for the Company's needs in the
foreseeable future.
Plasticizers. The Company manufactures plasticizers using a series of
processes. Primary raw materials are alpha-olefins and orthoxylene, which
are supplied by BASF under its long-term contract with the Company which
expires at the end of 1999. The Company believes that adequate supplies of
raw materials will be available for the Company's needs in the foreseeable
future.
TBA. TBA is produced by the addition of hydrogen cyanide to isobutylene in
an acid catalyst reaction. The Company uses a portion of its by-product
hydrogen cyanide in this process. Flexsys supplies the isobutylene, sulfuric
acid and caustic soda under its long-term conversion agreement with the
Company. The Company believes that supplies of these raw materials will
remain adequate for its needs in the foreseeable future.
Sodium Cyanide. Sodium cyanide is manufactured from the Company's by-
product hydrogen cyanide and caustic soda. DuPont supplies the caustic soda
for sodium cyanide under its long-term contract with the Company.
PULP CHEMICALS
Sodium Chlorate. Sodium chlorate is manufactured by passing an electric
current through an undivided cell containing a solution of sodium chloride
(salt). Electric power costs typically represent approximately 65% of the
variable cost of production of sodium chlorate. Electric power is purchased
by each of the Company's facilities pursuant to contracts with local electric
utilities. Consequently, the rates charged by local electric utilities are
an important competitive factor among sodium chlorate producers. On average,
the Company's electrical power costs are believed to be competitive with
other producers in the areas in which it operates.
The Company also purchases sodium chloride for use in the manufacture of
sodium chlorate. Sodium chloride is purchased under requirements contracts
with major suppliers. The Company believes that sodium chloride will be
available for its needs for the foreseeable future.
TECHNOLOGY AND LICENSING
Petrochemicals
In 1986, Monsanto granted the Company a nonexclusive, 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 the Texas City Plant. These licenses are used in the
production of styrene, acrylonitrile, methanol, TBA, acetic acid, and
plasticizers. During fiscal 1991, BP Chemicals Ltd. ("BPCL") purchased the
acetic acid technology from Monsanto (subject to the above licenses).
BPCL has granted to the Company a nonexclusive, perpetual, royalty-free
license (except in the case of a breach of the related production agreement)
to use BPCL's acrylonitrile technology at the Texas City Plant as part of the
acrylonitrile expansion project. The Company and BPCL have agreed to cross-
license any technology or improvements relating to the manufacture of
acrylonitrile at the Texas City Plant.
The Company believes that the manufacturing processes that the Company
utilizes at the Texas City Plant are cost effective and competitive.
Although the Company does not engage in alternative process research with
respect to its U.S. operations, it does monitor new technology developments
and when the Company believes it is necessary, it will seek to obtain
licenses for process improvements.
Pulp Chemicals
The Company produces sodium chlorate using state-of-the-art metal cell
technology. The principal technology business of the Company is the design,
sale and technical service of custom-built patented chlorine dioxide
9
generators. The ERCO engineering group is involved in the technical support
of the Company's sales and marketing group through joint calling efforts
which define the scope of a project as well as producing technical schedules
and cost estimates. The Company performs detailed design of chlorine dioxide
generators which are then fabricated by contractors. Plant installation,
instrumentation testing and generator start-up are supervised by a joint
engineering/technical service team of the Company. Prior to 1996, the
Company was involved in a number of patent disputes with Akzo Nobel regarding
chlorine dioxide technology. In 1996, the parties reached a settlement of
such disputes that allows licensees of both the Company and Akzo Nobel to
operate their chlorine dioxide generators within the broadest range of
operating conditions, subject to cross licensing and payment of royalties.
The Company's pulp chemical research and development activities are carried
out at its Toronto, Ontario laboratories. Activities include the development
of new or improved chlorine dioxide generation processes and research in 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 AND INDUSTRY CONDITIONS
GENERAL
The industry in which the Company operates is highly competitive. Many of
the Company's competitors, particularly in the petrochemical industry, are
larger and have substantially greater financial resources than the Company.
Among the Company's competitors are some of the world's largest chemical
companies that have their own raw material resources. In addition, a
significant portion of the Company's business is based upon widely available
technology. The entrance of new competitors into the industry and the
addition by existing competitors of new capacity may reduce the Company's
ability to maintain profit margins or its ability to preserve its market
share, or both. Such developments could have a negative impact on the
Company's ability to obtain higher profit margins, even during periods of
increased demand for the Company's products.
The Company's primary domestic competitors by product are set forth below:
Styrene Dow Chemical Company, ARCO Chemical Company, Amoco
Chemical Company (a subsidiary of Amoco Corporation),
Chevron Chemical Company (a subsidiary of Chevron
Corporation), Cos-Mar (a joint venture of General
Electric Company and FINA Inc.), and Huntsman Chemical
Corporation
Acrylonitrile BP Chemicals Inc., Cytec Industries Inc., E.I. DuPont de
Nemours and Company, and Monsanto Company
Acetic Acid Hoechst Celanese Corporation, Eastman Chemical Company,
and Millennium Chemicals
Plasticizers Exxon Corporation, Aristech Chemicals, and Eastman
Chemical Company
TBA BASF Corporation and Nitto Chemical Industry Co., Ltd.
Sodium Chlorate Akzo Nobel N.V., CXY Chemicals Ltd., and Kerr-McGee
Corporation
Sodium Chlorite Vulcan Chemicals (a subsidiary of Vulcan Materials Co.)
Historically, petrochemical industry profitability has been affected by
vigorous price competition, which may intensify due to, among other things,
new domestic and foreign industry capacity. The Company's 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 in the world tend to reduce demand and put pressure on 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
10
regulations. During fiscal 1996, the Company's export sales were
approximately 34% of total revenues. It is not possible to predict accurately
how changes in raw material costs, market conditions, or other factors will
affect petrochemical industry margins in the future.
PETROCHEMICALS
Styrene. According to Chemical Marketing Associates, Inc. ("CMAI"), the
total North American capacity for styrene is currently 14.4 billion pounds
per year. The Company's rated capacity of 1.7 billion pounds per year
represents approximately 12% of the North American capacity.
From 1991 to 1993, styrene's profitability was depressed because of both
industry overcapacity and global recessionary pressures. By the spring of
1994, however, demand growth resulting from economic expansion had absorbed
much of the excess capacity. As a result, styrene prices and margins
increased substantially in fiscal 1994 and through most of fiscal 1995, and
average industry utilization rates exceeded rated capacity by the third
quarter of fiscal 1995. Shortly thereafter, styrene prices started
decreasing as demand weakened as a result of a general slowdown in the
worldwide economic growth rate, prompting customers to begin utilizing their
available inventories and decreasing purchases of additional product. The
weakening market conditions were accelerated in the fourth quarter of fiscal
1995 by significantly decreased purchases of styrene and styrene derivatives
by China, primarily as a result of changes in China's enforcement of economic
and tax policies and monetary constraints that negatively affected its
imports. China accounts for a significant portion of global purchases of
styrene and styrene derivatives. Average styrene prices declined by over 41%
from fiscal 1995 to fiscal 1996, primarily as a result of weaker market
conditions in the Far East.
According to CMAI, the North American styrene industry operated at
approximately a 98% utilization rate in fiscal 1995, and approximately 93% in
fiscal 1996. Certain styrene producers have announced plans to add
significant production capacity over the next several years, particularly in
the Far East. Current global production capacity for styrene is estimated to
be approximately 40 billion pounds and the Company believes that
approximately 7.2 billion pounds of capacity will be added by competitors in
the next two fiscal years, including an estimated 3.5 billion pounds in
fiscal 1997 and 3.7 billion pounds in fiscal 1998. The Company expects that
prices for styrene will continue at current depressed levels until global
demand for styrene increases sufficiently to absorb such additional
production capacity.
Acrylonitrile. The acrylonitrile market exhibits characteristics in
capacity utilization, selling prices and profit margins similar to those of
styrene. Moreover, as a result of the Company's high percentage of export
acrylonitrile sales, demand for the Company's acrylonitrile is most
significantly influenced by export customers, particularly those that supply
acrylic fiber to China. In recent years, the acrylic fiber market has been
subject to volatility because of fluctuations in demand from the Chinese
market. During most of fiscal 1995, strong demand for acrylic fiber and ABS
resins, particularly in China, increased demand for acrylonitrile. However,
the Company believes that acrylonitrile demand began to weaken in the third
quarter of fiscal 1995 for the same reasons that caused the deterioration in
the styrene market. Demand for acrylonitrile from export customers decreased
significantly in the fourth quarter of fiscal 1995 as a result of these
developments, although export prices and margins did not decrease
significantly until the first quarter of fiscal 1996. Average acrylonitrile
sales prices declined 29% from fiscal 1995 to fiscal 1996 as a result of
weaker market conditions in the Far East.
According to CMAI, the North American acrylonitrile industry operated at
approximately a 97% utilization rate in fiscal 1995 and approximately 93% in
fiscal 1996. The Company believes that during fiscal years 1997 and 1998,
global industry capacity will increase by approximately 940 million pounds or
9%. As a result of the increased global industry capacity in fiscal years
1997 and 1998, industry utilization rates may decline and price competition
may increase during this period.
Acetic Acid. According to CMAI, the total domestic capacity for acetic
acid production is approximately 4.9 billion pounds per year, with the
Company's current rated capacity of approximately 800 million pounds per year
representing approximately 16% of the total domestic capacity.
11
Methanol. The Company completed construction of a world-scale, 150 million
gallon per year methanol unit at the Texas City Plant in August 1996.
Capital investment in the unit and production capacity is shared by the
Company and BP. Approximately 50% of the methanol production is used as a
raw material in the Company's acetic acid unit. The remaining methanol
production is available for the merchant market and for BP's worldwide acetic
acid business.
Plasticizers. The Company's capacity for plasticizers is 280 million
pounds per year. The Company has an agreement with BASF pursuant to which
the Company will sell all of its plasticizers production to BASF through
1999.
TBA. The Company operates a TBA production unit with a capacity of 21
million pounds per year. The Company believes that currently there are only
three TBA production units in the world: those operated by the Company (21
million pounds capacity), Nitto Chemical Industries Co., Ltd. (3.3 million
pounds capacity), and BASF (13 million pounds capacity).
Sodium Cyanide. The Company operates a sodium cyanide unit at its Texas
City Plant which is owned by DuPont. The capacity of this unit is 100
million pounds per year.
PULP CHEMICALS
Sodium Chlorate. Historically, sodium chlorate has experienced cycles in
capacity utilization, selling prices and profit margins. From 1990 to 1994,
the industry had been operating well below rated capacity, resulting in
declining product prices, due to significant capacity expansion during the
period from 1990 to 1992. Since the mid-1980s, however, North American
demand for sodium chlorate has grown at an average annual rate of 10% as pulp
mills have accelerated substitution of chlorine dioxide, sodium chlorate's
primary derivative, for elemental chlorine in bleaching applications.
Chlorine dioxide is a powerful and highly selective oxidizing agent suitable
for pulp bleaching. It has the ability to substantially reduce hazardous
substances, including dioxins and furans, in bleach plant effluent, as well
as produce high-brightness pulp with little or no damage to the cellulose
fiber.
Substitution of chlorine dioxide for elemental chlorine is driven primarily
by environmental concerns. Through the end of 1995, approximately 80% to 85%
of Canadian bleach plant capacity and approximately 60% to 65% of U.S. bleach
plant capacity has been converted to chlorine dioxide. The Environmental
Protection Agency ("EPA") has published draft regulations known as "Cluster
Rules" which, if enacted, are likely to 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.
For information regarding capacity utilization and revenues for each of the
Company's principal products, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
ENVIRONMENTAL AND SAFETY MATTERS
The Company's operations involve the handling, production, transportation,
and disposal of materials classified as hazardous or toxic and are
extensively regulated under environmental and health and safety laws.
Operating permits required for the Company's operations are subject to
periodic renewal and may be revoked or modified for cause or when new or
revised environmental laws or requirements are implemented.
New laws or permit requirements and conditions may affect the Company's
operations, products, or waste disposal. Past or future operations may result
in claims, regulatory action, or liabilities. Expenditures could be required
to upgrade wastewater collection, pretreatment or disposal systems, or other
matters. Some risk of environmental costs and liabilities is inherent in
particular operations and products of the Company, as it is with other
companies engaged in similar businesses.
12
The Company conducts environmental management programs to maintain
compliance with applicable environmental laws. As part of these programs,
the Company conducts or commissions reviews of its environmental performance
and addresses issues identified. The Company routinely conducts inspection
and surveillance programs to detect and respond to any leaks or spills of
regulated hazardous substances and to correct any identified regulatory
deficiency. To reduce the risk of offsite consequences from any
unanticipated event, the Company acquired a greenbelt buffer zone adjacent to
the Texas City Plant in 1991. The Company also participates in a regional
air monitoring network to monitor ambient air quality in the Texas City
community. These programs are part of the Company's commitment to
Responsible Care initiatives of the Chemical Manufacturers Association and
Canadian Chemical Producers Association.
During fiscal 1996, the Company was recognized as a 33/50 Environmental
Champion by the EPA for surpassing the emission reduction goals of the 33/50
program at the Texas City Plant faster than the EPA's timetable. The
voluntary 33/50 program targeted 17 high priority chemicals included in the
EPA's Toxic Release Inventory. Six of the 17 chemicals are present at the
Company's Texas City Plant. The goal of the program was a 33% reduction in
air emissions of these compounds by 1992, compared to 1987 levels, and a 50%
reduction by 1995. For the 1995 reporting year, the final year of the 33/50
program, the Company achieved a 71% reduction in the targeted chemicals,
including a 95% reduction in hydrogen cyanide emissions by converting this
by-product into sodium cyanide, an 83% reduction in benzene emissions
primarily by constructing a major wastewater treatment facility, a 66%
reduction in toluene and orthoxylene, and a 13% reduction in chromium and
nickel compounds. In addition to these improvements, the Company has
recently completed an extensive review of the overall environmental condition
at its Texas City Plant and has initiated a groundwater monitoring program.
No assurances can be given that the Company will not incur material
environmental expenditures associated with its facilities, operations, or
products.
Changing and increasingly strict environmental laws and regulations might
affect the manufacture, handling, processing, distribution or use of chemical
products and the release, treatment, storage or disposal of wastes by the
Company. Accordingly, the Company could be required from time to time to
make expenditures to upgrade its wastewater collection, pretreatment, or
disposal systems at the Texas City Plant.
Production of chemical products involves the use, storage, transportation,
and disposal of materials that may be classified as hazardous or toxic under
applicable laws. The Company believes that its procedures for the use,
storage, transportation, and disposal of these materials are consistent with
industry standards and applicable laws and that it takes precautions to
protect its employees and others from harmful exposure to such materials.
However, there can be no assurance that past or future operations will not
result in exposure or injury or to claims of injury by employees or the
public due to the use, storage, transportation, or disposal of these
materials.
Under the Assets Purchase Agreement for the Company's acquisition of the
Texas City Plant from Monsanto, Monsanto agreed to be liable and to indemnify
the Company for certain environmental liabilities. The contractual indemnity
expires upon certain changes of control of the Company. Monsanto has taken
the position that the Merger constitutes such a change of control.
Accordingly, any future claims the Company may have against Monsanto may
necessarily be based upon statutory laws or common law principles, although
there can be no assurance that the Company would prevail against Monsanto
with respect to any such claim. Based on information currently available,
the Company believes the loss of the contractual indemnity will not have a
material adverse effect on its financial condition.
In connection with the Company's purchase of the pulp chemical business in
1992, the seller, Tenneco Canada, Inc. ("Tenneco"), contractually retained
liability for costs, damages, fines, penalties and other losses under claims
by third parties (including employees and authorities) arising from the
ownership or operation of the facilities and businesses prior to the
acquisition. The Company is also indemnified against the breach of
environmental remediation covenants. These covenants oblige the indemnifying
party to do specific remedial work (including decommissioning the old section
of the Vancouver facility, which is underway) at the facilities within set
time periods, and to do any investigation, monitoring or remedial work
required by present or future legislation governing environmental conditions
predating the acquisition. The indemnity also protects the Company against
losses arising from the remediation of pre-acquisition environmental
conditions or from pre-acquisition violations of environmental laws. With
the exception of any third-party claims, the losses against which the Company
is
13
indemnified do not include consequential damages or lost profits. The Tenneco
obligations have been assigned to Albright & Wilson UK Ltd. ("Albright &
Wilson") as a result of the sale by Tenneco of certain assets to Albright &
Wilson.
Groundwater data obtained in the course of the acquisition of the pulp
chemical business indicated elevated concentrations of certain chemicals in
the soil and groundwater at the four Canadian sites. The Company conducted a
focused baseline sampling of groundwater conditions beneath its Canadian
facilities in connection with Tenneco's indemnification of the Company for
preclosing conditions which confirmed the previous data. The Company from
time to time has encountered elevated concentrations of chemicals in soils or
groundwater at its Canadian plants which it has addressed or is addressing.
During the course of the acquisition of the pulp chemical facilities by the
Company, air emissions sources were reviewed, and any available dustfall and
vegetation stress studies were considered. This review indicated emission
excursion episodes at specific locations in the scrubber systems at the
Thunder Bay, Buckingham, and Vancouver facilities. The conditions at Thunder
Bay and Vancouver have been addressed and satisfactorily resolved and the
conditions at Buckingham are being addressed. The Company believes that it
is otherwise in compliance in all material respects with permit requirements
under applicable provincial law for operating emissions sources.
The Company's pulp chemical business is sensitive to potential
environmental regulation. The EPA has published draft regulations which, if
enacted, would support substitution of chlorine dioxide, which is produced
from sodium chlorate, for elemental chlorine in the pulp bleaching process.
Certain environmental groups are encouraging passage of regulations which
restrict the amount of AOX (chlorine derivatives) in bleach plant effluent.
Increased substitution of chlorine dioxide for elemental chlorine in the pulp
bleaching process significantly reduces the amount of AOX and chlorine
derivatives in bleach plant effluent. As long as there is not an outright
ban on chlorine containing compounds, regulations restricting AOX or chlorine
derivatives in bleach plant effluent should favor the use of chlorine
dioxide, thus sodium chlorate. Any significant ban on all chlorine
containing compounds could have a material adverse effect on the Company's
financial condition and results of operations.
British Columbia has a regulation in place that would effectively eliminate
the use of chlorine dioxide in the bleaching process by the year 2002. The
pulp and paper industry is working to change this regulation and believes
that a ban of chlorine dioxide in the bleaching process will yield no
measurable environmental or public health benefit. In the event such a
regulation was implemented, the Company would seek to sell its products to
customers in other markets. The Company is not aware of any other laws or
regulations currently in place in North America which would restrict the use
of the product.
Emissions into the air from the Texas City Plant are subject to certain
permit requirements and self-implementing emission limitations and standards
under state and federal law. The Texas City Plant is located in an area that
is classified by the EPA as not having attained the ambient air quality
standards for ozone, which is controlled by direct regulation of volatile
organic compounds ("VOCs") and nitrogen oxide ("NOx"). Additional
requirements were issued in fiscal 1994 and modified in fiscal 1996 by the
Texas Natural Resource Conservation Commission in order to achieve ambient
air quality standards for ozone. These measures may substantially increase
the Company's NOx control costs in the future, although the cost and full
impact, if any, cannot be determined at this time.
Additionally, the Clean Air Act Amendments of 1990 authorize new federal
permit requirements and provisions governing toxic and criteria air
contaminants. The Company has incurred and will incur additional costs to
comply with this law and with requirements issued by the State of Texas to
control VOCs and NOx, as will all other similarly situated organic chemical
manufacturing facilities.
The Company believes that it is in compliance in all material respects with
applicable environmental law. However, there can be no assurance that past
practices or future operations will not result in material claims or
regulatory action or require material environmental expenditures.
14
EMPLOYEES
As of September 30, 1996, the Company had approximately 1,200 employees,
including approximately 300 at its facilities in Canada. Approximately 60%
of the employees at the Company's manufacturing facilities are covered by
union agreements. The primary union agreement is with the Texas City, Texas
Metal Trades Council, AFL-CIO, of Galveston County, Texas, and covers all
hourly employees at the Texas City Plant. The Company signed a new labor
agreement in May 1996 which is subject to renegotiation in April 1999. The
new agreement increases the flexibility of work rules which the Company
believes will increase the overall efficiency of the Texas City Plant.
Employees at the Vancouver plant are represented by the Pulp, Paper and
Woodworkers Union. The Vancouver agreement was renegotiated in November 1994
and is subject to further renegotiation in November 1997. Employees at the
Buckingham plant are represented by either the Energy and Chemicals Workers
Union or an office and professional workers union. Both Buckingham
agreements were negotiated in November 1994 and are subject to renegotiation
in November 1997. The Company believes its relationship with its employees
is good.
INSURANCE
The Company currently maintains $500 million of coverage for property
damage to its Texas City Plant and resulting business interruption. Although
the Company carries such insurance, it has only one styrene manufacturing
facility and one acrylonitrile manufacturing facility; thus, a significant
interruption in the operation of either facility could have a material
adverse effect on the Company's financial condition, results of operations or
cash flows. The Company maintains $338 million of combined coverage for
property damage and resulting business interruption for its pulp chemical
operations. The Company also maintains other insurance coverages for various
risks associated with its business. There is no assurance that the Company
will not incur losses beyond the limits of, or outside the coverage of, its
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 is no assurance that in the future the Company will be able to maintain
its existing coverage or that the premiums will not increase substantially.
ITEM 2. PROPERTIES
The principal executive offices of the Company are located in Houston,
Texas, and are subleased through Citicorp, N.A.
The Company's Texas City Plant 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. The Company has
facilities to load its 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.
The Company's Texas City Plant comprises seven basic operating units which
can be divided into three groups based on the chemistry involved. One group
of operating units involves synthesis gas chemistry (carbon monoxide and
hydrogen), and its facilities include the acetic acid unit, three plasticizer
units (oxo-alcohol, phthalic anhydride and linear phthalate esters), and the
methanol unit. Carbon monoxide and hydrogen are utilized as feedstocks in
the oxo-alcohol manufacturing process and carbon monoxide and methanol are
utilized as feedstocks to produce acetic acid. As described in Item 1 under
the caption "Recent Developments," a new partial oxidation unit was
constructed by Praxair at the Texas City Plant to supply carbon monoxide and
hydrogen to the Company. The synthesis gas reformer is now used in the
methanol unit. A second group of operating units involves acrylonitrile and
hydrogen cyanide chemistry, and its facilities include the acrylonitrile
unit, the TBA unit, and the sodium cyanide unit. Ammonia and propylene are
used as feedstocks in the acrylonitrile process and hydrogen cyanide, a by-
product of that process, is used as a feedstock for the other units in this
second group and is also burned as fuel. The third operating group is based
on ethylene and benzene chemistry and its facilities comprise the
ethylbenzene and styrene units. Although the styrene unit is independent of
the rest of the Texas City Plant from a feedstock and by-product standpoint,
it is the cornerstone of the Texas City Plant's energy balance as it uses
large quantities of by-product steam generated by the acrylonitrile and
phthalic anhydride units, thus reducing the demands on the
15
Company's steam generating facility. In this way, the Texas City Plant's
utilities system links the three operating groups together in an effort to
minimize utility costs. This integration results in cost efficiencies without
significantly compromising the operating flexibility of the individual
product units.
The Company owns or leases all of the real property which comprise its
Texas City Plant and all of the facilities and equipment located there, other
than the sodium cyanide unit which is owned by DuPont, a cogeneration
facility owned by a joint venture between the Company and Praxair Energy
Resources, Inc., and the new partial oxidation unit constructed at the site
by Praxair. Following the expiration of its ten-year lease with BP on July
31, 1996, legal title to the acetic acid unit reverted to the Company. The
Company also owns storage facilities, approximately 200 rail cars and an
acetic acid barge. In addition, the Company subleases approximately 20,000
square feet of office space in Houston, Texas for its corporate headquarters
and leases several storage facilities in the U.S. and Korea.
The Company's pulp chemical business includes four manufacturing plants in
Canada and one in Valdosta, Georgia, currently nearing completion. The
Buckingham, Quebec and Vancouver, British Columbia sites are approximately 20
acres each and are owned by the Company. The Thunder Bay, Ontario and Grande
Prairie, Alberta sites are leased by the Company. The new plant is being
constructed in conjunction with, and will be leased from, the Valdosta-
Lowndes County Industrial Authority. The Company also leases approximately
325 rail cars. Headquarters for the Canadian operations is located in Toronto
in an approximately 50,000 square foot single story office building owned by
the Company. The building is situated on 6.56 acres owned by the Company and
serves as the headquarters for the pulp chemical business and its respective
laboratories.
The Company believes that these properties and equipment are sufficient to
conduct the Company's business.
See Item 1. "Business" for other information required by this item.
ITEM 3. LEGAL PROCEEDINGS
The information set forth under the caption "Legal Proceedings" in Note 7
of the "Notes to Consolidated Financial Statements" is incorporated herein
by this reference. The cause numbers, the styles of the cases, the courts in
which the cases are pending and certain other information with respect to the
matters described in Note 7 are set forth below.
HUNTSMAN LAWSUIT: Sterling Chemicals, Inc. v. Huntsman Chemical
Corporation, Huntsman Styrene Corporation and Huntsman Corporation; Cause No.
95-005256; In the 61st Judicial District Court of Harris County, Texas.
ALLEMAND LAWSUIT: George Allemand and Willa Allemand v. Sterling Chemicals,
Inc., Olin Corporation, Goodyear Tire & Rubber Co., Inc. Marine Fueling
Service, Inc.; le Manufacturier de Granford, Triplex Inc. and Shrieve
Chemical Company, Cause No. A-152,286; In the 58th Judicial District Court of
Jefferson County, Texas.
AMMONIA RELEASE LAWSUITS:
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 ("Pointer").
2. Holly Benefiel, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV0246;
In the 56th Judicial District Court of Galveston County, Texas.
3. Lilly Gordon, et al. v. Sterling Chemicals, Inc.; Cause No. 95-36592;
In the 281st Judicial District Court of Harris County, Texas ("Gordon").
4. 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.
5. Maurice Benson, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1265;
In the 56th Judicial District Court of Galveston County, Texas.
16
6. Rodney Curry, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1263;
In the 122nd Judicial District Court of Galveston County, Texas.
7. Jayson Rhodes, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1266;
In the 10th Judicial District Court of Galveston County, Texas.
8. Darrell Vick, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1262;
In the 122nd Judicial District Court of Galveston County, Texas.
9. Nathaniel Barron, et al. v. Sterling Chemicals, Inc. and Paul Saunders;
Cause No. 96CV0103; In the 10th Judicial District Court of Galveston County,
Texas.
10. Melton Avie, et al. v. Sterling Chemicals, Inc., BP America, Inc., BP
Chemicals America, Inc., n/k/a BP Chemicals, Inc., Allen Bolen, and Paul
Saunders; Cause No. 96CV0377; In the 56th Judicial District Court of
Galveston County, Texas.
11. Feliciana Cantu, et al. v. Sterling Chemicals, Inc.; Cause No. 664459;
In the County Civil Court at Law No. 4 of Harris County, Texas.
12. Lee Arvie, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0431; In
the 56th Judicial District Court of Galveston County, Texas.
13. Edwin Laday v. Sterling Chemicals, Inc.; Cause No. 96CV0430; In the
212th Judicial District Court of Galveston County, Texas.
14. Earl Rivas and Rosie Rivas v. Sterling Chemicals, Inc., Sterling
Chemical Company, Sterling Chemical Company, Inc., B.P. Chemicals, Inc., B.P.
Chemicals America, Inc., Paul Saunders, and Allan Bolen; Cause No. 96CV0438;
In the 10th Judicial District Court of Galveston County, Texas.
15. Bertha L. Anderson, et al. v. Sterling Chemicals, Inc.; Cause No.
96CV0440; In the 122nd Judicial District Court of Galveston County, Texas.
16. Carl Terry, et al. v. Sterling Chemicals, Inc. and Paul Saunders;
Cause No. 96CV0436; In the 212th Judicial District Court of Galveston County,
Texas.
17. Phyllis Cormier, et al. v. Sterling Chemicals, Inc.; Cause No. 96-
023195; In the 269th Judicial District Court of Harris County, Texas.
18. Nita Moore, et al. v. Sterling Chemicals, Inc.; Cause No. 96-22420; In
the 270th Judicial District Court of Harris County, Texas.
19. Mattie Moses, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0458;
In the 56th Judicial District Court of Galveston County, Texas.
20. Prince Ella Green and James Green v. Sterling Chemicals, Inc.; Cause
No. 96CV0454; In the 212th Judicial District Court of Galveston County,
Texas.
21. Jacqueline Lynch, et al. v. Sterling Chemicals, Inc.; Cause No. 43353;
In the County Court at Law No. 2 of Galveston County, Texas.
22. Gloria Cotton, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0446;
In the 122nd Judicial District Court of Galveston County, Texas.
23. Phyllis Joiner, et al. v. Sterling Chemicals, Inc.; Cause No. 56189;
In the Justice of the Precinct No. 1, Galveston County, Texas.
24. Timothy McClurkin, Sr. v. Sterling Chemicals, Inc.; Cause No.
96CV0451; In the 56th Judicial District Court of Galveston County, Texas.
25. Allen E. Kitchens v. Sterling Chemicals, Inc., et al.; Cause No.
43,352; In the Galveston County Court, Galveston County, Texas.
26. Patricia A. Glover v. Sterling Chemicals, Inc., Paul Saunders, Allen
Bolen, et al.; Cause No. 96CV0459; In the 212th Judicial District Court of
Galveston County, Texas.
27. Wayne R. Lee v. Sterling Chemicals, Inc.; Cause No. 96CV0467; In the
10th Judicial District Court of Galveston County, Texas.
The following ammonia lawsuits against the Company have been dismissed by
voluntary non-suit, however, the plaintiffs in these lawsuits have maintained
their claims against the Company by filing Pleas-in-Intervention in either
Pointer or Gordon referenced above:
1. Bobbie J. Adams, et al. v. Sterling Chemicals, Inc.; Cause No. 94CV0764;
In the 56th Judicial District Court of Galveston County, Texas.
2. Courtney Adomond, et al. v. Sterling Chemicals, Inc.; Cause No.
94CV0947; In the 56th Judicial District Court of Galveston County, Texas.
17
3. Caroll Allen, et al. v. Sterling Chemicals, Inc.; Cause No. 94CV1147;
In the 212th Judicial District Court of Galveston County, Texas
4. Richard Gayton, individually and as next friend of Ruben Gayton, et al.
v. Sterling Chemicals, Inc., Paul Saunders and an unknown chemical operator;
Cause No. 95-43771; In the 55th Judicial District Court of Harris County,
Texas.
5. Connie Alaniz and Emilio Alaniz, et al. v. Sterling Chemicals, Inc.,
Paul Saunders and Terry Bellard; Cause No. 95CV1011; In the 10th Judicial
District Court of Galveston County, Texas.
6. Anita R. Afriyie, et al. v. Sterling Chemicals, Inc., Paul Saunders and
Terry Bellard; Cause No. 95CV0997; In the 122nd Judicial District Court of
Galveston County, Texas.
7. Beverly D. Mitchell, et al. v. Sterling Chemicals, Inc., et al.; Cause
No. 94CV1312 in the 56th Judicial District Court of Galveston County, Texas.
The following ammonia lawsuit was settled in August 1996:
Guadalupe Trevino v. Sterling Chemicals, Inc.; Cause No. 42634; In the
Probate and County Court of Galveston County, Texas.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 20, 1996, a Special Meeting of the Company's stockholders was
held for the purpose of approving an Amended and Restated Agreement and Plan
of Merger, dated April 24, 1996, pursuant to which, among other things, STX
Acquisition Corp. would be merged with and into the Company, the Company
would become a holding company through the transfer of its assets to an
operating subsidiary, and the existing stockholders of the Company could
elect to either retain their shares of stock (subject to certain limitations)
or receive $12.00 cash per share. The results of the stockholders vote on
the Merger were as follows: 40,618,219 votes for, 1,812,182 votes against or
withheld, 226,727 abstentions, and 13,032,863 shares not voting.
Accordingly, the Merger was approved and was consummated on August 21, 1996.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established public trading market for Holdings' common stock,
par value $.01 per share ("Common Stock"), although the Common Stock is
traded on the OTC Electronic Bulletin Board maintained by the National
Association of Securities Dealers, Inc. under the symbol "STXX". Prior to
the Merger, the Common Stock was listed on the New York Stock Exchange
("NYSE") under the symbol "STX". The following table sets forth the price
range of the Common Stock during the fiscal years ended September 30, 1996
and September 30, 1995. Information for the fourth quarter of fiscal 1996
reflects high and low sales prices on the NYSE for the period of July 1
through August 21, and high and low sales price information as reported on
the OTC Electronic Bulletin Board for the period of August 22 through
September 30.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- -------- ---------
1996 High $ 9 1/4 $13 $13 1/8 $12 1/2
Low $ 7 1/2 $ 8 $11 1/8 $10 7/8
1995 High $13 7/8 $14 $13 $12 7/8
Low $ 9 3/4 $10 7/8 $10 1/4 $ 8 1/4
As of September 30, 1996, there were approximately 280 record holders of
Common Stock.
Holdings has not paid dividends on the Common Stock in any of the last
three fiscal years and does not anticipate paying dividends in the
foreseeable future. Any future determination as to the payment of dividends
will be made at the discretion of the Board of Directors of Holdings and will
depend upon the Company's operating results, financial condition, capital
requirements, general business conditions and such other factors that the
Board of Directors deems relevant. In addition, the payment of dividends on
the Common Stock is restricted by the terms of the indenture governing the
13 1/2% Senior Secured Discount Notes Due 2008 ("Discount Notes"), and
indirectly restricted by the terms of the Chemicals Credit Facility and the
indenture governing the 11 3/4% Senior Subordinated Notes Due 2006
("Subordinated Notes") which restrict the ability of Chemicals to transfer
funds to Holdings.
19
ITEM 6. SELECTED FINANCIAL DATA OF THE COMPANY
The following table sets forth selected financial data with respect to the
Company's consolidated financial condition and consolidated results of
operations and should be read in conjunction with the Company's Consolidated
Financial Statements and related notes in Item 8 of this Form 10-K.
Year Ended September 30,
------------------------------------------------------------
1996/(2)/ 1995 1994 1993 1992
---- ---- ---- ---- ----
OPERATING DATA: (In Thousands Except Per Share Data)
Revenues $ 790,465 $1,030,198 $700,840 $518,821 $430,529
Gross profit 111,426 271,618 93,924 40,919 27,882
Net income (loss) 31,604 150,049 19,132 (5,420) (5,890)
Net cash provided by (used in) 63,601 191,838 75,249 48,114 (3,752)
operating activities
Net cash used in investing activities (95,957) (53,962) (9,737) (12,175) (20,424)
Net cash provided by (used in) 7,190 (109,017) (64,874) (37,057) 23,752
financing activities
EBITDA/(1)/ 121,200 281,480 108,600 52,477 40,967
PER SHARE DATA:
Net income (loss) per share 0.62 2.70 0.34 (0.10) (0.11)
Cash dividends - - - 0.06 0.245
BALANCE SHEET DATA:
Working capital $ 76,933 $ 74,620 $ 20,809 $ 30,952 $ 56,787
Total assets 689,684 609,939 580,925 546,754 608,470
Long-term debt (excluding current 714,632 103,581 192,621 263,894 300,220
maturities)
Shareholders' equity (deficiency in (272,439) 239,318 89,734 70,336 87,343
assets)
__________
/(1)/EBITDA (Earnings before interest, taxes, depreciation, amortization,
stock appreciation rights ("SARs"), and certain merger-related expenses) is
presented to further enhance understanding of the Company's results of
operations and cash flows. It is not intended as an alternative measure of
performance to net income. With certain adjustments, EBITDA is the basis for
payments to employees under the Company's profit sharing plans.
/(2)/See Note 1 of Notes to Consolidated Financial Statements for a
discussion of merger activities and related financing.
20
SELECTED FINANCIAL DATA FOR CHEMICALS
The following table sets forth selected financial data with respect to
Chemical's consolidated financial condition and consolidated results of
operations and should be read in conjunction with Chemical's Consolidated
Financial Statements and related notes in Item 8 of this Form 10-K.
Period from
May 14, 1996 (Date of Inception)
to September 30, 1996/1/
--------------------------------
(Dollars in Thousands)
OPERATING DATA:
Revenues $ 83,410
Gross profit 363
Net income 174
BALANCE SHEET DATA:
Working capital $ 77,299
Total assets 685,451
Long-term debt (excluding 619,875
current maturities)
Stockholders' equity (184,302)
(deficiency in assets)
/1/See Note 1 of Notes to Consolidated Financial Statements for a
discussion of merger activities and related financing. Prior to August 21,
1996, Chemicals had no operating activities, other than those related to
merger activities.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Holdings is a holding company whose only material asset is Chemicals.
Holdings' only material liability is its obligation to repay the Discount
Notes issued in connection with the Merger. Chemicals and its subsidiaries
own substantially all of the consolidated operating assets and are obligated
for substantially all liabilities of the Company other than the Discount
Notes. The Merger that occurred on August 21, 1996 and related financings
were accounted for as a recapitalization, with no change in the basis of the
assets and liabilities of Chemicals. Other than the additional interest
expense associated with the Discount Notes, the results of operations for the
Company are the same as those for Chemicals. Accordingly, the discussion
that follows is applicable to both entities, except as specifically noted. A
separate discussion of the results of operations for Chemicals for the period
ended September 30, 1996, would not, in the opinion of the Company, provide
any additional meaningful information.
The primary markets in which the Company competes, especially styrene and
acrylonitrile, are cyclical and are sensitive to changes in the balance
between supply and demand, the price of raw materials, and 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 margins. Large global capacity
additions of styrene and acrylonitrile are projected to be completed during
fiscal years 1997 and 1998. For styrene, approximately 7.2 billion pounds of
new capacity is expected, and for acrylonitrile, approximately 940 million
pounds of new capacity is expected. The Company believes that these
announced global capacity additions in styrene and acrylonitrile will result
in overcapacity for these markets in fiscal years 1997 and 1998. The
resulting impact on prices and margins began to negatively affect the
Company's results in the last half of fiscal 1996. Demand growth is
generally driven by new applications and the substitution of petrochemical-
based plastics and fibers for materials, such as metals, paper, glass, wood,
and cotton. Demand from the Far East, particularly China, tends to have a
disproportionate impact on the global markets for styrene and acrylonitrile
due to both volume and volatility of the region's demand. Although direct
sales to China were approximately only 1% of total revenues in fiscal 1996,
much of the Company's Far Eastern petrochemical product demand is ultimately
driven by Chinese demand for downstream products. In fiscal 1996, the
Company's export sales to the Far East and total export sales were
approximately 22% and 34%, respectively, of its total sales.
The Company primarily sells its petrochemical products pursuant to multi-
year contracts and high volume spot transactions in both the domestic and
export markets. This long-term, high volume focus allows the Company to
maintain relatively low selling, general and administrative expenses relating
to product marketing. Prices for the Company's commodity chemicals are
determined by global market factors, including changes in the cost of raw
materials, that are largely beyond the Company's control, and, except with
respect to certain of its multi-year contracts, the Company generally sells
its products at prevailing market prices.
During the past five years, the Company's results of operations have varied
significantly from year to year primarily as a result of cyclical changes in
the markets for its primary products. The Company has attempted to stabilize
these fluctuations by manufacturing two product groups, petrochemicals and
pulp chemicals, which have historically been subject to different market
dynamics, including timing differences in their respective cyclical upturns
and downturns.
Despite this diversification, however, prolonged or severe softness in the
market for any of its principal products, particularly styrene and
acrylonitrile, will adversely affect the Company. Although earnings from
styrene and acrylonitrile are expected to be significantly impacted by the
global petrochemical capacity increases in fiscal years 1997 and 1998, this
impact should be partially offset by the pulp chemical business which is
expected to benefit from growing demand for generators and sodium chlorate
and the 30% increase in the Company's sodium chlorate capacity as a result of
completion of the Valdosta, Georgia plant. There can be no assurance,
however, that such favorable results in the pulp chemical business will be
realized.
In addition, the Company markets substantial volumes of petrochemicals
(approximately 50%, 54% and 51% of total sales volumes in fiscal years 1996,
1995, and 1994, respectively) and generates substantial revenues
22
(approximately 36%, 30%, and 32% of total revenues in fiscal years 1996,
1995, and 1994, respectively) under conversion agreements. Under these
agreements, the customer furnishes raw materials which the Company processes
in exchange for a fee designed to cover its fixed and variable costs of
production. The conversion agreements allow the Company to maintain lower
levels of working capital and, in some cases, to gain access to certain
improvements in manufacturing process technology. The Company believes that
its conversion agreements help insulate the Company to some extent from the
effects of declining markets and increases in raw material prices while
allowing it to share in the benefits of favorable market conditions for most
of the products sold under these arrangements.
In fiscal 1995, the Company began a three-year, $200 million capacity
expansion and modernization program. Approximately 75% of the capital
expenditures were completed by the end of fiscal 1996, and the balance will
be completed in future periods. Through this program, the Company has
expanded its total annual petrochemical production capacity including
capacity additions of 200 million pounds of styrene, 200 million pounds of
acetic acid, and 150 million gallons of methanol. In addition, the Company
will increase its sodium chlorate production capacity by 30% or 110,000 tons
upon completion of the Valdosta, Georgia plant. Future capital expenditures
are expected to be funded from operating cash flow and borrowings under its
revolving credit facility.
Notwithstanding the anticipated weakness in the styrene and acrylonitrile
markets, the Company believes that cash flow from operations, together with
funds available under its revolving credit facility will be adequate to make
the required payments of principal and interest due in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
On August 21, 1996, in connection with the Merger, the Company completed
debt and equity transactions resulting in a recapitalization of the Company
(collectively, the "Transaction"). The following table sets forth the
sources and uses of funds to effect the Transaction, which was accounted for
as a recapitalization with no impact on the historical basis of the assets
and liabilities of the Company. See Notes 1 and 4 of Notes to Consolidated
Financial Statements for further information on the Transaction and the terms
of the debt instruments, including definitions of certain terms.
Sources of Funds Dollars in Millions
---------------- -------------------
Revolving credit facility $ 6.4
Term loans 350.0
ESOP term loan 6.5
Subordinated notes 275.0
Discount notes and warrants 100.0
Equity private placement 70.7
Cash from operations 10.3
------
Total $818.9
======
Uses of Funds
-------------
Purchase of common stock $608.3
Purchase of other equity
interests 14.6
Repayment of outstanding debt 142.7
Chemicals ESOP loan 6.5
Transaction expenses and fees 46.8
------
$818.9
======
As a result of the Transaction, the Company is highly leveraged with
significantly increased cash requirements for debt service. At September 30,
1996, long-term debt (including current maturities) was $726 million and
deficiency in assets was $(272) million as a result of recapitalization
accounting.
23
The Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions and general corporate
purposes, should it need to do so, will be affected by cash requirements for
debt service. The Credit Agreement and the indentures governing the
Subordinated Notes and the Discount Notes (collectively, the "Indentures")
contain numerous financial and operating covenants, including, but not
limited to, restrictions on the Company's ability to incur indebtedness, pay
dividends, create liens, sell assets, engage in mergers and acquisitions and
refinance existing indebtedness. The Company's ability to comply with the
terms of these various debt agreements (including its ability to comply with
such covenants) and to meet its debt service obligations will depend on the
future performance of the Company. As a result of weaker than expected
market conditions for styrene and acrylonitrile during the first quarter of
fiscal 1997 and costs that were expensed related to the Merger in the fourth
quarter of fiscal 1996, the Company may not be in compliance with its
leverage ratio covenant under the Credit Agreement as of the end of the first
quarter of fiscal 1997. If needed, the Company intends to obtain a waiver to
correct any such noncompliance. The Company expects to be in compliance with
all the other coverage ratios under the Credit Agreement as of December 31,
1996, but there can be no assurance in this regard nor can there be any
assurance that the requisite waiver will be obtained with respect to the
leverage ratio covenant. The Credit Agreement also requires that certain
amounts of Excess Cash Flow (as defined) be used to prepay amounts
outstanding under the Term Loans. The first such mandatory prepayment is not
required to be made until January 1998.
The Company intends to meet its liquidity needs for operating activities
and capital expenditures (other than acquisitions) through internally
generated funds and, to the extent necessary, borrowings under the revolving
credit facility. The Company believes that such sources of funds will be
sufficient to permit the Company to meet its liquidity needs during fiscal
1997.
The Credit Agreement and the indenture for the Subordinated Notes contain
provisions which restrict the payment of advances, loans and dividends from
Chemicals to Holdings. The most restrictive of those covenants limits such
payments during fiscal 1997 to approximately $1.6 million plus any amounts
due to Holdings from Chemicals under the intercompany tax sharing agreement.
Such restriction is not expected to limit Holdings' ability to meet its
obligations in fiscal 1997.
Working Capital. Working capital at September 30, 1996 was $77 million, an
increase of $2 million from September 30, 1995. This increase was the result
of the following changes:
Current Assets Current Liabilities
-------------- -------------------
(In Millions) (In Millions)
Cash and cash equivalents $(25) Accounts payable $ 5
Inventories (14) Accrued liabilities 2
Accounts receivable 21 Current portion long-term debt 6
Other 7
---- ---
$(11) $13
( ) - Decrease in assets, increase in liabilities.
Cash Flow. Net cash provided from operations was $64 million for fiscal
1996, a decrease of $128 million compared to fiscal 1995. This decrease
primarily resulted from decreased earnings during fiscal 1996. Net cash flow
used in investing activities was $96 million in fiscal 1996 compared to $54
million in fiscal 1995. The increase was primarily due to additional
expenditures made as a part of the Company's three-year capital spending
program. Net cash flow provided by financing activities was $7 million in
fiscal 1996 compared to net cash flow used of $109 million in fiscal 1995.
In fiscal 1995, net cash flow used in financing activities primarily resulted
from utilizing cash flow from operations to reduce long-term debt.
Capital Expenditures. In fiscal 1995, the Company initiated its three-
year, $200 million capital spending program. As of September 30, 1996, the
Company has spent approximately 75% of the capital program. Capital
24
expenditures for fiscal 1996 were $96 million compared to $54 million in
fiscal 1995. The fiscal 1996 capital expenditures were primarily for the
expansion of the acetic acid unit, construction of the methanol unit, and
construction of the Valdosta, Georgia sodium chlorate plant. The fiscal 1995
capital expenditures were primarily for plant instrumentation modernization
and process improvements, the acetic acid expansion, and construction of the
methanol unit and the new sodium chlorate plant. The acetic acid expansion
was completed in June 1996, the methanol unit was completed in August 1996,
and the Valdosta plant is expected to be on stream by January 1, 1997.
Capital expenditures are expected to be approximately $33 million in fiscal
1997, with about $18 million dedicated to the petrochemical business and $15
million dedicated to the pulp chemical business. Capital expenditures for
the petrochemical business will be primarily for process modernization in
styrene and acrylonitrile and routine safety, environmental and replacement
capital. Capital expenditures for the pulp chemical business will be
primarily for completion of the Georgia sodium chlorate plant.
The Company's capital expenditures for environmentally-related prevention,
containment and process improvements were $2 million and $3 million for
fiscal years 1996 and 1995, respectively. The Company does not anticipate a
material increase in these types of expenses during fiscal 1997. During both
fiscal years, the Company did not incur any other infrequent or non-recurring
material environmental expenditures which were required under existing
environmental regulations. See "Certain Known Events, Trends and
Uncertainties - Environmental and Safety Matters."
The Company routinely incurs expenses associated with hazardous substance
management and pollution prevention in ongoing operations. These operating
expenses include items such as depreciation on its waste treatment
facilities, outside waste management, fuel, electricity and salaries. The
amounts of these operating expenses were approximately $47 million and $45
million for fiscal years 1996 and 1995, respectively. The Company does not
anticipate a material increase in these types of expenses during fiscal 1997.
The Company considers these types of environmental expenditures normal
operating expenses and includes them in cost of goods sold.
Acquisitions. A part of the Company's business strategy is to implement a
focused acquisition strategy, targeting chemical businesses and assets which
would strengthen the Company's existing market positions, provide upstream or
downstream integration or produce complementary chemical products. As
previously discussed, the Company's ability to consummate acquisitions may be
limited by restrictions in its debt agreements, results of operations and
industry conditions. Though there can be no assurance, the Company currently
believes that, if such acquisition opportunities arise, it will be able to
obtain the necessary approval from its existing lenders and obtain additional
financing, as necessary, to consummate such acquisitions.
Foreign Exchange. 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 forward foreign
exchange contracts have varying maturities with none exceeding 18 months.
The Company makes net settlements of U.S. dollars for Canadian dollars at
rates agreed to at inception of the contracts. The Company had a notional
amount of approximately $30 million and $26 million of forward foreign
exchange contracts outstanding to buy Canadian dollars at September 30, 1996
and 1995, respectively. The deferred gain on these forward foreign exchange
contracts at September 30, 1996 and 1995 was immaterial.
ACCOUNTING CHANGES
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation" in October 1995. Under SFAS No. 123, companies
are permitted to either adopt this new standard and record expenses for stock
options and other stock-based employee compensation plans based on their fair
value at date of grant, or continue to apply its current accounting policy
under Accounting Principles Board ("APB") Opinion No. 25 and increase its
footnote disclosure. The Company will continue to apply APB Opinion No. 25,
and in fiscal 1997 will increase its footnote disclosure to include the pro-
forma impact on net income and earnings per share of the application of the
fair value based method of accounting.
25
The Company will adopt SFAS No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" in fiscal 1997.
Issued in March 1995, SFAS No. 121 sets forth guidance on how to measure an
impairment of long-lived assets and when to recognize such an impairment.
The adoption of the new standard is not expected to have a material impact on
the Company's financial position or results from operations.
CERTAIN KNOWN EVENTS, TRENDS, UNCERTAINTIES AND RISK FACTORS
Petrochemical Raw Material Prices and Availability. For each of the
Company's petrochemical products, the cost of raw materials and utilities is
far greater than all other costs of production combined. Therefore, an
adequate supply of raw materials at reasonable prices is critical to the
success of the Company's business. The Company does not produce any of its
major raw materials (benzene, ethylene, propylene, ammonia, and natural gas),
although a methanol unit was completed in August 1996 as described above.
This unit supplies the methanol required in acetic acid production.
These materials are all commodity petrochemicals and the price for each can
fluctuate widely for a variety of reasons, including changes in the
availability of these products because of major capacity additions or
significant plant operating problems. Although no assurances can be given,
the Company believes that it will continue to secure adequate supplies of all
its raw materials at acceptable prices.
Cyclical Markets for Products; Capacity Increases on Key Petrochemical
Products. The prices of the Company's petrochemical and pulp chemical
products have been cyclical and sensitive to overall supply relative to
demand and the level of general business activity. Large global capacity
additions of styrene and acrylonitrile are projected to be completed in
fiscal years 1997 and 1998. For styrene, approximately 7.2 billion pounds of
new capacity is expected, and for acrylonitrile, approximately 940 million
pounds of new capacity is expected. The Company believes that these announced
global capacity additions in styrene and acrylonitrile will result in
overcapacity for these markets in fiscal years 1997 and 1998. The resulting
impact on prices and margins began to negatively affect the Company's results
of operations negatively in the last half of fiscal 1996.
Environmental and Safety Matters. The Company's operations involve the
handling, production, transportation and disposal of materials classified as
hazardous or toxic and are extensively regulated under environmental and
health and safety laws. Operating permits which are required for the
Company's operations are subject to periodic renewal and may be revoked or
modified for cause.
At its Texas City Plant, the Company has reduced emissions of targeted
chemicals 71% from 1987 levels under the EPA's voluntary 33/50 program.
These reductions included a 95% reduction in hydrogen cyanide emissions and
an 83% reduction in benzene emissions. Additionally, the Company will
initiate appropriate actions or preventive projects necessary to insure that
the facility continues to operate in a safe and environmentally responsible
manner. No assurances can be given that the Company will not incur material
environmental expenditures associated with its facilities, operations or
products.
The Company's sodium chlorate market is sensitive to potential
environmental regulation. In general, environmental regulations support
substitution of chlorine dioxide, which is produced from sodium chlorate, for
elemental chlorine in the pulp bleaching process. Certain environmental
groups are encouraging passage of regulations which restrict the amount of
Absorbable Organic Halides (AOX) or chlorine derivatives in bleach plant
effluent. Increased substitution of chlorine dioxide for elemental chlorine
in the pulp bleaching process significantly reduces the amount of AOX and
chlorine derivatives in bleach plant effluent. As long as there is not an
outright ban on chlorine-containing compounds, regulations restricting AOX or
chlorine derivatives in bleach plant effluent should favor the use of
chlorine dioxide, thus sodium chlorate. Any significant ban on all chlorine-
containing compounds could have a material adverse effect on the Company's
financial condition and results of operations.
British Columbia has a regulation in place that would effectively eliminate
the use of chlorine dioxide in the bleaching process by the year 2002. The
pulp and paper industry is working to change this regulation and believes
26
that the ban of chlorine dioxide in the bleaching process will yield no
measurable environmental or public health benefit. The Company is not aware
of any other laws or regulations existing in North America which would
restrict the use of the product.
Legal Proceedings. The information under "Legal Proceedings" in Note 7 of
the "Notes to Consolidated Financial Statements" herein is incorporated by
reference.
High Financial Leverage. As a result of the Merger, the Company had
consolidated indebtedness of $726 million and deficiency in assets of $(272)
million at September 30, 1996. The Company's high degree of leverage could
have important consequences, including the following: (i) the ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes, if
needed, may be restricted; (ii) a substantial portion of cash flow from
operations will be dedicated to cover cash interest requirements, thereby
limiting the funds available for operations and any future business
opportunities; and (iii) the degree of leverage may make the Company more
vulnerable to a downturn in its businesses or the economy generally.
Substantial Restrictions and Covenants. The Company's debt instruments
contain numerous financial and operating covenants, including, but not
limited to, restrictions on the Company's ability to incur indebtedness, pay
dividends, create liens, sell assets, engage in certain mergers and
acquisitions and refinance existing indebtedness. These covenants may limit
the Company's ability to pursue its planned acquisition strategy. In the
event of a change of control, the Company will be required, subject to
certain conditions, to offer to purchase all outstanding Discount Notes and
Subordinated Notes, respectively, at a price equal to 101% of the Accreted
Value with respect to the Discount Notes, and 101% of the principal amount,
with respect to the Subordinated Notes, plus accrued interest. The ability of
the Company to comply with such covenants and other terms of its debt
instruments and to satisfy its other debt obligations will depend on the
future performance of the Company.
Highly Competitive Industry. The industry in which the Company operates is
highly competitive. Many of the Company's competitors, particularly in the
petrochemical industry, are larger and have substantially greater financial
resources than the Company. Among the Company's competitors are some of the
world's largest chemical companies that have their own raw material
resources. In addition, a significant portion of the Company's business is
based upon widely available technology. The entrance of new competitors into
the industry and the addition by existing competitors of new capacity may
reduce the Company's ability to maintain profit margins or its ability to
preserve its market share, or both. Such developments could have a negative
impact on the Company's ability to obtain higher profit margins, even during
periods of increased demand for the Company's products.
Dependence on Texas City Plant. All of the Company's petrochemicals,
including all of its styrene and acrylonitrile, are produced at the Texas
City Plant. Significant unscheduled downtime at the Texas City Plant due to
equipment breakdowns, interruptions in the supply of raw materials, power
failures, natural forces or any other cause, including the normal hazards
associated with the production of petrochemicals, could materially adversely
affect the Company. Although the Company maintains insurance, including
business interruption insurance, that it considers to be adequate under the
circumstances, there can be no assurance that a significant interruption in
the operation of the Texas City Plant would not have a material adverse
effect on the Company's financial condition and results of operations.
Ability to Complete Acquisitions. A significant element of the Company's
business strategy is to pursue strategic acquisitions that either expand or
complement the Company's products. The financing for such acquisitions will
likely affect the Company's capitalization. There can be no assurance that
the Company will be able to identify and make acquisitions on terms favorable
to it or that the Company will be able to obtain financing for such
acquisitions on terms the Company finds acceptable. In addition, the
Indentures and the Credit Agreement substantially limit the Company's ability
to incur additional debt to finance such acquisitions.
Long-Term Contracts and Significant Customers. The Company sells
substantial portions of its styrene and acrylonitrile production under long-
term contracts, and sells all of its acetic acid and plasticizers production
under long-term contracts with single customers. These contracts are
intended to provide some stability if demand for or prices of these products
decline significantly, but also limit the Company's ability to take full
advantage of attractive market
27
conditions during periods of higher prices for these products. During fiscal
1996, a significant portion of the Company's production from the Texas City
Plant was dedicated to multi-year contracts with Monsanto, Bayer, BP, and
BASF. Under certain market conditions, 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 the Company.
Foreign Operations, Country Risks and Exchange Rate Fluctuations.
Approximately 20% of the Company's fiscal 1996 revenues were derived from its
Canadian-based pulp chemical business and approximately 34% were derived from
export sales. International operations and exports to foreign markets are
subject to a number of special risks, including currency exchange rate
fluctuations, trade barriers, exchange controls, national and regional labor
strikes, political risks and risks of increases in duties, taxes and
governmental royalties, as well as changes in laws and policies governing
operations of foreign-based companies. In addition, earnings of foreign
subsidiaries and intercompany payments are subject to foreign income tax
rules that may reduce cash flow available to meet required debt service and
other obligations of the Company.
Since the Company derives most of its pulp chemical revenues from
production and sales by subsidiaries within Canada, the Company has organized
its subsidiary structure and its operations in part based on certain
assumptions about various Canadian tax laws, currency exchange and capital
repatriation laws and other relevant laws. While the Company believes that
such assumptions are correct, there can be no assurance that Canadian taxing
or other authorities will reach the same conclusion. If such assumptions are
incorrect, or if Canada were to change or modify such laws or the current
interpretation thereof, the Company may suffer adverse tax and financial
consequences.
A portion of the Company's expenses and sales are denominated in Canadian
dollars, and accordingly, the Company's 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 adverse tax consequences.
In addition, because a portion of the Company's sales, cost of goods sold and
other expenses are denominated in Canadian dollars, the Company has a
translation exposure to fluctuations in the Canadian dollar against the U.S.
dollar. These currency fluctuations could have a material impact on the
Company as increases in the value of the Canadian dollar have the effect of
increasing the U.S. dollar equivalent of cost of goods sold and other
expenses with respect to the Company's Canadian production facilities. The
Company enters into forward foreign exchange contracts to hedge such exposure
for periods consistent with its committed exposure, but does not engage in
currency speculation.
28
RESULTS OF OPERATIONS
The following table sets forth revenues, gross profit and operating income
for the Company's primary product groups for the years ended September 30,
1996, 1995, and 1994.
Year Ended
September 30,
1996 1995 1994
------ ------ ------
(Dollars in millions)
REVENUES:
Petrochemicals..... $ 633 $ 886 $ 578
Pulp Chemicals..... 157 144 123
----- ------ -----
$ 790 $1,030 $ 701
===== ====== =====
GROSS PROFIT:
Petrochemicals..... $ 53 $ 225 $ 58
Pulp Chemicals..... 58 47 36
----- ------ -----
$ 111 $ 272 $ 94
===== ====== =====
OPERATING INCOME:
Petrochemicals..... $ 31 $ 212 $ 37
Pulp Chemicals..... 36 31 11
----- ------ -----
$ 67 $ 243 $ 48
===== ====== =====
COMPARISON OF FISCAL 1996 TO FISCAL 1995
Revenues. Revenues for fiscal 1996 were $790 million compared to revenues
of $1.03 billion for fiscal 1995, a decrease of 23%. The decrease in
revenues resulted primarily from lower average sales prices for styrene and
acrylonitrile and lower acrylonitrile and acetic acid sales volumes, which
was partially offset by increased revenues in the pulp chemical business as a
result of higher average sodium chlorate sales prices.
Petrochemicals. For fiscal 1996, the Company's revenues from its
petrochemical business decreased 29% to $633 million when compared to fiscal
1995 primarily as a result of decreases in styrene and acrylonitrile average
sales prices and lower acrylonitrile and acetic acid sales volumes.
Styrene. Styrene revenues for fiscal 1996 decreased due to average sales
prices decreasing by approximately 41% primarily as a result of weaker market
conditions in the Far East. Fiscal 1996 sales volumes increased by
approximately 18% over fiscal 1995 when two planned shutdowns for scheduled
maintenance restricted production. The second planned shutdown also included
modernization of the styrene unit's control instrumentation with state-of-
the-art distributive control systems. The modernization project completed in
fiscal 1995 increased the Company's annual styrene production capacity to 1.7
billion pounds. The prices of styrene's major raw materials, benzene and
ethylene, were substantially lower during fiscal 1996 compared to fiscal
1995. Benzene prices were approximately 17% lower while ethylene prices were
approximately 25% lower. These decreases offset some of the decrease in
selling prices discussed above, but styrene margins still declined
substantially.
Acrylonitrile. Acrylonitrile revenues for fiscal 1996 decreased as a
result of a decline of approximately 29% in average sales prices and
approximately 11% in sales volumes. Reduced imports of acrylonitrile
derivatives by the Far East market (primarily acrylic fiber and ABS resins)
resulted in lower acrylonitrile average sales prices and sales volumes.
The Company's acrylonitrile unit operated at a reduced rate in 1996 due to
an extended shutdown for most of March 1996 for scheduled maintenance and
installation of the first phase of state-of-the-art distributive control
systems. A second phase of distributive controls was installed in October
1996. The new distributive control
29
systems are expected to result in increased efficiencies and stronger
operating fundamentals in the future. The prices of propylene and ammonia,
which are the major raw materials used to make acrylonitrile, were
approximately 23% and 22% lower, respectively, in fiscal 1996 than in fiscal
1995. These decreases helped to offset some of the lower average selling
prices discussed above, but margins still declined substantially.
Acetic Acid. Acetic acid revenues in fiscal 1996 decreased primarily as a
result of a 19% decrease in sales volumes related to a shutdown of the acetic
acid unit to expand the unit by nearly 200 million pounds annually and for
installation of new distributive control systems. The expansion of the
acetic acid unit and the related construction of the partial oxidation unit
by Praxair at the Texas City Plant were completed in June 1996. The partial
oxidation unit supplies raw materials to the Company's acetic acid unit.
Other Petrochemical Products. Revenues during fiscal 1996 from the
Company's other petrochemical products (excluding lactic acid revenues)
increased approximately 30% primarily as a result of increases in revenues
from plasticizers. The Company ceased production of lactic acid in May 1996.
In the second and third quarters of fiscal 1996, the Company wrote off the
remaining net book value of the lactic acid unit assets and expensed other
related costs resulting in a $3.7 million charge against earnings before
taxes.
Pulp Chemicals. Revenues from the Company's pulp chemical business for
fiscal 1996 increased by approximately 9% to $157 million compared to fiscal
1995 primarily as a result of an increase in sodium chlorate average sales
prices of approximately 8%, partially offset by an approximately 2% decrease
in sales volumes. Sodium chlorate experienced higher sales prices as a
result of improved demand due to increased chlorine dioxide utilization in
pulp bleaching. Royalty revenues in fiscal 1996 from installed generator
technology were $19 million, the same as fiscal 1995. In addition, the
Company received ten generator contracts including all eight contracts that
were awarded in North America during fiscal 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses for fiscal 1996 totaled $40 million,
compared to $29 million in fiscal 1995. This increase was related to an
increase in SAR expense which was paid as a part of the Merger.
Income from Operations. Income from operations for fiscal 1996 was $67
million (including merger-related expenses of $3.6 million), consisting of
$31 million from petrochemical operations and $36 million from pulp chemical
operations. This amount represented an approximately 72% decrease from
fiscal 1995, primarily as a result of weakness in the markets for styrene and
acrylonitrile discussed above, which resulted in significantly lower margins
during fiscal 1996 compared to the 1995 fiscal year. This weakness was
partially offset by higher operating income from the pulp chemical business
and other petrochemical products. In addition, the Company incurred
approximately $2 million in start-up expenses during fiscal 1996 in
connection with construction of the methanol unit.
Other Expenses. Other expenses in fiscal 1996 consist of the $3.7 million
pre-tax charge against earnings related to the write-off of the Company's
lactic acid unit assets.
Interest and Debt Related Expenses. Interest expense for fiscal 1996
decreased $1 million compared to fiscal 1995 primarily due to lower
outstanding debt for most of fiscal 1996. The Company's average interest
rate per annum increased to 10% on September 30, 1996 from 7% on September
30, 1995 primarily due to the financing in August 1996 related to the
Transaction.
Provision for Income Taxes. Provision for income taxes for fiscal 1996 was
$17 million, with an effective tax rate of 34%, compared to $75 million, with
an effective tax rate of 33% for fiscal 1995. The decrease in the provision
was primarily the result of the significant decrease in the Company's pre-tax
income to $50 million for fiscal 1996 from $228 million in fiscal 1995.
Extraordinary Item. The extraordinary item of $1.9 million relates to the
loss on early extinguishment of debt of $3.0 million (net of taxes of $1.1
million) resulting from the Transaction.
30
Net Income. Due to the factors described above, net income for fiscal 1996
was $32 million compared to $150 million for fiscal 1995.
COMPARISON OF FISCAL 1995 TO FISCAL 1994
Revenues. The Company's revenues for fiscal 1995 were $1.03 billion, an
increase of $329 million from fiscal 1994. Fiscal 1995 revenues were the
highest in Company history, achieved primarily through higher sales prices
and volumes for styrene and acrylonitrile due to improving conditions in the
commodity chemical markets in 1994 and 1995. The Company's pulp chemical
business also experienced record revenues in fiscal 1995 primarily due to
increased sales prices and volumes of sodium chlorate.
Petrochemicals. The financial performance of the Company's petrochemical
business was significantly better during fiscal 1995 than in fiscal 1994.
Petrochemical revenues increased 53% to $886 million from fiscal 1994,
primarily as a result of increased average styrene and acrylonitrile sales
prices and higher acrylonitrile sales volumes.
Styrene. Styrene revenues increased in fiscal 1995 compared to fiscal 1994
primarily because of a 64% increase in average sales prices. The styrene
unit operated at a slightly higher rate than in fiscal 1994, in spite of two
planned shutdowns for maintenance and catalyst replacement during fiscal 1995
compared to no shutdowns in the prior year. The second planned shutdown,
which occurred in the fourth quarter of fiscal 1995, also included
modernization of the styrene unit's control instrumentation with state-of-
the-art distributive control systems. The average prices for styrene's
primary raw materials, benzene and ethylene, increased approximately 5% and
40%, respectively, in fiscal 1995 compared to fiscal 1994. However, the
Company was able to increase styrene selling prices and thereby margins
through most of the fiscal year until the dramatic fall in prices and margins
in the fourth quarter of fiscal 1995.
Acrylonitrile. Acrylonitrile revenues for fiscal 1995 increased primarily
due to an increase of approximately 70% in average sales prices, peaking at
unprecedented levels in the third quarter of fiscal 1995, and an increase of
approximately 11% in sales volumes. Acrylonitrile revenues from export sales
constituted approximately 93% of the Company's total acrylonitrile revenues
and approximately 81% of its acrylonitrile production for fiscal 1995.
Almost all of the Company's domestic acrylonitrile revenues are from
conversion agreements. Average export acrylonitrile prices and margins were
significantly higher in fiscal 1995 than in fiscal 1994 as a result of the
strong demand during most of the year.
The average prices of acrylonitrile's primary raw materials, propylene and
ammonia, increased substantially in fiscal 1995 compared to fiscal 1994.
Average propylene prices were approximately 70% higher and average ammonia
prices increased by approximately 35%. However, the Company was able to
substantially improve margins for acrylonitrile during most of the year due
to increases in acrylonitrile sales prices, until the downturn in the fourth
quarter that negatively affected sales prices and margins.
Acetic Acid. Acetic acid revenues for fiscal 1995 increased approximately
24% from fiscal 1994. The increase in revenues was related to an increase in
passed through raw material costs, specifically methanol, during the period.
Other Petrochemical Products. Revenues in fiscal 1995 from plasticizers,
lactic acid, TBA and sodium cyanide decreased approximately 3% compared to
fiscal 1994. The decline was primarily attributable to lower lactic acid
revenues.
Pulp Chemicals. Revenues from the Company's pulp chemical business
increased by approximately 17% to $144 million in fiscal 1995. The increase
in revenues resulted primarily from (i) an approximately 14% increase in
sodium chlorate sales volumes, due to the substitution of chlorine dioxide
for elemental chlorine in the bleaching process, and (ii) an approximately
11% increase in average selling prices. Royalty revenues from installed
generator technology increased by approximately 15% to $19 million in fiscal
1995 as a result of higher customer operating rates and additional installed
capacity. Sales of generator technology were approximately the same in
fiscal 1995 as the previous year.
31
The increased sodium chlorate sales volumes in fiscal 1995 resulted in
increased capacity utilization, which contributed to lower per unit cost and
increased margins.
Selling, General and Administrative Expenses. The Company's SG&A expenses
in fiscal 1995 were $29 million compared to $46 million in fiscal 1994. A
$25 million decrease in the expense related to the SAR program, resulting
from an approximately 50% decrease in the number of SARs outstanding and a
decrease in the Company's stock price at the end of fiscal 1995 compared to
the end of fiscal 1994, was partially offset by a $4 million increase in
employee profit sharing, which was directly related to the Company's improved
earnings in fiscal 1995.
Income from Operations. Income from operations for fiscal 1995 was $243
million, consisting of $212 million from petrochemical operations and $31
million from pulp chemical operations. This amount represented an
approximately 406% increase from fiscal 1994. The increase was primarily the
result of strength in the markets for styrene and acrylonitrile discussed
above, which resulted in significantly higher margins and volumes during
fiscal 1995 compared to fiscal 1994.
Interest and Debt Related Expenses. Interest expense decreased $7.5
million in fiscal 1995 primarily due to the Company's repayment of $105
million of debt during the year. The Company's average interest rates
decreased to 7% per annum on September 30, 1995 from 8% per annum on
September 30, 1994 primarily due to the refinancing in April 1995.
Provision for Income Taxes. Provision for income taxes for fiscal 1995 was
$75 million, with an effective tax rate of 33%, compared to $9 million, with
an effective tax rate of 32% for fiscal 1994. The increase was primarily due
to the significant increase in the Company's pre-tax income of $228 million
for fiscal 1995 from $28 million in fiscal 1994, which was largely the result
of higher earnings from the petrochemical business.
Net Income. Due to the factors described above, net income for fiscal 1995
was $150 million compared to $19 million for fiscal 1994.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30,
--------------------------------
1996 1995 1994
-------- ----------- ---------
Revenues.................................................... $790,465 $1,030,198 $700,840
Cost of goods sold.......................................... 679,039 758,580 606,916
-------- ---------- --------
Gross profit................................................ 111,426 271,618 93,924
Selling, general and administrative expenses................ 40,305 28,856 46,150
Merger related expenses..................................... 3,633 -- --
Write-off of assets......................................... 3,706 -- --
Interest and debt related expenses, net of interest income.. 13,380 14,604 22,126
Gain on sale of assets...................................... -- -- (2,606)
-------- ---------- --------
Income before taxes and extraordinary item.................. 50,402 228,158 28,254
Provision for income taxes.................................. 16,898 75,005 9,122
-------- ---------- --------
Income before extraordinary item............................ 33,504 153,153 19,132
Extraordinary item, loss on early extinguishment of debt,
net of tax (Note 3)........................................ 1,900 3,104 --
-------- ---------- --------
Net income.................................................. $ 31,604 $ 150,049 $ 19,132
======== ========== ========
Per share data:
Income before extraordinary item............................ $ .66 $ 2.76 $ .34
Extraordinary item.......................................... .04 .06 --
-------- ---------- --------
Net income per share........................................ $ .62 $ 2.70 $ .34
======== ========== ========
The accompanying notes are an integral part of the consolidated financial
statements.
33
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
SEPTEMBER 30,
---------------------
1996 1995
---------- ---------
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 5,609 $ 30,882
Accounts receivable.................................................................. 133,399 112,102
Inventories.......................................................................... 53,720 67,867
Prepaid expenses..................................................................... 9,076 3,878
Deferred income tax benefit.......................................................... 7,214 5,622
--------- --------
Total current assets................................................................. 209,018 220,351
Property, plant and equipment, net..................................................... 365,765 309,084
Other assets........................................................................... 114,901 80,504
--------- --------
Total assets......................................................................... $ 689,684 $609,939
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable..................................................................... $ 66,562 $ 72,016
Accrued liabilities.................................................................. 53,898 55,858
Current portion of long-term debt.................................................... 11,625 17,857
--------- --------
Total current liabilities............................................................ 132,085 145,731
Long-term debt......................................................................... 714,632 103,581
Deferred income tax liability.......................................................... 46,933 40,297
Deferred credits and other liabilities................................................. 68,473 81,012
Common stock held by ESOP.............................................................. 6,500 --
Less: unearned compensation........................................................... (6,500) --
Commitments and contingencies (Note 7)
Stockholders' equity (Deficiency in assets):
Common stock, $.01 par value, 150,000 shares authorized, 10,599 shares issued and
outstanding at September 30, 1996; 60,327 shares issued, 55,674 shares outstanding
at September 30, 1995............................................................... 106 603
Additional paid-in capital........................................................... (560,077) 33,269
Retained earnings.................................................................... 306,656 275,052
Pension adjustment................................................................... -- (1,556)
Accumulated translation adjustment................................................... (19,124) (17,307)
Deferred compensation................................................................ -- (129)
--------- --------
(272,439) 289,932
Treasury stock, at cost, 4,653 shares at September 30, 1995.......................... -- (50,614)
--------- --------
Total stockholders' equity (deficiency in assets).................................... (272,439) 239,318
--------- --------
Total liabilities and stockholders' equity (deficiency in assets).................... $ 689,684 $609,939
========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
34
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
(AMOUNTS IN THOUSANDS)
COMMON STOCK ADDITIONAL ACCUMULATED
----------------------- PAID-IN RETAINED PENSION TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT ADJUSTMENT
----------- -------- ----------- -------- ------------ ------------
Balance, September 30, 1993..... 60,325 $ 603 $ 34,708 $105,871 $(1,297) $(16,184)
Net income...................... -- -- -- 19,132 -- --
Translation adjustment.......... -- -- -- -- -- (1,138)
Common stock issued............. 2 -- 6 -- -- --
Treasury stock transactions..... -- -- (1,482) -- -- --
Amortization of deferred
compensation................... -- -- -- -- -- --
Pension adjustment.............. -- -- -- -- 347 --
------- ----- --------- -------- ----------- -----------
Balance, September 30, 1994..... 60,327 603 33,232 125,003 (950) (17,322)
Net income...................... -- -- -- 150,049 -- --
Translation adjustment.......... -- -- -- -- -- 15
Treasury stock transactions..... -- -- 37 -- -- --
Amortization of deferred
compensation................... -- -- -- -- -- --
Pension adjustment.............. -- -- -- -- (606) --
------- ----- --------- -------- ----------- -----------
Balance, September 30, 1995..... 60,327 603 33,269 275,052 (1,556) (17,307)
Net income...................... -- -- -- 31,604 -- --
Redemption of common stock...... (50,690) (507) (616,892) -- -- --
Common stock issued in
Transaction................... 5,349 54 64,084 -- -- --
Employee stock purchase......... 250 2 3,000 -- -- --
Stock warrants.................. -- -- 6,900 -- -- --
Translation adjustment.......... -- -- -- -- -- (1,817)
Treasury stock transactions..... (4,637) (46) (50,438) -- -- --
Amortization of deferred
compensation.................. -- -- -- -- -- --
Pension adjustment.............. -- -- -- -- 1,556 --
------- ----- --------- -------- ----------- -----------
Balance, September 30, 1996..... 10,599 $ 106 $(560,077) $306,656 $ -- $(19,124)
======= ===== ========= ======== =========== ===========
DEFERRED TREASURY
COMPENSATION STOCK
------------- ---------
Balance, September 30, 1993..... $ (164) $ (53,201)
Net income...................... -- --
Translation adjustment.......... -- --
Common stock issued............. -- --
Treasury stock transactions..... -- 2,437
Amortization of deferred
compensation................... 96 --
Pension adjustment.............. -- --
------- ---------
Balance, September 30, 1994..... (68) (50,764)
Net income...................... -- --
Translation adjustment.......... -- --
Treasury stock transactions..... -- 150
Amortization of deferred
compensation................... (61) --
Pension adjustment.............. -- --
------- ---------
Balance, September 30, 1995..... (129) (50,614)
Net income...................... -- --
Redemption of common stock...... -- --
Common stock issued in
Transaction................... -- --
Employee stock purchase......... -- --
Stock warrants.................. -- --
Translation adjustment.......... -- --
Treasury stock transactions..... -- 50,614
Amortization of deferred
compensation.................. 129 --
Pension adjustment.............. -- --
------- ---------
Balance, September 30, 1996..... $ -- $ --
======= =========
The accompanying notes are an integral part of the consolidated financial
statements.
35
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
------------------------------------
1996 1995 1994
---------- ------------ ----------
Cash flows from operating activities:
Cash received from customers.......................................... $ 874,253 $1,159,192 $ 709,026
Miscellaneous cash receipts........................................... 17,758 14,007 10,618
Cash paid to suppliers and employees.................................. (804,414) (893,324) (614,856)
Interest paid......................................................... (9,492) (14,811) (20,443)
Interest received..................................................... 1,114 2,540 60
Income taxes paid..................................................... (15,618) (75,766) (9,156)
--------- ---------- ---------
Net cash provided by operating activities............................... 63,601 191,838 75,249
Cash flows from investing activities:
Capital expenditures.................................................. (95,957) (53,962) (12,343)
Proceeds from sale of assets.......................................... - - 2,606
--------- ---------- ---------
Net cash used in investing activities................................... (95,957) (53,962) (9,737)
Cash flows from financing activities:
Proceeds from long-term debt.......................................... 800,350 217,000 -
Repayment of long-term debt........................................... (196,285) (322,282) (65,517)
Redemption of common stock............................................ (616,160) - -
Purchase of other equity interests.................................... (14,587) - -
Issuance of common stock.............................................. 64,040 - -
Sale of warrants...................................................... 6,900 - -
Debt issuance costs................................................... (33,070) - -
Other merger fees..................................................... (3,709) - -
Other................................................................. (289) (3,735) 643
--------- ---------- ---------
Net cash provided by (used in) financing activities..................... 7,190 (109,017) (64,874)
Effect of U.S./Canadian exchange rate on cash........................... (107) 10 23
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents.................... (25,273) 28,869 661
Cash and cash equivalents - beginning of year........................... 30,882 2,013 1,352
--------- ---------- ---------
Cash and cash equivalents - end of year................................. $ 5,609 $ 30,882 $ 2,013
========= ========== =========
Reconciliation of net income to cash provided by operating activities:
Net income.............................................................. $ 31,604 $ 150,049 $ 19,132
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization......................................... 42,702 43,033 40,953
Loss (gain) on disposal/write off of assets........................... 3,706 - (2,606)
Extraordinary item.................................................... 1,900 3,104 -
Deferred tax expense (benefit)........................................ 4,172 4,280 (4,817)
Accrued compensation including SARs................................... 8,984 (2,638) 21,941
Merger related expenses............................................... 3,633 - -
Discount notes amortization........................................... 1,656 - -
Other................................................................. (3,766) 1,058 1,426
Change in assets/liabilities:
Accounts receivable................................................... (18,297) 22,540 (52,304)
Inventories........................................................... 14,147 1,921 (9,493)
Prepaid expenses...................................................... (5,173) (1,183) 2,649
Other assets.......................................................... (8,900) (4,075) (1,437)
Accounts payable...................................................... (5,454) (4,117) 34,083
Accrued liabilities................................................... (7,018) (21,447) 17,604
Other liabilities..................................................... (295) (687) 8,118
--------- ---------- ---------
Net cash provided by operating activities............................... $ 63,601 $ 191,838 $ 75,249
========= ========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
36
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
MAY 14, 1996
(DATE OF INCEPTION)
TO SEPTEMBER 30, 1996/1/
-------------------------
Revenues...................................... $83,410
Cost of goods sold............................ 83,047
-------
Gross profit.................................. 363
Selling, general and administrative expenses.. 3,426
Interest and debt related expenses............ 1,615
Interest income from parent................... (5,236)
-------
Income before taxes........................... 558
Provision for income taxes.................... 384
-------
Net Income.................................... $ 174
=======
/ 1/See Note 1 of Notes to Consolidated Financial Statements for a
discussion of merger activities and related financing. Prior to August 21,
1996, Chemicals had no operating activities, other than those related to
merger activities.
The accompanying notes are an integral part of the consolidated financial
statements.
37
STERLING CHEMICALS, INC.
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 5,581
Accounts receivable................................................ 135,635
Inventories........................................................ 53,720
Prepaid expenses................................................... 9,076
Deferred income tax benefit........................................ 7,214
---------
Total current assets............................................... 211,226
Property, plant and equipment, net................................... 365,765
Other assets......................................................... 108,460
---------
Total assets....................................................... $ 685,451
=========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable................................................... $ 66,562
Accrued liabilities................................................ 55,740
Current portion of long-term debt.................................. 11,625
---------
Total current liabilities.......................................... 133,927
Long-term debt....................................................... 619,875
Deferred income tax liability........................................ 47,478
Deferred credits and other liabilities............................... 68,473
Commitments and contingencies (Note 7)
Stockholders' equity (deficiency in assets):
Common stock, $.01 par value....................................... -
Additional paid-in capital......................................... (165,352)
Retained earnings.................................................. 174
Accumulated translation adjustment................................. (19,124)
---------
Total stockholders' equity (deficiency in assets).................. (184,302)
---------
Total liabilities and stockholders' equity (deficiency in assets).. $ 685,451
=========
The accompanying notes are an integral part of the consolidated financial
statements.
38
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
(DOLLARS IN THOUSANDS)
ADDITIONAL ACCUMULATED
COMMON STOCK PAID-IN RETAINED PENSION TRANSLATION
--------------
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT ADJUSTMENT
------ ------ ----------- -------- ----------- ------------
Balance, May 14,1996 - $ - $ - $ - $ - $ -
Common stock issued.......... 1 - 1 - - -
Capital transfer, net........ - - (165,353) - (1,556) (20,194)
Net income................... - - - 174 - -
Pension adjustment........... - - - - 1,556 -
Translation adjustment....... - - - - - 1,070
------ ------ --------- -------- ---------- --------
Balance, September 30, 1996.. 1 $ - $(165,352) $ 174 $ - $(19,124)
====== ====== ========= ======== ========== ========
39
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
MAY 14, 1996
(DATE OF INCEPTION)
TO SEPTEMBER 30, 1996/1/
-------------------------
Cash flows from operating activities:
Cash received from customers............................... $ 102,900
Miscellaneous cash receipts................................ 1,749
Cash paid to suppliers and employees....................... (92,800)
Interest paid.............................................. (3,129)
Interest received.......................................... 474
Income taxes paid.......................................... (4,950)
---------
Net cash provided by operating activities.................... 4,244
Cash flows from investing activities:
Capital expenditures....................................... (6,398)
---------
Net cash used in investing activities........................ (6,398)
Cash flows from financing activities:
Proceeds from long-term debt............................... 637,900
Debt issuance costs........................................ (27,939)
Distribution from parent................................... (609,961)
Repayment of long-term debt................................ (6,400)
Distribution to parent..................................... 14,165
---------
Net cash provided by financing activities.................... 7,765
Effect of U.S./Canadian exchange rate on cash................ (30)
---------
Net increase in cash and cash equivalents.................... 5,581
Cash and cash equivalents - beginning of period.............. -
---------
Cash and cash equivalents - end of year...................... $ 5,581
=========
Reconciliation of Net Income to
Cash Provided by Operating Activities
Net income................................................... $ 174
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 4,801
Deferred tax expense....................................... 1,457
Other...................................................... (511)
Change in assets/liabilities:
Accounts receivable........................................ 164
Inventories................................................ (468)
Prepaid expenses........................................... (2,428)
Other assets............................................... 784
Accounts payable........................................... 7,025
Accrued liabilities........................................ (4,460)
Other liabilities.......................................... (2,294)
---------
Net cash provided by operating activities.................... $ 4,244
=========
/1/See Note 1 of Notes to Consolidated Financial Statements for a
discussion of merger activities and related financing. Prior to August 21,
1996, Chemicals had no operating activities, other than those related to
merger activities.
The accompanying notes are an integral part of the consolidated financial
statements.
40
STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. MERGER ACTIVITIES
Sterling Chemicals, Inc. (prior to the Merger, "Sterling") and STX
Acquisition Corp. ("STX Acquisition"), a Delaware Corporation formed in April
1996 by an investor group led by The Sterling Group, Inc. ("TSG") and the
Unicorn Group L.L.C. ("Unicorn"), entered into an Amended and Restated
Agreement and Plan of Merger dated April 24, 1996 (the "Merger Agreement").
On August 20, 1996, the Merger Agreement was approved by a majority of the
shares outstanding, and on August 21, 1996, STX Acquisition merged with and
into Sterling, changing its name to Sterling Chemicals Holdings, Inc.
("Holdings"), and continuing as the surviving corporation (the "Merger"). In
connection with the Merger, Holdings transferred all of its operating assets
and liabilities (excluding the Discount Notes) to a wholly owned subsidiary,
STX Chemicals Corp., which at the time of the Merger, changed its name to
Sterling Chemicals, Inc. and continued as the surviving company (after the
Merger, "Chemicals"). Holdings has no direct subsidiaries other than
Chemicals. As used in these notes, the term "Company" refers to Sterling and
its subsidiaries prior to the consummation of the Merger and, following the
Merger, to Holdings and its subsidiaries, including Chemicals.
Each share of the Company's common stock outstanding immediately prior to
the Merger was converted (at the election of the holder thereof) into either
$12.00 cash or the right to retain shares of the Company's common stock
("Rollover Shares"), with the aggregate number of Rollover Shares limited to
5.0 million. As a result of the Merger, on August 21, 1996, the former STX
Acquisition stockholders held approximately 5.3 million shares (49%),
stockholders with Rollover Shares held approximately 5.0 million shares (46%)
and the Company's newly formed ESOP held approximately 542,000 shares (5%) of
the Company's outstanding common stock.
The Merger was financed by the proceeds of bank term loans of $356.5
million, including an ESOP term loan of $6.5 million, amounts drawn against a
revolving credit facility of $6.4 million, an offering of $275.0 million
Subordinated Notes, an offering of $191.8 million (initial proceeds of $100
million) representing 191,751 Units, with each unit consisting of one
Discount Note and one Warrant to purchase three shares of Holding's common
stock for $0.01 per share beginning in August 1997, equity raised by STX
Acquisition of approximately $70.7 million, and cash on hand of $10.3
million. These proceeds were used to redeem Sterling's common stock other
than Rollover Shares ($608.3 million), purchase other equity interests -
primarily stock appreciation rights ("SARs") ($14.6 million), repay debt
outstanding prior to the Merger ($142.7 million), loan monies to the new ESOP
($6.5 million) and pay fees and expenses ($46.8 million).
The Company has accounted for the Merger and related financing as a series
of debt and equity transactions representing a recapitalization.
Accordingly, the historical basis of the Company's assets and liabilities
have not been impacted by the Merger and related financing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company operates petrochemical facilities in Texas City, Texas, and
pulp chemical facilities throughout Canada. Construction of a new sodium
chlorate plant is nearing completion in Valdosta, Georgia. 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
41
investment in a cogeneration joint venture of a 50% equity interest is
accounted for under the equity method with the Company's share of earnings
from the joint venture recorded as a reduction of cost of goods sold.
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 is accounted for under
the equity method with the Company's share of earnings from the joint venture
recorded as a reduction of cost of goods sold.
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 determined
on the first-in, first-out ("FIFO") 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 1996,
1995 and 1994 was $4.1 million, $1.0 million and $145,000, respectively.
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.
DEBT ISSUE COSTS
Debt issue costs relating to long-term debt are amortized using the
effective interest method and are included in other assets.
42
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 petrochemical products. The Company recognizes revenue from sales in
the open market, raw material conversion agreements, and long-term supply
contracts as 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.
FOREIGN EXCHANGE
Assets and liabilities denominated in Canadian dollars are translated into
U.S. 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
Income per share for fiscal years 1996, 1995 and 1994 has been computed
using a weighted average shares outstanding of 50,700,000, 55,674,000, and
55,606,000, respectively. The weighted average shares outstanding used in
the computation of earnings per share are net of the shares held by the ESOP
that are not allocated to the employees.
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.
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 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.
43
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. 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 or stockholders' equity.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
SEPTEMBER 30,
---------------------
1996 1995
---------- ---------
(Dollars in Thousands)
Inventories:
Finished products...................... $ 31,868 $ 44,802
Raw materials.......................... 9,499 16,506
--------- ---------
Inventories at FIFO cost................. 41,367 61,308
--------- ---------
Inventories under exchange agreements.. 722 (4,783)
Stores and supplies.................... 11,631 11,342
--------- ---------
$ 53,720 $ 67,867
========= =========
Property, plant and equipment:
Land................................... $ 11,720 $ 11,775
Buildings.............................. 27,448 26,955
Plant and equipment.................... 468,647 422,479
Construction in progress............... 85,490 49,782
Less: accumulated depreciation........ (227,540) (201,907)
--------- ---------
$ 365,765 $ 309,084
========= =========
Other assets:
Patents and technology, net............ $ 34,902 $ 40,971
Estimated insurance recoveries......... 15,600 10,315
Intangible pension asset............... -- 3,733
Deferred catalyst...................... 8,288 4,357
Debt issue costs....................... 34,025 3,370
Other.................................. 22,086 17,758
--------- ---------
$ 114,901 $ 80,504
========= =========
Accrued liabilities:
Repairs................................ $ 11,417 $ 9,021
Income taxes........................... 1,190 2,250
Interest............................... 3,869 574
Estimated contract adjustments......... -- 1,536
Property taxes......................... 6,772 6,179
Litigation contingency................. -- 6,000
Accrued compensation................... 5,646 10,019
Other.................................. 25,004 20,279
--------- ---------
$ 53,898 $ 55,858
========= =========
Deferred credits and other liabilities:
Deferred revenue....................... $ 17,720 $ 21,969
Accrued postretirement benefits........ 27,143 24,722
Additional minimum pension liability... -- 6,127
Accrued compensation................... -- 2,922
Litigation contingency................. 16,000 10,315
Other.................................. 7,610 14,957
--------- ---------
$ 68,473 $ 81,012
========= =========
44
4. LONG-TERM DEBT:
Long-term debt consisted of the following:
SEPTEMBER 30,
-------------------
1996 1995
-------- --------
(Dollars in Thousands)
Revolving credit facilities................... $ -- $ 902
Term loans.................................... 350,000 120,536
ESOP term loan................................ 6,500 --
Subordinated notes............................ 275,000 --
Discount notes................................ 94,757 --
-------- --------
Total debt outstanding...................... 726,257 121,438
======== ========
Less:
Current maturities.......................... (11,625) (17,857)
-------- --------
Total long-term debt.......................... $714,632 $103,581
======== ========
TERM LOANS, REVOLVER AND ESOP LOANS
In connection with the Merger financing, Chemicals entered into a credit
agreement (the "Credit Agreement") with Texas Commerce Bank National
Association, as agent bank for a syndicate of lenders, and Credit Suisse and
Chase Securities, Inc. as co-arrangers. Funding under the Credit Agreement
occurred August 21, 1996, upon the consummation of the Merger. The Credit
Agreement provides for facilities consisting of a six and one-half year
revolving credit facility providing for up to $100 million (subject to a
monthly borrowing base calculation) in revolving loans (the "Revolver"), a
term loan facility consisting of a six and one-half year $200 million Tranche
A term loan and an eight-year $150 million Tranche B term loan (the "Term
Loans"), and a four-year $6.5 million ESOP Term Loan (the "ESOP Loan").
The Term Loans, the ESOP Loan and the Revolver borrowings bear interest, at
Chemicals' option, at an annual rate of either the Eurodollar Rate or the
Base Rate plus an Applicable Margin ranging from 0% to 3%, depending upon the
Company's leverage ratio. The Base Rate is equal to the greater of the Prime
Rate as announced from time to time by the agent bank, the Federal Funds
Rate plus 1/2%, or the Base CD Rate plus 1%. The Credit Agreement also
requires Chemicals to pay a commitment fee in the amounts of 3/8% or 1/2%
of the unused commitment under the Revolver depending on the Company's
leverage ratio (as defined in the Credit Agreement).
The Credit Agreement requires the principal amount of the Term Loans to be
amortized in quarterly installments beginning with the fiscal quarter ending
December 31, 1996, plus additional mandatory prepayments based upon
consolidated Excess Cash Flow (as defined in the Credit Agreement). The ESOP
Loan will be amortized in 16 equal quarterly installments of $406,250 during
its four-year term. Advances under the Revolver will be 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.
Chemicals' obligations under the Credit Agreement are secured by a first
priority lien on the capital stock of Chemicals' domestic subsidiaries, 65%
of the capital stock of its foreign subsidiaries and substantially all of the
domestic assets of Chemicals, including without limitation, accounts
receivable, inventory, intangibles and fixed assets and assignments of
certain material leases, licenses, and contracts. In addition, the Credit
Agreement is secured by a pledge by Holdings of all of the capital stock of
Chemicals.
The Credit Agreement contains numerous financial and operating covenants,
including, but not limited to, restrictions on Chemicals' ability to incur
indebtedness, pay dividends, create liens, sell assets, engage in mergers and
acquisitions, and refinance existing indebtedness. The Credit Agreement also
requires Chemicals to satisfy certain financial covenants and tests. As a
result of weaker than expected market conditions in styrene and acrylonitrile
during the first quarter of fiscal 1997 and costs that were expensed related
to the Merger in the fourth quarter of fiscal 1996, the Company may not be in
compliance with its leverage ratio under the Credit Agreement as of the end
of the first quarter of fiscal 1997. The Company intends to obtain a waiver
to correct any noncompliance.
45
The Company expects to be in compliance with all other coverage ratios under
the Credit Agreement as of December 31, 1996, but there can be no assurance
in this regard nor can there be any assurance that the requisite waiver will
be obtained with respect to the leverage ratio covenant. In addition, the
Credit Agreement includes various circumstances that will constitute, upon
occurrence and subject in certain cases to notice and grace periods, an event
of default thereunder.
At September 30, 1996, Chemicals had indebtedness of $350 million under the
Term Loans and $6.5 million under the ESOP Loan. Additionally, the Company
had $470,000 in letters of credit under the Revolver, thereby reducing the
available commitment to $99.5 million. Available credit under the Revolver
for loans and letters of credit is subject to a monthly borrowing base and at
September 30, 1996, the borrowing base did not limit such available credit.
At September 30, 1995, indebtedness under former credit agreements dated
April 1995 totaled $120.5 million in term loans and $902,000 drawn against a
$150 million revolving credit facility and a Cdn $20 million revolving credit
facility. All amounts outstanding under these agreements were repaid in the
current year as part of the Merger financing and such agreements were
terminated and replaced with the new Credit Agreement upon consummation of
the Merger financing. Interest under the former credit agreements was based
on the Base Rate (the greater of the Prime Rate or the Federal Funds Rate
plus 1/2%) or the Eurodollar Rate (the Eurodollar Interbank Rate plus a
margin ranging from 0.65% to 1 1/4%). The variable rate on the term loan
under the former credit agreements was fixed at approximately 7% per annum
with an interest swap agreement.
On September 28, 1995, Chemicals entered into a seven-year credit agreement
(the "Chlorate Plant Credit Agreement") to finance the construction of the
Georgia sodium chlorate plant. The borrowing margins under the Chlorate
Plant Credit Agreement were similar to those contained in the former credit
agreements. During fiscal 1996, Chemicals borrowed $39 million under this
agreement to finance the construction of the Georgia sodium chlorate plant.
The entire amount was repaid as a part of the Merger financing.
In connection with arranging the Credit Agreement, the Company incurred
fees of approximately $16 million which are being amortized over the term of
the loans under the effective interest method. Unamortized debt issue costs
related to the retired loans of approximately $3 million, before tax effect
of $1.1 million, were expensed in August 1996 and recorded as an
extraordinary loss from early extinguishment of debt.
DISCOUNT NOTES AND SUBORDINATED NOTES
As part of the Merger financing, Chemicals also issued $275 million in
aggregate principal amount of senior subordinated notes (the "Subordinated
Notes") maturing on August 15, 2006 and Holdings issued $191.8 million ($100
million initial proceeds) representing 191,751 Units, with each Unit
consisting of one 13 1/2% senior subordinated discount note due 2008 (the
"Discount Notes") and one warrant to purchase three shares of Holding's
common stock for $.01 per share (the "Warrants").
The Subordinated 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 Discount 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%. Commencing in 2002, interest will be payable semi-annually on
February 15 and August 15 of each year until maturity.
The Subordinated Notes may not be redeemed by Chemicals prior to August 15,
2001, and from thereon through August 15, 2004, the Subordinated Notes may be
redeemed at a premium varying between 105.875% to 101.958%. Subsequent to
August 15, 2004, Chemicals may redeem the Subordinated Notes at their face
value plus accrued interest. Prior to August 15, 1999, Chemicals may redeem
in the aggregate up to 35% of the original principal amount of the
Subordinated Notes with the proceeds of one or more public equity offerings
following which there is a public market. Such redemptions may be made at a
redemption price of 111 3/4% of the face value plus accrued interest to the
redemption date. After such redemption, at least $178.8 million aggregate
principal amount of the Subordinated Notes must remain outstanding.
46
The Discount Notes may not be redeemed by Holdings prior to August 15,
2001, and from thereon through August 15, 2006, the Discount Notes may be
redeemed at a premium varying between 106.75% to 101.35%. Subsequent to
August 15, 2006, the Company may redeem the Discount Notes at their Accreted
Value (as defined in the indenture) plus accrued interest. Prior to August
15, 1999, Holdings may redeem in the aggregate up to 35% of the Accreted
Value of the Discount Notes with the proceeds of one or more public equity
offerings following which there is a public market. Such redemptions may be
made at a redemption price of 113 1/2% of the face value plus accrued
interest to the redemption date. After such redemption, at least $124.6
million aggregate principal amount of the Discount Notes must remain
outstanding.
The indentures for both Subordinated Notes and Discount Notes 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 includes
various circumstances that will constitute, upon occurrence and subject in
certain cases to notice and grace periods, an event of default thereunder.
The Credit Agreement and the indenture for the Subordinated Notes 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 1997 to approximately $1.6 million, plus any amounts
due to Holdings from Chemicals under the intercompany tax sharing agreement.
As of September 30, 1996, Chemicals had a deficiency in net assets of $184.3
million.
DEBT MATURITIES
The estimated remaining principal payments on the outstanding Term Loans,
Revolver, and ESOP Loan are as follows:
YEAR ENDING PRINCIPAL
SEPTEMBER 30, PAYMENTS
------------- ---------
(Dollars in Thousands)
1997...................................... $ 11,625
1998...................................... 26,625
1999...................................... 26,625
2000...................................... 31,625
2001...................................... 40,000
Thereafter................................ 220,000
--------
Total Term Loans, Revolver and ESOP Loan.. $356,500
========
5. INCOME TAXES:
A reconciliation of federal statutory income taxes to the Company's
effective tax provision (benefit) before extraordinary item follows:
YEAR ENDED SEPTEMBER 30,
---------------------------
1996 1995 1994
-------- -------- -------
(Dollars in Thousands)
Provision for federal income tax at the statutory rate.. $17,641 $79,855 $9,772
Foreign sales corporation............................... (700) (7,991) --
State and foreign income taxes.......................... 1,529 2,862 90
Estimated income tax settlement and other............... (1,572) 279 (740)
------- ------- ------
Effective tax provision................................. $16,898 $75,005 $9,122
======= ======= ======
47
The provision (benefit) for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30,
---------------------------
1996 1995 1994
-------- ------- --------
(Dollars in Thousands)
From operations:
Current federal.... $12,084 $67,393 $18,618
Deferred federal... (3,249) 1,075 (7,809)
Deferred foreign... 7,421 3,489 (1,687)
Current state...... 642 2,947 --
Deferred state..... 101 --
------- ------- -------
Total tax provision.. $16,898 $75,005 $ 9,122
======= ======= =======
The components of the Company's deferred income tax assets and liabilities
are summarized below:
SEPTEMBER 30,
----------------------
1996 1995
---------- ----------
(Dollars in Thousands)
Assets:
Accrued liabilities......................... $10,348 $10,475
Accrued postretirement cost................. 9,544 8,719
Tax loss and credit carryforward and other.. 5,817 7,470
------- -------
Total deferred tax assets................... 25,709 26,664
------- -------
Less: current deferred income tax benefit.. 7,214 5,622
------- -------
Noncurrent deferred tax assets.............. $18,495 $21,042
======= =======
Liabilities:
Property, plant and equipment............... $61,304 $57,466
Accrued pension cost........................ 2,525 2,471
Other....................................... 1,599 1,402
------- -------
Total deferred tax liabilities.............. $65,428 $61,339
------- -------
Net deferred tax liability.................. $46,933 $40,297
======= =======
The Company has approximately Cdn. $13.2 million in Canadian tax loss
carryforwards which will expire from 1999 through 2001 and approximately Cdn.
$15.1 million in Canadian tax credit carryforwards which will expire from
2000 through 2004.
6. 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.
48
The Company has recorded its additional minimum liability in accordance
with Statement of Financial Accounting Standards No. 87 "Employers'
Accounting for Pensions." In recognizing the additional pension liability at
September 30, 1995, the Company recorded a liability of $6.1 million, an
intangible asset of $3.7 million, which is included with other assets, and a
reduction of stockholders' equity of $1.6 million, net of deferred tax of
$838,000. There were no additional pension liabilities to recognize at
September 30, 1996.
The components of pension expense for the years ended September 30, 1996,
1995 and 1994 were as follows:
1996 1995 1994
-------- -------- -------
(Dollars in Thousands)
Service cost (for benefits earned during the period)....................... $ 3,664 $ 3,288 $ 3,386
Interest cost on projected benefit obligation.............................. 5,044 4,471 3,891
Actual return on plan assets and contributions............................. (6,001) (5,825) 617
Deferral of asset gain (loss).............................................. 1,050 1,909 (3,997)
Net amortization of unrecognized amounts................................... 926 871 848
------- -------- -------
Pension expense............................................................ $ 4,683 $ 4,714 $ 4,745
======= ======== =======
Assumptions used in determining the projected benefit obligation and
pension cost for the periods were as follows:
FISCAL YEAR
-----------------------------------
1996 1995 1994
------- -------- -------
Discount rates............................................................. 7.75% 7.5% 8.0%
Rates of increase in salary compensation level............................. 5.5% 5.5% 5.5%
Expected long-term rate of return on assets................................ 9.0% 9.0% 9.0%
The funded status of the Company's pension plans for which assets exceed
accumulated benefits and plans for which accumulated benefits exceed
assets as of the actuarial valuation dates of August 31, 1996 and 1995
were as follows:
1996 1995
------------------------- -------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
(Dollars in Thousands)
Actuarial present value of benefits based on service
to date and present pay levels:
Vested benefit obligation.................................................. $52,053 $ 525 $ 26,222 $21,743
Non-vested benefit obligation.............................................. 2,064 2 1,029 1,293
Accumulated benefit obligation............................................. 54,117 527 27,251 23,036
Plan assets at fair value.................................................. 65,443 -- 33,540 21,134
Plan assets in excess of (less than) accumulated
benefit obligation........................................................ 11,326 (527) 6,289 (1,902)
Additional amounts related to projected salary
increases................................................................. 16,568 177 16,431 658
Plan assets less than total projected benefit
obligation................................................................ (5,242) (704) (10,142) (2,560)
Unrecognized net (gain) loss resulting from plan
experience and changes in actuarial assumptions........................... 3,688 (107) 5,995 2,579
Unrecognized prior service cost............................................ 3,376 -- 2 3,689
Unrecognized transition obligation......................................... 2,486 7 2,716 156
Prepaid (accrued) pension cost before additional
minimum liability......................................................... 4,308 (804) (1,429) 3,864
Additional minimum liability............................................... -- -- -- (6,127)
Total prepaid (accrued) pension obligation................................. $ 4,308 $ (804) $ (1,429) $(2,263)
49
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 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 U.S. employees are provided for under a contributory,
comprehensive plan while all other 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 U.S. employees,
postretirement medical plan deductibles are assumed to increase at the rate
of the long-term consumer price index. The components of postretirement
benefits cost other than pensions for the years ended September 30, 1996,
1995 and 1994 were as follows:
1996 1995 1994
------ ------- -------
(Dollars in Thousands)
Service cost (for benefits earned during the period).. $1,155 $1,084 $1,064
Interest cost on projected benefit obligation......... 1,985 1,835 1,688
Amortization of plan amendments....................... 243 29 29
------ ------ ------
$3,383 $2,948 $2,781
====== ====== ======
Actuarial assumptions used to determine fiscal years 1996, 1995 and 1994
costs and benefit obligations for postretirement benefit plans other than
pensions include an average discount rate of 7.5% and an average rate of
future increases in benefit compensation of 5.5%. The assumed composite rate
of future increases in per capita cost of health care benefits (health care
cost trend rate) was 7.8% for fiscal 1996, exclusive of demographic changes,
decreasing gradually to 5.5% by the year 2028.
These trend rates reflect current cost performance and the Company's
expectation that future rates will decline. Increasing the health care cost
trend rate by one percentage point would increase the accumulated
postretirement benefit obligation by $1.5 million and would increase annual
aggregate service and interest costs by $187,000.
The following sets forth the plan's funded status reconciled with amounts
reported in the Company's consolidated balance sheet at September 30, 1996
and 1995.
Accumulated postretirement benefit obligation (APBO):
1996 1995
----------- -----------
(Dollars in Thousands)
Retirees.................................. $ 7,896 $ 7,315
Fully eligible active plan participants... 8,301 7,690
Other active plan participants............ 12,906 11,956
------- -------
Total APBO.............................. 29,103 26,961
Plan assets at fair value................. -- --
Unrecognized loss......................... (1,737) (1,987)
Unrecognized prior service cost........... (223) (252)
------- -------
Accrued postretirement benefit liability.. $27,143 $24,722
======= =======
POSTEMPLOYMENT BENEFITS
During the first quarter of fiscal 1993, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits" ("SFAS 112"). SFAS 112 requires
accrual accounting for benefits provided to former or inactive employees
after employment but before retirement. The Company implemented the
provisions of SFAS 112 in fiscal 1995 and the effect of adoption on the
Company's financial position and results of operations was not material.
50
EMPLOYEE STOCK PURCHASE PLAN 250,000 SHARES
In fiscal 1996, the Company established the 1996 Employee Stock Purchase
Plan. This plan authorized up to 250,000 shares of common stock to be issued
to key employees and management at an issue price of $12 per share. This
plan became effective as of September 19, 1996 and terminated on September
30, 1996. All authorized shares were issued by the end of fiscal 1996.
EMPLOYEE STOCK OWNERSHIP TRUST
The original Employee Stock Ownership Trust ("old ESOT") was formed to
invest primarily in the Company's common stock and includes only participants
contributing to the Company's Savings and Investment Plan (the "Savings
Plan"). The Company's contribution to the old ESOT was 60% of the
participant's Savings Plan contributions to the extent that such
participant's contributions did not exceed 7.5% of the employee's eligible
earnings. The Company's contributions were subject to a 20% per year vesting
schedule commencing after one year of service. The Company's contributions
to the old ESOT for the years ended September 30, 1996, 1995 and 1994 were
$1.7 million per year.
An application for determination has been filed with the Internal Revenue
Service to terminate the old ESOT and distribute assets to participants.
In connection with the Merger, a new Employee Stock Ownership Trust ("new
ESOT") was established which will cover substantially all employees. The
new ESOT primarily invests in shares of Holdings' common stock and has
borrowed $6.5 million from Chemicals pursuant to the Chemicals ESOP Loan to
purchase approximately 542,000 shares of Holdings' common stock. As more
fully described in Note 4, the 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 has been pledged as security for the ESOP Loan and such shares will be
released and allocated to the ESOT participants' account 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.
Allocations will be made annually to participants.
SAVINGS AND INVESTMENT PLAN
The Savings Plan covers substantially all 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, as defined in Section 414(q) of the Code. A participant's
contributions become distributable upon the termination of his or her
employment.
PROFIT SHARING PLANS
The Company is currently planning the establishment of new profit sharing
plans for the benefit of salaried and hourly employees meeting certain
eligibility requirements. Under the Company's previous profit sharing plans,
expense for the years ended September 30, 1996, 1995 and 1994 was $2.8
million, $13.0 million and $3.8 million, respectively.
51
OMNIBUS STOCK AND INCENTIVE PLAN
The Company had an Omnibus Stock and Incentive Plan ("Omnibus Plan"), under
which the Company could grant to key employees incentive and nonincentive
stock options, stock appreciation rights, restricted stock, performance units
and performance shares. The terms and amounts of the awards were determined
by the Compensation Committee of the Board of Directors. Upon a change of
control of the Company, all awards granted under the plan were to become
fully vested and all performance based awards were to be paid at the higher
of performance goals or actual performance to date. 3,000,000 shares of the
Company's stock were reserved under the plan when it was established. At
September 30, 1995, 263,000 shares had been issued.
In fiscal 1993, the Company granted SARs to certain key employees and
directors. Total expense (benefit) is determined based on 3.6 million SARs
granted, the vesting period (five years beginning September 1992) and the
appreciation of the Company's stock price above $4 per share, which was the
fair market value of the Company's common stock on the date of grant of the
SARs. In October 1994, the Company amended the SAR program by modifying the
vesting periods and limiting the amount of appreciation for each SAR during
each vesting period, thereby limiting the Company's aggregate future
expenses. The Company recorded expense (benefit) for the years ended
September 30, 1996, 1995 and 1994 of 8.5 million, $(2.8) million and $21.8
million, respectively, and paid $8.3 million in October 1994, $5.8 million in
September 1995 and $13.8 million in August 1996 pursuant to the SARs, as
amended. The expense (benefit) for the SARs is included in selling, general
and administrative expenses in the Company's income statement.
In fiscal 1995, the Company granted 82,500 stock options to certain
officers of the Company with an exercise price of $13.50 per share. The
options were exercisable from the third through the tenth anniversary of the
date of the grant. All existing stock options were terminated in connection
with the Merger.
Upon consummation of the Merger, the Omnibus Plan was terminated. However,
the Company is expected to establish a new stock option plan.
7. 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 and sodium cyanide, each to one customer. The Company also has various
sales and conversion agreements which dedicate significant portions of the
Company's production of styrene monomer and acrylonitrile to various
customers. 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, 1996 are as
follows: fiscal 1997 -- $2.5 million; fiscal 1998 -- $2.4 million; fiscal
1999 -- $2.2 million; fiscal 2000 -- $2.1 million; fiscal 2001 -- $1.3
million; and $4.9 million thereafter. Rent expense for fiscal years 1996,
1995 and 1994 was not material.
ENVIRONMENTAL AND SAFETY MATTERS
The Company's operations involve the handling, production, transportation
and disposal of materials classified as hazardous or toxic and are
extensively regulated under environmental and health and safety laws.
Operating permits which are required for the Company's operations are subject
to periodic renewal and may be revoked or modified for cause.
52
New laws or permit requirements and conditions may affect the Company's
operations, products or waste disposal. Past or future operations may result
in claims or liabilities. Expenditures could be required to upgrade
wastewater collection, pretreatment or disposal systems or other matters.
The Company routinely incurs expenses associated with hazardous substance
management and pollution prevention in ongoing operations. These operating
expenses include items such as depreciation on its waste treatment
facilities, outside waste management, fuel, electricity and salaries. The
amounts of these operating expenses were approximately $47 million and $45
million for fiscal years 1996 and 1995, respectively. The Company does not
anticipate a material increase in these types of expenses during fiscal 1997.
The Company considers these types of environmental expenditures normal
operating expenses and includes them in cost of goods sold.
At its Texas City Plant, the Company has reduced emissions of targeted
chemicals 71% from 1987 levels under the EPA's voluntary 33/50 program.
These reductions included a 95% reduction in hydrogen cyanide emissions and
an 83% reduction in benzene emissions. Additionally, the Company will
initiate appropriate actions or preventive projects necessary to insure that
the facility continues to operate in a safe and environmentally responsible
manner. No assurances can be given that the Company will not incur material
environmental expenditures associated with its facilities, operations or
products.
The Company's sodium chlorate market is sensitive to potential
environmental regulations. In general, environmental regulations support
substitution of chlorine dioxide, which is produced from sodium chlorate, for
elemental chlorine in the pulp bleaching process. Certain environmental
groups are encouraging passage of regulations which restrict the amount of
Absorbable Organic Halides (AOX) or chlorine derivatives in bleach plant
effluent. Increased substitution of chlorine dioxide for elemental chlorine
in the pulp bleaching process significantly reduces the amount of AOX and
chlorine derivatives in bleach plant effluent. As long as there is not an
outright ban on chlorine-containing compounds, regulations restricting AOX or
chlorine derivatives in bleach plant effluent should favor the use of
chlorine dioxide, thus sodium chlorate. Any significant ban on all chlorine-
containing compounds could have a material adverse effect on the Company's
financial condition and results of operations.
British Columbia has a regulation in place that would effectively eliminate
the use of chlorine dioxide in the bleaching process by the year 2002. The
pulp and paper industry is working to change this regulation and believes
that the ban of chlorine dioxide in the bleaching process will yield no
measurable environmental or public health benefit. The Company is not aware
of any other laws or regulations currently in place which would restrict the
use of the product.
LEGAL PROCEEDINGS
PETROCHEMICALS
HUNTSMAN LAWSUIT: On January 30, 1995, the Company filed a lawsuit against
Huntsman Chemical Corporation and certain affiliates seeking a declaratory
judgment in connection with an alleged agreement arising from discussions,
previously suspended by the Company, relating to possible future capacity
rights for a significant portion of the Company's styrene monomer unit at its
Texas City Plant. In the lawsuit, the Company requested a judicial
determination that, among other things, there was no enforceable agreement
between the Company and any of the defendants. In response, the defendants
filed a counterclaim demanding a jury trial and asserting that a contractual
agreement existed, that the Company breached the alleged agreement, and that
as a result the defendants incurred an unspecified amount of "massive
damages". Subsequently, the Company filed a motion for summary judgment.
On November 30, 1995, the trial court granted the Company's motion for
summary judgment establishing that as a matter of law, no enforceable
contract or agreement ever existed between the Company and the defendants.
The court's order of summary judgment also moots the defendants' counterclaim
against the Company for damages resulting from breach of the alleged
contract. The defendants have appealed from that judgment. The Company
53
and the defendants have filed their principal briefs before the Court of
Appeals, but oral argument has not been set and the Court of Appeals has not
rendered any decision.
The Company believes a loss with respect to this matter is not probable and
is unable to quantify a reasonably possible loss estimate (as defined in
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies") at this time.
ALLEMAND LAWSUIT: On June 19, 1995, a lawsuit was filed against the
Company and several other corporate defendants asserting personal injury and
mental anguish resulting from an incident occurring on June 16, 1995 in which
a hose being used to unload a barge of sulfuric acid at the Company's Texas
City Plant ruptured, spraying sulfuric acid on an employee of Marine Fueling
Service, Inc. ("Marine Fueling"). The plaintiffs' claims against the Company
in this lawsuit have been settled. The Company, however, remains a defendant
in the lawsuit by virtue of a maritime law cross-claim asserted by Marine
Fueling against the Company and the other defendants in the lawsuit for
recovery of a portion of the settlement money Marine Fueling previously paid
to the plaintiffs. The amount sought in Marine Fueling's claim against the
Company is not a material amount.
AMMONIA RELEASE LAWSUITS: On May 8, 1994, an ammonia release occurred at
the Company's Texas City Plant while a reactor in the acrylonitrile unit was
being restarted after a shutdown for routine maintenance. A total of 52
lawsuits and interventions, involving approximately five thousand five
hundred plaintiffs, have been filed against the Company seeking an
unspecified amount of money for alleged damages from the ammonia release.
Many of these lawsuits were filed in April and early May 1996, presumably in
anticipation of the expiration of the two-year statute of limitations
applicable to this release.
Approximately two thousand six hundred of the plaintiffs agreed to submit
their damage claims to binding arbitration. Each of the plaintiffs who
agreed to participate in the arbitration waived any right of recovery for
punitive or exemplary damages. Pursuant to the agreement to arbitrate, a
two-week evidentiary proceeding was conducted in July 1996 before a three
judge panel which will make a determination of the amount of damages.
Currently, the Company anticipates that the results of this arbitration will
be rendered in early February 1997.
The Company continues to vigorously defend the claims of the approximately
two thousand nine hundred plaintiffs who did not participate in the July 1996
arbitration.
OTHER LAWSUITS. The Company is subject to various other claims and legal
actions that arise in the ordinary course of its business.
LITIGATION CONTINGENCY
In accordance with Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies" and Financial Accounting Standards Board
Interpretation No. 39 "Offsetting of Amounts Related to Certain Contracts",
the Company has made estimates of the reasonably possible range of liability
with regard to its outstanding litigation for which it may incur liability.
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, 1996, the Company has
accrued approximately $16.0 million as its estimate of aggregate contingent
liability for these matters, and has also recorded aggregate receivables from
its insurers and third-party indemnitors of approximately $15.6 million. In
addition, the Company estimates that at present, the reasonably possible
range of loss is from $0 to $44.8 million. The Company believes that it is
insured or indemnified for this additional reasonably possible loss, except
for a portion which is not material.
54
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.
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.
55
8. SEGMENT AND GEOGRAPHIC INFORMATION:
Sales to individual customers constituting 10% or more of total revenues
and sales by geographic region were as follows (there were no sales to
individual customers constituting 10% or more of total revenues in fiscal
1996):
YEAR ENDED SEPTEMBER 30,
---------------------------------
1996 1995 1994
--------- ----------- ---------
(Dollars in Thousands)
Major Customers:
British Petroleum plc and subsidiaries.......................................... * $ 169,944 $103,637
Mitsubishi International Corporation............................................ * $ 129,812 $ 69,920
Export Sales:
Export revenues................................................................. $267,153 $ 534,067 $324,930
Percentage of total revenues.................................................... 34% 52% 46%
Export revenues (as a percent of total exports) by geographical area:
Asia........................................................................... 66% 64% 80%
Europe......................................................................... 34% 36% 16%
Other.......................................................................... - - 4%
*DOES NOT COMPRISE 10% OF TOTAL REVENUE FOR 1996 AND, THEREFORE, NOT REPORTED.
YEAR ENDED SEPTEMBER 30,
--------------------------------
1996 1995 1994
-------- ---------- --------
(Dollars in Thousands)
Geographic Segment Information:
Revenues:
United States................................................................. $633,754 $ 886,247 $578,295
Canada........................................................................ 156,711 143,951 122,545
-------- ---------- --------
Total........................................................................... $790,465 $1,030,198 $700,840
Income before taxes and extraordinary item:
United States................................................................. $ 27,540 $ 210,320 $ 27,106
Canada........................................................................ 22,862 17,838 1,148
-------- ---------- --------
Total........................................................................... $ 50,402 $ 228,158 $ 28,254
Net Income:
United States................................................................. $ 18,330 $ 140,382 $ 17,979
Canada........................................................................ 13,274 9,667 1,153
-------- ---------- --------
Total........................................................................... $ 31,604 $ 150,049 $ 19,132
Assets:
United States................................................................. $457,273 $ 405,324 $376,594
Canada........................................................................ 232,411 204,615 204,331
-------- ---------- --------
Total........................................................................... $689,684 $ 609,939 $580,925
Selling, general and administrative expenses:
United States................................................................. $ 14,570 $ 14,535 $ 10,232
Canada........................................................................ 17,195 17,088 14,075
SARs.......................................................................... 8,540 (2,767) 21,843
-------- ---------- --------
Total........................................................................... $ 40,305 $ 28,856 $ 46,150
56
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 U.S. 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
$30 million and $26 million of forward foreign exchange contracts outstanding
to buy Canadian dollars at September 30, 1996 and 1995, respectively. The
deferred gain on these forward foreign exchange contracts at September 30,
1996 and 1995 was immaterial.
CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to companies involved in the
petrochemical 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. 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.
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 U.S.
corporations with ratings of A1 by Standard & Poor's Ratings Group or P1 by
Moody's Investor Services, Inc., loan participation of major U.S.
corporations with a short term credit rating of A1/P1 and direct obligations
of the U.S. Government or its agencies. In addition, not more than $5
million will be invested with any single bank, financial institution, or U.S.
corporation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At September 30, 1996, the fair market value of all of the Company's
financial instruments approximated the book value, except as stated below.
Book Value Fair Value
---------- ----------
(Dollars in Thousands)
Discount Notes $ 94,757 $121,302
Subordinated Notes 275,000 289,273
The fair values of the Discount Notes and the Subordinated Notes are based
on quoted market prices.
57
10. RELATED PARTY TRANSACTIONS
In connection with the Merger, the Company paid TSG and Unicorn one-time
transaction fees of approximately $8.4 million and $4.4 million,
respectively. Investment banking fees of approximately $3.3 million were
paid to Lazard Freres & Company ("Lazard"). A member of the former Board of
Directors is a Limited Managing Director of Lazard. However, the Board
member agreed not to receive any compensation from Lazard related to the
Merger.
Also in connection with the Merger, CS First Boston Corporation served as
managing underwriter for the Public Offering and provided certain financial
advisory services to STX Acquisition and Chemicals, for which such firm
received underwriting discounts and commissions and financial advisory fees
totaling approximately $20 million. John L. Garcia, a director and
stockholder of the Company, is a Managing Director of CS First Boston
Corporation.
Koch Capital Services, Inc. formerly known as Koch Equities, Inc., a
subsidiary of Koch Industries, Inc. ("Koch Industries") owns approximately 9%
of the outstanding capital stock of Holdings. The Company and affiliates of
Koch Industries have ongoing commercial relationships, including, from time
to time, supply of raw materials or sales of petrochemicals. For fiscal
1996, sales to and purchases from Koch Industries and its affiliates
represented less than 1% of the Company's revenues.
58
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
CASH FLOWS
On August 21, 1996, Holdings transferred all of its operating assets and
liabilities (net $422.8 million) to Chemicals. At the same time, Chemicals
transferred $610 million in cash to Holdings.
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 computed.
2. INCOME TAXES
A reconciliation of federal statutory income taxes to Chemicals' effective
tax provision (benefit) before extraordinary item follows:
PERIOD FROM MAY 14, 1996
-------------------------
TO SEPTEMBER 30, 1996
-------------------------
(Dollars in Thousands)
Provision for federal income tax at the statutory rate.................. $ 195
Foreign sales corporation............................................... (116)
State and foreign income taxes.......................................... 115
Other................................................................... 190
-------
Effective tax provision................................................. $ 384
=======
The provision (benefit) for income taxes is composed of the following:
PERIOD FROM MAY 14, 1996
-------------------------
TO SEPTEMBER 30, 1996
-------------------------
(Dollars in Thousands)
From operations:
Current federal........................................................ $(1,001)
Deferred federal....................................................... 1,457
Deferred foreign....................................................... 90
Current state.......................................................... (162)
-------
Total tax provision.................................................... $ 384
=======
59
The components of Chemicals' deferred income tax assets and liabilities are
summarized below:
SEPTEMBER 30, 1996
----------------------
(Dollars in Thousands)
Assets:
Accrued liabilities......................... $ 9,803
Accrued postretirement cost................. 9,544
Tax loss and credit carryforward and other.. 5,817
-------
Total deferred tax assets................... 25,164
-------
Less: current deferred income tax benefit.. 7,214
-------
Noncurrent deferred tax assets.............. $17,950
=======
Liabilities:
Property, plant and equipment............... $61,304
Accrued pension cost........................ 2,525
Other....................................... 1,599
-------
Total deferred tax liabilities.............. $65,428
-------
Net deferred tax liability.................. $47,478
=======
Chemicals has approximately Cdn. $13.2 million in Canadian tax loss
carryforwards which will expire from 1999 through 2001 and approximately Cdn.
$15.1 million in Canadian tax credit carryforwards which will expire from
2000 through 2004.
60
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Sterling Chemicals Holdings,
Inc.
We have audited the consolidated balance sheet of Sterling Chemicals
Holdings, Inc. and subsidiaries as of September 30, 1996, and the related
consolidated statements of operations, changes in stockholders' equity
(deficiency in assets) and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sterling
Chemicals Holdings, Inc. and subsidiaries as of September 30, 1996 and the
consolidated results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
December 6, 1996
Houston, Texas
61
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of Sterling Chemicals, Inc.
We have audited the consolidated balance sheet of Sterling Chemicals, Inc.
and subsidiaries as of September 30, 1996, and the related consolidated
statements of operations, changes in stockholders' equity (deficiency in
assets) and cash flows for the period from May 14, 1996 (date of
incorporation) to September 30, 1996. 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sterling
Chemicals, Inc. and subsidiaries as of September 30, 1996 and the
consolidated results of their operations and their cash flows for the period
from May 14, 1996 (date of incorporation) to September 30, 1996 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
December 6, 1996
Houston, Texas
62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Sterling Chemicals Holdings,
Inc.
We have audited the consolidated balance sheet of Sterling Chemicals
Holdings, Inc. (formerly Sterling Chemicals, Inc.) and subsidiaries as of
September 30, 1995, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of two years in the
period ended September 30, 1995. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sterling
Chemicals Holdings, Inc. and subsidiaries as of September 30, 1995 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended September 30, 1995, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
October 25, 1995
Houston, Texas
63
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. Internal audits have been conducted to test compliance with
internal controls. Results of audit efforts and actions are communicated to
appropriate members of management and to the Audit Committee of the Board of
Directors.
Deloitte & Touche LLP and Coopers & Lybrand LLP performed a separate
independent audit of the Company's financial statements for fiscal years 1996
and 1995, respectively, 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 Committee of the Board. The Audit
Committee of the Board of Directors is composed solely of outside directors.
The Audit 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.
Robert W. Roten
President and Chief Executive Officer
Jim P. Wise
Vice President - Finance and Chief Financial Officer
December 6, 1996
64
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 1996 $191,542 $190,879 $218,371 $189,673
1995 240,622 303,954 298,491 187,131
Gross Profit 1996 29,395 29,398 33,250 19,383
1995 48,354 93,530 103,504 26,230
Income (loss) before extraordinary item 1996 12,787 6,427 16,420 (2,130)
1995 22,259 56,077 59,767 15,050
Net income (loss) 1996 12,787 6,427 16,420 (4,030)
1995 22,259 56,077 56,663 15,050
Per Share Data:
Income (loss) before extraordinary item 1996 $ .23 $ .12 $ .29 $ (.06)
1995 .40 1.01 1.08 .27
Net income (loss) 1996 .23 .12 .29 (.11)
1995 .40 1.01 1.02 .27
Cash dividends per common share 1996 -- -- -- --
1995 -- -- -- --
Price range of common stock 1996 High 9 1/4 13 13 1/8 12 1/2
1996 Low 7 1/2 8 11 1/8 10 7/8
1995 High 13 7/8 14 13 12 7/8
1995 Low 9 3/4 10 7/8 10 1/4 8 1/4
There is no established public trading market for the Holdings' Common
Stock, although the Common Stock is traded on the OTC Electronic Bulletin
Board under the symbol "STXX". Prior to the Merger, the Common Stock was
listed on the New York Stock Exchange ("NYSE") under the symbol "STX". The
table above sets forth the price range of the Common Stock during the fiscal
years ended September 30, 1996 and September 30, 1995. Information for the
fourth quarter of fiscal 1996 reflects high and low sales prices on the NYSE
for the period of July 1 through August 21, and high and low sales price
information as reported on the OTC Electronic Bulletin Board maintained by
the National Association of Securities Dealers, Inc. ("NASD") for the period
of August 22 through September 30.
As of September 30, 1996, there were approximately 280 record holders of
the Common Stock.
Holdings has not paid dividends on the Common Stock in any of the last
three fiscal years and does not anticipate paying dividends in the
foreseeable future. Any future determination as to the payment of dividends
will be made at the discretion of the Board of Directors of Holdings and will
depend upon the Company's operating results, financial condition, capital
requirements, general business conditions and such other factors that the
Board of Directors deems relevant. In addition, the payment of dividends on
the Common Stock is restricted by the terms of the indenture governing the
Discount Notes and indirectly restricted by the terms of the Chemicals Credit
65
Agreement and the indenture governing the Subordinated Notes which restrict
the ability of Chemicals to transfer funds to Holdings.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Termination of Coopers & Lybrand L.L.P. On October 25, 1995, the Audit
Committee of the Board of Directors of the Company recommended and the Board
of Directors of the Company approved the engagement of the firm of Arthur
Andersen LLP ("Andersen") as its independent auditors for the year ending
September 30, 1996, to replace the firm of Coopers & Lybrand L.L.P.
("Coopers"). The termination by the Company of the engagement of Coopers was
effective upon the completion of the audit for the year ended September 30,
1995, and the filing of the Company's Annual Report on Form 10-K for such
year. The appointment of Andersen as the Company's independent auditors for
the fiscal year ending September 30, 1996 was ratified by the stockholders at
the 1996 Annual Meeting of Stockholders.
During the two previous fiscal years and the subsequent period through
December 18, 1995, the date of filing of the Company's Annual Report on Form
10-K, there were no disagreements with Coopers on any matter of accounting
principles or practices, financial statement disclosure, or audit scope or
procedures, which disagreements, if not resolved to their satisfaction, would
have caused them to make reference in connection with their report to the
subject matter of the disagreement.
During the two previous fiscal years and the subsequent period through
December 18, 1995, the date of filing of the Company's Annual Report on Form
10-K, the Company was not advised by Coopers of any of the reportable events
listed in Item 304(a)(1)(v)(A) through (D) of SEC Regulation S-K and during
such period of the Company did not consult with Andersen regarding any matter
referenced under Item 304(a)(2) of the SEC Regulation S-K.
The audit reports of Coopers on the consolidated financial statements of
the Company as of and for the fiscal years ended September 30, 1995 and 1994,
did not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting
principles, except for an explanatory paragraph noting that the Company
changed its method of accounting for income taxes effective October 1, 1993.
The Company requested that Coopers furnish a letter addressed to the SEC
stating whether Coopers agreed with the above statements. A copy of the
Coopers letter to the SEC stating that such firm agreement with the above
statements, dated December 18, 1995, was filed as Exhibit 16 to the Company's
Form 8-K, dated December 18, 1995.
Resignation of Arthur Andersen LLP. On August 21, 1996, Andersen resigned
effective immediately in connection with the Merger. The Company engaged
Deloitte & Touche LLP ("Deloitte") as its independent auditors for the fiscal
year ended September 30, 1996. Deloitte served as independent auditors of
STX Acquisition prior to the Merger.
Andersen did not perform an audit of the Company's financial statements for
any period. During the period of the engagement of Andersen, there were no
disagreements with Andersen on any matter of accounting principles or
practices or financial statement disclosure. The Company has not been
advised by Andersen of any of the reportable events listed in Item
304(a)(1)(v)(A) through (D) of Regulation S-K.
The Company requested that Andersen furnish a letter, addressed to the SEC,
stating whether Andersen agreed with the above statements. A copy of the
letter of Andersen to the SEC stating that such firm agreed with the above
statements, dated August 28, 1996, was filed as Exhibit 16.1 to the Company's
Form 8-K, dated August 21, 1996.
66
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information beginning on page 4 and the information beginning on page
18 of the Proxy Statement for the Company's 1997 Annual Meeting of
Stockholders is incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information beginning on page 7 of the Proxy Statement for the
Company's 1997 Annual Meeting of Stockholders is incorporated herein by
reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information beginning on page 16 of the Proxy Statement for the
Company's 1997 Annual Meeting of Stockholders is incorporated herein by
reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information beginning on page 12 of the Proxy Statement for the
Company's 1997 Annual Meeting of Stockholders is incorporated herein by
reference in response to this item.
67
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
PAGE OF
THIS 10-K
---------
Sterling Chemicals Holdings, Inc. Consolidated
Statements of Operations for the fiscal years
ended September 30, 1996, 1995 and 1994............ 33
Sterling Chemicals Holdings, Inc. Consolidated
Balance Sheet as of September 30, 1996 and 1995.... 34
Sterling Chemicals Holdings, Inc. Consolidated
Statement of Changes in Stockholders' Equity
(Deficiency in Assets) for the fiscal years ended
September 30, 1996, 1995 and 1994.................. 35
Sterling Chemicals Holdings, Inc. Consolidated
Statement of Cash Flows for the fiscal years ended
September 30, 1996, 1995 and 1994.................. 36
Sterling Chemicals, Inc. Consolidated Statement of
Operations for the period from May 14, 1996 to
September 30, 1996................................. 37
Sterling Chemicals, Inc. Consolidated Balance Sheet
as of September 30, 1996........................... 38
Sterling Chemicals, Inc. Consolidated Statement of
Changes in Stockholders' Equity (Deficiency in
Assets) for the period from May 14, 1996 to
September 30, 1996................................. 39
Sterling Chemicals, Inc. Consolidated Statement of
Cash Flows for the period from May 14, 1996 to
September 30, 1996................................. 40
Notes to Consolidated Financial Statements........... 41
Reports of Independent Accountants................... 61
Report of Management................................. 64
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.
68
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.
**3.2 --Certificate of Incorporation of Sterling Chemicals, Inc., as
amended.
**3.3 --Restated Bylaws of Sterling Chemicals Holdings, Inc.
3.4 --Bylaws of Sterling Chemicals, Inc., incorporated by reference from
Exhibit 3.4 to the Registration Statement on Form S-1 of STX
Acquisition Corp. and STX Chemicals Corp.
(Registration No. 333-04343).
4.1 --Form of Warrant Agreement, 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 --Form of Indenture governing the 13 1/2% Senior Secured Discount
Notes Due 2008 of the Company, 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).
4.3 --Form of Indenture governing the 11 3/4% Senior Subordinated Notes
Due 2006 of Sterling Chemicals, Inc. (formerly known as STX
Chemicals Corp.), 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).
4.4 --Credit Agreement among Sterling Chemicals, Inc. (formerly known as
STX Chemicals Corp.), Texas Commerce Bank as Agent, Credit Suisse
and Chase Securities, Inc. as co-arrangers and the lenders named
therein, incorporated by reference from Exhibit (a) to the
Company's Schedule 13E-3, Commission File No. 5-40034.
4.5 --Stockholders Agreement, 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).
4.6 --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).
4.7 --Voting Agreement, incorporated by reference from Exhibit 4.12 to the
Registration Statement on Form S-1 of STX Acquisition Corp. and STX
Chemicals Corp. (Registration No. 333-04343).
4.8 --Tag-Along Agreement, 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).
4.9 --Intercreditor Agreement, 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).
4.10 --Security Agreement (Pledge) between STX Acquisition Corp. and Texas
Commerce Bank, incorporated by reference from Exhibit 4.15 to the
Registration Statement on Form S-1 of STX Acquisition Corp. and STX
Chemicals Corp. (Registration No. 333-04343).
+10.1 --Assets Purchase Agreement dated August 1, 1986, between Monsanto
Company and the Company, incorporated by reference from Exhibit 10.1
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1992.
10.2 --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.
10.2(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.
69
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.2(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.
10.3 --Sterling Chemicals, Inc. Hourly Paid Employees' Pension Plan
(Restated as of October 1, 1993), incorporated by reference from
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1993.
10.3(a)--Supplement to the Sterling Chemicals, Inc. Hourly Paid Employee's
Pension Plan (Restated as of January 1, 1994), incorporated by
reference from Exhibit 10.8(a) to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1994.
10.3(b)--First Amendment to the Sterling Chemicals, Inc. Hourly Paid
Employees' Pension Plan dated April 27, 1994, incorporated by
reference from Exhibit 10.8(b) to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1994.
**10.3(c)--Sterling Chemicals, Inc. Amended and Restated Hourly Paid
Employees' Pension Plan (Effective as of May 1, 1996).
10.4 --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.
10.4(a)--Supplements to the Sterling Chemicals, Inc. Savings and Investment
Plan for Hourly Paid Employees and Salaried Employees, 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.
10.4(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.
10.5 --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).
**10.6 --Sterling Chemicals Employee Stock Ownership Plan (ESOP).
10.7 --Sterling Chemicals, Inc. Amended and Restated Employee Stock
Ownership Plan, incorporated by reference from Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1993.
10.7(a)--First Amendment to the Sterling Chemicals, Inc. Amended and Restated
Employees' Stock Ownership Plan dated April 27, 1994, incorporated
by reference from Exhibit 10.12(a) to the Company's Annual Report
on Form 10-K for the for the fiscal year ended September 30, 1994.
+10.8 --Styrene Monomer Conversion Contract dated November 3, 1995, between
Monsanto Company (subsequently assigned to Bayer Corporation, a
subsidiary of Bayer AG) and the Company, incorporated by reference
from Exhibit 10.13 to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995.
+10.9 --Acrylonitrile Exchange Contract dated January 1, 1994, between the
Company and Monsanto Company, incorporated by reference from
Exhibit 10.19 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994.
+10.10 --Production Agreement dated April 15, 1988 between BP Chemicals
Americas Inc. and the Company and First and Second Amendment
thereto, incorporated by reference from Exhibit 10.21 to the
Company's Registration Statement on Form S-1 (Registration No.
33-24020).
+10.11 --Agreement dated May 2, 1988, between E.I. du Pont de Nemours and
Company and the Company, incorporated by reference from Exhibit
10.22 to the Company's Registration Statement on Form S-1
(Registration No. 33-24020).
10.12 --License Agreement dated April 15, 1988, between BP Chemicals
Americas Inc. and the Company, incorporated by reference from
Exhibit 10.23 to the Company's Registration Statement on Form S-1
(Registration No. 33-24020).
+10.13 --Product Sales Agreement dated August 1, 1986, between BASF
Corporation and the Company, incorporated by reference from Exhibit
10.22 to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1992.
70
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
+10.13(a)--Amendment No. 3 to Product Sales Agreement as of January 1,1994,
between BASF Corporation and the Company, incorporated by reference
from Exhibit 10.22(a) to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994.
10.14 --License Agreement dated August 1, 1986, between Monsanto Company
and the Company, incorporated by reference from Exhibit 10.25 to
the Company's Registration Statement on Form S-1 (Registration
No. 33-24020).
+10.15 --Amended Lease and Production Agreement dated August 8, 1994, between
BP Chemicals Americas Inc. and the Company, incorporated by
reference from Exhibit 10.21 to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1994.
10.16 --Form of Indemnity Agreement executed between the Company and each
of its officers and directors prior to the Merger, 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.
**10.17 --Form of Indemnity Agreement executed between the Company and each
of its officers and directors.
10.18 --Amended and Restated Sterling Chemicals, Inc. Hourly Employees'
Profit Sharing Plan, incorporated by reference from Exhibit
10.32 to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1993.
10.19 --Amended and Restated Sterling Chemicals, Inc. Salaried Employee's
Profit Sharing Plan, incorporated by reference from Exhibit 10.31
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1993.
10.20 --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).
10.21 --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).
**10.22 --Articles of Agreement between the Company, its successors and
assigns, and Texas City, Texas Metal Trades Council, AFL-CIO Texas
City, Texas, May 1, 1996 to May 1, 1999.
10.23 --Conditional Performance Guaranty dated as of August 20, 1992, by
Albright & Wilson, Ltd. in favor of Sterling Pulp Chemicals, Ltd.,
Sterling Canada, Inc. and the Indemnities identified in Section 10.2
of the Purchase Agreement, incorporated by reference from Exhibit
10.38 to the Company's Current Report on Form 8-K dated September
3, 1992.
10.24 --Performance Guaranty dated as of August 20, 1992, by the Company in
favor of Tenneco Canada Inc., Rio Linda Chemical Co., Albright
& Wilson Americas, Inc. and the Indemnities identified in Section
10.3 of the Purchase Agreement, incorporated by reference from
Exhibit 10.39 to the Company's Current Report on Form 8-K dated
September 3, 1992.
10.25 --Lease dated March 1, 1990, between Procter & Gamble, Inc. and
Tenneco Canada Inc., as amended by a Lease Modification Agreement
dated August 9, 1991, and Consent and Assignment Agreement dated as
of August 21, 1992, among 982174 Ontario Limited, Sterling Pulp
Chemicals, Ltd., Proctor & Gamble, Inc., Tenneco Canada Inc. and The
Bank of Nova Scotia, incorporated by reference from Exhibit 10.45 to
the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1992.
10.26 --Lease dated July 1, 1977 between Canadian National Railway Company
and ERCO Industries Limited, and Consent and Assignment Agreement
dated as of August 21, 1992, among Tenneco Canada Inc., Sterling
Pulp Chemicals, Ltd., Canadian National Railway Company and The Bank
of Nova Scotia, incorporated by reference from Exhibit 10.46 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1992.
+10.27 --Sales and Purchase Agreement dated April 1, 1994, between BP
Chemicals Ltd. and the Company, incorporated by reference from
Exhibit 10.48 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994.
+10.28 --Contract for Sale and Purchase of Ethylene dated October 28, 1988,
between Phillips 66 Company and the Company, incorporated by
reference from Exhibit 10.49 to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1994.
71
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.29 --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, 1997,
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.
10.30 --Agreement between Sterling Pulp Chemicals Ltd. Buckingham, Quebec
and the Energy and Chemicals Workers Union effective November 30,
1994 to November 30, 1997, incorporated by reference from Exhibit
10.53 to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1995.
10.31 --Agreement between Sterling Pulp Chemicals Ltd. Buckingham, Quebec,
and the Office and Professional Employees International Union
effective June 25, 1995 to November 14, 1997, incorporated by
reference from Exhibit 10.54 to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1995.
+10.32 --Product Supply Agreement dated May 15, 1995, between Praxair
Hydrogen Supply, Inc. and the Company, incorporated by reference
from Exhibit 10.55 to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995.
++10.33 --Methanol Production Agreement between BP Chemicals Inc. and the
Company dated September 26, 1996.
**10.34 --Consulting Agreement dated April 23, 1996, among The Sterling Group,
Inc. STX Acquisition Corp. and STX Chemicals Corp.
**21.1 --Subsidiaries of Sterling Chemicals Holdings, Inc.
**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.
++ Filed herewith and confidential treatment has been requested with respect
to portions of this Exhibit.
(b) Reports on Form 8-K.
On August 28, 1996, the Company filed a Current Report on Form 8-K
reporting under Items 1, 2, 4, and 5 of such Form.
72
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/ ROBERT W. ROTEN
-------------------------------------
(Robert W. Roten)
President and Chief Executive Officer
DATE: DECEMBER 18, 1996
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 18, 1996
- - ------------------------------------------ Directors
(Frank P. Diassi)
/s/ ROBERT W. ROTEN President, Chief Executive December 18, 1996
- - ------------------------------------------ Officer and Director
(Robert W. Roten) (principal executive officer)
/s/ JIM P. WISE Vice President--Finance and December 18, 1996
- - ------------------------------------------ Chief Financial Officer
(Jim P. Wise) (principal financial officer)
/s/ PAUL G. VANDERHOVEN Controller December 18, 1996
- - ------------------------------------------ (principal accounting officer)
(Paul G. Vanderhoven)
/s/ J. VIRGIL WAGGONER Vice Chairman of the Board of December 18, 1996
- - ------------------------------------------ Directors
J. Virgil Waggoner)
/s/ FRANK J. HEVRDEJS Director December 18, 1996
- - ------------------------------------------
(Frank J. Hevrdejs)
/s/ T. HUNTER NELSON Director December 18, 1996
- - ------------------------------------------
(T. Hunter Nelson)
/s/ JOHN L. GARCIA Director December 18, 1996
- - ------------------------------------------
(John L. Garcia)
Director December 18, 1996
- - ------------------------------------------
(Allan R. Dragone)
/s/ GEORGE B. GREGORY Director December 18, 1996
- - ------------------------------------------
(George B. Gregory)
/s/ ROBERT B. CALHOUN Director December 18, 1996
- - ------------------------------------------
(Robert B. Calhoun)
73
CORPORATE INFORMATION
ANNUAL MEETING STOCK LISTING
Date: January 22, 1997 OTC Electronic Bulletin Board
Time: 9:00 a.m. Ticker Symbol - STXX
Place: Texas Commerce
Center Auditorium
601 Travis
Houston, Texas 77002
LEGAL COUNSEL STOCK TRANSFER AGENT
Andrews & Kurth L.L.P. AND REGISTRAR
600 Travis, Suite 4200 Society National Bank
Houston, Texas 77002 c/o KeyCorp Shareholder Services, Inc.
(713) 220-4200 700 Louisiana, Suite 2620
Houston, Texas 77002-2729
INDEPENDENT CORPORATE HEADQUARTERS
ACCOUNTANTS Sterling Chemicals Holdings, Inc.
Deloitte & Touche LLP 1200 Smith, Suite 1900
333 Clay, Suite 2300 Houston, Texas 77002-4312
Houston, Texas 77002 (713) 650-3700
(713) 756-2000