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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
COMMISSION FILE NUMBER 1-10059
STERLING CHEMICALS HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0185186
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1200 SMITH STREET, SUITE 1900
HOUSTON, TEXAS 77002-4312 (713) 650-3700
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE
COMMISSION FILE NUMBER 333-04343-01
STERLING CHEMICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0502785
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1200 SMITH STREET SUITE 1900
HOUSTON, TEXAS 77002-4312 (713) 650-3700
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
STERLING CHEMICALS, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION I(1)(a) AND (b) OF FORM 10-K, AND IS THEREFORE FILING THIS FORM WITH
THE REDUCED DISCLOSURE FORMAT PROVIDED FOR BY GENERAL INSTRUCTION I(2) OF FORM
10-K
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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
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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.
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As of December 4, 2000, Sterling Chemicals Holdings, Inc. had 12,784,007
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 $5 million.
As of December 4, 2000, all outstanding equity securities of Sterling Chemicals,
Inc. were owned by Sterling Chemicals Holdings, Inc.
Portions of the definitive Proxy Statement relating to the 2001 Annual
Meeting of Stockholders of Sterling Chemicals Holdings, Inc. are incorporated by
reference in Part III of this Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
Important Information Regarding this Form 10-K............................................. 1
Item 1. Business................................................................................... 3
Business Strategy....................................................................... 3
Recent Developments..................................................................... 3
Industry Overview....................................................................... 4
Product Summary......................................................................... 6
Products................................................................................ 7
Sales and Marketing..................................................................... 9
Contracts............................................................................... 10
Raw Materials for Products and Energy Resources......................................... 11
Technology and Licensing................................................................ 12
Competition............................................................................. 13
Environmental Matters................................................................... 14
Employees............................................................................... 16
Insurance............................................................................... 16
Item 2. Properties................................................................................. 16
Item 3. Legal Proceedings.......................................................................... 17
Item 4. Submission of Matters to Vote of Security Holders.......................................... 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 19
Item 6. Selected Financial Data of the Company..................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 22
Overview................................................................................ 22
Liquidity and Capital Resources......................................................... 23
New Accounting Standards................................................................ 26
Certain Known Events, Trends, Uncertainties, and Risk Factors........................... 27
Results of Operations................................................................... 32
Comparison of Fiscal 2000 to Fiscal 1999................................................ 32
Comparison of Fiscal 1999 to Fiscal 1998................................................ 34
Item 7A. Qualitative and Quantitative Disclosure about Market Risk.................................. 37
Item 8. Financial Statements and Supplementary Data................................................ 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................................. 90
PART III
Item 10. Directors and Executive Officers of the Registrant......................................... 90
Item 11. Executive Compensation..................................................................... 90
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 90
Item 13. Certain Relationships and Related Transactions............................................. 90
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K............... 91
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IMPORTANT INFORMATION REGARDING THIS FORM 10-K
Readers should consider the following information as they review this Form
10-K.
PRESENTATION OF FINANCIAL STATEMENTS
This Form 10-K includes four separate sets of financial statements and
related notes:
o The first set of financial statements and related notes present both
the consolidated financial position, results of operations, and cash
flows of Sterling Chemicals Holdings, Inc. ("Holdings") and its
subsidiaries and the consolidated financial position, results of
operations, and cash flows of Sterling Chemicals, Inc. ("Chemicals")
and its subsidiaries. Holdings directly or indirectly owns all of the
other subsidiaries whose financial results are included in this Form
10-K and Chemicals is the primary operating subsidiary of Holdings.
o The second set of financial statements and related notes present the
combined financial position, results of operations, and cash flows of
the Guarantors and their subsidiaries (discussed below).
o The third and fourth sets of financial statements and related notes
present the consolidated financial position, results of operations,
and cash flows of Sterling Canada, Inc. and its subsidiaries
("Sterling Canada") and the financial position, results of operations,
and cash flows of Sterling Pulp, Ltd. ("Sterling Pulp"), our two
significant subsidiaries whose securities are pledged to secure an
issuance of debt securities by Chemicals.
Under SEC rules, specified financial information is required to be provided with
respect to subsidiaries of an issuer of debt securities that guarantee the
repayment of those debt securities. In addition, under different provisions of
those rules, specified financial information is required to be provided with
respect to subsidiaries meeting certain size criteria of an issuer of debt
securities whose capital stock is pledged to secure the repayment of those debt
securities. In July of 1999, Chemicals issued $295 million of its 12 3/8% Senior
Secured Notes due 2006. The obligations of Chemicals related to the 12 3/8%
Notes were guaranteed by most of its subsidiaries incorporated in the United
States (the "Guarantors"). In addition, all of the capital stock of each of the
Guarantors was pledged to secure the repayment of the 12 3/8% Notes. Finally,
65% of the capital stock of three of Chemicals' subsidiaries incorporated
outside of the United States was pledged to secure the repayment of the 12 3/8%
Notes, but these subsidiaries did not guarantee the repayment of the 12 3/8%
Notes. In order to comply with these SEC rules, the financial statements of the
Guarantors, each of which guaranteed the repayment of the 12 3/8% Notes, and the
financial statements of Sterling Canada and Sterling Pulp, our significant
subsidiaries whose securities are pledged to secure the repayment of the 12 3/8%
Notes, are included with this Form 10-K. The financial statements of the
Guarantors are included in this Form 10-K under Item 8 and the financial
statements of Sterling Canada and Sterling Pulp are filed as exhibits to this
Form 10-K.
FORWARD-LOOKING STATEMENTS
This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this Form 10-K, including without limitation the statements under
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Qualitative and Quantitative Disclosure about
Market Risk" regarding the cyclicality of our industry, current and future
industry conditions, the potential effects of such matters on our business
strategy, results of operations, and financial position, and our market
sensitive financial instruments and other statements identified by such words as
"expects," "projects," "plans," and similar expressions, are forward-looking
statements. The forward-looking statements are based upon current information
and expectations. Estimates, forecasts, and other statements contained in or
implied by the forward-looking statements speak only as of the date on which
they are made, are not guarantees of future performance, and involve certain
risks, uncertainties, and assumptions that are difficult to evaluate and
predict. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, no assurances can be given that such
expectations will prove to have been correct. Certain important factors that
could cause actual results to differ materially from our expectations or what is
expressed, implied, or forecasted by or in the
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forward-looking statements include the timing and extent of changes in commodity
prices and global economic conditions, industry production capacity and
operating rates, the supply-demand balance for our products, competitive
products and pricing pressures, increases in raw material costs, federal and
state regulatory developments, our high financial leverage, the availability of
skilled personnel, and operating hazards attendant to the industry. Additional
factors that could cause actual results to differ materially from our
expectations or what is expressed, implied, or forecasted by or in the
forward-looking statements are stated herein in cautionary statements made in
conjunction with the forward-looking statements or are included elsewhere in
this Form 10-K. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Certain Known Events, Trends, Uncertainties, and
Risk Factors." All subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by these cautionary statements.
SUBSEQUENT EVENTS, ETC.
All statements contained in this Form 10-K, including the forward-looking
statements discussed above, are made as of December 14, 2000, unless those
statements are expressly made as of another date. We disclaim any responsibility
for the correctness of any information contained in this Form 10-K to the extent
such information is affected or impacted by events, circumstances, or
developments occurring after December 14, 2000, or by the passage of time after
such date and, except as required by applicable securities laws, we do not
intend to update such information and disclaim any responsibility to do so.
DOCUMENT SUMMARIES
Statements contained in this Form 10-K describing documents and agreements
are provided in summary form only and such summaries are qualified in their
entirety by reference to the actual documents and agreements filed as exhibits
to this Form 10-K.
FISCAL YEAR
We keep our books of record and accounts based on annual accounting periods
ending on September 30 of each year. Accordingly, all references in this Form
10-K to a particular fiscal year refer to the twelve calendar month period
ending on September 30 of that year.
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PART I
This combined Form 10-K is separately filed by Sterling Chemicals Holdings,
Inc. ("Holdings") and Sterling Chemicals, Inc. ("Chemicals"). Information
contained herein relating to Chemicals is filed by Holdings and separately by
Chemicals on its own behalf. Unless otherwise indicated, Holdings and its
subsidiaries, including Chemicals, are collectively referred to as the
"Company," "we," "our," "ours," and "us."
ITEM 1. BUSINESS
We were organized as a Delaware corporation in 1986 and have our principal
executive offices in Houston, Texas. In connection with our August 21, 1996
merger with STX Acquisition Corp., we recapitalized and reorganized into a
holding company structure, with our only material asset after the merger being
the capital stock of Chemicals, our wholly owned operating subsidiary. Through
Chemicals and its subsidiaries, we manufacture seven commodity petrochemicals at
our Texas City, Texas plant. Near the end of the first quarter of fiscal 2001,
we also began operating a disodium iminodiacetic acid, or "DSIDA," plant at our
Texas City facility that is owned by Monsanto. We also manufacture chemicals for
use primarily in the pulp and paper industry at five plants in Canada and a
plant in Valdosta, Georgia, and acrylic fibers at our plant near Pensacola,
Florida. At our Texas City facility, we produce styrene, acrylonitrile, acetic
acid, plasticizers, methanol, tertiary butylamine, or "TBA," and sodium cyanide.
We generally sell our petrochemicals products to customers for use in the
manufacture of other chemicals and products, which in turn are used in the
production of a wide array of consumer goods and industrial products. We produce
regular textile fibers, specialty textile fibers, and technical fibers at our
acrylic fibers facility, as well as licensing our acrylic fibers manufacturing
technology to producers worldwide. Sodium chlorate is produced at our five
plants in Canada and our Valdosta facility. Sodium chlorite is produced at one
of our Canadian locations. In addition, chlor-alkali and calcium hypochlorite
are produced at one of our Canadian locations. We also license, engineer, and
oversee construction of large-scale chlorine dioxide generators for the pulp and
paper industry as part of our pulp chemicals business. These generators convert
sodium chlorate into chlorine dioxide at pulp mills.
BUSINESS STRATEGY
Our objectives are to be a premier producer of chemicals, to maintain a
strong market position, to achieve first quartile cost performance in all of our
major products, to provide superior customer service and to improve our capital
structure. Our management team has adopted the following strategies in pursuit
of these objectives:
o continue to improve our cost structure;
o pursue growth opportunities through facility expansions, upgrades, and
strategic alliances; and
o optimize capacity utilization rates through long-term supply
arrangements.
The cyclicality of the markets for our primary products, however, subjects us to
periods of overcapacity accompanied by lower prices and profit margins. In
addition, the instruments governing our outstanding debt limit our ability to
incur additional debt to finance additional acquisitions and other expenditures.
These and other factors may limit our ability to successfully implement our
business strategy.
RECENT DEVELOPMENTS
During the third quarter of fiscal 2000, we announced the engagement of
Schnitzius & Vaughn, an investment banking firm, to help us identify and
evaluate a variety of strategic alternatives with respect to our acrylic fibers
operations ranging from an outright sale of this operation to a joint venture or
alliance arrangement. We have continued to operate our acrylic fibers facility
while we explore these possible strategic alternatives. However, we do not know
whether our evaluation process will result in a transaction. In addition, even
if an acceptable purchaser or joint venture partner is identified, we may elect
to forgo that transaction. During the fourth quarter of fiscal 2000, we recorded
a $60 million non-cash charge related to the write down of our acrylic fibers
business production assets.
On June 29, 2000, we, in conjunction with BP Chemicals, announced a
multi-year contract with Methanex Corporation for the purchase of our respective
methanol requirements from Methanex. At the time, we granted Methanex exclusive
rights to acquire the output of our methanol plant, which we continue to own.
Under this agreement, Methanex chose to shut down our methanol plant July 1,
2000, and provide our methanol requirements with methanol produced in countries
that have a significant advantage in the cost of natural gas, the primary raw
material in the production of methanol. However, Methanex may elect to restart
our methanol facility at any time, subject to notice requirements and the
payment of related expenses.
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On September 8, 2000, we announced the engagement of Donaldson, Lufkin &
Jenrette Securities Corporation (now Credit Suisse First Boston) as financial
advisor to assist us in identifying and evaluating possible methods of
restructuring or refinancing our 13 1/2% Senior Secured Discount Notes due 2008.
CSFB has had preliminary discussions with some of the larger holders of our
13 1/2% Notes regarding a possible restructuring of those Notes. However, we
cannot predict whether such discussions will lead to any restructuring of our
13 1/2% Notes.
Spot prices for styrene peaked early in the third quarter of fiscal 2000 at
approximately $0.48 per pound. However, the completion of several industry
turnarounds early in the quarter, combined with decreased styrene purchases by
customers and lower polystyrene operating rates, caused spot prices to decline
during the fourth quarter of fiscal 2000. Spot prices have continued to be in
the $0.25-$0.28 per pound range into the first quarter of fiscal 2001. This
decline in sales prices, together with higher raw materials and energy costs,
has resulted in a significant decrease in styrene margins and a corresponding
decrease in our financial results.
INDUSTRY OVERVIEW
Petrochemicals
Styrene. Current global styrene capacity is approximately 45 billion
pounds. Current total North American styrene capacity is approximately 14
billion pounds per year. As is the case with other petrochemicals, styrene from
time to time experiences periods of strong demand resulting in tight supply and
high prices and margins. This tight balance in supply and demand often results
in new capacity additions. In most cases, incremental capacity comes in the form
of large new plants or major expansions of existing facilities. As this new
capacity comes on line, it often exceeds current demand growth and results in a
decline in prices and margins.
Following a period of strong demand growth and high utilization rates in
1994 through 1996, several major producers announced new capacity increases in
1997 and 1998, particularly in the Far East. At the time of this announced new
capacity, there was a general slowdown in the economic growth rate in the Far
East, prompting customers to begin utilizing their available inventories and
decrease purchases of additional product. As a result, our average styrene
prices declined from fiscal 1997 through fiscal 1999, as the previously
announced new capacity came on line at the same time that economic events in
various Asian countries significantly reduced demand growth for styrene.
During fiscal 2000, styrene prices and margins increased significantly from
levels experienced in fiscal 1999. These improvements were driven by a
combination of stronger market demand, operating problems experienced at several
of our competitors, and generally low inventory levels worldwide. Styrene prices
and margins peaked in April of 2000 at a published spot price of $0.48 per pound
and decreased over the second half of 2000, with published spot prices dropping
to $0.31 per pound in September 2000, due to lower demand and inventory
corrections. Currently, Chemical Market Associates, Inc. is reporting styrene
spot prices in the $0.25 to $0.28 per pound range. We cannot predict future
increases or decreases in styrene prices and margins.
Acrylonitrile. Current global acrylonitrile capacity is approximately 12
billion pounds per year. The acrylonitrile market exhibits similar
characteristics regarding capacity utilization, selling prices, and profit
margins as those of styrene. Moreover, as a result of our high percentage of
export acrylonitrile sales, demand for our acrylonitrile is significantly
influenced by export customers, particularly those that supply acrylic fibers to
customers in China. During 1995, strong demand for acrylic fibers and ABS
resins, particularly in China, increased demand for acrylonitrile resulting in
high prices and margins. High utilization rates and prices prompted many major
producers to announce new capacity increases and approximately two billion
pounds of capacity increases came on line between 1996 and 1998. As new
acrylonitrile capacity in the United States and Asia came on line and demand
growth in Asian markets weakened, acrylonitrile prices and margins decreased
significantly from 1996 through 1999. Beginning in early fiscal 2000,
acrylonitrile prices increased significantly due to strong market demand,
operating problems experienced at several of our competitors, and generally low
inventory levels. However, we were not able to fully capitalize on this
opportunity as a result of planned shutdowns related to the construction by
Monsanto of the DSIDA plant at our Texas City facility and several plant
operating problems.
Solutia, Inc. began operating a new acrylonitrile production facility in
North America in the fourth calendar quarter of 2000, which has a rated annual
production capacity of approximately 500 million pounds. In addition, Formosa
Plastics, Inc. has begun producing from its new 450 million pound facility in
Taiwan.
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Acetic Acid. Current United States acetic acid capacity is approximately
6.5 billion pounds per year. Several capacity additions occurred in 1998 and
1999, including an expansion of our acetic acid unit in Texas City from 800
million pounds of rated annual production capacity to 1 billion pounds. In
addition, in late 2000, BP Chemicals Inc. and Celanese AG began operations of
880 million pound and 1,100 million pound acetic acid production units in
Malaysia and Singapore, respectively. Demand for acetic acid is linked to demand
for vinyl acetate monomer, a key intermediate in the production of a wide array
of polymers. Demand for vinyl acetate monomer has increased as a result of
strong demand for environmentally friendly coatings.
Plasticizers. Our rated plasticizers capacity is 280 million pounds per
year. We have an agreement with BASF Corporation pursuant to which we sell all
of our plasticizers production to BASF through 2007. Our plasticizers are
produced with an ethylene based technology, while most of our competitors use a
propylene based technology. Our plasticizers are produced from linear alpha
olefins, while many of our competitors use propylene-based technology. Our
plasticizers typically receive a premium over certain commodity products based
on propylene due to their performance enhancing properties. However, the
financial performance of our business can be affected by the cost of underlying
raw materials, especially when the cost of one olefin rises faster than the
other.
Acrylic Fibers. We and Solutia are the only two manufacturers of acrylic
fibers in North America. Acrylic fibers compete with other fibers, including
polyester and wool. From 1998 through 2000, the acrylic fibers industry
experienced decreased sales prices and margins due to a significant drop in the
demand for acrylic fibers products which resulted from the economic events in
various countries in Asia, increased competition from European suppliers, and a
negative growth rate in demand in North America.
Pulp Chemicals
Sodium Chlorate. Historically, sodium chlorate has also experienced cycles
in capacity utilization, selling prices, and profit margins, although not to the
extremes seen in the petrochemicals markets. Since the mid-1980s, North American
demand for sodium chlorate has grown at an average annual rate of approximately
9% as pulp mills have accelerated substitution of chlorine dioxide for elemental
chlorine in bleaching applications. Substitution of chlorine dioxide for
elemental chlorine is driven primarily by environmental concerns. Chlorine
dioxide is produced from sodium chlorate, which is one of our primary pulp
chemicals products. Under the United States Environmental Protection Agency's
"Cluster Rules," elemental chlorine cannot be used in bleaching applications,
which has resulted in increased substitution of chlorine dioxide for elemental
chlorine by the North American pulp and paper industry as the mandatory
compliance date of the Cluster Rules, April of 2001, draws near.
In 1998 and 1999, demand for sodium chlorate did not increase at historical
rates due to weak market conditions and lower operating rates in the pulp and
paper industry. In addition, new sodium chlorate production capacity was added
while implementation of the Cluster Rules was delayed. United States operating
rates remained flat from 1998 to 1999 and average prices for our sodium chlorate
decreased by approximately 8% from fiscal 1998 to fiscal 1999. However, during
fiscal 2000, average sodium chlorate prices increased due to increased operating
rates at pulp mills and the continued conversion to elemental chlorine free
bleaching at pulp mills. Our average sodium chlorate prices increased by
approximately 4% from fiscal 1999 to fiscal 2000. We and two other companies
collectively account for more than 70% of North American sodium chlorate
production capacity.
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PRODUCT SUMMARY
The following table summarizes our principal products, including our
capacity, primary end uses, raw materials, and major competitors for each
product. "Capacity" represents rated annual production capacity at September 30,
2000, which is calculated by estimating the number of days in a typical year a
production facility is expected to operate after allowing for downtime for
regular maintenance and multiplying that number by an amount equal to the
facility's optimal daily output based on the design feedstock mix. As the
capacity of a facility is an estimated amount, actual production may be more or
less than capacity.
STERLING PRODUCT INTERMEDIATE
(CAPACITY) PRODUCTS PRIMARY END PRODUCTS RAW MATERIALS MAJOR COMPETITORS
- ---------------- ------------ -------------------- ------------- -----------------
PETROCHEMICALS
Styrene Polystyrene, Building products, boat Ethylene and benzene Dow Chemical Company,
(1.7 billion ABS/SAN resins, and automotive components, Lyondell Chemical
pounds per year) styrene butadiene disposable cups and trays, Company, BP
latex, and trays, packaging and Chemicals Inc.,
unsaturated containers, housewares, Chevron Chemical
polyester resins tires, audio and video Company, Shell
cassettes, luggage, Chemicals, Inc.,
children's toys, paper Cos-Mar (a
coating, appliance joint venture of General
parts, and Electric Company and
carpet backing FINA Inc.), and Nova
Corporation
Acrylonitrile Acrylic fibers Apparel, furnishings, Ammonia and BP Chemicals Inc., Cytec
(740 million and upholstery, household propylene Industries Inc., E.I.
pounds per year) ABS/SAN resins appliances, carpets, and du Pont de Nemours and
plastics for automotive Company, Asahi Chemical
parts using ABS and SAN Industry Company, Ltd.,
polymers EC Erdoelchemie GmbH,
and Solutia Inc.
Acrylic Fibers NA Apparel, fleece, hosiery, Acrylonitrile, vinyl Solutia Inc.
(150 million industrial, sweaters, acetate, sodium Cydsa, S.A. de C.V.
pounds per year) pile fabrics, outdoor thiocyanate, sodium Bayer AG
furniture, friction bisulfate, and finish
materials, gaskets, oil
specialty papers, and
non-wovens
Acetic Acid Vinyl acetate, Adhesives, PET bottles, Methanol and carbon Celanese AG, Eastman
(1 billion terephthalic fibers, and surface monoxide Chemical Company, and
pounds per year) acid, coatings Millennium Chemicals
and acetate Inc.
solvents
Methanol Acetic acid, Adhesives, Natural gas, steam, Methanex Corporation,
(150 million MTBE, and surface coatings, and carbon dioxide Borden Chemical,
gallons per year) formaldehyde gasoline oxygenate and Lyondell Methanol
octane enhancer, and Company, L.P., Celanese
plywood adhesives AG, and Terra Industries
Plasticizers Polyvinyl Flexible plastics, such Alpha-olefins, carbon Exxon Mobile Corporation,
(280 million chloride as shower curtains and monoxide, hydrogen, Aristech Chemical, and
pounds per year) (PVC) liners, floor coverings, and orthoxylene Eastman Chemical
cable insulation, Company
upholstery, and plastic
molding
TBA NA Pesticides, solvents, Isobutylene, sulfuric BASF Corporation and
(21 million pharmaceuticals, and acid, caustic soda, Nitto Chemical Industry
pounds per year) synthetic rubber and hydrogen cyanide Co., Ltd.
Sodium Cyanide NA Electroplating and Caustic soda and Degussa-Huls
(85 million precious metals recovery hydrogen cyanide FMC Corporation
pounds per year)
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STERLING PRODUCT INTERMEDIATE
(CAPACITY) PRODUCTS PRIMARY END PRODUCTS RAW MATERIALS MAJOR COMPETITORS
- ---------------- ------------ -------------------- ------------- -----------------
PULP CHEMICALS
Sodium Chlorate Chlorine dioxide Bleaching agent for Electricity, salt, and Akzo Nobel, N.V.,
(500,000 tons wood pulp production; water Nexen Inc., Kerr-McGee
per year) downstream products Corporation, and Huron
include high quality Chemicals
office and coated
papers
Chlorine Dioxide NA Chlorine dioxide for use NA Akzo Nobel, N.V.
Generators in the bleaching of
wood pulp
Sodium Chlorite Chlorine dioxide Antimicrobial agent for Sodium chlorate and Vulcan Chemicals
(3,500 tons per year) municipal water hydrochloric acid
treatment and disinfectant
for fresh produce
Chlor Alkali NA Bleaching and digesting Electricity, salt, and Occidental Chemical
agent for pulp and water Company, Dow Chemical
paper, widely used in Company, and Pioneer
potable water and Companies, Inc.
wastewater treatment
programs and in swimming
pools
Calcium Hypochlorite NA Sanitizing agent to Lime, water, caustic Olin Corporation and
(9,000 metric control bacteria soda, and chlorine PPG Industries
tons per year) and algae in swimming
pools
PRODUCTS
Petrochemicals
Styrene. We are the fourth largest North American producer of styrene. Our
styrene unit, located at our Texas City facility, is one of the largest in the
world and has a rated annual production capacity of approximately 1.7 billion
pounds, which represents approximately 13% of total North American capacity. We
sold approximately 25% of our styrene sales volumes pursuant to conversion and
other long-term agreements during fiscal 2000. Approximately 61% of our styrene
sales volumes were exported in fiscal 2000, principally to Asia, either directly
or through arrangements with large international trading companies.
Acrylonitrile. We are the third largest North American producer of
acrylonitrile. Our acrylonitrile unit, located at our Texas City facility, has a
rated annual production capacity of approximately 740 million pounds, which
represents approximately 19% of total North American capacity. We sold
approximately 82% of our acrylonitrile sales volumes pursuant to conversion and
other long-term agreements during fiscal 2000. Approximately 48% of our
acrylonitrile production in fiscal 2000 was exported. All of our acrylonitrile
sold in Asia and South America is sold through ANEXCO, LLC, our joint venture
with BP Chemicals Inc. During fiscal 2000, we used a portion of our hydrogen
cyanide, a by-product of acrylonitrile manufacturing, as a raw material for the
production of TBA and sodium cyanide and burned the rest as fuel. In October of
1999, we and Monsanto entered into several agreements related to the
construction by Monsanto of the DSIDA plant at our Texas City facility. When the
DSIDA plant began operating near the end of the first quarter of fiscal 2001,we
started using all of our previously under-utilized hydrogen cyanide as a primary
feedstock for the production of DSIDA.
As previously discussed, we are currently evaluating a variety of strategic
alternatives with respect to our acrylic fibers operations. We do not know
whether this process will result in a transaction. In addition, even if an
acceptable transaction is identified, we may elect to forgo that transaction.
Acetic Acid. We are the second largest North American producer of acetic
acid. Our acetic acid unit, located at our Texas City facility, has a rated
annual production capacity of approximately 1 billion pounds, which represents
approximately 16% of total North American capacity. All of our acetic acid
production is sold to BP Chemicals pursuant to a long-term contract that expires
in 2016. In March of 1999, we completed an expansion of our acetic acid
facilities in conjunction with BP Chemicals. BP Chemicals provided its CativaTM
technology and a significant portion of
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the capital for the expansion. The expansion increased our annual acetic acid
production capacity by approximately 25% to our current rated annual capacity of
1 billion pounds.
Methanol. We own a methanol unit at our Texas City facility with a rated
annual production capacity of approximately 150 million gallons. Approximately
57% of our methanol production was used as a raw material in our acetic acid
unit during fiscal 2000. On June 29, 2000, we, in conjunction with BP Chemicals,
announced a multi-year contract with Methanex Corporation for the purchase of
our respective methanol requirements from Methanex. At the time, we granted
Methanex exclusive rights to acquire the output of our methanol plant, which we
continue to own. Under this agreement, Methanex chose to shut down our methanol
plant on July 1, 2000 and provide our methanol requirements with methanol
produced in countries that have a significant advantage in the cost of natural
gas, the primary raw material in the production of methanol. However, Methanex
may elect to restart our methanol facility at any time, subject to notice
requirements and the payment of related expenses.
Plasticizers. We produce plasticizers at our Texas City facility for BASF
Corporation. Under our long-term agreement with BASF, which expires in 2007, we
sell all of our plasticizers production to BASF. Our rated annual production
capacity of plasticizers is approximately 280 million pounds.
TBA. Our rated annual production capacity for TBA is approximately 21
million pounds. We use a portion of our hydrogen cyanide by-product from our
Texas City acrylonitrile facility to produce TBA, which we sell to Flexsys
America L.P. pursuant to a conversion agreement. In December of 1999, Flexsys
notified us of their intention to terminate the contract as of December 31,
2001. We are currently evaluating our options related to TBA production
following the termination of this contract.
Sodium Cyanide. Pursuant to a long-term arrangement, we operate a sodium
cyanide unit at our Texas City facility which is owned by E. I. du Pont de
Nemours and Company. This sodium cyanide unit uses hydrogen cyanide by-product
from our Texas City acrylonitrile facility as a raw material. The rated annual
production capacity of this unit is approximately 85 million pounds.
DSIDA. Near the end of the first quarter of fiscal 2001, we began operating
a DSIDA plant at our Texas City facility that is owned by Monsanto. DSIDA is an
essential intermediate in the production of Monsanto's Roundup(R), a glyphosate
based herbicide. Under long-term arrangements with Monsanto, we operate the
DSIDA plant on behalf of Monsanto and supply hydrogen cyanide by-product from
our Texas City acrylonitrile facility as a raw material. The rated annual
production capacity of the DSIDA plant is 80 million pounds.
Acrylic Fibers. We are one of two North American producers of acrylic
fibers. Our acrylic fibers facility's rated annual production capacity is
approximately 150 million pounds, which represents approximately 33% of total
North American capacity. Approximately 27% of our acrylic fibers production was
exported in fiscal 2000. We produce regular textile fibers, specialty textile
fibers, and technical fibers. Regular textile fibers are commodity fibers whose
sales are primarily driven by price and service rather than product
characteristics. Specialty textile fibers are targeted for specific applications
or end uses and typically have higher margins than regular textile fibers.
Technical fibers are specially engineered for industrial, non-textile uses such
as brake linings and typically have higher margins than textile fibers.
Pulp Chemicals
Sodium Chlorate. We are the second largest producer of sodium chlorate in
North America. Our six sodium chlorate facilities have an aggregate rated annual
production capacity of approximately 500,000 tons, which represents
approximately 23% of total North American capacity.
Chlorine Dioxide Generators. Through our ERCO Systems Group, we are the
largest worldwide supplier of patented technology for generators that certain
pulp mills use to convert sodium chlorate into chlorine dioxide. Each mill that
uses chlorine dioxide requires at least one generator. We receive revenue when a
generator is sold to a mill and also receive royalties from the mill after
start-up, generally over a ten-year period, based on the amount of chlorine
dioxide produced by the generator. We have supplied approximately two-thirds of
all existing modern pulp mill generators worldwide.
The research and development group of ERCO works to develop new and more
efficient generators. When pulp mills move to higher levels of substitution of
chlorine dioxide for elemental chlorine, they are usually required to upgrade
generator capacity or purchase new generator technology. Pulp mills may also
convert to a newer generator to
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take advantage of efficiency advances and technological improvements. Each
upgrade or conversion requires a licensing agreement, which generally provides
for payment of an additional ten-year royalty.
Sodium Chlorite. We have a rated annual production capacity of sodium
chlorite of approximately 3,500 tons.
For historical information presented on a segmented basis for our
petrochemicals business and pulp chemicals business, see Note 7 of the Notes to
Consolidated Financial Statements included in this Form 10-K.
SALES AND MARKETING
We sell our petrochemicals products pursuant to:
o multi-year contracts;
o conversion agreements; and
o spot transactions in both the domestic and export markets.
We have certain long-term agreements that provide for the dedication of 100% of
our production of acetic acid, plasticizers, sodium cyanide, and DSIDA each to
one customer. We also have various sales and conversion agreements that dedicate
significant portions of our production of styrene and acrylonitrile to certain
customers. Some of these agreements provide for cost recovery plus an agreed
profit margin based upon market prices. These agreements help us to:
o optimize capacity utilization rates;
o lower our selling, general, and administrative expenses;
o reduce our working capital requirements; and
o insulate our operations to some extent from the effects of declining
markets and changes in raw materials prices.
We compete on the basis of product price, quality, and deliverability.
Prices for our petrochemicals products are determined by global market
factors that are largely beyond our control and, except with respect to a number
of our multi-year contracts, we generally sell these products at prevailing
market prices.
Some of our multi-year contracts for our petrochemicals products are
structured as conversion agreements, pursuant to which the customer furnishes
raw materials that we process into finished products. In exchange, we receive a
fee typically designed to cover our fixed and variable costs of production and
to generally provide an element of profit depending on the existing market
conditions for the product. These conversion agreements help us to maintain
lower levels of working capital and, in some cases, to gain access to certain
improvements in manufacturing process technology. We believe our conversion
agreements help insulate us to some extent from the effects of declining markets
and changes in raw materials prices, while allowing us to share in the benefits
of favorable market conditions for most of the products sold under these
arrangements. The balance of our petrochemicals products are sold by our direct
sales force or through ANEXCO, LLC, our marketing joint venture with BP
Chemicals.
Our acrylic fibers facility currently markets products in North America
through our internal sales staff and to international customers through
non-affiliated agents. Acrylic fibers are priced based upon market conditions,
which include, but are not limited to, raw materials costs, prices of competing
and alternative products, and type of end use.
We sell sodium chlorate primarily in Canada and the United States,
generally under one to five-year supply contracts, most of which provide for
minimum and maximum volumes or a percentage of requirements at market prices. In
addition, most of our sodium chlorate sales contracts contain certain "meet or
release" pricing clauses and restrictions on the amount and timing of future
price increases.
We market chlorine dioxide generators worldwide to the pulp and paper
industry. We sell the technology and equipment, which we design and purchase
from our strategic alliance partners. In addition to being paid for the
technology and equipment, we receive royalties based on the amount of chlorine
dioxide produced by the generator, generally over a ten-year period.
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For information regarding our export sales and domestic and foreign
operations, see Note 7 of the Notes to Consolidated Financial Statements
included in this Form 10-K.
CONTRACTS
Our key multi-year contracts, which collectively accounted for 17% of our
fiscal 2000 revenues, are described below. BP Chemicals accounted for
approximately 12%, 10%, and 12% of our revenues in fiscal 2000, 1999, and 1998,
respectively. No other single customer accounted for more than 10% of our
revenues in the last three fiscal years.
Styrene-Bayer
We currently have a conversion agreement with Bayer Corporation, a
subsidiary of Bayer AG. Under this agreement, we provide Bayer, subject to
specified minimum and maximum quantities, with a major portion of Bayer's
styrene requirements for its manufacture of styrene-containing polymers. During
fiscal 2000, we delivered approximately 8% of our styrene production pursuant to
this agreement. This agreement expires on December 31, 2000.
Acrylonitrile-Solutia
We had a multi-year conversion agreement with Solutia, formerly the
chemical business of Monsanto Company, pursuant to which we delivered
approximately 23% of our fiscal 2000 acrylonitrile production to Solutia.
Solutia began operating a new acrylonitrile production facility in Chocolate
Bayou, Texas, in the fourth calendar quarter of 2000, which has a rated annual
production capacity of approximately 500 million pounds. In anticipation of the
start-up of this facility, Solutia terminated our conversion agreement,
effective September 1, 2000.
Acrylonitrile-BP Chemicals
In 1988, we entered into a long-term production agreement with BP Chemicals
under which BP Chemicals contributed the majority of the capital expenditures
required for starting the third acrylonitrile reactor train at our Texas City
acrylonitrile facility. Under this agreement, BP Chemicals has the option to
take up to approximately one-sixth of our total acrylonitrile capacity. BP
Chemicals furnishes the necessary raw materials and pays us a conversion fee for
the amount of acrylonitrile it takes and reimburses us for a portion of the
fixed costs related to acrylonitrile production at our Texas City facility. To
protect BP Chemicals in the event we default under the production agreement, BP
Chemicals has a first priority security interest in the third reactor and
related equipment and in the first acrylonitrile produced in our three reactor
units to the extent BP Chemicals is entitled to purchase acrylonitrile under
this production agreement. This agreement was amended and restated during April
of 1998 to, among other things, encourage increased manufacturing and technical
cooperation. During fiscal 2000, we delivered approximately 25% of our
acrylonitrile production to BP Chemicals pursuant to this agreement.
The acrylonitrile reactor in which BP Chemicals invested capital
incorporates certain BP Chemicals technological improvements under a separate
license agreement. We have the right to incorporate these and any future
improvements into our other two acrylonitrile reactors.
In order to enhance the marketing of our acrylonitrile, we and BP Chemicals
formed ANEXCO, LLC, an exclusive 50/50 joint venture to market acrylonitrile in
Asia and South America. During fiscal 2000, we sold approximately 32% of our
acrylonitrile production through ANEXCO.
Acetic Acid-BP Chemicals
In 1986, we entered into a long-term production agreement with BP
Chemicals, which has since been amended, under which BP Chemicals has the
exclusive right to purchase all of our acetic acid production until August of
2016 and is obligated to make certain unconditional monthly payments to us until
August of 2006 and reimburse us for our operating costs. We are also entitled to
receive a portion of the profits earned by BP Chemicals from the sale of the
acetic acid we produce.
Methanol-BP Chemicals-Methanex
In August of 1996, we entered into a long-term production and sales
agreement with BP Chemicals, under which BP Chemicals contributed a significant
portion of the capital expenditures required for the construction of our
methanol production facility at our Texas City facility and obtained the right
to receive a substantial portion of our methanol
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production. The initial term of this agreement expires July 31, 2016.
Historically, a portion of the output of the methanol facility was used in our
acetic acid unit and the remainder was marketed by BP Chemicals in the merchant
market and in BP Chemicals' worldwide acetic acid business.
On June 29, 2000, we, in conjunction with BP Chemicals, announced a
multi-year contract with Methanex Corporation for the purchase of our respective
methanol requirements from Methanex. At the time, we granted Methanex exclusive
rights to acquire the output of our methanol plant, which we continue to own.
Under this agreement, Methanex chose to shut down our methanol plant July 1,
2000, and provide our methanol requirements with methanol produced in countries
that have a significant advantage in the cost of natural gas, the primary raw
material in the production of methanol. However, Methanex may elect to restart
our methanol facility at any time, subject to notice requirements and the
payment of related expenses. The initial term of these arrangements expires
December 31, 2003, with automatic annual renewals thereafter unless we or
Methanex elect to terminate these arrangements.
Plasticizers-BASF
Since 1986, we have sold all of our plasticizers production to BASF
pursuant to a product sales agreement that has previously been amended and
expires at the end of 2007. BASF provides us with some of the required raw
materials and markets the plasticizers we produce. BASF is obligated to make
certain quarterly payments to us and reimburses us monthly for actual production
costs. In addition, we are entitled to a share of the profits earned by BASF
that are attributable to the plasticizers we produce.
RAW MATERIALS FOR PRODUCTS AND ENERGY RESOURCES
For most of our products, the cost of raw materials and energy resources,
including utilities in the case of pulp chemicals, is far greater than all other
production costs combined. Thus, an adequate supply of raw materials and
utilities at reasonable prices and on acceptable terms is critical to the
success of our business. Most of the raw materials we use are global commodities
which are made by a large number of producers. Prices for many of these raw
materials are subject to wide fluctuations for a variety of reasons beyond our
control. Although we believe that we will continue to be able to secure adequate
supplies of our raw materials and energy, there can be no assurance that we will
be able to do so at acceptable prices and payment terms to meet our
requirements. See "Certain Known Events, Trends, Uncertainties, and Risk
Factors."
Petrochemicals
Styrene. We manufacture styrene by converting ethylene and benzene into
ethylbenzene, which we then process into styrene. Ethylene and benzene are both
commodity petrochemicals. Prices for each can fluctuate widely due to
significant changes in the availability of these products. We have multi-year
arrangements with several major ethylene and benzene suppliers that provide our
estimated requirements for purchased ethylene and benzene at generally
prevailing and competitive market prices. Our conversion agreements require that
the other parties to these agreements furnish us with the ethylene or benzene
necessary to fulfill our conversion obligations. Approximately 15% of our fiscal
2000 benzene requirements and approximately 17% of our fiscal 2000 ethylene
requirements were furnished by customers pursuant to conversion arrangements. If
various customers for whom we now manufacture styrene under conversion
agreements were to cease furnishing their own raw materials and seek only to
purchase styrene from us without supplying their own raw materials, our
requirements for purchased benzene and ethylene could significantly increase.
Acrylonitrile. We produce acrylonitrile by reacting propylene and ammonia.
Propylene and ammonia are both commodity chemicals and the price for each can
fluctuate widely due to significant changes in the availability of these
products. The propylene or ammonia needed for the acrylonitrile we produce under
conversion agreements is furnished to us by our customers. We purchase the rest
of the propylene and ammonia we need for acrylonitrile production. Approximately
50% of our fiscal 2000 propylene requirements and approximately 46% of our
fiscal 2000 ammonia requirements were furnished by customers pursuant to
conversion agreements. If various customers for whom we now manufacture
acrylonitrile under conversion agreements were to cease furnishing their own raw
materials and seek only to purchase acrylonitrile from us without supplying
their own raw materials, our requirements for purchased propylene and ammonia
could significantly increase.
Acetic Acid. Acetic acid is manufactured primarily from carbon monoxide and
methanol. In the past, we produced all of the methanol required by our acetic
acid unit. However, under the previously discussed multi-year agreements with
Methanex, we have purchased all of our methanol requirements from Methanex since
July 1, 2000. In 1996,
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Praxair Hydrogen Supply, Inc. constructed a partial oxidation unit at our Texas
City facility that supplies us with all of the carbon monoxide we require for
the production of acetic acid. This unit was recently expanded in conjunction
with the expansion of our acetic acid unit.
Methanol. Methanol is produced primarily from natural gas and steam. We
obtain our natural gas under supply contracts and on the spot market, typically
at prevailing market prices, and we produce our own steam.
Plasticizers. The primary raw materials for plasticizers are alpha-olefins
and orthoxylene, which are supplied by BASF under our long-term conversion
agreement.
TBA. We produce TBA from hydrogen cyanide, isobutylene, sulfuric acid, and
caustic soda. We use hydrogen cyanide produced as a by-product of our
acrylonitrile manufacturing process. Currently, Flexsys supplies the
isobutylene, sulfuric acid, and caustic soda needed in our TBA operations under
our conversion agreement with them.
Sodium Cyanide. Sodium cyanide is manufactured from hydrogen cyanide and
caustic soda. We use hydrogen cyanide produced as a by-product of our
acrylonitrile manufacturing process and DuPont supplies the caustic soda under
our long-term conversion agreement.
Acrylic Fibers. Acrylonitrile is the most significant raw material used in
the production of acrylic fibers, representing approximately 50% of the total
cash cost of production. Pursuant to our supply agreement with Cytec, which we
assumed in connection with our purchase of the acrylic fibers facility from
Cytec, our acrylic fibers facility is required to purchase all of its
acrylonitrile requirements from Cytec until February 28, 2002. After this
agreement expires, we expect to supply the acrylonitrile requirements of our
acrylic fibers facility from our Texas City acrylonitrile facility.
Pulp Chemicals
Sodium Chlorate. Sodium chlorate is manufactured by passing an electric
current through an undivided cell containing a solution of sodium chloride. The
primary raw materials for the production of sodium chlorate are electricity,
salt, and water. Of these, electric power typically represents approximately 65%
of the variable cost of production. Consequently, the rates charged by local
electric utilities are an important competitive factor among sodium chlorate
producers. Electric power is purchased by each of our pulp chemicals facilities
pursuant to contracts with local electric utilities. On average, we believe that
our electrical power costs at our pulp chemical facilities are competitive with
other producers in the areas in which we operate. The current trend towards
deregulation of electric power makes our future cost for electric power
uncertain in the short term. We purchase most of the sodium chloride that we use
in the manufacture of sodium chlorate under requirements contracts with major
suppliers.
TECHNOLOGY AND LICENSING
Petrochemicals
In 1986, Monsanto granted us a non-exclusive, irrevocable, and perpetual
right and license to use Monsanto's technology and other technology Monsanto
acquired through third-party licenses in effect at the time of the acquisition
of our Texas City facility from Monsanto. We use these licenses in the
production of styrene, acrylonitrile, methanol, TBA, acetic acid, and
plasticizers. During 1991, BP Chemicals Ltd. ("BPCL") purchased the acetic acid
technology from Monsanto, subject to existing licenses.
Under an Acetic Acid Technology Agreement with BP Chemicals and BPCL, BPCL
granted us a non-exclusive, irrevocable, and perpetual right and license to use
acetic acid technology owned by BPCL and some of its affiliates at our Texas
City facility, including any new acetic technology developed by BPCL at its
acetic acid facilities in England during the term of such agreement or pursuant
to the research and development program provided by BPCL under the terms of such
agreement.
BPCL has also granted us a non-exclusive, irrevocable, and perpetual
royalty-free license to use its acrylonitrile technology at our Texas City
facility as part of the 1988 acrylonitrile expansion project. This license
automatically terminates upon the termination of our acrylonitrile production
agreement with BP Chemicals. We have agreed with BPCL to cross-license any
technology or improvements relating to the manufacture of acrylonitrile at our
Texas City facility.
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We believe that the manufacturing processes we utilize at our Texas City
facility are cost effective and competitive. Although we do not engage in
alternative process research with respect to our Texas City facility, we do
monitor new technology developments and, when we believe it is necessary, we
typically seek to obtain licenses for process improvements.
We own substantially all of the technology used in our acrylic fibers
operations. We license certain of our acrylic fibers manufacturing technology to
producers worldwide. We hope to capitalize on increasing demand for this
technology as developing countries seek to increase acrylic fibers production
capacity. Approximately 15% of the world's total acrylic fibers capacity is
based on our technology.
Pulp Chemicals
We produce sodium chlorate using state-of-the-art metal cell technology.
Our principal technology business is the design, sale, and technical service of
custom-built patented chlorine dioxide generators. Our ERCO Systems Group is
involved in the technical support of our sales and marketing group through joint
calling efforts which define the scope of a project, as well as producing
technical schedules and cost estimates.
We perform detailed design of chlorine dioxide generators, which are then
fabricated by contractors. Plant installation, instrumentation testing, and
generator start-up are supervised by our joint engineering/technical service
team. Prior to 1996, we were involved in a number of patent disputes with Akzo
Nobel, N.V. regarding chlorine dioxide technology. In 1996, we reached a
settlement of these disputes that allows licensees of both companies to operate
their respective chlorine dioxide generators within the broadest range of
operating conditions.
Our pulp chemicals research and development activities are carried out at
our Toronto, Ontario laboratories. Activities include the development of new or
improved chlorine dioxide generation processes and research into new
technologies focusing on electrochemical and membrane technology related to
chlorine dioxide, including improvement of quality and reduction of quantity of
pulp mill effluents and treatment of municipal water supplies.
COMPETITION
The industries in which we operate are highly competitive. Many of our
competitors, particularly in the petrochemicals industry, are larger and have
substantially greater financial resources than we have. Among our competitors
are some of the world's largest chemical companies that, in contrast to us, have
their own raw materials resources. In addition, a significant portion of our
business is based upon widely available technology. The entrance of new
competitors into the industry and the addition by existing competitors of new
capacity could have a negative impact on our ability to maintain existing market
share or maintain or increase profit margins, even during periods of increased
demand for our products. You can find a list of our principal competitors in the
"Product Summary" table.
Historically, profitability of the petrochemicals industry has been
affected by vigorous price competition, which may intensify due to, among other
things, new domestic and foreign industry capacity. Our businesses are subject
to changes in the world economy, including changes in currency exchange rates.
In general, weak economic conditions, either in the United States or worldwide,
tend to reduce demand and put pressure on the margins for our products.
Beginning in fiscal 1997, economic events in various Asian countries negatively
impacted the demand growth for our products and, along with increases in supply,
had a negative impact on sales volumes, prices, and margins. However, beginning
in fiscal 2000, market conditions for our styrene, acrylonitrile, and sodium
chlorate began to strengthen as a result of the previously discussed strong
market demand, operating problems at some of our competitors, and generally low
inventory levels. Spot prices for styrene peaked early in the third quarter of
fiscal 2000 at approximately $0.48 per pound. However, the completion of several
industry turnarounds early in the quarter, combined with decreased styrene
purchases by customers and lower polystyrene operating rates, caused spot prices
to decline during the fourth quarter of fiscal 2000. Spot prices have continued
to be in the $0.25-$0.28 per pound range into the first quarter of fiscal 2001.
Operations outside the United States are subject to the economic and political
risks inherent in the countries in which they operate. Additionally, the export
and domestic markets can be affected significantly by import laws and
regulations. During fiscal 2000, our export sales were approximately 43% of our
total revenues. It is not possible to predict accurately how changes in raw
materials costs, market conditions, or other factors will affect future sales
volumes, prices, and margins for our products.
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ENVIRONMENTAL MATTERS
General
Our operations involve the handling, production, transportation, treatment,
and disposal of materials that are classified as hazardous or toxic waste and
that are extensively regulated by environmental and health and safety laws,
regulations, and permit requirements. Environmental permits required for our
operations are subject to periodic renewal and can be revoked or modified for
cause or when new or revised environmental requirements are implemented.
Changing and increasingly strict environmental requirements can affect the
manufacture, handling, processing, distribution, and use of our chemical
products and, if so affected, our business and operations may be materially and
adversely affected. In addition, changes in environmental requirements can cause
us to incur substantial costs in upgrading or redesigning our facilities and
processes, including our waste treatment, storage, disposal, and other waste
handling practices and equipment.
We conduct environmental management programs designed to maintain
compliance with applicable environmental requirements at all of our facilities.
We routinely conduct inspection and surveillance programs designed to detect and
respond to leaks or spills of regulated hazardous substances and to correct
identified regulatory deficiencies. We believe that our procedures for waste
handling are consistent with industry standards and applicable requirements. In
addition, we believe that our operations are consistent with good industry
practice. During fiscal 2000, we withdrew our membership in the American
Chemistry Council as part of our ongoing assessment of trade association
membership costs versus benefits. However, we continue to participate in the
ACC's Responsible Care(R) initiatives as a part of our membership in several
trade groups which are partner associations in the ACC in the United States and
the Canadian Chemical Producers Association. Notwithstanding our efforts and
beliefs, a business risk inherent with chemical operations is the potential for
personal injury and property damage claims from employees, contractors and their
employees, and nearby landowners and occupants. While we believe our business
operations and facilities generally are operated in compliance in all material
respects with all applicable environmental and health and safety requirements,
we cannot be sure that past practices or future operations will not result in
material claims or regulatory action, require material environmental
expenditures, or result in exposure or injury claims by employees, contractors
and their employees, and the public. Some risk of environmental costs and
liabilities is inherent in our operations and products, as it is with other
companies engaged in similar businesses.
Our operating expenditures for environmental matters, mostly waste
management and compliance, were approximately $31 million for fiscal 2000 and
$30 million for fiscal 1999. We also spent approximately $1 million for
environmentally related capital projects in fiscal 2000 and $6 million for these
types of capital projects in fiscal 1999. In fiscal 2001, we anticipate spending
approximately $4 million for capital projects related to waste management and
environmental compliance. There are no capital expenditures related to
remediation of environmental conditions projected for fiscal 2001.
In light of our historical expenditures and expected future results of
operations, we believe we will have adequate resources to conduct our operations
in compliance with applicable environmental and health and safety requirements.
Nevertheless, we may be required to make significant site and operational
modifications that are not currently contemplated in order to comply with
changing facility permitting requirements and regulatory standards.
Additionally, we have incurred and may continue to incur liability for
investigation and cleanup of waste or contamination at our own facilities or at
facilities operated by third parties where we have disposed of waste. We
continually review all estimates of potential environmental liabilities but can
give no assurances that all potential liabilities arising out of our past or
present operations have been identified or fully assessed or that the amount
necessary to investigate and remediate such conditions will not be significant
to us.
We believe that we would be able to recover certain losses that may arise
out of claims related to environmental conditions at each of our facilities that
existed prior to their acquisition by us through contractual indemnities and/or
statutory law and common law principles, although there can be no assurance that
we would prevail against any prior owner of any of our facilities with respect
to any such claim.
Petrochemicals
Air emissions from our Texas City facility and our acrylic fibers facility
are subject to certain permit requirements and self-implementing emission
limitations and standards under state and federal laws. Our Texas City facility
is located in an area that the Environmental Protection Agency has classified as
not having attained the ambient air quality standards for ozone, which is
controlled by direct regulation of volatile organic compounds and nitrogen
oxide. The
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Texas Natural Resource Conservation Commission has imposed strict requirements
on regulated facilities, including our Texas City facility, to ensure that the
air quality control region will achieve the ambient air quality standards for
ozone. Our acrylic fibers facility is located in an area currently designated as
being in attainment for ozone under the Clean Air Act. Our Texas City facility
and our acrylic fibers facility are subject to the federal government's June
1997 National Ambient Air Quality Standards which lower the ozone and
particulate matter threshold for attainment. Local authorities also may impose
new ozone and particulate matter standards. Compliance with these stricter
standards may substantially increase our future nitrogen oxide and particulate
matter control costs, the amount and full impact of which cannot be determined
at this time. In addition, the Texas Natural Resource Conservation Commission
has proposed new regulations requiring significant reductions of nitrogen oxide
and particulate matter which, if enacted, will apply to our Texas City facility.
These proposed regulations are subject to the approval of the United States
Environmental Protection Agency, which is expected to be granted by mid-2001.
Under the current form of these proposed regulations, we would be required to
reduce emissions of nitrogen oxide at our Texas City facility by more than 90%,
which we estimate would require Chemicals to make between $30 million and $50
million in capital improvements at our Texas City facilities. The majority of
these capital expenditures would be expected in fiscal 2002, 2003 and 2004.
Under our production agreements with BP Chemicals, we would be able to recover a
small portion of these costs from BP Chemicals. We are currently evaluating
several alternative methods of reducing nitrogen oxide emissions at our Texas
City facility that would require a lesser amount of capital expenditures;
however, we cannot give any assurances that any alternative methods will be
available to us or that, even if available, these alternative methods will
reduce the amount of capital expenditures required to be made by a meaningful
amount. In addition, some of these expenditures could result in a reduction in
operating costs, however, there can be no assurances that we will be able to do
so.
To reduce the risk of offsite consequences from unanticipated events, we
acquired a greenbelt buffer zone adjacent to our Texas City facility in 1991
and, in connection with the acquisition of our acrylic fibers facility, acquired
a greenbelt area for our acrylic fibers facility. We also participate in a
regional air monitoring network to monitor ambient air quality in the Texas City
community.
A December 1994 Florida Department of Environmental Protection waiver for
use of an onsite nonhazardous landfill applies to our acrylic fibers facility.
This waiver was obtained in connection with Cytec's July 1994 petition for a
rulemaking to avoid a January 1995 rule prohibiting disposal of industrial waste
in other than a Class I landfill. Upon consummation of the acquisition of the
acrylic fibers business, we succeeded to the rights of Cytec under that petition
and waiver. In February of 2000, this issue was resolved when we received an
Industrial Waste Permit from the Florida Department of Environmental Protection
which allows us to continue to operate the landfill until February of 2005.
A settlement agreement entered into by the Environmental Protection Agency,
the Florida Department of Environmental Protection, and an environmental group
may also potentially apply to our acrylic fibers facility. This settlement
agreement imposes a no-migration standard for injection wells in underground
drinking water zones without regard to actual risk considerations. We and
several similarly situated companies have been contesting this settlement. An
April of 1999 ruling by the United States Court of Appeals for the 11th Circuit
may reduce the likelihood that the no-migration rule is enforceable, although we
can give you no assurance in that regard. In the event that the no-migration
rule becomes enforceable, we may incur material costs in redesigning our
wastewater handling systems. However, in September of 2000, the Florida
Department of Environmental Protection awarded us a five-year permit to operate
the deepwell injection facilities at our acrylic fibers facilities. Under this
permit, we were granted an "injection into an aquifer" exemption, subject to
monitoring of groundwater. As a result, during the life of this permit, we would
not be subject to this no-migration rule even if it became enforceable, assuming
that this permit is not revised in any material way.
Pulp Chemicals
Our pulp chemicals business is sensitive to potential environmental
regulations. On November 14, 1997, the Environmental Protection Agency enacted
regulations that support substitution of chlorine dioxide for elemental chlorine
in paper pulp bleaching processes to reduce the amount of absorbable organic
halides and other chlorine derivatives in bleach plant effluent. Chlorine
dioxide is produced from sodium chlorate, which is one of our pulp chemicals
products. Therefore, regulations restricting, but not completely banning,
absorbable organic halides and other chlorine derivatives in bleach plant
effluent have a favorable effect on our business.
Conversely, a significant ban on all chlorine containing compounds could
have a materially adverse effect on us. British Columbia has a regulation in
place requiring elimination of the use of all chlorine products, including
chlorine dioxide, in the bleaching process by the year 2002. The pulp and paper
industry believes that a ban of chlorine dioxide in the bleaching process will
yield no measurable environmental or public health benefit and is working to
change this
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regulation, but there can be no assurance that this regulation will be changed.
In the event such a regulation is implemented, we would seek to sell the
products we manufacture at our British Columbia facility to customers in other
markets. We are not aware of any other laws or regulations in place in North
America that would restrict the use of such products for other purposes.
We acquired four of our Canadian pulp chemicals facilities from Tenneco
Canada, Inc. in 1992 and our Saskatoon facility from Weyerhauser Canada Ltd. in
1997. Groundwater data obtained during the acquisition of the Tenneco facilities
indicated elevated concentrations of certain chemicals in the soil and
groundwater. Prior to completion of that acquisition, we conducted a focused
baseline sampling of groundwater conditions beneath the facilities and confirmed
that previous data. We have addressed or are addressing elevated soil or
groundwater concentrations of chemicals that we have encountered from time to
time at the facilities we acquired from Tenneco. We also reviewed air emissions
sources during the acquisition of these facilities and considered all available
dustfall and vegetation stress studies. This review indicated emission excursion
episodes at specific locations in the scrubber systems at the Thunder Bay,
Buckingham, and Vancouver facilities. The conditions at these three sites have
been addressed and satisfactorily resolved. We believe that all of the
facilities we acquired from Tenneco are otherwise in compliance in all material
respects with all permit requirements under applicable provincial law. At our
Saskatoon facility, remediation plans regarding ground water contamination from
prior operations are under negotiation. Weyerhauser Canada Ltd. and Crown
Treatment Corporation, who previously owned the facility, along with the
Saskatchewan Environmental Resource Ministry and ourselves, are participants in
the negotiations. Currently, our role is to coordinate the activities and the
prior owners are expected to fund the remediation costs.
EMPLOYEES
As of September 30, 2000, we had approximately 1,180 employees, including
approximately 790 assigned to our petrochemicals operations and approximately
390 assigned to our pulp chemicals operations. Approximately 35% of our
employees are covered by union agreements. The primary union agreement at our
Texas City facility is with the Texas City, Texas Metal Trades Council, AFL-CIO,
of Galveston County, Texas, which covers all hourly employees at our Texas City
facility. This agreement was renegotiated as of December 28, 1998, and will
expire on May 1, 2002. Employees at our Vancouver facility are represented by
the Pulp, Paper, and Woodworkers Union. The Vancouver labor agreement was
renegotiated in November of 2000 and is subject to further renegotiations in
November of 2003. Employees at our Buckingham facility are represented by either
the Communications, Energy, and Paperworkers Union or an office and professional
workers union. Both Buckingham labor agreements were renegotiated in November of
1999 and are subject to renegotiation in November of 2002. Approximately 81% of
the employees at our Saskatoon facility are represented by the Communications,
Energy, and Paperworkers of Canada. Our collective agreement with this union
expires September 30, 2001. Although we believe our relationship with our
employees is generally good, a strike by one or more of the unions representing
our employees could have a material adverse effect on us.
INSURANCE
We maintain full replacement value insurance coverage for property damage
to all of our facilities and business interruption insurance. Nevertheless, a
significant interruption in the operation of one or more of our facilities could
have a material adverse effect on us. We also maintain other insurance coverages
for various risks associated with our business. There can be no assurance that
we will not incur losses beyond the limits of, or outside the coverage of, our
insurance. From time to time various types of insurance for companies in the
chemical industry have been very expensive or, in some cases, unavailable. There
can be no assurance that in the future we will be able to maintain our existing
coverage or that premiums will not increase substantially.
ITEM 2. PROPERTIES
Our Texas City facility is located approximately 45 miles south of Houston
in Texas City, Texas, on a 290-acre site on Galveston Bay near many other
chemical manufacturing complexes and refineries. We have facilities to load our
products in trucks, railcars, barges, and ocean-going vessels for shipment to
customers. The site offers room for future expansion and includes a greenbelt
around the northern edge of the plant site. We own or lease all of the real
property which comprises our Texas City facility and all of the equipment and
facilities located there, other than the sodium cyanide unit which is owned by
DuPont, a cogeneration facility owned by a joint venture between us and Praxair
Energy Resources, Inc., the partial oxidation unit which is owned by Praxair
Hydrogen Supply, Inc., and the DSIDA plant which is owned by Monsanto. We also
own storage facilities, approximately 100 rail cars, and an acetic acid barge in
connection with our petrochemicals business.
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Our acrylic fibers facility is located on 1,100 acres near Pensacola in
Santa Rosa County, Florida. We own all of the real property on which our acrylic
fibers facility is situated and own or lease all of the facilities and equipment
located there. We have recently entered into an agreement for the construction
of a co-generation facility at our acrylic fibers facility that will be owned by
Santa Rosa Energy LLC, an affiliate of Polsky Energy Corporation.
Our pulp chemicals business includes five manufacturing facilities in
Canada and our Valdosta, Georgia facility. We own the property on which our
Buckingham, Quebec and Vancouver, British Columbia manufacturing facilities are
located, with each site comprising approximately 20 acres. We also own the
property on which our Saskatoon manufacturing facility is located, which
consists of approximately 270 acres. We lease the property for our Thunder Bay,
Ontario, and Grande Prairie, Alberta manufacturing facilities. Our Valdosta
facility was constructed in conjunction with, and is leased from, the
Valdosta-Lowndes County Industrial Authority. We also lease approximately 572
rail cars in connection with our pulp chemicals business. Headquarters for our
pulp chemicals operations are located in Toronto, Ontario in an office building
that we lease.
We lease our principal executive offices, located in Houston, Texas.
We believe our properties and equipment are sufficient to conduct our
business.
ITEM 3. LEGAL PROCEEDINGS
Ammonia Release
On May 8, 1994, an ammonia release occurred at our Texas City facility
while a reactor in our acrylonitrile unit was being restarted after a shutdown
for routine maintenance. Approximately 52 lawsuits and interventions involving
approximately 6,000 plaintiffs were filed against us seeking an unspecified
amount of money for alleged damages from the ammonia release. All claims related
to this release have been resolved within the limits of our insurance coverage.
The following ammonia lawsuits were settled or dismissed after September 30,
1999:
1. Otis Pointer Jr., individually and on behalf of all others similarly
situated, v. Sterling Chemicals, Inc., Paul Saunders, and an unknown
chemical operator; Cause No. 94CV0514; In the 56th Judicial District
Court of Galveston County, Texas.
2. Lilly Gordon, et al. v. Sterling Chemicals, Inc.; Cause No. 95-36592;
In the 281st Judicial District Court of Harris County, Texas.
Nickel Carbonyl Release
On July 30, 1997, as our methanol unit at our Texas City facility was being
shut down for repair, nickel carbonyl was formed when carbon monoxide reacted
with nickel catalyst in the unit's reformer. After isolating the nickel carbonyl
within the methanol unit, we worked with the permission and guidance of the
Texas Natural Resources Conservation Commission to destroy the nickel carbonyl
by incineration on-site. Prior to its incineration, several of our employees and
contractor employees may have been exposed to nickel carbonyl in the methanol
unit. Two lawsuits and two interventions involving approximately 306 plaintiffs
were filed against us seeking an unspecified amount for alleged damages from the
nickel carbonyl release. These lawsuits and interventions have either been
dismissed or settled within the limits of our insurance coverage.
The following nickel carbonyl lawsuits were settled or dismissed after
September 30, 1999:
1. Kurt Bodenshot, et al. v. Sterling Chemicals, Inc.; Cause No.
97CV0966; In the 212th Judicial District Court of Galveston County,
Texas.
2. Alonjo Ayala, et al. v. Sterling Chemicals Holdings, Inc. and Sterling
Chemicals, Inc.; Cause No. 99CV0759; In the 56th Judicial District of
Galveston County, Texas.
Ethylbenzene Release
On April 1, 1998, a chemical leak occurred when a line failed in the
ethylbenzene unit at our Texas City facility. The released chemicals included
ethylbenzene, benzene, polyethylbenzene, and hydrochloric acid. We do not
believe any serious injuries were sustained, although a number of citizens
sought medical examinations at local hospitals after a precautionary alert was
given to neighboring communities.
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The following ethylbenzene lawsuits are outstanding:
1. Zabrina Alexander, et al. v. Sterling Chemicals Holdings, Inc., et
al.; Cause No. 00CV0217; In the 10th Judicial District Court of
Galveston County, Texas;
2. James Allen, et al. v. Sterling Chemicals, Inc., et al.; Cause No.
200015823; In the 152nd Judicial District Court of Harris County,
Texas
3. Bobbie Adams, et al. v. Sterling Chemicals International, Inc., et
al.; Cause No. 00CV0311; In the 212th Judicial District Court of
Galveston County, Texas;
4. Nettie Allen, et al. v. Sterling Chemicals, Inc., et al.; Cause No.
00CV0304; In the 10th Judicial District Court of Galveston County,
Texas.
5. Climon Davis, et al. v. Sterling Chemicals, Inc.; Cause No. 00CV 0343;
In the 212th Judicial District Court of Galveston County, Texas
6. Ida Goldman, et al. v. Sterling Chemicals, Inc., et al.; Cause No.
00CV0338; In the 56th Judicial District Court of Galveston County,
Texas;
7. Joe L. Kimble, et al. v. Sterling Chemicals, Inc., et al.; Cause No.
00CV0333; In the 56th Judicial District Court of Galveston, County,
Texas;
8. Clyde Shade v. Sterling Chemicals, Inc., et al.; Cause No. 00CV0328;
In the 10th Judicial District Court of Galveston County, Texas; and
9. Olivia Ellis v. Sterling Chemicals, Inc.; Cause No. JC7096; In Justice
Court No. 5 of Galveston County, Texas.
These lawsuits involve 1,292 plaintiffs/intervenors who seek an unspecified
amount for damages. We believe that substantially all of our future
out-of-pocket costs and expenses, including settlement payments and judgments,
relating to these lawsuits will be covered by our liability insurance policies
or indemnification from third parties. We do not believe that the claims and
litigation arising out of this incident will have a material adverse effect on
us, although we cannot give any assurances to that effect.
Other Claims
We are subject to various other claims and legal actions that arise in the
ordinary course of our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for our common stock, par
value $.01 per share, although our common stock is traded on the OTC Electronic
Bulletin Board maintained by the National Association of Securities Dealers,
Inc. under the symbol "STXX." The following table sets forth the high and low
bid information of our common stock as reported on the OTC Electronic Bulletin
Board for the fiscal years ended September 30, 2000 and 1999.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2000 High $5 3/4 $7 1/8 $6 1/4 $3 1/2
Low $3 1/2 $4 $2 5/8 $1 3/8
1999 High $7 $7 1/4 $ 7 $5 3/4
Low $4 $3 1/2 $ 5 $2 5/8
As of December 4, 2000, there were approximately 503 record holders of our
common stock.
We have not paid dividends on our common stock in any of the last three
fiscal years and do not anticipate paying dividends in the foreseeable future.
Any future determination as to the payment of dividends will be made at the
discretion of our Board of Directors and will depend upon our operating results,
financial condition, capital requirements, general business conditions, and such
other factors that our Board of Directors deems relevant. The payment of
dividends on our common stock is also restricted by the terms of the indenture
governing our 13 1/2% Senior Secured Discount Notes due 2008 and the terms of
both series of our outstanding preferred stock. In addition, our subsidiaries
(including Chemicals) are parties to various debt agreements that limit their
ability to provide funds to us by way of dividends, distributions, and advances.
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ITEM 6. SELECTED FINANCIAL DATA OF HOLDINGS
The following table sets forth selected financial data with respect to our
consolidated financial condition and consolidated results of operations and
should be read in conjunction with "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our Consolidated Financial
Statements and related notes in Item 8 of this Form 10-K.
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------
2000 1999 1998 1997(1) 1996(2)
------------ ------------ ------------ ------------ ------------
OPERATING DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 1,078,351 $ 720,752 $ 822,590 $ 908,787 $ 790,465
Gross profit 140,891 38,158 77,267 85,522 102,168
Net income (loss) attributable to
common stockholders(3) (89,960) (112,712) (48,579) (28,965) 31,604
Net cash provided by (used in)
operating activities 48,133 (13,890) 45,884 47,314 63,601
Net cash used in investing activities (28,797) (25,957) (26,622) (196,351) (95,957)
Net cash provided by (used in)
financing activities (26,443) 43,274 (15,238) 151,610 7,190
EBITDA(4) 159,474 54,134 88,753 107,318 121,200
PER SHARE DATA:
Net income (loss) per common share (7.13) (8.94) (3.99) (2.58) 0.62
Cash dividends -- -- -- -- --
BALANCE SHEET DATA:
Working capital $ 83,505 $ 91,399 $ 91,910 $ 120,104 $ 76,933
Total assets 710,212 775,099 765,956 878,971 689,684
Long-term debt (excluding current
maturities) 961,570 964,555 873,616 876,281 714,632
Redeemable preferred stock 23,928 20,932 18,249 15,793 --
Stockholders' equity
(deficiency in assets) (547,722) (455,387) (348,179) (288,528) (272,439)
(1) During fiscal 1997, we acquired our acrylic fibers facility and our
Saskatoon facility.
(2) In August of 1996 we recapitalized.
(3) During fiscal 2000, we recorded pre-tax charges of $2 million for costs
associated with workforce reductions and a $60 million non-cash charge related
to the write down of our acrylic fibers production assets. During fiscal 1999,
we recorded pre-tax charges of $4 million for costs associated with workforce
reductions, $7 million non-cash charge related to early retirement programs and
benefit changes, and a $26 million non-cash charge related to the write down of
our methanol production assets. During fiscal 1998, we recorded a pre-tax charge
of $6 million for costs associated with workforce reductions.
(4) EBITDA (earnings before interest, taxes, depreciation, amortization,
stock appreciation rights ("SARs"), certain merger-related expenses, impairment
of assets, and certain non-cash charges related to an early retirement program
and benefit changes) is presented because it is a widely accepted financial
indicator of a company's ability to incur and service debt. It is not intended
as an alternative measure of performance to net income (loss). Because EBITDA
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excludes some, but not all, items that affect net income (loss) and may vary
among companies, the EBITDA calculation presented above may not be comparable to
similarly titled measures of other companies. SARs expense was $8,540,000 for
the fiscal year ended September 30, 1996. Certain merger-related expenses were
$3,633,000 for the year ended September 30, 1996. Certain non-cash charges
related to an early retirement program and benefit changes were $6,781,000 for
the year ended September 30, 1999. Non-cash charges related to the write-down of
our production assets were $60,000,000 for acrylic fibers in the fiscal year
ended September 30, 2000 and $26,368,000 for methanol in the fiscal year ended
September 30, 1999.
SELECTED FINANCIAL DATA FOR CHEMICALS
The following table sets forth selected financial data with respect to
Chemicals' consolidated financial condition and consolidated results of
operations and should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Chemicals' Consolidated Financial Statements and related notes in Item 8 of this
Form 10-K. All issued and outstanding shares of Chemicals are held by Holdings
and, accordingly, per share data is not presented.
PERIOD FROM
MAY 14, 1996
(DATE OF
YEAR ENDED SEPTEMBER 30, INCEPTION) TO
----------------------------------------------------------- SEPTEMBER 30,
2000 1999 1998 1997(1) 1996(2)
------------ ------------ ------------ ------------ ------------
OPERATING DATA: (Dollars in Thousands)
Revenues $ 1,078,351 $ 720,752 $ 822,590 $ 908,787 $ 83,410
Gross profit 140,891 38,158 77,267 85,522 (1,659)
Net income (loss) (63,847) (94,722) (33,669) (14,851) 174
BALANCE SHEET DATA:
Working capital $ 84,587 $ 92,927 $ 91,997 $ 119,829 $ 77,299
Total assets 677,143 752,106 762,503 875,317 685,451
Long-term debt
(excluding current maturities) 791,684 816,927 745,709 768,870 619,875
Stockholder's equity
(deficiency in assets) (377,790) (309,590) (220,445) (175,587) (184,302)
(1) During fiscal 1997, we acquired our acrylic fibers facility and our
Saskatoon facility.
(2) In August of 1996 we recapitalized. Prior to August 21, 1996, Chemicals
had no operating activities, other than those related to merger activities.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a holding company whose only material asset is our investment in
Chemicals, our primary operating subsidiary. Chemicals owns substantially all of
our consolidated operating assets. Other than additional interest expense
associated with our 13 1/2% Senior Secured Discount Notes due 2008, our results
of operations are essentially the same as Chemicals.
The primary markets in which we compete, especially styrene and
acrylonitrile, are cyclical and are sensitive to factors such as:
o changes in the balance between supply and demand;
o the price of raw materials; and
o the level of general worldwide economic activity.
Styrene prices are cyclical and sensitive to overall supply relative to
demand and the level of general business activity. Following a period of strong
demand growth and high utilization rates in 1994 through 1996, several major
producers announced new capacity increases in 1997 and 1998, particularly in the
Far East. At the time of this announced new capacity, there was a general
slowdown in the economic growth rate in the Far East, prompting customers to
begin utilizing their available inventories and decrease purchases of additional
product. As a result, our average styrene prices declined from fiscal 1997
through fiscal 1999, as the previously announced new capacity came on line at
the same time that economic events in various Asian countries significantly
reduced demand growth for styrene. Beginning in the first quarter of fiscal
2000, styrene prices increased significantly due to the strong market demand,
rising raw material costs, operating problems experienced at several of our
competitors, and generally low inventory levels. The average prices we received
for our styrene increased approximately 78% from fiscal 1999 to fiscal 2000.
However, styrene spot selling prices, as reported by Chemical Market Associates,
Inc. ("CMAI"), a chemical industry consultant, decreased from a high of $0.48
per pound in April of 2000 to a low of $0.31 per pound in September of 2000,
while at the same time margins were further reduced due to higher benzene and
energy costs. Currently, CMAI is reporting styrene spot prices in the $0.25 to
$0.28 per pound range. We cannot predict future increases or decreases in
styrene prices and margins.
The acrylonitrile market exhibits characteristics in capacity utilization,
selling prices, and profit margins similar to those of styrene. Moreover, as a
result of our high percentage of export acrylonitrile sales, demand for our
acrylonitrile is significantly influenced by export customers, particularly
those that supply acrylic fibers to China. During 1995, strong demand for
acrylic fibers and ABS resins, particularly in China, increased demand for
acrylonitrile resulting in high prices and margins. Acrylonitrile demand began
to weaken in late 1995 for the same reasons that caused the deterioration in the
styrene market. Increased acrylonitrile capacity, primarily in Asia, and
weakened demand growth in Asian markets resulted in lower acrylonitrile prices
and margins beginning in fiscal 1996 and continuing through fiscal 1999. Global
production capacity for acrylonitrile is estimated at over 13 billion pounds,
including approximately two billion pounds which was added by competitors
between 1997 and 2000. The average acrylonitrile sales prices we received
declined by approximately 3% from fiscal 1996 to fiscal 1997, approximately 29%
from fiscal 1997 to fiscal 1998, and approximately 32% from fiscal 1998 to
fiscal 1999. Beginning in early fiscal 2000, acrylonitrile prices increased
significantly due to strong market demand, rising raw material costs, operating
problems experienced at several of our competitors, and generally low inventory
levels. The average prices we received for our acrylonitrile increased
approximately 122% from fiscal 1999 to fiscal 2000. However, we were not able to
fully capitalize on this opportunity as a result of planned shut downs related
to the construction of the DSIDA plant, and several plant operating problems,
and higher raw materials and energy costs. We cannot predict future increases or
decreases in acrylonitrile prices and margins.
The sodium chlorate market has also historically experienced cycles in
capacity utilization, selling prices, and profit margins. Since the mid-1980s,
North American demand for sodium chlorate has grown at an average annual rate of
approximately 9% as pulp mills have accelerated substitution of chlorine dioxide
for elemental chlorine in bleaching applications. During fiscal 1998 and fiscal
1999, demand for sodium chlorate did not increase at historical rates as a
result of weak market conditions and lower operating rates in the pulp and paper
industry. In addition, new production capacity was added while implementation of
the Cluster Rules was delayed. Our average sodium chlorate prices decreased by
approximately 5% from fiscal 1996 to fiscal 1997, approximately 7% from fiscal
1997 to fiscal 1998, and approximately 8% from fiscal 1998 to fiscal 1999.
However, during fiscal 2000, sodium chlorate prices increased due to increased
operating rates at pulp mills and the continued conversion to elemental chlorine
free bleaching at pulp mills. Our sodium chlorate prices increased by
approximately 4% from fiscal 1999 to fiscal 2000. Mandatory
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compliance with the Cluster Rules in the United States beginning in 2001 should
continue to impact demand for sodium chlorate in 2001. However, approximately
110,000 metric tons of new capacity of sodium chlorate is expected in calendar
year 2002 in North America. We cannot predict future increases or decreases in
sodium chlorate prices and margins.
We market substantial volumes of petrochemicals and generate substantial
revenues under our conversion and long-term agreements. The approximate
percentages of our total petrochemicals sales volumes and revenues from our
conversion and long-term agreements in the last three fiscal years are shown in
the following table:
2000 1999 1998
---- ---- ----
Percentage of total sales volumes..... 66% 56% 52%
Percentage of total revenues.......... 33% 41% 38%
Under our conversion agreements, the customer furnishes some or all of the raw
materials, which we process into other petrochemicals in exchange for a fee
designed to cover our fixed and variable costs of production. These conversion
agreements help us to maintain lower levels of working capital and, in some
cases, to gain access to certain improvements in manufacturing process
technology. We believe that our petrochemicals conversion agreements help us to:
o optimize capacity utilization rates;
o lower our selling, general, and administrative expenses;
o reduce our working capital requirements; and
o insulate our operations to some extent from the effects of declining
markets and changes in raw materials prices.
LIQUIDITY AND CAPITAL RESOURCES
Long-Term Debt
As of September 30, 2000, our long-term debt, including current maturities,
totaled approximately $964 million and consisted of:
o Chemicals' two secured revolving credit facilities;
o two secured term loans under a credit facility at our Saskatoon
subsidiary;
o Chemicals' 11 1/4% Senior Subordinated Notes due 2007, 11 3/4% Senior
Subordinated Notes due 2006, and 12 3/8% Senior Secured Notes due
2006; and
o Holdings' 13 1/2% Senior Secured Discount Notes due 2008.
On July 23, 1999, Chemicals completed a refinancing of all senior debt
outstanding under its old senior credit facility by issuing its 12 3/8% Notes,
establishing a revolving credit facility secured by its and some of its
subsidiaries' fixed assets and certain other assets, and establishing an
additional revolving credit facility secured by its and some of its
subsidiaries' working capital. The two revolving credit facilities provide
Chemicals an aggregate borrowing capacity of $155 million. All indebtedness
under the old senior credit facility was repaid and the old senior credit
facility was terminated upon consummation of the refinancing. The refinancing
increased Chemicals' liquidity by eliminating near-term debt amortization and
financial covenants associated with the old senior credit facility, as well as
by increasing revolving credit availability. Although no assurances can be
given, we believe the additional liquidity provided by the refinancing, when
combined with cash flows from operations and other sources of available capital,
will be sufficient to enable us to operate through current and expected market
conditions for our primary petrochemicals products through fiscal 2001. This
belief is largely based upon assumptions regarding the condition of the markets
of our primary products over the next several years, which assumptions are based
in part on published reports of industry experts as well as our own internal
forecasts. If these assumptions prove to be incorrect there is a strong
possibility that we would be unable to fund our operations and meet our debt
service requirements over an extended period. Additional information regarding
our liquidity, both short-term and long-term, appear below in "Certain Known
Events, Trends, Uncertainties, and Risk Factors."
The 12 3/8% Notes are senior secured obligations of Chemicals and rank
equally in right of payment with all other existing and future senior
indebtedness of Chemicals and senior in right of payment to all existing and
future subordinated indebtedness of Chemicals. The 12 3/8% Notes are guaranteed
by all of Chemicals' existing direct and indirect United States subsidiaries
(other than Sterling Chemicals Acquisitions, Inc.) on a joint and several basis.
Each subsidiary's guarantee ranks equally in right of payment with all of that
subsidiary's existing and future senior
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indebtedness and senior in right of payment to all existing and future
subordinated indebtedness of that subsidiary. However, the 12 3/8% Notes, and
each subsidiary's guarantee, is subordinated to the extent of the collateral
securing our secured revolving credit facilities. The 12 3/8% Notes and the
subsidiary guarantees are secured by:
o a second priority lien on all of our United States production
facilities and related assets;
o a second priority pledge of all of the capital stock of each
subsidiary guarantor; and
o a first priority pledge of 65% of the stock of certain of our
subsidiaries incorporated outside of the United States.
Under the secured revolving credit facilities, Chemicals and each of its
direct and indirect United States subsidiaries, other than Sterling Chemicals
Acquisitions, Inc., are co-borrowers and are jointly and severally liable for
any indebtedness thereunder. The secured revolving credit facilities consist of:
o a $70,000,000 revolving credit facility secured by a first priority
lien on all of our United States production facilities and related
assets, all of Chemicals' capital stock, and all of the capital stock
of each co-borrower and a second priority lien on all accounts
receivable, inventory, and other specified assets of Chemicals and
each co-borrower; and
o an $85,000,000 revolving credit facility secured by a first priority
lien on all accounts receivable, inventory, and other specified assets
of Chemicals and each co-borrower.
Available credit under the current assets revolver is subject to a monthly
borrowing base consisting of 85% of eligible accounts receivable and 65% of
eligible inventory, with an inventory cap of $42,500,000. In addition, the
borrowing base for the current assets revolver must exceed outstanding
borrowings thereunder by $12,000,000 at all times. Available credit under the
fixed assets revolver is not subject to a borrowing base.
The commitments for each of the secured revolving credit facilities will be
permanently reduced to the extent required under the credit agreement upon
prepayments made out of specific sources of funds, including assets sales by
Chemicals and the co-borrowers and certain equity issuances by Holdings.
The indentures governing the 13 1/2% Notes, the 12 3/8% Notes, the 11 3/4%
Notes, and the 11 1/4% Notes and our credit agreement contain numerous
covenants, including, but not limited to, restrictions on our ability to incur
indebtedness, pay dividends, create liens, sell assets, engage in mergers and
acquisitions, and refinance existing indebtedness. In addition, these indentures
and the credit agreement specify various circumstances that will constitute,
upon occurrence and subject in certain cases to notice and grace periods, an
event of default thereunder. However, none of these indentures or the credit
agreement require us to satisfy any financial ratios or maintenance tests.
The indentures governing the 12 3/8% Notes, the 11 1/4% Notes, and the
11 3/4% Notes and the credit agreement contain provisions which restrict the
payment of advances, loans, and dividends from Chemicals to Holdings. The most
restrictive of these covenants limits those payments during fiscal 2001 to
approximately $2.0 million, plus any amounts due to Holdings from Chemicals
under the intercompany tax sharing agreement.
At September 30, 2000, the total credit available under the secured
revolving credit facilities was $155 million, and approximately $37 million was
drawn under the fixed assets revolver. Therefore, at September 30, 2000,
Chemicals had additional borrowing capacity of approximately $118 million.
Dividend restrictions in the indentures governing the 12 3/8% Notes, the
11 3/4% Notes and the 11 1/4% Notes allow Chemicals to pay dividends to Holdings
in connection with required interest payments on the 13 1/2% Notes only if the
ratio of the consolidated EBITDA of Chemicals and certain of its subsidiaries to
their interest expense is 2.0 to 1.0 or greater, on a trailing four quarter
basis. Holdings currently has no viable sources of funds to make interest
payments on the 13 1/2% Notes other than the sale or monetization of our
investment in unrestricted subsidiaries and dividends from Chemicals. Holdings
must make the first cash interest payment on the 13 1/2% Notes on February 15,
2002. For the four quarters ended September 30, 2000, the consolidated EBITDA
coverage ratio under these indentures was 1.5 to 1.0, significantly below the
required ratio. Based upon our anticipated consolidated interest expense for the
four quarter period ending December 31, 2001, Chemicals and its subsidiaries
(excluding our subsidiary that conducts operations in Saskatoon) would need to
generate approximately $190 million in consolidated EBITDA during such four
quarter period in order to pay a dividend to Holdings to make the required cash
interest payment on February 15, 2002. While there is a possibility that
Chemicals could generate sufficient EBITDA to pay dividends to Holdings for the
purpose of paying one or more of the initial interest payments on the 13 1/2%
Notes, we can give no assurances to that effect. Moreover, we believe that it is
unlikely that Chemicals will generate sufficient EBITDA to pay dividends to
Holdings every time an interest payment becomes due on the 13 1/2% Notes through
their maturity in 2008. The permissible
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methods for reducing the risk of a cash interest payment default on the 13 1/2%
Notes are limited in scope and amount and no assurances can be given that any
permissible method will be available or sufficient. We are currently exploring
all permissible methods for improving our liquidity, including the possible sale
or monetization of our investment in our unrestricted subsidiaries.
On September 8, 2000, we announced the engagement of Donaldson, Lufkin &
Jenrette Securities Corporation (now Credit Suisse First Boston) as financial
advisor to assist us in identifying and evaluating possible methods of
restructuring or refinancing our 13 1/2% Notes. CSFB has had preliminary
discussions with some of the larger holders of our 13 1/2% Notes regarding a
possible restructuring of those Notes. However, we cannot predict whether such
discussions will lead to any restructuring of our 13 1/2% Notes.
If Holdings fails to make a required interest payment on the 13 1/2% Notes,
the holders would have certain remedies available to them under the indenture,
including the option of accelerating the maturity of the 13 1/2% Notes. A
default under the 13 1/2% Notes will not, in and of itself, cause a default
under the indentures for 12 3/8% Notes, the 11 3/4% Notes or the 11 1/4% Notes.
However, a default under the 13 1/2% Notes will cause a default under the credit
agreement, giving the lenders under the credit agreement the option of
accelerating the indebtedness under the credit agreement and terminating all
commitments to lend under the credit agreement. If the indebtedness under the
credit agreement is accelerated, a default will occur under the indentures for
the 12 3/8% Notes, the 11 3/4% Notes or the 11 1/4% Notes. Consequently, whether
a default under the 13 1/2% Notes indenture results in a default under the
indentures for the 12 3/8% Notes, the 11 3/4% Notes, or the 11 1/4% Notes
depends on the actions of the lenders under the credit agreement. If the lenders
under the credit agreement do not accelerate the indebtedness under the credit
agreement, the default under the 13 1/2% Notes indenture will have no effect
under the credit agreement or the indentures for the 12 3/8% Notes, the 11 3/4%
Notes, or the 11 1/4% Notes. We cannot predict what actions (if any) any of our
lenders or noteholders would take following a default under the 13 1/2% Notes.
For additional possible implications of a default under the 13 1/2% Notes see
"Certain Known Events, Trends, Uncertainties, and Risk Factors."
Standby Equity Commitments
In December of 1998, we entered into separate Standby Purchase Agreements
with each of Gordon A. Cain, William A. McMinn, James Crane, Frank P. Diassi,
Frank J. Hevrdejs, and Koch Capital Services, Inc. Pursuant to the terms of the
Standby Purchase Agreements, the purchasers committed to purchase up to 2.5
million shares of our common stock, at a price of $6.00 per share, if, as, and
when requested by us at any time or from time to time prior to December 15,
2001. Under each of the Standby Purchase Agreements, we may only require the
purchasers to purchase these shares if we believe that such capital is necessary
to maintain, reestablish, or enhance Chemicals' borrowing ability under its
revolving credit facilities or to satisfy any requirement thereunder to raise
additional equity. To induce the purchasers to enter into the Standby Purchase
Agreements, we issued warrants to purchase an aggregate of 300,000 shares of our
common stock to the purchasers at an exercise price of $6.00 per share. Under
the Standby Purchase Agreements, we are obligated to issue additional warrants
to purchase up to 300,000 additional shares of our common stock to the
purchasers if, as, and when they purchase shares of our common stock under the
Standby Purchase Agreements. We do not believe that the Standby Purchase
Agreements would provide any meaningful assistance in resolving issues presented
by the conversion of our 13 1/2% Notes to cash interest in early 2002.
Saskatoon Facility
In July of 1997, Sterling Pulp Chemicals (Sask) Ltd., our Canadian
subsidiary that operates our Saskatoon facility, entered into a credit agreement
with The Chase Manhattan Bank of Canada, individually and as administrative
agent, and certain other financial institutions. The indebtedness under the
Saskatoon credit agreement is secured by substantially all of the assets of this
subsidiary, including the Saskatoon facility. The Saskatoon credit agreement
requires that certain amounts of "Excess Cash Flow" be used to prepay amounts
outstanding under the term portion of the credit facility. A prepayment in the
amount of approximately Cdn. $7.1 million was made in September of 2000 pursuant
to this obligation.
The Saskatoon credit agreement provides a revolving credit facility of Cdn.
$8 million to be used by our Saskatoon subsidiary solely for its general
corporate purposes. No borrowings were outstanding under the Saskatoon revolving
credit facility as of September 30, 2000. We believe the credit available under
the Saskatoon revolving credit facility, when added to internally generated
funds and other sources of capital, will be sufficient to meet our Saskatoon
subsidiary's liquidity needs for the reasonably foreseeable future, although we
can give no assurances to that effect.
Because of restrictions in the Saskatoon credit agreement, we will
generally not have access to the cash flows of our Saskatoon subsidiary. In
addition, because of its designation as an "Unrestricted Subsidiary" under our
credit
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agreement and the indentures for the 13 1/2% Notes, the 12 3/8% Notes, the
11 3/4% Notes, and the 11 1/4% Notes, our Saskatoon subsidiary's results are not
considered in determining compliance with the covenants contained therein.
The Saskatoon credit agreement contains provisions which restrict the
payment of advances, loans, and dividends from our Saskatoon subsidiary to us or
Chemicals. The most restrictive of these covenants limits such payments during
fiscal 2001 to approximately $1 million, plus any amounts due to us from our
Saskatoon subsidiary under the intercompany tax sharing agreement.
Working Capital
Working capital at September 30, 2000 was $84 million, a decrease of $7
million from September 30, 1999. This increase was the result of the following
changes:
Current Assets Current Liabilities
-------------- -------------------
(In Millions) (In Millions)
Cash and cash equivalents $ (7) Accounts payable $ (11)
Accounts receivable 19 Accrued liabilities (11)
Inventory 13 Current portion long-term debt 2
-----
Prepaid expenses (4) $ (20)
Deferred income tax benefit (8)
-----
$ (13)
( ) - Decrease in assets, increase in liabilities
Cash Flow
Net cash provided by our operations was $48 million in fiscal 2000, an
increase of $62 million from the net cash used in our operations in fiscal 1999.
This increase in net cash resulted primarily from a decrease in net losses
between fiscal 2000 and fiscal 1999. Net cash flow used in our investing
activities was $29 million in fiscal 2000 compared to $26 million in fiscal
1999. Net cash flow used in our financing activities was $26 million in fiscal
2000 compared to net cash flows provided by our financing activities of $43
million in fiscal 1999. This decrease in cash provided by financing activities
was primarily due to the decrease in borrowings under our secured revolving
credit facilities and principal payments on the term portion of the Saskatoon
credit facility.
Capital Expenditures
Our capital expenditures were $29 million in fiscal 2000, $30 million in
fiscal 1999, and $27 million in fiscal 1998. Our capital expenditures in fiscal
2000 were primarily related to the DSIDA project, a water disposal project, and
routine safety, environmental, and replacement capital. Our capital expenditures
in fiscal 1999 were primarily related to the acetic acid expansion, our project
to reduce the levels of phenylacetylene, or "PA," in the styrene produced at our
Texas City facility, and routine safety, environmental, and replacement capital.
Our fiscal 1998 capital expenditures were primarily related to routine safety,
environmental, and replacement capital.
Capital expenditures are expected to be approximately $35 to $40 million in
fiscal 2001, with about $25 to $28 million dedicated to our petrochemicals
business and $10 to $12 million dedicated to our pulp chemicals business. These
capital expenditures will primarily be for process enhancements for styrene and
routine safety, environmental, and replacement capital.
Our capital expenditures for environmentally-related prevention,
containment, and process improvements were $1 million and $6 million for fiscal
2000 and fiscal 1999, respectively. We anticipate spending approximately $4
million on these types of expenditures during fiscal 2001. During fiscal 2000
and fiscal 1999, we did not incur any other infrequent or non-recurring material
environmental expenditures which were required under existing environmental
regulations. See "Certain Known Events, Trends, Uncertainties, and Risk
Factors."
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," establish
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accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
We adopted these statements as of October 1, 2000. The transition adjustment
related to the adoption of these statements was not material.
CERTAIN KNOWN EVENTS, TRENDS, UNCERTAINTIES, AND RISK FACTORS
The amount of our outstanding indebtedness is substantial and may limit our
ability to fund future working capital needs and increase our exposure during
adverse economic conditions. Additionally, our debt level could prevent us from
fulfilling our obligations under our indebtedness.
Our substantial indebtedness of $964 million and deficiency in assets of
$548 million at September 30, 2000 could have important negative consequences.
For example, it could:
o make it more difficult for us to satisfy our obligations with respect
to all of our indebtedness;
o make us more vulnerable to a continued downturn in our industry or a
downturn in the economy in general;
o require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, acquisitions, and other general corporate requirements;
o limit our flexibility in planning for, or reacting to, changes in our
businesses and the industries in which we operate;
o impact the availability of raw materials and financial terms of our
business with suppliers;
o place us at a competitive disadvantage compared to our competitors
that have less debt; and
o limit our ability to borrow additional funds.
The covenants in our debt instruments restrict our flexibility.
The covenants in our indentures and credit agreement restrict our ability
to:
o incur indebtedness;
o pay dividends and make other restricted payments or investments;
o sell assets;
o make capital expenditures;
o engage in certain mergers and acquisitions; and
o refinance existing indebtedness.
Despite current indebtedness levels, we may still be able to incur substantially
more debt, which could further exacerbate the risks described above.
The terms of the agreements governing our indebtedness restrict but do not
prohibit us from incurring more debt. As of September 30, 2000, Chemicals had
additional borrowing capacity under its secured revolving credit facilities of
up to approximately $118 million. If new debt is added to our current debt
levels, the related risks that we now face could increase.
Factors beyond our control may impact our ability to meet our debt service
requirements.
Our ability to meet our debt service requirements will depend on our future
performance, which in turn is dependent upon conditions in the global markets
for our products, the global economy generally, and other factors that are
beyond our control. We cannot assure you that our business will generate
sufficient cash flow from operations or that future borrowings will be available
to Chemicals under its secured revolving credit facilities in amounts sufficient
to enable us to pay our indebtedness or to fund our other liquidity needs.
Moreover, we may need to refinance all or a portion of our indebtedness on or
before maturity. We cannot assure you that we will be able to refinance any of
our indebtedness on commercially reasonable terms or at all. If we are unable to
make scheduled debt payments or comply with the other provisions of our debt
instruments, our various lenders will be permitted under certain circumstances
to accelerate the maturity of the indebtedness owing to them and exercise other
remedies provided for in those instruments and under applicable law.
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Chemicals may be unable to pay dividends to Holdings, which may prevent Holdings
from fulfilling its obligations under its 13 1/2% Notes and may lead to a
default under our debt instruments or a change in control.
The dividend restrictions in the indentures governing the 12 3/8% Notes,
the 11 3/4% Notes, and the 11 1/4% Notes allow Chemicals to pay dividends to
Holdings in connection with the required interest payments on the 13 1/2% Notes
only if the ratio of the consolidated EBITDA of Chemicals and certain of its
subsidiaries to their interest expense is 2.0 to 1.0 or greater, on a trailing
four quarter basis, after giving pro-forma effect to the dividend. Holdings
currently has no source of funds to make interest payments on the 13 1/2% Notes
other than dividends from Chemicals and must make the first cash interest
payment on the 13 1/2% Notes on February 15, 2002. For the four quarters ended
September 30, 2000, the consolidated EBITDA coverage ratio under these
indentures was 1.5 to 1.0, significantly below the required ratio. Based on our
anticipated consolidated interest expense for the four-quarter period ending
December 31, 2001, Chemicals and its subsidiaries (excluding our subsidiary that
conducts operations in Saskatoon) would need to generate approximately $190
million in consolidated EBITDA during that four-quarter period in order to pay a
dividend to Holdings to make the required cash interest payment on February 15,
2002. While there is a possibility that Chemicals could generate sufficient
EBITDA to pay dividends to Holdings for the purpose of paying one or more of the
initial interest payments on the 13 1/2% Notes, we can give no assurances to
that effect. Moreover, we believe that it is unlikely that Chemicals will
generate sufficient EBITDA to pay dividends to Holdings every time an interest
payment becomes due on the 13 1/2% Notes through their maturity in 2008. In the
event that the consolidated EBITDA coverage ratio is insufficient to make the
required dividends, we would need to pursue other permissible methods of
distributing cash to or otherwise acquiring cash for Holdings. However, the
number of permissible methods of distributing cash to or acquiring cash for
Holdings, or otherwise reducing the risk of a cash interest payment default on
the 13 1/2% Notes, are limited in scope and amount and no assurances can be
given that any such permissible method will be available or sufficient.
If Holdings fails to make a required interest payment on the 13 1/2% Notes,
the holders would have certain remedies available to them under the indenture
for the 13 1/2% Notes, including the option of accelerating the maturity of the
13 1/2% Notes. A default under the 13 1/2% Notes will not, in and of itself,
cause a default under the indentures for the 12 3/8% Notes, the 11 3/4% Notes,
or the 11 1/4% Notes. However, a default under the 13 1/2% Notes will cause a
default under Chemicals' credit agreement, giving the lenders under our credit
agreement the option of accelerating the indebtedness under Chemicals' credit
agreement and terminating all commitments to make additional loans. If the
indebtedness under Chemicals' credit agreement is accelerated, a default will
occur under the indentures for the 12 3/8% Notes, the 11 3/4% Notes, and the
11 1/4% Notes. Consequently, whether a default under the indenture for the
13 1/2% Notes by itself will result in a default under the indentures for the
12 3/8% Notes, the 11 3/4% Notes, or the 11 1/4% Notes depends on the actions of
the lenders under Chemicals' credit agreement. We cannot predict what actions
(if any) any of our lenders or noteholders would take following a default under
the 13 1/2% Notes. In addition, the exercise of certain remedies available to
the holders of the 13 1/2% Notes or the lenders under Chemicals' credit
agreement following a failure to pay cash interest on the 13 1/2% Notes could
result in a change of control under Chemicals' credit agreement and each of our
indentures and defaults under each of those documents.
We may be unable to repurchase our notes upon a change of control, and a change
of control may trigger defaults under our debt instruments.
All of the capital stock of Chemicals is pledged to secure the 13 1/2%
Notes and Chemicals' fixed assets revolver. An event of default under the
indenture for the 13 1/2% Notes or our fixed assets revolver may prompt those
lenders to foreclose upon Chemicals' stock. Among other things, that foreclosure
would likely constitute a change of control under Chemicals' credit agreement
and the indentures for the 13 1/2% Notes, the 12 3/8% Notes, the 11 3/4% Notes,
and the 11 1/4% Notes. Upon the occurrence of this type of change of control,
Holdings and Chemicals are required under Chemicals' indentures to offer to
repurchase all of their respective notes. It is possible that we will not have
sufficient funds at the time of a change of control to make the required
repurchases, which would result in a default under Chemicals' indentures and
Chemicals' credit agreement. In addition, a change of control under our
indentures will result in a default under Chemicals' credit agreement, and other
provisions of Chemicals' credit agreement prohibit Chemicals from repurchasing
any of its notes in connection with a change of control, meaning that, in the
absence of amendments to or waivers under Chemicals' credit agreement, Chemicals
could not purchase any of its notes without violating the terms of its credit
agreement. As a result, complying with the terms of Chemicals' credit agreement
could result in its failure to purchase its notes tendered under the offer to
repurchase, which would cause a default under each of our indentures. On the
other hand, if Chemicals purchased any of its notes in violation of the
prohibition contained in Chemicals' credit agreement, a default would occur
under Chemicals' credit agreement which, in turn, would result in a default
under each of our indentures. Some important corporate events, such as leveraged
recapitalizations that would
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increase the level of our indebtedness, would not constitute a change of control
event and would not trigger the required offer to repurchase under our
indentures.
The industries in which we participate are cyclical and depressed market
conditions for our major products can negatively affect our business and make it
difficult for us to repay our debts.
Demand for our petrochemicals and pulp products are cyclical and are
influenced by, among other things, the health of the global economy and changes
in overall supply relative to demand. An economic slowdown or a prolonged
downturn in our petrochemicals markets will impact both the sales volumes and
sales prices of our products and could have a material adverse effect on our
financial results. As prices decline, our profit margins generally decrease,
which adversely affects our business and our ability to pay interest and
principal on our indebtedness. Large global capacity additions of styrene and
acrylonitrile were completed between 1997 and 2000. For styrene, approximately
eight billion pounds of net new capacity was added and, for acrylonitrile,
approximately two billion pounds of net new capacity was added. Further capacity
additions for both styrene and acrylonitrile are planned in fiscal 2001 and
later years. Further, reduced operating rates at pulp mills have reduced the
rate of growth in demand for our pulp chemicals products and services. The
resulting impact on prices and margins negatively impacted our results in fiscal
1997, 1998, and 1999, and could negatively impact our results in the future.
Although during the first half of fiscal 2000 there was some improvements in the
markets for styrene, these positive conditions have since deteriorated and we
can give no assurances whether conditions will improve or worsen in the future.
If the markets for our primary products do not improve significantly, we may be
unable to fulfill our obligations to repay the principal on our indebtedness
when that indebtedness matures. We may need to refinance all or a portion of our
indebtedness on or before maturity, but we may be unable to do so on
commercially reasonable terms or at all. If market conditions for our products
decline significantly from current levels, we may be unable to make scheduled
interest payments on our indebtedness.
The petrochemicals, acrylic fibers, and pulp chemicals industries are highly
competitive.
Many of our competitors, particularly in the petrochemicals industry, are
larger and have substantially greater financial resources than we have. We
compete with some of the world's largest chemical companies, many of whom, in
contrast to us, supply much of their own raw materials requirements. In
addition, a significant portion of our business is based upon widely available
technology. The entrance of new competitors into the industry or the addition by
existing competitors of new capacity may reduce our ability to maintain profit
margins or preserve our market share, even during periods of increased demand
for our products.
Our business may be adversely affected by deregulation of electric power or if
we are unable to obtain raw materials and energy resources from third-party
suppliers at reasonable prices or on acceptable terms.
For most of our products, the combined cost of raw materials and energy
resources, including utilities in the case of pulp chemicals, is far greater
than all other costs of production combined. Therefore, an adequate supply of
raw materials at reasonable prices and on acceptable terms is critical to the
success of our business. If we are unable to obtain raw materials at reasonable
prices and on acceptable terms, our results of operations would be negatively
impacted by an increase in our costs or a decrease in our capacity or both. Most
of the raw materials we use are supplied by others, and many of them are subject
to wide price fluctuations for a variety of reasons beyond our control. For
example, changes in the availability of these products may result from major
capacity additions or significant facility operating problems. The current trend
towards deregulation of electric power makes our future cost for electric power
uncertain. Electricity is the largest cost of manufacturing sodium chlorate. In
addition, natural gas is a significant cost of production for some of our
petrochemicals and pulp chemicals, as well as for our suppliers of raw
materials. The recent significant increase in natural gas prices has increased
our total costs of production, and we may not be able to recover this increase
in costs through higher selling prices. We do not currently hedge against
changes in natural gas prices. We can give no assurances that we will continue
to be able to secure adequate supplies of electric power or any of our raw
materials or energy resources at reasonable prices or on acceptable terms.
Our industry is subject to extensive environmental regulation, which creates
uncertainty regarding future environmental expenditures and liabilities.
Our operations involve the handling, production, transportation, treatment,
and disposal of materials that are classified as hazardous or toxic waste and
that are extensively regulated by environmental and health and safety laws,
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regulations, and permit requirements. This regulation, and the potential for
further expanded regulation, may increase our costs and thereby negatively
affect our business. Environmental permits required for our operations are
subject to periodic renewal and can be revoked or modified for cause or when new
or revised environmental requirements are implemented. Changing and increasingly
strict environmental requirements and the potential for further expanded
regulation may increase our costs and thereby negatively affect our business.
Changing and increasingly strict environmental requirements can affect the
manufacturing, handling, processing, distribution, and use of our products and,
if so affected, our business and operations may be materially and adversely
affected. In addition, changes in these requirements may cause us to incur
substantial costs in upgrading or redesigning our facilities and processes,
including our waste treatment, storage, disposal, and other waste handling
practices and equipment. For these reasons, we are uncertain as to the amount of
our future environmental expenditures and liabilities. The Texas Natural
Resource Conservation Commission has proposed new regulations requiring
significant reductions of nitrogen oxide and particulate matter which, if
enacted, will apply to our Texas City facility. These proposed regulations are
subject to the approval of the United States Environmental Protection Agency,
which is expected to be granted in late December of 2000 or early in 2001. Under
the current form of these proposed regulations, we would be required to reduce
emissions of nitrogen oxide at our Texas City facility by more than 90%. Based
on the current form of these proposed regulations, we estimate that we will be
required to make between $30 million and $50 million in capital improvements at
our Texas City facilities, with the vast majority of these capital expenditures
being required in fiscal 2002, 2003, and 2004.
The regulatory outlook for our pulp chemicals business is uncertain.
Our pulp chemicals business is sensitive to environmental regulations.
Regulations restricting, but not completely banning, absorbable organic halides
and other chlorine derivatives in bleach plant effluent have a favorable effect
on our pulp chemicals business. Conversely, any significant ban on all
chlorine-containing compounds in the pulp bleaching process could have a
material adverse effect on our financial condition and results of operations.
British Columbia has adopted regulations that require the elimination of the use
of all chlorine products, including chlorine dioxide, in the pulp bleaching
process by the year 2002, although the pulp and paper industry is working to
change this regulation.
We are subject to many operating risks, some of which may not be covered by
insurance.
A business risk inherent in all chemical operations is the potential for
personal injury and property damage claims from employees, contractors and their
employees, and nearby landowners and occupants. While we attempt to operate our
facilities responsibly and in compliance in all material respects with all
applicable environmental and health and safety requirements, we may face
expenses and liabilities as a result of our past or future operations. Some risk
of environmental costs and liabilities is inherent in our operations and
products, as it is with other companies engaged in similar businesses, and we
maintain insurance at levels that we believe are typical for our industry. A
major incident or other event at any of our facilities, however, could result in
liabilities in excess of our insurance coverages or uncovered liabilities or
claims beyond the financial ability of the insurance carrier to pay.
Current and future legal proceedings may have unfavorable outcomes.
We are currently a party to several legal proceedings, and additional legal
proceedings could be filed against us in the future. We are not able to predict
the final outcome of the current proceedings, and we cannot guarantee that the
ultimate resolution of current or future proceedings will not have a material
adverse effect on us. For more information, see Note 6 of the Notes to
Consolidated Financial Statement included in this Form 10-K.
We depend upon the continued operation of our Texas City facility.
All of the petrochemicals we manufacture, including all of our styrene,
acrylonitrile, and acetic acid, are produced at our Texas City facility.
Significant unscheduled downtime at our Texas City facility could have a
material adverse affect on our results. Downtime can occur for a variety of
reasons, including equipment breakdowns, interruptions in the supply of raw
materials, power failures, natural forces, or other normal hazards associated
with the production of petrochemicals. Although we maintain business
interruption insurance, we cannot guarantee that a significant interruption in
the operation of our Texas City facility would be covered by this insurance or
would not otherwise have a material adverse effect on us.
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We may have difficulty forming strategic joint ventures.
An element of our long-term business strategy is to pursue attractive
strategic joint ventures. However, restrictions under our indentures and credit
agreement limit our ability to do so, such as restrictions on our ability to
sell assets, incur indebtedness, create liens, and make investments and other
restricted payments.
We depend upon our long-term contracts and significant customers.
We sell significant portions of our acrylonitrile and styrene production
and all of our acetic acid, methanol and plasticizers production under long-term
contracts. These contracts are intended to provide stability in the event that
the demand for or prices of these products decline significantly, but also limit
our ability to take full advantage of attractive market conditions during
periods of higher prices for these products. During fiscal 2000, a significant
portion of the production from our Texas City facility was dedicated to
multi-year contracts with Solutia, Bayer, BP Chemicals, and BASF. If the markets
for these products are depressed, the loss of one or more of these customers or
a material reduction in the amount of product purchased by one or more of them
could have a material adverse effect on us. Solutia is building an acrylonitrile
manufacturing facility in Chocolate Bayou, Texas and, in anticipation of the
completion of this facility, terminated its acrylonitrile purchase agreement
with us effective September 1, 2000. In addition, our styrene conversion
agreement with Bayer expires on December 31, 2000. We do not believe the
termination of these contracts will have a material adverse effect on us,
although we can give no assurance to that effect.
We face risks related to our foreign operations that may negatively affect our
business.
Approximately 16% of our fiscal 2000 revenues were derived from our
Canadian-based pulp chemicals business and approximately 43% were derived from
export sales of our products. Our international operations and exports to
foreign markets make us subject to a number of special risks such as:
o currency exchange rate fluctuations;
o foreign economic conditions;
o trade barriers;
o exchange controls;
o national and regional labor strikes;
o political risks and risks of increases in duties;
o taxes;
o governmental royalties; and
o changes in laws and policies governing operations of foreign-based
companies.
The occurrence of any one or a combination of these factors may increase our
costs or have other negative effects on our business. In addition, earnings of
foreign subsidiaries and intercompany payments are subject to foreign income tax
rules that may reduce cash flow available to meet our required debt service and
other obligations.
As we derive most of our pulp chemicals revenues from production and sales
by our subsidiaries within Canada, we have organized our subsidiary structure
and our operations in part based on assumptions regarding various Canadian tax
laws, currency exchange laws, capital repatriation laws, and other relevant
laws. While we believe that these assumptions are correct, we cannot guarantee
that Canadian taxing or other authorities will reach the same conclusion. If our
assumptions are incorrect, or if the Canadian government changes or modifies
such laws or the current interpretations thereof, we may suffer material adverse
tax and financial consequences.
A portion of our expenses and sales are denominated in Canadian dollars
and, accordingly, our revenues, cash flows, and earnings may be affected by
fluctuations in the exchange rate between the United States dollar and the
Canadian dollar, which may also have material adverse tax consequences. These
currency fluctuations could have a material adverse impact on us as increases in
the value of the Canadian dollar relative to the United States dollar have the
effect of increasing the United States dollar equivalent of cost of goods sold
and other expenses with respect to our Canadian production facilities.
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Our right to directly participate in the earnings of our subsidiaries is limited
by our organizational structure and our debt instruments.
All of our operations are conducted, and all of our assets are owned, by
our subsidiaries (including Chemicals). Our right, and thus the right of our
stockholders, to participate in any distribution of earnings or assets of our
subsidiaries is subject to the claims of creditors of our subsidiaries. In
addition, our subsidiaries are parties to various debt documents and other
agreements that limit their ability to incur additional indebtedness and to
provide funds to us by way of dividends, distributions, and advances. A
substantial portion of Chemicals' operations are conducted, and a substantial
portion of Chemicals' assets are owned, by its subsidiaries. The right of
Chemicals, and thus our right to participate in any distribution of earnings or
assets of Chemicals' subsidiaries is subject to the claims of creditors of such
subsidiaries. Chemicals' subsidiaries are parties to various debt documents and
other agreements that limit their ability to incur additional indebtedness and
to provide funds to Chemicals by way of dividends, distributions, and advances.
Labor Relations
Approximately 35% of our employees are covered under various union
contracts. Approximately 20% of our employees are covered by one union contract
at our Texas City facility which expires on May 1, 2002. Approximately 7% of our
employees are covered by one union contract at our Saskatoon facility which
expires in September 30, 2001.
Although we believe our relationship with our employees is generally good,
a strike by one or more of the unions representing our employees could have a
material adverse effect on our financial condition, results of operations, or
cash flows.
RESULTS OF OPERATIONS
The following table sets forth revenues, gross profit, and operating income
(loss) for our segments for the years ended September 30, 2000, 1999, and 1998.
YEAR ENDED SEPTEMBER 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
(Dollars in Millions)
REVENUES:
Petrochemicals .................... $ 867 $ 531 $ 622
Pulp Chemicals .................... 211 190 201
------------ ------------ ------------
$ 1,078 $ 721 $ 823
============ ============ ============
GROSS PROFIT:
Petrochemicals .................... $ 93 $ -- $ 31
Pulp Chemicals .................... 48 38 46
------------ ------------ ------------
$ 141 $ 38 $ 77
============ ============ ============
OPERATING INCOME (LOSS):
Petrochemicals .................... $ 5 $ (64) $ (3)
Pulp Chemicals .................... 35 27 36
------------ ------------ ------------
$ 40 $ (37) $ 33
============ ============ ============
COMPARISON OF FISCAL 2000 TO FISCAL 1999
Our revenues were approximately $1,078 million in fiscal 2000, an increase
of approximately 50% from the approximately $721 million in revenues we received
in fiscal 1999. This increase in our revenues resulted primarily from increased
styrene sales prices and sales volumes and, to a lesser extent, increased
acrylonitrile, sodium chlorate, and methanol sales prices and sales volumes. We
recorded a net loss of approximately $90.0 million, or $7.13 per share, for
fiscal 2000 compared to the net loss of approximately $112.7 million, or $8.94
per share, that we recorded for fiscal 1999. Our improved performance was
primarily due to increased styrene margins and sales volumes and, to a lesser
extent, increased acrylonitrile and sodium chlorate margins and sales volumes.
Our improved performance was partially offset by increased interest expense and
a $60 million non-cash charge related to the write down of our acrylic fibers
business production assets. Our performance in fiscal 1999 was negatively
impacted by a $26 million non-cash charge related to the write down of our
methanol production assets.
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35
Revenues, Gross Profit, and Operating Income (Loss)
Petrochemicals. Revenues from our petrochemicals operations were
approximately $867 million in fiscal 2000, an increase of approximately 63% from
the approximately $531 million in revenues we received from these operations in
fiscal 1999. This increase in revenues resulted primarily from increased styrene
sales prices and sales volumes and, to a lesser extent, increased acrylonitrile
and methanol sales prices and sales volumes. Our petrochemicals operations
recorded operating income of approximately $5 million for fiscal 2000, compared
to operating losses of approximately $64 million from our petrochemicals
operations for fiscal 1999. This increase in income resulted primarily from
increased styrene margins and sales volumes and, to a lesser extent, increased
acrylonitrile margins and sales volumes, partially offset by a larger impairment
expense recorded in fiscal 2000 than that recorded in fiscal 1999.
Revenues from our styrene operations were approximately $492 million in
fiscal 2000, an increase of approximately 100% from the approximately $246
million in revenues we received from these operations in fiscal 1999. Average
sales prices for our styrene increased approximately 78% in fiscal 2000 from
average sales prices for our styrene in fiscal 1999. In addition, sales volume
of our styrene increased approximately 17% for fiscal 2000 from sales volumes of
our styrene for fiscal 1999. These increases in revenues, sales prices, and
volumes for our styrene resulted primarily from the combination of stronger
market demand, operating problems experienced at several of our competitors, and
generally low inventory levels worldwide. However, styrene market conditions
peaked in April of 2000 with spot prices of $0.48 per pound and decreased to
$0.31 per pound as of September 30, 2000. During fiscal 2000, prices for
benzene, one of the primary raw materials for styrene, were approximately 56%
higher than the prices we paid for benzene in fiscal 1999 and prices for
ethylene, the other primary raw material for styrene, were approximately 47%
higher than the prices we paid for ethylene in fiscal 1999. Margins on our
styrene sales during fiscal 2000 increased from margins on our styrene sales
during fiscal 1999, primarily as a result of higher sales prices, which more
than offset our higher raw materials costs.
Revenues from our acrylonitrile and derivatives operations, including
sodium cyanide and TBA, were approximately $164 million in fiscal 2000, an
increase of approximately 76% from the approximately $93 million in revenues we
received from these operations in fiscal 1999. Average sales prices for our
acrylonitrile increased approximately 122% in fiscal 2000 from average sales
prices for our acrylonitrile in fiscal 1999. Sales volume of our acrylonitrile
increased approximately 19% in fiscal 2000 from sales volumes of our
acrylonitrile in fiscal 1999. These increases in revenues, sales prices, and
volumes for our acrylonitrile resulted primarily from the combination of
stronger market demand, operating problems experienced at several of our
competitors, and generally low inventory levels worldwide. During fiscal 2000,
prices for propylene, one of the primary raw materials for acrylonitrile, were
approximately 79% higher than the prices we paid for propylene in fiscal 1999
and prices for ammonia, the other primary raw material for acrylonitrile, were
approximately 27% higher than the prices we paid for ammonia in fiscal 1999.
Margins on our acrylonitrile sales during fiscal 2000 increased from the margins
we received in fiscal 1999, primarily as a result of higher sales prices, which
more than offset our higher raw materials costs.
Revenues from our other petrochemicals operations, including acetic acid,
plasticizers, and methanol, were approximately $141 million in fiscal 2000, an
increase of approximately 12% from the approximately $126 million in revenues we
received from these operations in fiscal 1999. This increase in revenues was
primarily due to increased methanol volumes and sales prices during the first
nine months of fiscal 2000. Our other petrochemicals operations reported a
decrease in operating earnings in fiscal 2000 compared to fiscal 1999. This
decrease in operating earnings resulted primarily from a reduction in margins
for our plasticizers and acetic acid caused by higher raw material and energy
costs.
Revenues from our acrylic fibers operations were approximately $70 million
in fiscal 2000, an increase of approximately 4% from the approximately $67
million in revenues we received from these operations in fiscal 1999. Sales
volumes of our acrylic fibers in fiscal 2000 increased 6% from those realized
during fiscal 1999. Sales prices for our acrylic fibers in fiscal 2000 remained
approximately the same with those realized in fiscal 1999. The performance of
our acrylic fibers operations in fiscal 2000 was below the performance of these
operations in fiscal 1999 due to weak market conditions, imports from foreign
suppliers, and higher acrylonitrile and energy costs.
Pulp Chemicals. Revenues from our pulp chemicals operations were
approximately $211 million for fiscal 2000, an increase of approximately 11%
from the approximately $190 million in revenues we received from these
operations in fiscal 1999. Sales volumes of our sodium chlorate, our primary
pulp chemical product, in fiscal 2000 increased approximately 7% from those
realized in fiscal 1999. Sales prices of our sodium chlorate in fiscal 2000
increased approximately 4% from those realized in fiscal 1999. Our pulp
chemicals operations recorded operating earnings of approximately $35 million in
fiscal 2000, compared to operating earnings of approximately $27 million in
fiscal 1999.
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36
These increases in revenues, sales volumes, sales prices, and operating earnings
resulted primarily from increased operating rates at pulp mills and the
continued conversion to elemental chlorine free bleaching at pulp mills.
Selling, General, and Administrative Expenses
Our SG&A expenses in fiscal 2000 were approximately $39 million, whereas we
had SG&A expenses of approximately $38 million in fiscal 1999. Our SG&A expenses
were impacted favorably in fiscal 2000 by reduced costs for upgrades of certain
of our information technology systems, including year 2000 compliance
activities. However, these positive impacts were more than offset by increased
costs in fiscal 2000 primarily related to an increase in variable compensation
costs as a result of improved business performance.
Other Expense
We had other expense of approximately $2 million in fiscal 2000 related to
workforce reductions in our acrylic fibers operations. We had other expense of
approximately $11 million in fiscal 1999 from one-time non-cash charges related
to early retirement programs, benefit changes, and workforce reductions.
Interest and Debt Related Expenses
Our interest and debt related expense was approximately $122 million for
fiscal 2000 compared to approximately $104 million in fiscal 1999. This increase
resulted primarily from the higher interest rates we paid on some of our
indebtedness after we refinanced that indebtedness in July of 1999 and the
payment of interest on additional indebtedness we incurred at that time.
Provision (Benefit) for Income Taxes
Our provision for income taxes in fiscal 2000 was approximately $5 million,
reflecting the foreign tax provision on the income of our Canadian subsidiaries.
Due to the recurring losses of our United States subsidiaries, in fiscal 2000 we
recorded a valuation allowance in an amount equal to the benefit for income
taxes generated by the losses from our United States subsidiaries. Our benefit
for income taxes in fiscal 1999 was approximately $35 million.
Extraordinary Item
We had a $4 million after-tax ($6 million pre-tax) extraordinary item in
fiscal 1999 related to unamortized debt issue costs which were expensed in
fiscal 1999 as a result of the refinancing of some of our indebtedness in July
of 1999.
COMPARISON OF FISCAL 1999 TO FISCAL 1998
Our revenues were approximately $721 million in fiscal 1999, a decrease of
approximately 12% from our revenues of approximately $823 million in fiscal
1998. This decrease in our revenues resulted primarily from lower acrylonitrile,
sodium chlorate, and methanol sales prices and reduced acrylonitrile sales
volumes, partially offset by increased styrene sales volumes. We recorded a net
loss of approximately $112.7 million, or $8.94 per share, for fiscal 1999
compared to a net loss of approximately $48.6 million, or $3.99 per share, that
we recorded for fiscal 1998. This increase in net loss resulted primarily from:
o reduced acrylonitrile, sodium chlorate, and methanol margins;
o decreased acrylonitrile sales volumes;
o turnarounds of our styrene and acetic acid facilities;
o weak markets in acrylic fibers;
o expense of $26.4 million related to the impairment of our methanol
production assets;
o increased costs associated with early retirement programs, benefit
changes, and workforce reductions;
o and an extraordinary loss related to unamortized debt issue costs as a
result of the refinancing of some of our indebtedness on July 23,
1999.
34
37
Revenues, Gross Profit, and Operating Income (Loss)
Petrochemicals. Revenues from our petrochemicals operations were
approximately $531 million in fiscal 1999, a decrease of approximately 15% from
the approximately $622 million in revenues we received from these operations in
fiscal 1998. This decrease in revenues resulted primarily from reduced
acrylonitrile, acrylic fibers, and methanol sales prices and decreased
acrylonitrile sales volumes. The economic conditions in Asia negatively impacted
market conditions in fiscal 1999, particularly for our styrene, acrylonitrile,
and acrylic fibers products. Our petrochemicals operations recorded operating
losses of approximately $64 million for fiscal 1999, compared to operating
losses of approximately $3 million from our petrochemicals operations for fiscal
1998. The increased losses resulted primarily from weaker operational
performance in acrylonitrile, acrylic fibers, and methanol and the expense
related to the impairment of our methanol plant.
Revenues from our styrene operations were approximately $246 million in
fiscal 1999, an increase of approximately 4% from the approximately $237 million
in revenues we received from these operations in fiscal 1998. Sales prices for
our styrene were approximately the same in fiscal 1999 and fiscal 1998. Sales
volume of our styrene increased approximately 3% for fiscal 1999 from sales
volumes of our styrene for fiscal 1998. This increase in sales volumes of our
styrene resulted primarily from improved market conditions in the fourth quarter
of fiscal 1999, particularly in Asia. During fiscal 1999, prices for benzene,
one of the primary raw materials for styrene, were approximately 7% lower than
the prices we paid for benzene in fiscal 1998 and prices for ethylene, the other
primary raw material for styrene, were approximately 6% higher than the prices
we paid for ethylene in fiscal 1998. Margins on our styrene sales during fiscal
1999 increased from margins on our styrene sales during fiscal 1998, primarily
as a result of lower raw materials costs and improved market conditions in the
fourth quarter of fiscal 1999.
Revenues from our acrylonitrile and derivatives operations, including
sodium cyanide and TBA, were approximately $93 million in fiscal 1999, a
decrease of approximately 30% from our fiscal 1998 revenues from these
operations of approximately $132 million. Sales prices for our acrylonitrile
decreased approximately 32% in fiscal 1999 from sales prices for our
acrylonitrile in fiscal 1998. This decrease in sales prices resulted primarily
from weaker market conditions, particularly in Asia. Sales volume of our
acrylonitrile decreased approximately 18% in fiscal 1999 from sales volumes of
our acrylonitrile in fiscal 1998. During fiscal 1999, prices for propylene, one
of the primary raw materials for acrylonitrile, were approximately 25% lower
than the prices we paid for propylene in fiscal 1998 and prices for ammonia, the
other primary raw material for acrylonitrile, were approximately 9% lower than
the prices we paid for ammonia in fiscal 1998. Margins on our acrylonitrile
sales during fiscal 1999 decreased from the margins on our acrylonitrile sales
during fiscal 1998, primarily as a result of lower acrylonitrile sales prices,
which more than offset our lower raw materials costs.
Revenues from our acrylic fibers operations in fiscal 1999 were
approximately $67 million, a decrease of approximately 33% from the
approximately $100 million in revenues we received from these operations in
fiscal 1998. Sales prices and volumes for our acrylic fibers decreased 10% and
25%, respectively, in fiscal 1999 compared to fiscal 1998. Performance of our
acrylic fibers operations in fiscal 1999 continued to be negatively impacted by
weak market conditions and imports from European suppliers.
Revenues from our other petrochemicals operations, including acetic acid,
plasticizers, and methanol, were approximately $126 million for fiscal 1999, a
decrease of approximately 17% from the approximately $152 million in revenues we
received from these operations in fiscal 1998. This decrease in revenues
resulted primarily from a 24% decrease in methanol sales prices which resulted
from overcapacity in the global methanol market. Our other petrochemicals
products reported a decrease in operating earnings in fiscal 1999 compared to
fiscal 1998, primarily due to weaker margins in methanol.
Pulp Chemicals. Revenues from our pulp chemicals operations were
approximately $190 million for fiscal 1999, a decrease of approximately 5% from
the approximately $201 million in revenues we received from these operations in
fiscal 1998. This decrease in revenues resulted primarily from the approximately
8% decrease in sales prices for our sodium chlorate in fiscal 1999 compared to
sales prices for our sodium chlorate in fiscal 1998. This decrease in sales
prices of sodium chlorate resulted primarily from an increase in North American
sodium chlorate capacity and generally weak market conditions in the pulp and
paper industry. Our pulp chemicals operations recorded operating earnings of
approximately $27 million in fiscal 1999, a decrease of approximately 25% from
the approximately $36 million in operating earnings we recorded from these
operations in fiscal 1998. This decrease in operating earnings resulted
primarily from reduced sodium chlorate sales prices in fiscal 1999, which were
partially offset by slightly increased sodium chlorate sales volumes.
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38
Selling, General, and Administrative Expenses
Our SG&A expenses in fiscal 1999 and fiscal 1998 remained constant at
approximately $38 million. Our SG&A expenses were impacted favorably in fiscal
1999 by cost reduction programs. However, these positive impacts were offset by
increased costs in fiscal 1999 for upgrades of certain of our information
technology systems, including year 2000 compliance activities.
Other Expense
We had other expense of approximately $11 million in fiscal 1999 from our
one-time non-cash charges related to early retirement programs, benefit changes,
and workforce reductions. We had other expense of approximately $6 million in
fiscal 1998 which was primarily related to the voluntary severance programs we
offered in January and April of 1998 at our Texas City facility.
Interest and Debt Related Expenses
Our interest and debt related expenses for fiscal 1999 and fiscal 1998
remained constant at approximately $104 million.
Benefit for Income Taxes
Our benefit for income taxes in fiscal 1999 was approximately $35 million,
with an effective tax rate of approximately 25%, whereas in fiscal 1998 our
benefit for income taxes was approximately $26 million, with an effective tax
rate of approximately 36%. This increase in our benefit for income taxes
resulted primarily from our pre-tax loss of approximately $141 million in fiscal
1999, compared to a pre-tax loss of approximately $72 million in fiscal 1998.
Extraordinary Item
We had a $4 million after-tax ($6 million pre-tax) extraordinary item in
fiscal 1999 related to unamortized debt issue costs which were expensed in
fiscal 1999 as a result of the refinancing of some of our indebtedness in July
of 1999.
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ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about our market sensitive financial
instruments and constitutes a "forward-looking statement." Our major financial
market risk exposure is changing interest rates, primarily in the United States.
Interest rate swaps may be used to adjust interest rate exposure, when
appropriate, based upon market conditions. A portion of our borrowings and
transactions are denominated in foreign currencies which exposes us to market
risk associated with exchange rate movements. All items described are
non-trading and are stated in United States dollars.
FAIR
VALUE
EXPECTED MATURITY DATES SEPTEMBER
(IN THOUSANDS) 2001 2002 2003 2004 2005 THEREAFTER TOTAL 30, 2000
-------- -------- -------- -------- -------- ---------- -------- --------
DEBT
United States $ denominated $ 583 $ 1,531 $ 6,924 $ 51,784 $ 3,714 $ 892,039 $956,575 $755,015
Average interest rates
- fixed -- -- -- -- -- 12.2%
Average interest rates
- variable (c) (c) (c) (a)(c) (c)
Interest rate swaps(b) $ 13,393 $ -- $ -- $ -- $ -- $ -- $ --
Canadian $ denominated $ 1,997 $ 3,128 $ 2,450 $ -- $ -- $ -- $ 7,575 $ 7,575
Average interest rates
- variable (c) (c) (c) -- -- --
(a) Borrowings under our fixed assets revolver bear interest, at our option, at
an annual rate of either the "LIBOR Rate" plus 3.75% or the "Alternate Base
Rate" plus 2.25%. Borrowings under our current assets revolver bear
interest, at our option, at an annual rate of either the LIBOR Rate plus
3.00% or the Alternate Base Rate plus 1.50%. The "Alternate Base Rate" is
equal to the greater of the "Base Rate" as announced from time to time by
The Chase Manhattan Bank in New York, New York or the "Federal Funds
Effective Rate" plus 1/2%. At September 30, 2000, the weighted average
interest rate in effect for our fixed assets revolver was 10.6% and there
were no amounts outstanding under our current assets revolver.
(b) Expected maturity amounts represent notional amounts. Fair value of
September 30, 2000 represents unrealized gain (loss).
(c) The Saskatoon tranche A term loan, which is denominated in Canadian
dollars, and the Saskatoon revolver borrowings bear interest, at
Saskatoon's option, at an annual rate of either the "Bankers Acceptance
Rate" or the "Base Rate" plus an "Applicable Margin" ranging from 1% to
2.5% depending upon Saskatoon's "Leverage Ratio". The Saskatoon tranche B
term loan, which is denominated in United States dollars, bears interest,
at Saskatoon's option, at an annual rate of either the "Eurodollar Rate" or
the "Base Rate" plus an Applicable Margin ranging from 0% to 2.5% depending
upon Saskatoon's Leverage Ratio. The "Base Rate" for the tranche A term
loan and the Saskatoon revolver is equal to the greater of the Prime Rate
for Canadian Dollar commercial loans made in Canada, as announced from time
to time by the agent bank, or the rate for Canadian Dollar Bankers
Acceptances accepted by the agent with a term to maturity of 30 days plus
1%. The "Base Rate" for the tranche B term loan is equal to the greater of
the Prime Rate as announced from time to time by the agent bank, the
"Federal Funds Effective Rate" plus 1/2% or the "Base CD Rate" plus 1%. At
September 30, 2000, the interest rates in effect for the Saskatoon tranche
A and tranche B term loans were 8.4% and 9.7%, respectively.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
STERLING CHEMICALS HOLDINGS, INC. AND STERLING CHEMICALS, INC.
Sterling Chemicals Holdings, Inc. Consolidated Statements of Operations for the years ended
September 30, 2000, 1999, and 1998....................................................................... 40
Sterling Chemicals Holdings, Inc. Consolidated Balance Sheets as of September 30, 2000 and 1999............. 41
Sterling Chemicals Holdings, Inc. Consolidated Statements of Changes in Stockholders' Equity
(Deficiency in Assets) for the years ended September 30, 2000, 1999, and 1998............................ 42
Sterling Chemicals Holdings, Inc. Consolidated Statements of Cash Flows for the years ended
September 30, 2000, 1999, and 1998....................................................................... 43
Sterling Chemicals, Inc. Consolidated Statements of Operations for the years ended September 30, 2000,
1999, and 1998........................................................................................... 44
Sterling Chemicals, Inc. Consolidated Balance Sheets as of September 30, 2000 and 1999...................... 45
Sterling Chemicals, Inc. Consolidated Statements of Changes in Stockholder's Equity (Deficiency in
Assets) for the years ended September 30, 2000, 1999, and 1998 .......................................... 46
Sterling Chemicals, Inc. Consolidated Statements of Cash Flows for the years ended September 30, 2000,
1999, and 1998........................................................................................... 47
Notes to Consolidated Financial Statements.................................................................. 48
Independent Auditors' Reports............................................................................... 70
STERLING CHEMICALS GUARANTORS
Sterling Chemicals Guarantors Combined Statements of Operations for the years ended
September 30, 2000, 1999, and 1998....................................................................... 72
Sterling Chemicals Guarantors Combined Balance Sheets as of September 30, 2000 and 1999..................... 73
Sterling Chemicals Guarantors Combined Statements of Changes in Stockholder's Equity for the
years ended September 30, 2000, 1999, and 1998........................................................... 74
Sterling Chemicals Guarantors Combined Statements of Cash Flows for the years ended
September 30, 2000, 1999, and 1998....................................................................... 75
38
41
Notes to Combined Financial Statements...................................................................... 76
Independent Auditors' Report................................................................................ 87
Report of Management....................................................................................... 88
39
42
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues ........................................................ $ 1,078,351 $ 720,752 $ 822,590
Cost of goods sold .............................................. 937,460 682,594 745,323
------------ ------------ ------------
Gross profit .................................................... 140,891 38,158 77,267
Selling, general, and administrative expenses ................... 39,327 37,649 38,515
Impairment of assets ............................................ 60,000 26,369 --
Other expense ................................................... 1,554 10,832 5,962
Interest and debt related expenses, net of interest income ...... 122,414 104,061 104,455
------------ ------------ ------------
Loss before taxes and extraordinary item ........................ (82,404) (140,753) (71,665)
Provision (benefit) for income taxes ............................ 4,560 (34,936) (25,546)
------------ ------------ ------------
Loss before extraordinary item .................................. (86,964) (105,817) (46,119)
Extraordinary item, loss on early extinguishment of debt,
net of tax .................................................. -- 4,212 --
------------ ------------ ------------
Net loss ........................................................ (86,964) (110,029) (46,119)
Preferred stock dividends ....................................... 2,996 2,683 2,460
------------ ------------ ------------
Net loss attributable to common stockholders .................... $ (89,960) $ (112,712) $ (48,579)
============ ============ ============
Per share data:
Loss before extraordinary item .................................. $ (7.13) $ (8.60) $ (3.99)
Extraordinary item .............................................. -- (0.34) --
------------ ------------ ------------
Net loss per common share ....................................... $ (7.13) $ (8.94) $ (3.99)
============ ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
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43
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30,
---------------------------
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ....................................................... $ 7,667 $ 14,921
Accounts receivable, net ........................................................ 160,294 141,059
Inventories ..................................................................... 83,726 70,464
Prepaid expenses ................................................................ 1,027 5,157
Deferred income tax benefit ..................................................... 8,470 16,888
------------ ------------
Total current assets .......................................................... 261,184 248,489
Property, plant, and equipment, net ................................................ 318,626 402,723
Deferred income tax benefit ........................................................ 48,351 37,237
Other assets ....................................................................... 73,051 86,650
------------ ------------
Total assets .................................................................. $ 701,212 $ 775,099
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable ................................................................ $ 83,883 $ 72,961
Accrued liabilities ............................................................. 91,216 79,883
Current portion of long-term debt ............................................... 2,580 4,246
------------ ------------
Total current liabilities ..................................................... 177,679 157,090
Long-term debt ..................................................................... 961,570 964,555
Deferred income tax liability ...................................................... 11,294 8,815
Deferred credits and other liabilities ............................................. 70,944 76,893
Common stock held by ESOP .......................................................... 3,519 2,946
Less: unearned compensation ....................................................... -- (745)
Redeemable preferred stock ......................................................... 23,928 20,932
Commitments and contingencies (Note 6) ............................................. -- --
Stockholders' equity (deficiency in assets):
Common stock, $.01 par value, 20,000,000 shares authorized, 12,307,000 shares
issued and 12,094,000 outstanding at September 30, 2000; and 12,305,000
shares issued and 12,097,000 outstanding at September 30, 1999 ................ 123 123
Additional paid-in capital ...................................................... (542,712) (542,712)
Retained earnings ............................................................... 28,099 118,490
Accumulated other comprehensive income .......................................... (30,736) (28,768)
Deferred compensation ........................................................... (12) (58)
------------ ------------
(545,238) (452,925)
Treasury stock, at cost, 213,000 and 208,000 shares at September 30, 2000
and 1999, respectively ........................................................ (2,484) (2,462)
------------ ------------
Total stockholders' equity (deficiency in assets) ........................... (547,722) (455,387)
------------ ------------
Total liabilities and stockholders' equity (deficiency in assets) ......... $ 701,212 $ 775,099
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
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STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
(AMOUNTS IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE DEFERRED TREASURY
SHARES AMOUNT CAPITAL EARNINGS INCOME COMPENSATION STOCK TOTAL
--------- --------- --------- --------- ------------ --------- --------- ---------
Balance, September 30, 1997 ..... 11,714 $ 120 $(542,485) $ 277,691 $ (21,124) $ -- $ (2,730) $(288,528)
Comprehensive loss:
Net loss ........................ -- -- -- (46,119) -- -- --
Other comprehensive loss, net
of tax:
Translation adjustment ........ -- -- -- -- (11,466) -- --
Pension adjustment ............ -- -- -- -- (90) -- --
Comprehensive loss ......... (57,675)
Common stock issued in
connection with
the exercise of warrants ...... 345 3 -- -- -- -- -- 3
Preferred stock dividends ....... -- -- -- (2,460) -- -- -- (2,460)
Treasury shares issued as
restricted stock .............. 23 -- (48) -- -- (222) 270 --
Treasury shares issued to ESOP .. -- -- (168) -- -- -- 168 --
Revaluation of ESOP shares to
independently appraised
market value .................. -- -- -- 478 -- -- -- 478
Amortization of deferred
compensation .................. -- -- -- -- -- 111 -- 111
Treasury stock purchases ........ (9) -- -- -- -- -- (108) (108)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, September 30, 1998 ..... 12,073 123 (542,701) 229,590 (32,680) (111) (2,400) (348,179)
Comprehensive loss:
Net loss ........................ -- -- -- (110,029) -- -- --
Other comprehensive income
(loss), net of tax:
Translation adjustment ........ -- -- -- -- 3,972 -- --
Pension adjustment ............ -- -- -- -- (60) -- --
Comprehensive loss ......... (106,117)
Common stock issued in
connection with
the exercise of warrants ...... 32 -- -- -- -- -- -- --
Preferred stock dividends ....... -- -- -- (2,683) -- -- -- (2,683)
Treasury shares issued
as restricted stock ........... 1 -- (11) -- -- (7) 18 --
Revaluation of ESOP shares to
independently appraised
market value .................. -- -- -- 1,612 -- -- -- 1,612
Amortization of deferred
compensation .................. -- -- -- -- -- 60 -- 60
Treasury stock purchases ........ (9) -- -- -- -- -- (80) (80)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, September 30, 1999 ..... 12,097 123 (542,712) 118,490 (28,768) (58) (2,462) (455,387)
Comprehensive loss:
Net loss ........................ -- -- -- (86,964) -- -- --
Other comprehensive income
(loss), net of tax:
Translation adjustment ........ -- -- -- -- (2,015) -- --
Pension adjustment ............ -- -- -- -- 47 -- --
Comprehensive loss ......... (88,932)
Common stock issued in
connection with
the exercise of warrants ...... 1 -- -- -- -- -- -- --
Preferred stock dividends ....... -- -- -- (2,996) -- -- -- (2,996)
Revaluation of ESOP shares to
independently appraised
market value .................. -- -- -- (431) -- -- -- (431)
Amortization of deferred
compensation .................. -- -- -- -- -- 46 -- 46
Treasury stock purchases ........ (4) -- -- -- -- -- (22) (22)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, September 30, 2000 ..... 12,094 $ 123 $(542,712) $ 28,099 $ (30,736) $ (12) $ (2,484) $(547,722)
========= ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
42
45
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net loss ....................................................... $ (86,964) $ (110,029) $ (46,119)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ............................. 59,003 57,677 55,963
Interest amortization ..................................... 6,057 3,105 4,376
Extraordinary item, loss on early extinguishment of debt .. -- 4,212 --
Deferred tax benefit ...................................... (257) (38,024) (19,722)
Early retirement programs and benefit changes ............. -- 6,781 --
Discount notes amortization ............................... 21,638 19,483 16,878
Impairment of assets ...................................... 60,000 26,369 --
Other ..................................................... 726 1,016 1,820
Change in assets/liabilities:
Accounts receivable ....................................... (20,217) (11,547) 44,419
Inventories ............................................... (13,475) 3,207 13,675
Prepaid expenses .......................................... 4,104 (10,760) (2,852)
Other assets .............................................. 4,959 (1,477) 654
Accounts payable .......................................... 10,987 19,137 (32,896)
Accrued liabilities ....................................... 12,864 4,619 (9,300)
Other liabilities ......................................... (11,292) 12,341 18,988
------------ ------------ ------------
Net cash provided by (used in) operating activities ............ 48,133 (13,890) 45,884
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures ...................................... (28,797) (29,540) (26,622)
Proceeds from sale of assets .............................. -- 3,583 --
------------ ------------ ------------
Net cash used in investing activities .......................... (28,797) (25,957) (26,622)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt .............................. 916,885 814,105 59,862
Repayment of long-term debt ............................... (943,305) (751,001) (75,152)
Debt issuance costs ....................................... -- (16,480) --
Purchase of treasury stock ................................ (22) (80) (108)
Other ..................................................... (1) (3,270) 160
------------ ------------ ------------
Net cash provided by (used in) financing activities ............ (26,443) 43,274 (15,238)
Effect of United States/Canadian exchange rate on cash ......... (147) 326 (814)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ........... (7,254) 3,753 3,210
Cash and cash equivalents - beginning of year .................. 14,921 11,168 7,958
------------ ------------ ------------
Cash and cash equivalents - end of year ........................ $ 7,667 $ 14,921 $ 11,168
============ ============ ============
Supplemental disclosures of cash flow information:
Interest paid, net of interest income received ............ $ (96,134) $ (83,167) $ (80,223)
Income taxes (paid) received .............................. (1,194) 4,750 6,653
The accompanying notes are an integral part of the
consolidated financial statements.
43
46
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues ........................................... $ 1,078,351 $ 720,752 $ 822,590
Cost of goods sold ................................. 937,460 682,594 745,323
------------ ------------ ------------
Gross profit ....................................... 140,891 38,158 77,267
Selling, general, and administrative expenses ...... 38,901 36,980 37,319
Impairment of assets ............................... 60,000 26,369 --
Other expense ...................................... 1,554 10,832 5,962
Interest and debt related expenses ................. 99,723 83,897 86,618
------------ ------------ ------------
Loss before taxes and extraordinary item ........... (59,287) (119,920) (52,632)
Provision (benefit) for income taxes ............... 4,560 (29,410) (18,963)
------------ ------------ ------------
Loss before extraordinary item ..................... (63,847) (90,510) (33,669)
Extraordinary item, loss on early extinguishment
of debt, net of tax ............................. -- 4,212 --
------------ ------------ ------------
Net loss ........................................... $ (63,847) $ (94,722) $ (33,669)
============ ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
44
47
STERLING CHEMICALS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 5,740 $ 14,899
Accounts receivable, net ............................................... 163,116 143,556
Inventories ............................................................ 83,726 70,464
Prepaid expenses ....................................................... 1,027 3,980
Deferred income tax benefit ............................................ 8,470 16,888
---------- ----------
Total current assets ................................................. 262,079 249,787
Property, plant and equipment, net ........................................ 318,626 402,723
Deferred income tax benefit ............................................... 30,748 19,463
Other assets .............................................................. 65,690 80,133
---------- ----------
Total assets ......................................................... $ 677,143 $ 752,106
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable ....................................................... $ 83,883 $ 72,731
Accrued liabilities .................................................... 91,029 79,883
Current portion of long-term debt ...................................... 2,580 4,246
---------- ----------
Total current liabilities .............................................. 177,492 156,860
Long-term debt ............................................................ 791,684 816,927
Deferred income tax liability ............................................. 11,294 8,815
Deferred credits and other liabilities .................................... 70,944 76,893
Common stock held by ESOP ................................................. 3,519 2,946
Less: unearned compensation .............................................. -- (745)
Commitments and contingencies (Note 6) .................................... -- --
Stockholder's equity (deficiency in assets):
Common stock, $.01 par value ........................................... -- --
Additional paid-in capital ............................................. (141,786) (139,786)
Accumulated deficit .................................................... (205,256) (140,978)
Accumulated other comprehensive income ................................. (30,736) (28,768)
Deferred compensation .................................................. (12) (58)
---------- ----------
Total stockholder's equity (deficiency in assets) ...................... (377,790) (309,590)
---------- ----------
Total liabilities and stockholder's equity (deficiency in assets) ...... $ 677,143 $ 752,106
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
45
48
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
(AMOUNTS IN THOUSANDS)
RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER
COMMON STOCK PAID-IN (ACCUMULATED COMPREHENSIVE DEFERRED
SHARES AMOUNT CAPITAL DEFICIT) INCOME COMPENSATION TOTAL
--------- --------- --------- --------- --------- --------- ---------
Balance, September 30, 1997 ....... 1 $ -- $(139,786) $ (14,677) $ (21,124) $ -- $(175,587)
Comprehensive loss:
Net loss .......................... -- -- -- (33,669) -- --
Other comprehensive loss, net
of tax:
Translation adjustment .......... -- -- -- -- (11,466) --
Pension adjustment .............. -- -- -- -- (90) --
Comprehensive loss ........... (45,225)
Issuance of restricted stock of
Holdings ........................ -- -- -- -- -- (222) (222)
Revaluation of ESOP shares to
independently appraised
market value .................... -- -- -- 478 -- -- 478
Amortization of deferred
compensation .................... -- -- -- -- -- 111 111
--------- --------- --------- --------- --------- --------- ---------
Balance, September 30, 1998 ....... 1 -- (139,786) (47,868) (32,680) (111) (220,445)
Comprehensive loss:
Net loss .......................... -- -- -- (94,722) -- --
Other comprehensive income
(loss), net of tax:
Translation adjustment .......... -- -- -- -- 3,972 --
Pension adjustment .............. -- -- -- -- (60) --
Comprehensive loss ........... (90,810)
Issuance of restricted stock of
Holdings ........................ -- -- -- -- -- (7) (7)
Revaluation of ESOP shares to
independently appraised
market value .................... -- -- -- 1,612 -- -- 1,612
Amortization of deferred
compensation .................... -- -- -- -- -- 60 60
--------- --------- --------- --------- --------- --------- ---------
Balance, September 30, 1999 ....... 1 -- (139,786) (140,978) (28,768) (58) (309,590)
Net loss .......................... -- -- -- (63,847) -- --
Other comprehensive income
(loss), net of tax:
Translation adjustment .......... -- -- -- -- (2,015) --
Pension adjustment .............. -- -- -- -- 47 --
Comprehensive loss ........... (65,815)
Dividend paid to Holdings ......... -- -- (2,000) -- -- -- (2,000)
Revaluation of ESOP shares to
independently appraised
market value .................... -- -- -- (431) -- -- (431)
Amortization of deferred
compensation .................... -- -- -- -- -- 46 46
--------- --------- --------- --------- --------- --------- ---------
Balance, September 30, 2000 ....... 1 $ -- $(141,786) $(205,256) $ (30,736) $ (12) $(377,790)
========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
46
49
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net loss ............................................... $ (63,847) $ (94,722) $ (33,669)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization ....................... 64,567 60,349 59,151
Deferred tax expense (benefit) ...................... (257) (32,498) (13,139)
Extraordinary item .................................. -- 4,212 --
Early retirement and benefit charges ................ -- 6,781 --
Impairment of assets ................................ 60,000 26,368 --
Other ............................................... 726 1,016 2,020
Change in assets/liabilities:
Accounts receivable ................................. (20,347) (10,877) 45,484
Inventories ......................................... (13,475) 3,207 13,675
Prepaid expenses .................................... 4,967 (11,522) (1,838)
Other assets ........................................ 4,096 4,811 2,078
Accounts payable .................................... 10,791 17,797 (35,102)
Accrued liabilities ................................. 12,864 4,619 (3,441)
Other liabilities ................................... (11,857) 6,556 10,654
------------ ------------ ------------
Net cash provided by (used in) operating activities .... 48,228 (13,903) 45,873
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures ................................ (28,797) (29,540) (26,622)
Proceeds from sale of assets ........................ -- 3,583 --
------------ ------------ ------------
Net cash used in investing activities .................. (28,797) (25,957) (26,622)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt ........................ 916,885 814,105 59,862
Repayment of long-term debt ......................... (943,305) (751,001) (75,153)
Dividend paid to Holdings ........................... (2,000) -- --
Debt issuance costs ................................. -- (16,480) --
Other ............................................... (23) (3,350) 55
------------ ------------ ------------
Net cash provided by (used in) financing activities .... (28,443) 43,274 (15,236)
Effect of United States/Canadian exchange rate on
cash ................................................ (147) 326 (814)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ... (9,159) 3,740 3,201
Cash and cash equivalents - beginning of period ........ 14,899 11,159 7,958
------------ ------------ ------------
Cash and cash equivalents - end of year ................ $ 5,740 $ 14,899 $ 11,159
============ ============ ============
Supplement disclosures of cash flow information:
Interest paid, net of interest income received ...... $ (96,139) $ (83,180) $ (80,251)
Income taxes (paid) received ........................ (1,194) 4,750 6,653
The accompanying notes are an integral part of the
consolidated financial statements.
47
50
STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sterling Chemicals Holdings, Inc. ("Holdings" and, together with its
subsidiaries, unless otherwise indicated, are collectively referred to as "we,"
"our," "ours," and "us") manufactures seven commodity petrochemicals at our
Texas City, Texas plant. Additionally, we manufacture chemicals for use
primarily in the pulp and paper industry at five plants in Canada and a plant in
Valdosta, Georgia, and manufacture acrylic fibers at our plant in Santa Rosa
County, Florida. At our Texas City plant, we produce styrene, acrylonitrile,
acetic acid, plasticizers, methanol, tertiary butylamine ("TBA"), and sodium
cyanide. Near the end of the first quarter of 2001, we also began operating a
disodium iminodiacetic acid, or "DSIDA," facility that is owned by Monsanto. We
generally sell our petrochemicals products to customers for use in the
manufacture of other chemicals and products, which in turn are used in the
production of a wide array of consumer goods and industrial products. We produce
regular textiles, specialty textiles, and technical fibers at our Santa Rosa
plant, as well as licensing our acrylic fibers manufacturing technology to
producers worldwide. Sodium chlorate is produced at our five plants in Canada
and our Valdosta plant. Sodium chlorite is produced at one of our Canadian
locations. In addition, chlor-alkali and calcium hypochlorite are produced at
one of our Canadian locations. We also license, engineer, and oversee
construction of large-scale chlorine dioxide generators for the pulp and paper
industry as part of the pulp chemicals business. These generators convert sodium
chlorate into chlorine dioxide at pulp mills.
Holdings is a holding company whose only material asset is its investment
in Sterling Chemicals, Inc. ("Chemicals"). Chemicals and its subsidiaries own
substantially all of the consolidated operating assets.
Our significant accounting policies are described below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all of our
wholly owned and majority-owned subsidiaries, with all significant intercompany
accounts and transactions having been eliminated. Our 50% equity investments in
a cogeneration joint venture and an acrylonitrile marketing joint venture are
accounted for under the equity method, with our share of the operating results
of the joint ventures recorded in the Statement of Operations.
CASH EQUIVALENTS
We consider all investments having a remaining maturity of three months or
less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is primarily
determined on the first-in, first-out basis, except for stores and supplies,
which are valued at average cost.
We enter 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 us
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 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 plant and
equipment being 15 years. We capitalize interest costs which are incurred as
part of the cost of constructing major facilities and equipment. The amount of
interest capitalized for fiscal 2000, 1999, and 1998 was $2.2 million, $1.4
million, and $0.8 million, respectively.
48
51
IMPAIRMENT OF LONG-LIVED ASSETS
Impairment tests of long-lived assets are made when conditions indicate
their carrying cost may not be recoverable. Such impairment tests are based on a
comparison of undiscounted future cash flows or the market value of similar
assets to the carrying cost of the asset. If an impairment is indicated, the
asset value is written down to its estimated fair value. During fiscal 1999, we
incurred an impairment loss of $26.4 million related to our methanol production
assets. During fiscal 2000, we incurred an impairment loss of $60.0 million
related to our acrylic fibers business.
PATENTS AND ROYALTIES
The costs of patents are amortized on a straight-line basis over their
estimated useful lives, which approximate ten years. We 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
this technology. The resulting intangible amount is included in other assets and
is amortized over the average life for these royalty payments of ten years.
DEBT ISSUE COSTS
Debt issue costs relating to long-term debt are amortized over the term of
the related debt instrument using the effective interest method and are included
in other assets.
INCOME TAXES
Deferred income taxes are recorded to reflect the tax effect of the
temporary differences between the financial reporting basis and the tax basis of
our assets and liabilities at enacted rates.
REVENUE RECOGNITION
We generate revenues through sales in the open market, raw material
conversion agreements, and long-term supply contracts. In addition, we have
entered into profit sharing arrangements with respect to some of our
petrochemicals products. We recognize revenue from sales in the open market, raw
material conversion agreements, and long-term supply contracts when the products
are shipped. Revenues from profit sharing arrangements are estimated and accrued
monthly. Deferred credits are amortized over the life of the contracts which
gave rise to them. We also generate revenues from the construction and sale of
chlorine dioxide generators, which are recognized using the percentage of
completion method. We also receive prepaid royalties, which are recognized over
a period, which is typically ten years. In addition, we generate revenues from
the sale of acrylic fibers manufacturing technology to producers worldwide,
which are recognized as earned. We classify amounts billed to customers for
shipping and handling as revenues, with the related shipping and handling costs
included in cost of goods sold.
FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE
Our Canadian subsidiaries use the Canadian dollar as their functional
currency. For financial reporting purposes, assets and liabilities of these
subsidiaries denominated in Canadian dollars are translated into United States
dollars at year-end exchange rates and revenues and expenses are translated at
the average monthly exchange rates. Translation adjustments are included in
accumulated other comprehensive income, while transaction gains and losses are
included in operations when incurred.
Our Canadian subsidiaries previously entered into forward foreign exchange
contracts to minimize the short-term impact of Canadian dollar fluctuations on
some of its Canadian dollar denominated commitments. Gains or losses on these
contracts are deferred and are included in operations in the same period in
which the related transactions are settled.
HEDGING
We periodically enter into contracts to hedge against the volatility in the
price of natural gas, which is used in the production of styrene and methanol.
These transactions generally take the form of price collars, and are placed with
major financial institutions and industrial companies. The results of the
hedging transactions are included in Cost of Goods Sold as the related
production of styrene and methanol occurs.
49
52
EARNINGS PER SHARE
For purposes of computing net loss per common share, net loss has been
adjusted by an amount equal to the fair market value of "Released Shares," which
are shares held by Chemicals' employee stock ownership plan that have been
allocated to the ESOP accounts of our employees, minus amounts previously
recognized as compensation expense with respect to Released Shares, adjusted to
reflect the amount of depreciation/appreciation in value of Released Shares in
prior periods. This adjustment to net loss is made because we are obligated,
under certain circumstances, to purchase from participants under the plan any
shares of Holdings' common stock distributed by the ESOP to these participants.
The weighted average number of outstanding shares of the common stock of
Holdings and the computation of the net loss per common share are as follows (in
thousands):
YEAR ENDED SEPTEMBER 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net loss attributable to common stockholders $ (89,960) $ (112,712) $ (48,579)
Adjustment for depreciation (appreciation) in value of Released Shares (431) 1,048 298
------------ ------------ ------------
Net loss for purpose of computing net loss per share $ (90,391) $ (111,664) $ (48,281)
============ ============ ============
Net loss per common share $ (7.13) $ (8.94) $ (3.99)
============ ============ ============
Weighted average shares outstanding 12,670 12,495 12,104
============ ============ ============
As losses were incurred in fiscal 2000, 1999, and 1998, basic and diluted
earnings per share are the same for these periods.
COMPREHENSIVE INCOME (LOSS) (in thousands):
CUMULATIVE
TRANSLATION
ADJUSTMENT PENSION ADJUSTMENT TOTAL
---------------- ------------------ ----------------
Balance, September 30, 1997 $ (21,093) $ (31) $ (21,124)
Changes (11,466) (90) (11,556)
---------------- ---------------- ----------------
Balance, September 30, 1998 (32,559) (121) (32,680)
Changes 3,972 (60) 3,912
---------------- ---------------- ----------------
Balance, September 30, 1999 (28,587) (181) (28,768)
Changes (2,015) 47 (1,968)
---------------- ---------------- ----------------
Balance, September 30, 2000 $ (30,602) $ (134) $ (30,736)
================ ================ ================
There is no tax expense or benefit associated with the cumulative translation
adjustment amounts above. The pension adjustment amounts are net of tax
provision (benefit) of $24,000, $(32,000), and $(49,000) for the fiscal years
ended September 30, 2000, 1999, and 1998, respectively.
ENVIRONMENTAL COSTS
Environmental costs are expensed as incurred unless the expenditures extend
the economic useful life of the relevant assets. Costs that extend the economic
life of assets are capitalized and depreciated over the remaining life of those
assets. Liabilities are recorded when environmental assessments or remedial
efforts are probable and the cost can be reasonably estimated.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In preparing disclosures about the fair value of financial instruments, we
have assumed that the carrying amount approximates fair value for cash and cash
equivalents, receivables, accounts payable, and certain accrued expenses due to
the short maturities of these 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 us 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.
50
53
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. Significant estimates include environmental reserves, litigation
contingencies, maintenance costs related to shut downs, taxes, and revenues.
Actual results could differ from these estimates.
RECLASSIFICATION
Certain amounts reported in the financial statements for the prior periods
have been reclassified to conform with the current financial statement
presentation with no effect on net income (loss) or stockholders' equity
(deficiency in assets).
2. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
(Dollars in Thousands)
Inventories:
Finished products ................................................. $ 53,746 $ 37,484
Raw materials ..................................................... 14,107 10,355
---------- ----------
Inventories at cost ................................................. 67,853 47,839
Inventories under exchange agreements ............................. (3,666) 2,562
Stores and supplies ............................................... 19,539 20,063
---------- ----------
$ 83,726 $ 70,464
========== ==========
Property, plant, and equipment:
Land .............................................................. $ 10,237 $ 10,274
Buildings ......................................................... 57,074 56,728
Plant and equipment ............................................... 718,318 673,108
Construction in progress .......................................... 17,618 39,388
Less: accumulated depreciation ................................... (484,621) (376,775)
---------- ----------
$ 318,626 $ 402,723
========== ==========
Other assets:
Patents and technology, net ....................................... $ 15,641 $ 21,630
Debt issue costs, net ............................................. 30,791 34,055
Other ............................................................. 26,619 30,965
---------- ----------
$ 73,051 $ 86,650
========== ==========
Accrued liabilities:
Repairs ........................................................... $ 13,500 $ 9,635
Interest .......................................................... 20,650 20,778
Compensation ...................................................... 27,018 18,174
Property taxes .................................................... 6,469 8,243
Other ............................................................. 23,579 23,053
---------- ----------
$ 91,216 $ 79,883
========== ==========
Deferred credits and other liabilities:
Deferred revenue .................................................. $ 4,659 $ 7,667
Accrued postretirement, pension, and post employment benefits ..... 57,583 54,084
Other ............................................................. 8,702 15,142
---------- ----------
$ 70,944 $ 76,893
========== ==========
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54
3. LONG-TERM DEBT
Long-term debt consisted of the following:
SEPTEMBER 30,
---------------------------
2000 1999
------------ ------------
(Dollars in Thousands)
Revolving credit facilities ................ $ 37,206 $ 54,643
Saskatoon term loans ....................... 34,904 44,045
11 1/4% notes .............................. 152,154 152,485
11 3/4% notes .............................. 275,000 275,000
12 3/8% notes .............................. 295,000 295,000
------------ ------------
Total Chemicals' debt outstanding ....... 794,264 821,173
13 1/2% notes .............................. 169,886 147,628
------------ ------------
Total Holdings' debt outstanding ........ 964,150 968,801
------------ ------------
Less:
Current maturities ...................... (2,580) (4,246)
------------ ------------
Total long-term debt ....................... $ 961,570 $ 964,555
============ ============
On July 23, 1999, Chemicals completed a private offering of $295,000,000 of
its 12 3/8% Senior Secured Notes due 2006. On November 5, 1999, Chemicals
completed a registered exchange offer pursuant to which all of these notes were
exchanged for publicly registered 12 3/8% Notes with substantially similar terms
(the "12 3/8% Notes"). The 12 3/8% Notes are senior secured obligations of
Chemicals and rank equally in right of payment with all other existing and
future senior indebtedness of Chemicals and senior in right of payment to all
existing and future subordinated indebtedness of Chemicals. The 12 3/8% Notes
are guaranteed by all of Chemicals' existing direct and indirect United States
subsidiaries (other than Sterling Chemicals Acquisitions, Inc.) on a joint and
several basis. Each subsidiary's guarantee ranks equally in right of payment
with all of that subsidiary's existing and future senior indebtedness and senior
in right of payment to all existing and future subordinated indebtedness of that
subsidiary. However, the 12 3/8% Notes and the guarantees are subordinated to
the extent of the collateral securing Chemicals' secured revolving credit
facilities. The 12 3/8% Notes and the subsidiary guarantees are secured by (i) a
second priority lien on all of our United States production facilities and
related assets, (ii) a second priority pledge of all of the capital stock of
each subsidiary guarantor, and (iii) a first priority pledge of 65% of the stock
of certain of the Company's subsidiaries incorporated outside of the United
States.
The 12 3/8% Notes bear interest at the annual rate of 12 3/8%, payable
semi-annually on January 15 and July 15 of each year commencing January 15,
2000. Except as otherwise provided below, the 12 3/8% Notes may not be redeemed
by Chemicals prior to July 15, 2003. From that date until July 15, 2004, the
12 3/8% Notes may be redeemed at a premium of the principal amount thereof at
maturity of 106.188% and, from July 15, 2004 until July 15, 2005, the 12 3/8%
Notes may be redeemed at a premium of the principal amount thereof at maturity
of 103.094%. Thereafter, Chemicals may redeem the 12 3/8% Notes at their face
value plus accrued and unpaid interest. Prior to July 15, 2002, Chemicals may
redeem in the aggregate up to 35% of the original principal amount of the
12 3/8% Notes with the proceeds of one or more specified Public Equity
Offerings. Such redemptions may be made at a redemption price of 112.375% of the
face value of the 12 3/8% Notes plus accrued and unpaid interest to the
redemption date. After such redemption, at least $191.75 million aggregate
principal amount of the 12 3/8% Notes must remain outstanding.
On July 23, 1999, Chemicals also established two secured revolving credit
facilities providing up to $155,000,000 in revolving credit loans (the
"Revolvers") under a single Revolving Credit Agreement (the "Credit Agreement").
Under the Credit Agreement, Chemicals and each of its direct and indirect United
States subsidiaries (other than Sterling Chemicals Acquisitions, Inc.) are
co-borrowers and are jointly and severally liable for any indebtedness
thereunder. The Revolvers consist of (i) an $85,000,000 revolving credit
facility (the "Current Assets Revolver") secured by a first priority lien on all
accounts receivable, inventory, and other specified assets of Chemicals and the
other co-borrowers, and (ii) a $70,000,000 revolving credit facility (the "Fixed
Assets Revolver") secured by a first priority lien on all of our United States
production facilities and related assets, all of the capital stock of Chemicals,
and all of the capital stock of each co-borrower and a second priority lien on
all accounts receivable, inventory, and other specified assets of Chemicals and
the other co-borrowers.
Funding under the 12 3/8% Notes offering and the Revolvers occurred on July
23, 1999. The proceeds of the 12 3/8% Notes offering and the initial borrowings
under the Revolvers were used to completely repay all outstanding indebtedness
under Chemicals' then existing senior credit facility.
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Approximately $37.2 million was drawn under the Fixed Assets Revolver at
September 30, 2000. Borrowings under the Fixed Assets Revolver bear interest, at
Chemicals' option, at an annual rate of either the "LIBOR Rate" (as defined in
the Credit Agreement) plus 3.75% or the Alternate Base Rate plus 2.25%.
Borrowings under the Current Assets Revolver bear interest, at Chemicals'
option, at an annual rate of either the LIBOR Rate plus 3.00% or the Alternate
Base Rate plus 1.50%. The "Alternate Base Rate" is equal to the greater of the
Base Rate as announced from time to time by The Chase Manhattan Bank in New
York, New York or the "Federal Funds Effective Rate" plus 1/2% (as such terms
are defined in the Credit Agreement.). At September 30, 2000, the weighted
average interest rate in effect was 11.8%. The Credit Agreement also requires
Chemicals and the co-borrowers to pay an aggregate commitment fee ranging from
0.75% to 1.25% on the unused portion of the commitment for the Fixed Assets
Revolver, depending on the amount drawn, and an aggregate commitment fee of 0.5%
on the unused portion of the commitment for the Current Assets Revolver.
Available credit under the Current Assets Revolver is subject to a monthly
borrowing base consisting of 85% of eligible accounts receivable and 65% of
eligible inventory, with an inventory cap of $42,500,000. In addition, the
borrowing base for the Current Assets Revolver must exceed outstanding
borrowings thereunder by $12,000,000 at all times.
The Fixed Assets Revolver matures on July 23, 2004, with quarterly
commitment reductions totaling 30% of the total commitment in the twelve month
period ending July 23, 2003 and the balance in the following twelve month
period. The Current Assets Revolver matures in five years, with no scheduled
commitment reductions prior to that time. However, the commitments for each of
the Fixed Assets Revolver and the Current Assets Revolver is permanently reduced
to the extent required under the Credit Agreement upon prepayments made out of
specific sources of funds, including certain equity issuances by Holdings and
certain asset sales.
As part of our recapitalization in August of 1996, Chemicals issued $275.0
million of its 11 3/4% Senior Subordinated Notes due 2006 (the "11 3/4% Notes")
and Holdings issued 191,751 Units, with each Unit consisting of one 13 1/2%
Senior Secured Discount Note due 2008 (the "13 1/2% Notes") and one warrant to
purchase three shares of the common stock, par value $0.01 per share, of
Holdings ("Holdings Common Stock") for $0.01 per share. Holdings received $100
million in initial proceeds upon issuing $191.8 million of 13 1/2% Notes under
the Units offering. On April 7, 1997, Chemicals issued $150.0 million of its
11 1/4% Senior Subordinated Notes due 2007 (the "11 1/4% Notes").
The 11 3/4% Notes are unsecured senior subordinated obligations of
Chemicals, ranking subordinate in right of payment to all existing and future
senior debt of Chemicals, but pari passu with the 11 1/4% Notes and all future
senior subordinated indebtedness. The 11 3/4% Notes bear interest at the annual
rate of 11 3/4%, payable semi-annually on February 15 and August 15 of each year
commencing February 15, 1997. The 11 3/4% Notes may not be redeemed by Chemicals
prior to August 15, 2001. From that date through August 15, 2004, the 11 3/4%
Notes may be redeemed at a premium of the principal amount thereof at maturity
varying between 105.875% and 101.958%. After August 15, 2004, Chemicals may
redeem the 11 3/4% Notes at their face value plus accrued and unpaid interest.
The 11 1/4% Notes are unsecured senior subordinated obligations of
Chemicals, ranking subordinate in right of payment to all existing and future
senior debt of Chemicals, but pari passu with the 11 3/4 % Notes and all future
senior subordinated indebtedness of Chemicals. The 11 1/4% Notes bear interest
at the annual rate of 11 1/4%, payable semi-annually on April 1 and October 1 of
each year commencing October 1, 1997. The 11 1/4% Notes may not be redeemed by
Chemicals prior to April 1, 2002. From that date through April 1, 2005, the
11 1/4% Notes may be redeemed at a premium of the principal amount thereof at
maturity varying between 105.625% and 101.875%. After April 1, 2005, Chemicals
may redeem the 11 1/4% Notes at their face value plus accrued and unpaid
interest.
The 13 1/2% Notes are senior secured obligations of Holdings and rank
equally in right of payment with all other senior indebtedness of Holdings and
senior in right of payment to all subordinated indebtedness of Holdings. The
13 1/2% Notes will accrete interest until August 15, 2001, with no interest
payable in cash until February 15, 2002, at an annual rate of 13 1/2%,
compounded semi-annually. Commencing in 2002, interest will be payable on the
13 1/2% Notes semi-annually on February 15 and August 15 of each year until
maturity. The 13 1/2% Notes may not be redeemed by Holdings prior to August 15,
2001. From that date through August 15, 2006, the 13 1/2% Notes may be redeemed
at a premium of the principal amount thereof at maturity varying between 106.75%
and 101.35%. After August 15, 2006, Holdings may redeem the 13 1/2% Notes at
their principal amount plus accrued interest.
Under the terms of our Credit Agreement, we cannot redeem all or any
portion of the 12 3/8% Notes, 11 3/4% Notes, or 11 1/4% Notes at any time unless
expressly required to do so under the relevant indentures. In addition, our
ability to redeem all of any portion of the 11 3/4% Notes or 11 1/4% Notes is
restricted under the indenture governing the 12 3/8% Notes.
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The indentures governing the 12 3/8% Notes, 11 1/4% Notes, 11 3/4% Notes,
and 13 1/2% 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, these indentures
include various circumstances that will constitute, upon occurrence and subject
in certain cases to notice and grace periods, an event of default thereunder.
However, these indentures and the Credit Agreement do not require Holdings or
Chemicals to satisfy any financial ratios or maintenance tests.
The indentures governing the 11 1/4 % Notes, the 11 3/4% Notes, and the
12 3/8% Notes and the Credit Agreement contain provisions which restrict the
payment of advances, loans, and dividends from Chemicals to Holdings. The most
restrictive of these covenants limits such payments during fiscal 2001 to
approximately $2.0 million, plus any amounts due Holdings from Chemicals under
the intercompany tax sharing agreement.
On July 10, 1997, Sterling Pulp Chemicals (Sask) Ltd. ("Sterling Sask"), an
indirect wholly owned subsidiary of Holdings and Chemicals, acquired
substantially all of the assets of Saskatoon Chemicals Ltd. ("Saskatoon
Chemicals"), a subsidiary of Weyerhaeuser Canada Ltd. (the "Saskatoon
Acquisition"). In connection with the Saskatoon Acquisition, Sterling Sask
entered into a credit agreement (the "Saskatoon Credit Agreement") with The
Chase Manhattan Bank of Canada, individually and as administrative agent.
Funding under the Saskatoon Credit Agreement occurred July 10, 1997, upon
consummation of the Saskatoon Acquisition. The Saskatoon Credit Agreement
provides for a revolving credit facility of Cdn. $8.0 million (the "Saskatoon
Revolver"), and a term loan facility consisting of a Cdn. $21.2 million Tranche
A term loan due June 30, 2003, and a $36.4 million Tranche B term loan due June
30, 2005 (the "Saskatoon Term Loans"). Advances under the Saskatoon Revolver are
subject to a borrowing base consisting of 85% of eligible accounts receivable
and 65% of eligible inventory, with an inventory cap of 50% of the borrowing
base. At September 30, 2000, the borrowing base did not limit available credit
and there were no borrowings outstanding under the Saskatoon Revolver. Sterling
Sask's obligations under the Saskatoon Credit Agreement are secured by
substantially all of the assets of Sterling Sask. The Saskatoon Credit Agreement
requires Sterling Sask to satisfy certain financial covenants and tests. In
addition, the Saskatoon Credit Agreement requires that certain amounts of
"Excess Cash Flow" be used to prepay amounts outstanding under the Saskatoon
Term Loans. A prepayment of Cdn. $7.1 million was made in September of 2000
pursuant to this obligation.
The Sterling Sask Tranche A term loan and the Saskatoon Revolver borrowings
bear interest, at Sterling Sask's option, at an annual rate of either the
Bankers Acceptance Rate or the Base Rate plus an Applicable Margin ranging from
1% to 2.5% depending upon Sterling Sask's Leverage Ratio (as such terms are
defined in the Saskatoon Credit Agreement). The Tranche B term loan bears
interest, at Sterling Sask's option, at an annual rate of either the Eurodollar
Rate or the Base Rate plus an Applicable Margin ranging from 0% to 2.5%
depending upon Sterling Sask's Leverage Ratio. The "Base Rate" for the Tranche A
term loan and the Saskatoon Revolver is equal to the greater of the Prime Rate
for Canadian Dollar commercial loans made in Canada, as announced from time to
time by the agent bank, or the rate for Canadian Dollar Bankers Acceptances
accepted by the agent with a term to maturity of 30 days plus 1% (as such terms
are defined in the Saskatoon Credit Agreement). The "Base Rate" for the Tranche
B term loan is equal to the greater of the Prime Rate as announced from time to
time by the agent bank, the "Federal Funds Effective Rate" plus 1/2% or the
"Base CD Rate" plus 1% (as such terms are defined in the Saskatoon Credit
Agreement). At September 30, 2000, the interest rates in effect for the Tranche
A and Tranche B term loans were 8.4% and 9.7%, respectively. The Saskatoon
Credit Agreement also requires Sterling Sask to pay a commitment fee in the
amount of 1/2% commitment under the Saskatoon Revolver.
The Saskatoon Credit Agreement contains provisions, which restrict the
payment of advances, loans, and dividends from Sterling Sask to Chemicals or
Holdings. The most restrictive of these covenants limits such payments during
fiscal 2001 to approximately $1.0 million, plus any amounts due to Chemicals or
Holdings from Sterling Sask under the intercompany tax sharing agreement.
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DEBT MATURITIES
The estimated remaining principal payments on the outstanding debt follows:
YEAR ENDING PRINCIPAL
SEPTEMBER 30, PAYMENTS
- ------------- --------
(Dollars in Thousands)
2001 $ 2,580
2002 4,659
2003 9,374
2004 51,784
2005 3,714
Thereafter ............................................................. 892,039
---------
Total Debt...................................................... $ 964,150
=========
4. INCOME TAXES
A reconciliation of federal statutory income taxes to our effective tax
provision (benefit) before extraordinary item follows:
YEAR ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in Thousands)
Benefit for income taxes at statutory rates ... $(28,841) $(51,526) $(26,968)
Taxable foreign dividends ..................... 2,889 4,295 --
Change in valuation allowance ................. 31,093 1,514 --
Non-deductible expenses ....................... 879 815 --
State and foreign income taxes ................ (1,437) 550 1,422
Other ......................................... (23) 9,416 --
-------- -------- --------
Effective tax provision (benefit) ............. $ 4,560 $(34,936) $(25,546)
======== ======== ========
The benefit for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30,
-----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in Thousands)
Current federal ............................. $ -- $ 2,246 $ (5,900)
Deferred federal ............................ -- (36,724) (21,854)
Current foreign ............................. 3,328 -- --
Deferred foreign ............................ (257) (1,300) 2,132
Provincial and state income taxes ........... 1,489 842 76
-------- -------- --------
Total tax provision (benefit) ............... $ 4,560 $(34,936) $(25,546)
======== ======== ========
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The components of our deferred income tax assets and liabilities are summarized
below:
YEAR ENDED SEPTEMBER 30,
---------------------------
2000 1999
------------ ------------
(Dollars in Thousands)
Deferred tax assets:
Accrued liabilities .................... $ 11,513 $ 12,050
Accrued postretirement cost ............ 13,638 11,991
Tax loss and credit carry forwards ..... 58,982 64,044
Discount note interest ................. 24,466 17,393
Other .................................. 16,275 12,707
------------ ------------
Total deferred tax assets .............. 124,874 118,185
------------ ------------
Deferred tax liabilities:
Property, plant and equipment .......... $ (42,018) $ (68,732)
Other .................................. (4,722) (2,629)
------------ ------------
Total deferred tax liabilities ......... (46,740) (71,361)
Valuation allowance .................... (32,607) (1,514)
------------ ------------
Net deferred tax assets ................ 45,527 45,310
Less: current deferred tax assets ...... (8,470) (16,888)
------------ ------------
Long-term deferred tax assets .......... $ 37,057 $ 28,422
============ ============
We have approximately $164 million in United States net operating losses
which will be carried forward that will expire from fiscal 2018 to 2019 if not
utilized in prior years. We also have approximately Cdn. $8.2 million in
Canadian non-capital loss carryforwards and Cdn. $1.4 million of investment tax
credits which will expire from 2001 through 2006.
5. EMPLOYEE BENEFITS
We have established the following benefit plans:
RETIREMENT BENEFIT PLANS
We have 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 our employees who were employed
as of September 30, 1986 and who were previously employed by Monsanto Company,
we recognize their Monsanto pension years of service for purposes of determining
benefits under our plans. For our employees who were employed on August 21,
1992, and who were previously employed by Tenneco Inc., we recognize their
Tenneco Inc. pension years of service for purposes of determining benefits under
our plans. For our employees who were employed as of January 31, 1997 and, who:
(i) were previously employed by Cytec Industries Inc. and (ii) elected to retire
on or before January 31, 1999, we supplement the standard pension payable such
that the employee's total combined pension from us and from the Cytec
Nonbargaining Employees' Retirement Plan equals the amount the employee would
have received had he or she remained an employee of Cytec until retirement. The
estimated liability for such supplements as of September 30, 2000 and 1999 is
immaterial. Our 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.
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Information concerning the pension obligation, plan assets, amounts recognized
in our financial statements, and underlying actuarial assumptions is stated
below.
SEPTEMBER 30,
---------------------------
2000 1999
------------ ------------
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year ...................... $ 114,390 $ 96,327
Currency rate conversion ..................................... (293) 556
Service cost ................................................. 4,498 5,198
Interest cost ................................................ 8,446 6,735
Plan amendments .............................................. -- 2,878
FAS 88 additional benefits ................................... -- 10,765
Actuarial gain ............................................... (2,158) (1,205)
Benefits paid ................................................ (7,342) (6,864)
------------ ------------
Benefit obligation at end of year ............................ $ 117,541 $ 114,390
============ ============
Change in plan assets:
Fair value at beginning of year .............................. $ 99,291 $ 86,187
Currency rate conversion ..................................... (276) 498
Actual return on plan assets ................................. 15,201 18,705
Employer contributions ....................................... 3,736 765
Participants' contributions .................................. -- --
Benefits paid ................................................ (7,342) (6,864)
------------ ------------
Fair value at end of year .................................... $ 110,610 $ 99,291
============ ============
Development of net amount recognized:
Funded status ................................................ $ (6,931) $ (15,100)
Unrecognized cost:
Actuarial gain ............................................ (13,051) (4,197)
Prior service cost ........................................ 6,764 7,561
Transition liability ...................................... 979 1,354
------------ ------------
Net amount recognized ........................................ $ (12,239) $ (10,382)
============ ============
Amounts recognized in the statement of financial position:
Prepaid pension cost ......................................... $ 418 $ 529
Accrued pension cost ......................................... (12,909) (13,531)
Intangible asset ............................................. 45 2,341
Accumulated other comprehensive income (pre-tax) ............. 207 279
------------ ------------
Net amount recognized ........................................ $ (12,239) $ (10,382)
============ ============
For plans with benefit obligations in excess of plan assets, the benefit
obligation and fair value of plan assets were $45.2 million and $39.6 million,
respectively, at September 30, 2000.
Net periodic pension costs consist of the following components:
SEPTEMBER 30,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(Dollars in Thousands)
Components of net pension costs:
Service cost-benefits earned during the year ............ $ 4,498 $ 5,198 $ 5,093
Interest on prior year's projected benefit obligation ... 8,446 6,735 6,153
Expected return on plan assets .......................... (8,537) (7,538) (7,411)
Net amortization:
Actuarial loss (gain) ................................ 809 634 (130)
Prior service cost ................................... 7 73 658
Transition liability ................................. 375 376 378
Settlement/Curtailment loss ............................. -- 11,337 --
---------- ---------- ----------
Net pension costs ....................................... $ 5,598 $ 16,815 $ 4,741
========== ========== ==========
Weighted-average assumptions:
Discount Rate ........................................... 7.50% 7.50% 7.00%
Rates of increase in salary compensation level .......... 5.38% 5.38% 4.75%
Expected long-term rate of return on plan assets ........ 8.76% 8.77% 8.00%
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POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
We provide certain health care benefits and life insurance benefits for
retired employees. Substantially all of our employees become eligible for these
benefits at normal retirement age. We accrue 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 us with ten
or more years of service credit except for Canadian employees covered by
collective bargaining agreements. All of our employees are eligible for
postretirement life insurance. Postretirement health care benefits for United
States plans are non-contributory. Benefit provisions for most hourly and some
salaried employees are subject to collective bargaining. In general, the plans
stipulate that retiree health care benefits are paid as covered expenses are
incurred. For United States employees, postretirement medical plan deductibles
are assumed to increase at the rate of the long-term consumer price index.
Information concerning the plan obligation, the funded status, amounts
recognized in our financial statements, and underlying actuarial assumptions are
stated below.
SEPTEMBER 30,
------------------------
2000 1999
---------- ----------
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year .......................... $ 45,674 $ 43,131
Service cost ..................................................... 751 1,200
Interest cost .................................................... 2,759 3,005
Plan amendments, curtailments, and special termination benefit ... (82) (2,472)
Actuarial (gain) loss ............................................ (6,168) 3,124
Benefits paid .................................................... (2,872) (2,314)
---------- ----------
Benefit obligation at end of year ................................ $ 40,062 $ 45,674
========== ==========
Development of net amount recognized:
Funded status .................................................... $ (40,062) $ (45,674)
Unrecognized cost:
Actuarial loss ................................................ 4,862 11,380
Prior service cost ............................................ (5,447) (5,943)
---------- ----------
Net amount recognized ............................................ $ (40,647) $ (40,237)
========== ==========
Net periodic plan costs consist of the following components:
SEPTEMBER 30,
----------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in Thousands)
Components of net plan costs:
Service cost .................................. $ 751 $ 1,200 $ 1,466
Interest cost ................................. 2,759 3,005 2,818
Net amortization:
Actuarial loss (gain) ...................... 268 340 (3)
Prior service cost ......................... (496) (233) 29
Curtailment and special termination benefit ... -- (1,150) --
-------- -------- --------
Net plan costs ................................ $ 3,282 $ 3,162 $ 4,310
======== ======== ========
Weighted-average assumptions:
Discount Rate ................................. 7.50% 6.75% 7.50%
The weighted average annual assumed health care trend rate is assumed to be
7.3% for 2000. The rate is assumed to decrease gradually to 5.6% in 2027 and
remain level thereafter. Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plans. A one percentage point
change in assumed health care trend rates would have the following effects:
1% Increase 1% Decrease
---------------- ---------------
(Dollars in Thousands)
Effect on total of service and interest cost components............... $ 195 $ (170)
Effect on post-retirement benefit obligation.......................... 1,935 (1,679)
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We recorded a $10.2 million charge, included in other expense, increasing
our pension liability and other postretirement benefits liability in the second
quarter of fiscal 1999 as a result of an early retirement program for employees
at our Texas City plant and certain benefit changes for all of our U.S.
employees. The early retirement program resulted in curtailment expense for the
pension plan and special termination benefits expenses for both the pension and
the other postretirement benefits plans, partially offset by the curtailment
gain from the reduction of postretirement life insurance benefits for our
currently active U.S. employees.
EMPLOYEE STOCK OWNERSHIP TRUST
In connection with our recapitalization in August of 1996, an Employee
Stock Ownership Trust (the "ESOT") was established which covers substantially
all United States employees. Allocations of shares of common stock were made
annually to participants. The ESOT primarily invests in shares of Holdings
Common Stock and borrowed $6.5 million from Chemicals to purchase approximately
542,000 shares of Holdings Common Stock. In addition, during fiscal 1998 and
1997, the ESOT purchased 14,000 and 99,000, respectively, shares of Holdings
Common Stock. In fiscal 2000, 1999, and 1998, 163,000, 160,000, and 172,000,
respectively, ESOT shares were allocated to employees. We recorded $0.9 million,
$0.7 million, and $1.4 million of expense related to the ESOT in fiscal 2000,
1999, and 1998, respectively. The shares of Holdings Common Stock purchased by
the ESOT in August of 1996 were pledged as security for the ESOP loan. As of
September 30, 2000, the ESOP loan had been repaid in full and all shares of
Holdings Common Stock held by the ESOT had been released and will be allocated
to the ESOT participants' accounts. No additional allocations are contemplated
at this time.
SAVINGS AND INVESTMENT PLAN
Our Sixth Amended and Restated Savings and Investment Plan covers
substantially all United States employees, including executive officers. This
Plan is qualified under Section 401(k) of the Internal Revenue Code. Each
participant has the option to defer taxation of a portion of his or her earnings
by directing us to contribute a percentage of such earnings to their Plan. A
participant may direct up to a maximum of 20% of eligible earnings to this Plan,
subject to certain limitations set forth in the Internal Revenue Code for
"highly compensated" participants. A participant's contributions become
distributable upon the termination of his or her employment. We did not make any
contribution to this plan in fiscal 2000. Beginning October 1, 2000, we began
matching 50% of a participant's contributions, to the extent such contributions
do not exceed 7% of such participant's cash compensation (excluding bonuses,
profit sharing, and similar types of compensation).
EMPLOYEE SAVINGS PLAN
We introduced an employee savings plan for all eligible full-time Canadian
employees effective as of October 1, 2000. Each participant has the option to
contribute a percentage of his or her earnings to the Canadian savings plan,
with no limit on the maximum percentage contributed. Beginning October 1, 2000
we began matching 100% of a participant's contributions, to the extent such
contributions do not exceed 3.5% of such participant's cash compensation
(excluding bonuses, profit sharing, and similar types of compensation).
PROFIT SHARING AND BONUS PLANS
In January 1997, our Board of Directors, upon recommendation of its
Compensation Committee, approved the establishment of a Profit Sharing Plan that
is designed to benefit all qualified employees, and a Bonus Plan that is
designed to provide certain of our exempt salaried employees with the
opportunity to earn bonuses depending, among other things, on our annual
financial performance. We incurred $3.7 million and $7.4 million of expenses
related to the Profit Sharing Plan and Bonus Plan, respectively, in fiscal 2000.
No expenses for profit sharing or bonuses were incurred in fiscal 1999 or 1998.
OMNIBUS STOCK AWARDS AND INCENTIVE PLAN
In April 1997, our Board of Directors approved the establishment of our
Omnibus Stock Awards and Incentive Plan (as amended, the "Omnibus Plan"). Under
the Omnibus Plan, we may grant our key employees incentive and nonqualified
stock options, SARs, restricted stock awards, performance awards, and phantom
stock awards. Approximately 1,000,000 shares of Holdings Common Stock are
available for issuance under the Omnibus Plan, of
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which 745,645 shares are the subject of outstanding grants. The terms and
amounts of the awards (including vesting schedule) are determined by the
Compensation Committee of our Board of Directors. Generally, outstanding stock
options become exercisable (vest) in equal annual installments beginning a year
from date of grant and ending five years from date of grant. In the event of a
specified change of control of Holdings or a qualified public offering of
Holdings Common Stock, all awards immediately vest and become exercisable. Our
Board of Directors has approved an amendment to the Omnibus Plan under which the
total number of shares available for issuance under the Omnibus Plan will be
increased to 2,000,000. This amendment is being presented to our stockholders
for ratification and approval at the annual meeting of our stockholders being
held on January 24, 2001.
During fiscal 1999 and 1998, we issued 1,500 and 22,500, respectively,
restricted stock awards to certain employees. These restricted stock awards
vested 25% immediately, with 1/3 of remaining shares vesting each year after the
date of grant.
AMENDED AND RESTATED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
In April 1997, our Board of Directors approved the establishment of our
1997 Nonqualified Stock Option Plan for Non-Employee Directors. Each of our
non-employee directors is eligible to participate in this Plan. Each eligible
director on the date of adoption of this Plan was granted an option to acquire
2,000 shares of Holdings Common Stock (4,000 shares for the Vice-Chairman), and
each eligible director who was serving on the Board of Directors on each
subsequent October 1st was automatically granted an option to acquire 1,000
shares of Holdings Common Stock (2,000 shares for the Vice-Chairman). Effective
as of April 26, 2000, our 1997 Nonqualified Stock Option Plan was amended and
restated as our Amended and Restated Stock Plan for Non-Employee Directors.
Under our Amended and Restated Stock Plan, each of our non-employee directors
will receive $15,000 in shares of our common stock and options to purchase 2,000
shares of our common stock on October 1 of each year, starting with October 1,
2000. The annual grant of shares under our Amended and Restated Stock Plan is
valued at the average market price for a share of our common stock during the
90-day period ending on the date of grant. Under both our 1997 Nonqualified
Stock Option Plan and our Amended and Restated Stock Plan, each of our
non-employee directors has the ability to elect not to participate. All options
expire ten years from the date of grant, are granted with an exercise price at
or above the fair market value of a share of Holdings Common Stock on the date
of grant (as determined by our Board of Directors) and vest and are exercisable
immediately. As of September 30, 2000, a total of 160,000 shares of Holdings
Common Stock are reserved for issuance under this Plan, of which 32,000 shares
are the subject of outstanding options.
OUTSTANDING STOCK OPTIONS
A summary of the status of our outstanding stock options as of September
30, 2000, 1999, and 1998 and changes during the years then ended is presented
below:
2000 1999 1998
----------------------------- ---------------------------- ----------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
(IN EXERCISE (IN EXERCISE (IN EXERCISE
THOUSANDS) PRICE(1) THOUSANDS) PRICE(1) THOUSANDS) PRICE
---------- ---------------- ---------- ---------------- ---------- ----------------
Outstanding at beginning of year 682 $ 6.14 692 $ 11.74 241 $ 12.00
Granted 123 $ 6.00 95 $ 6.08 489 $ 11.62
Forfeited (27) $ 6.00 (105) $ 6.00 (38) $ 11.94
---------- ---------- --------- --------
Outstanding at end of year 778 $ 6.13 682 $ 6.14 692 $ 11.74
========== ======== ========== ======== ========= ========
Options exercisable at end of year 360 178 86
========== ========== =========
(1) On December 14, 1998, we issued to all of our employees who held stock
options on that date new options with an exercise price of $6.00 per share. The
new options were issued in exchange for and in cancellation of stock options
previously issued to those employees for the same number of shares and with the
same vesting schedules.
The range of exercise prices for options outstanding at September 30, 2000,
was $6.00 - $12.00, with all exercisable options having an exercise price range
of $6.00 - $12.00.
During fiscal 1998, Holdings granted certain employees rights to purchase
an aggregate of 230,000 shares of Holdings Common Stock, at then current market
prices. These rights expired without being exercised.
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All stock options are granted with an exercise price at or above fair
market value of a share of Holdings Common Stock at the grant date. The weighted
average fair value of the stock options granted during fiscal 2000, 1999, and
1998 was $0.6 million, $0.6 million, and $1.9 million, respectively. The fair
value of each stock option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for the grants in fiscal 2000, 1999, and 1998: risk free
interest rate of 5.8%, 5.9% and 4.4%, respectively; expected dividend yield of
0.0% for all years; expected life of ten years for all years; and expected
volatility of 83%, 59%, and 29%, respectively. Stock options generally expire
ten years from the date of grant and fully vest after five years. The
outstanding stock options at September 30, 2000 have a weighted average
contractual life of approximately 8 years.
In accordance with Statement of Financial Accounting Standard ("SFAS") 123,
"Accounting for Stock-Based Compensation," we utilize the intrinsic value method
of accounting for stock-based compensation, and no compensation costs have been
recognized for stock option awards described above. Had compensation cost for
all option issuances been determined consistent with SFAS No. 123, it would not
have had a material impact on our pro forma net loss and loss per share for
fiscal 2000, 1999, or 1998.
6. COMMITMENTS AND CONTINGENCIES
PRODUCT CONTRACTS
We have certain long-term agreements, which provide for the dedication of
100% of our production of acetic acid, methanol, plasticizers, sodium cyanide,
calcium hypochlorite, and DSIDA, each to one customer. We also have various
sales and conversion agreements, which dedicate significant portions of our
production of styrene and acrylonitrile to various customers. Some of these
agreements generally provide for cost recovery plus an agreed margin or element
of profit based upon market price.
LEASE COMMITMENTS
We have entered into various long-term noncancellable operating leases.
Future minimum lease commitments at September 30, 2000, are as follows: fiscal
2001 -- $6.4 million; fiscal 2002 -- $5.3 million; fiscal 2003 -- $4.7 million;
fiscal 2004 -- $4.3 million; fiscal 2005 -- $3.5 million; and thereafter -- $7.1
million.
ENVIRONMENTAL AND SAFETY MATTERS
Our operations involve the handling, production, transportation, treatment,
and disposal of materials that are classified as hazardous or toxic waste and
that are extensively regulated by environmental, health, and safety laws,
regulations, and permit requirements. Environmental permits required for our
operations are subject to periodic renewal and can be revoked or modified for
cause or when new or revised environmental requirements are implemented.
Changing and increasingly strict environmental requirements can affect the
manufacturing, handling, processing, distribution, and use of our chemical
products and the raw materials used to produce such products and, if so
affected, our business and operations may be materially and adversely affected.
In addition, changes in environmental requirements can cause us to incur
substantial costs in upgrading or redesigning our facilities and processes,
including waste treatment, storage, disposal, and other waste handling practices
and equipment.
We conduct environmental management programs designed to maintain
compliance with applicable environmental requirements at all of our facilities.
We routinely conduct inspection and surveillance programs designed to detect and
respond to leaks or spills of regulated hazardous substances and to correct
identified regulatory deficiencies. We believe that our procedures for waste
handling are consistent with industry standards and applicable requirements. In
addition, we believe that our operations are consistent with good industry
practice. However, a business risk inherent with chemical operations is the
potential for personal injury and property damage claims from employees,
contractors and their employees, and nearby landowners and occupants. While we
believe our business operations and facilities generally are operated in
compliance in all material respects with all applicable environmental and health
and safety requirements, we cannot be sure that past practices or future
operations will not result in material claims or regulatory action, require
material environmental expenditures, or result in exposure or injury claims by
employees, contractors and their employees, and the public. Some risk of
environmental costs and liabilities is inherent in our operations and products,
as it is with other companies engaged in similar businesses.
Our operating expenditures for environmental matters, mostly waste
management and compliance, were approximately $31 million for fiscal 2000 and
$30 million for fiscal 1999. We also spent approximately $1 million for
environmentally related capital projects in fiscal 2000 and $6 million for these
types of capital projects in fiscal 1999. In
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fiscal 2001, we anticipate spending approximately $4 million for capital
projects related to waste management and environmental compliance. There are no
capital expenditures related to remediation of environmental conditions
projected for fiscal 2001.
Any significant ban on all chlorine containing compounds could have a
materially adverse effect on our financial condition and results of operations.
British Columbia has a regulation in place requiring elimination of the use of
all chlorine products, including chlorine dioxide, in the bleaching process by
the year 2002. Chlorine dioxide is produced from sodium chlorate, which is one
of our pulp chemicals products. The pulp and paper industry believes that a ban
of chlorine dioxide in the bleaching process will yield no measurable
environmental or public health benefit and is working to change this regulation,
but there can be no assurance that this regulation will be changed. In the event
such a regulation is implemented, we would seek to sell the products we
manufacture at our British Columbia facility to customers in other markets. We
are not aware of any other laws or regulations in place in North America that
would restrict the use of such products for other purposes.
LEGAL PROCEEDINGS
Ammonia Release
On May 8, 1994, an ammonia release occurred at our Texas City plant while a
reactor in the acrylonitrile unit was being restarted after a shutdown for
routine maintenance. Approximately 52 lawsuits and interventions involving
approximately 6,000 plaintiffs were filed against us seeking an unspecified
amount of money for alleged damages from the ammonia release. All claims
related to this release have been resolved within the limits of our insurance
coverage.
Nickel Carbonyl Release
On July 30, 1997, as the methanol unit at our Texas City plant was being
shut down for repair, nickel carbonyl was formed when carbon monoxide reacted
with nickel catalyst in the unit's reformer. After isolating the nickel carbonyl
within the methanol unit, we worked with the permission and guidance of the
Texas Natural Resources Conservation Commission to destroy the nickel carbonyl
by incineration on-site. Prior to its incineration, several of our employees and
contractor employees may have been exposed to nickel carbonyl in the methanol
unit. Two lawsuits and two interventions involving approximately 306 plaintiffs
were filed against us seeking an unspecified amount for alleged damages from the
nickel carbonyl release. These lawsuits and interventions have either been
dismissed or settled within the limits of our insurance coverage.
Ethylbenzene Release
On April 1, 1998, a chemical leak occurred when a line failed in the
ethylbenzene unit at our Texas City facility. The released chemicals included
ethylbenzene, benzene, polyethylbenzene, and hydrochloric acid. We do not
believe any serious injuries were sustained, although a number of citizens
sought medical examinations at local hospitals after a precautionary alert was
given to neighboring communities. There have been nine lawsuits filed against us
related to this release, which involve 1,561 plaintiffs/intervenors who seek an
unspecified amount of damages. We believe that substantially all of our future
out-of-pocket costs and expenses, including settlement payments and judgments,
relating to these lawsuits will be covered by our liability insurance policies
or indemnification from third parties. We do not believe that the claims and
litigation arising out of this incident will have a material adverse effect on
us, although we cannot give any assurances to that effect.
Other Claims
We are subject to various other claims and legal actions that arise in the
ordinary course of its business.
LITIGATION CONTINGENCY
We have made estimates of the reasonably possible range of liability with
regard to our outstanding litigation for which we may incur any liability. These
estimates are based on our judgment using currently available information as
well as consultation with our insurance carriers and outside legal counsel. A
number of the claims in these litigation matters are covered by our insurance
policies or by third-party indemnification. Therefore, we have also made
estimates of our probable recoveries under insurance policies or from
third-party indemnitors based on our understanding of our insurance policies and
indemnification agreements, discussions with our insurers and indemnitors, and
consultation with outside legal counsel, in addition to our judgments. Based on
the foregoing, as of September 30, 2000, we have accrued approximately $2.8
million as our estimate of our aggregate contingent liability for these matters
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and have also recorded aggregate receivables from our insurers and third-party
indemnitors of approximately $2.2 million. At September 30, 2000, management
estimates that the aggregate reasonably possible range of loss for all
litigation combined, in addition to the amount accrued, is between $0 to $5
million. We believe that this additional reasonably possible loss would be
substantially covered by insurance or indemnification.
While we have based our estimates on our evaluation of available
information 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. We will adjust our estimates as necessary as
additional information is developed and evaluated. However, we believe that the
final resolution of these contingencies will not have a material adverse affect
on our financial position, results of operations, or cash flows. In addition,
the timing of probable insurance and indemnity recoveries, and payment of
liabilities, if any, is not expected to have a material adverse effect on our
financial position, results of operations, or cash flows.
7. SEGMENT, GEOGRAPHIC, AND MAJOR CUSTOMER INFORMATION
Our operations are divided into two reportable segments: petrochemicals and
pulp chemicals. The petrochemicals segment manufactures commodity petrochemicals
and acrylic fibers. The pulp chemicals segment manufactures chemicals for use
primarily in the pulp and paper industry. Operating segment information for
2000, 1999, and 1998 is presented below.
YEAR ENDED SEPTEMBER 30,
-------------------------------------
2000 1999 1998
---------- ---------- ----------
(Dollars in Thousands)
Segment Information(1)
Revenues:
Petrochemicals $ 867,630 $ 530,927 $ 621,605
Pulp chemicals 210,721 189,825 200,985
---------- ---------- ----------
Total $1,078,351 $ 720,752 $ 822,590
Operating income (loss):
Petrochemicals $ 5,330 $ (63,710) $ (3,442)
Pulp chemicals 34,680 27,018 36,232
---------- ---------- ----------
Total $ 40,010 $ (36,692) $ 32,790
Depreciation and amortization expenses:
Petrochemicals $ 33,988 $ 34,001 $ 31,894
Pulp chemicals 25,015 23,676 24,069
---------- ---------- ----------
Total $ 59,003 $ 57,677 $ 55,963
Interest expenses:
Petrochemicals $ 77,858 $ 65,426 $ 59,617
Pulp chemicals 44,556 38,635 44,838
---------- ---------- ----------
Total $ 122,414 $ 104,061 $ 104,455
Capital expenditures:
Petrochemicals $ 21,126 $ 21,252 $ 16,768
Pulp chemicals 7,671 8,288 9,854
---------- ---------- ----------
Total $ 28,797 $ 29,540 $ 26,622
Property, plant, and equipment, net:
Petrochemicals $ 153,853 $ 223,519 $ 263,692
Pulp chemicals 164,773 179,204 186,623
---------- ---------- ----------
Total $ 318,626 $ 402,723 $ 450,315
(1) The petrochemicals segment is based in the United States. The pulp chemicals
segment is primarily based in Canada.
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Sales to individual customers constituting 10% or more of total revenues
and export sales were as follows:
YEAR ENDED SEPTEMBER 30,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(Dollars in Thousands)
Major Customers:
British Petroleum plc and subsidiaries $ 125,942 $ 71,803 $ 100,610
Export Sales:
Export revenues $ 460,046 $ 200,448 $ 233,165
Percentage of total revenues 43% 28% 28%
8. FINANCIAL INSTRUMENTS
FOREIGN EXCHANGE
We have entered into forward foreign exchange contracts to reduce risk due
to Canadian dollar exchange rate movements. The forward foreign exchange
contracts had varying maturities with none exceeding 18 months. We made net
settlements of United States dollars for Canadian dollars at rates agreed to at
inception of the contracts. We do not engage in currency speculation. The last
of our existing forward exchange contracts expired in March of 2000, and we do
not intend to enter into any additional forward exchange contracts.
GAS HEDGE
We hedged a portion of our natural gas to be used in the production of
styrene and methanol during fiscal 1999, and 1998. At September 30, 2000, there
were no outstanding natural gas hedges. We had a net loss of $1.5 million and
$1.0 million in fiscal 1999 and 1998, respectively, due to natural gas hedging
contracts.
INTEREST RATE SWAP
We have entered into a declining balance interest rate swap contract to
hedge a portion of our interest rate risk that expires in January 2002. At
September 30, 2000, we had a contractual notional amount of $13.4 million
outstanding with a fixed rate of 6.66% and a floating rate based on LIBOR. Our
interest rate swap is settled on a quarterly basis, with the interest rate
differential received or paid by us recognized as an adjustment to interest
expense.
CONCENTRATIONS OF RISK
We sell our products primarily to companies involved in the petrochemicals,
acrylic fibers, and pulp and paper manufacturing industries. We perform ongoing
credit evaluations of our customers and generally do not require collateral for
accounts receivable. However, letters of credit are required by us on many of
our export sales. Historically, our credit losses have been minimal.
We maintain cash deposits with major banks, which from time to time may
exceed federally insured limits. We periodically assess the financial condition
of these institutions and believe that the likelihood of any possible loss is
minimal.
Approximately 35% of our employees are covered by union agreements.
Approximately 7% of our employees are covered by union agreements which could
expire within one year.
INVESTMENTS
It is our policy to invest our excess cash in investment instruments or
securities whose value is not subject to market fluctuations, such as
certificates of deposit, repurchase agreements, or Eurodollar deposits with
domestic or foreign banks or other financial institutions. Other permitted
investments include commercial paper of major United States corporations with
ratings of A1 by Standard & Poor's Ratings Group or P1 by Moody's Investor
Services, Inc., loan participations of major United States corporations with a
short term credit rating of A1/P1 and direct obligations of the United States
Government or its agencies. In addition, we will not invest more than $5 million
with any single bank, financial institution, or United States corporation.
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FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheet for cash
and cash equivalents, receivables, payables, and certain accrued expenses
approximate fair value due to the short maturities of these instruments. The
following table presents the carrying values and fair values of our long-term
debt at September 30, 2000:
CARRYING VALUE FAIR VALUE
-------------- ----------
(Dollars in Thousands)
Revolving credit facilities $ 37,206 $ 37,206
Saskatoon Term Loans 34,904 34,904
11 1/4% Notes 152,154 114,563
11 3/4% Notes 275,000 200,750
12 3/8% Notes 295,000 304,219
13 1/2% Notes 169,886 70,948
The fair values of the 13 1/2% Notes, 12 3/8% Notes, 11 1/4% Notes, and
11 3/4% Notes are based on quoted market prices. Due to the Revolvers and the
Saskatoon Term Loans having variable interest rates, the fair value equals their
carrying value.
At September 30, 2000, our interest rate swap had a fair market value of
zero, based on our estimate of what we would have to pay to terminate the swap
at September 30, 2000.
9. RELATED PARTY TRANSACTIONS
In May of 1999, we engaged Credit Suisse First Boston Corporation ("CSFB")
and Donaldson Lufkin & Jenrette Securities Corporation ("DLJ") as Joint-Book
Running Managers in connection with the issuance by Chemicals of the 12 3/8%
Notes. CSFB and DLJ also underwrote the Credit Agreement with The CIT
Group/Business Credit, Inc., as Administrative Agent. We paid CSFB a total of
$5,218,750 under these arrangement in fiscal 1999. John L. Garcia, one of our
former directors, was a Managing Director and the Head of the Global Chemical
Investment Banking Group of CSFB from 1994 until April of 1999.
Since October 1, 1991, we have had ongoing commercial relationships in the
ordinary course of business with certain affiliates of Koch Industries, Inc.,
including agreements for the supply of raw materials, sales of petrochemicals,
and transportation of natural gas. During our fiscal years ended September 30,
2000, 1999, and 1998:
o we made product sales to and purchased raw materials from Koch
Chemical and Koch Nitrogren Company, indirect wholly owned
subsidiaries of Koch Industries, Inc.;
o we made payments to John Zink Company, an indirect wholly owned
subsidiary of Koch Industries, Inc., in consideration for certain
contracting and construction services performed at our Texas City
facility; and
o we made payments to Koch Gateway Pipeline Company for the
transportation of natural gas to our acrylic fibers plant through a
pipeline in which it is a partner.
Each of these relationships represented less than 5% of our revenues in each of
such fiscal years. In addition, in 1998 we filed a lawsuit against John Zink
Company seeking recovery for certain types of damages sustained in connection
with a release of nickel carbonyl from our methanol unit on July 30, 1997. This
lawsuit has been voluntarily dismissed but, under a tolling agreement between
the parties, may be refiled at any time. In May of 2000, we entered into a new
3 1/2 year ammonia supply agreement with Koch Nitrogen. The new ammonia supply
agreement replaced our prior ammonia supply agreement with Koch Nitrogen which
was not scheduled to expire until 2002. The new ammonia supply agreement
requires us to purchase the same annual quantity of ammonia from Koch Nitrogen
but at a revised pricing formula. In connection with the execution of the new
ammonia supply agreement, we made a payment to Koch Nitrogen of $1.2 million to
settle a dispute under the old ammonia supply agreement and we also made a
one-time payment to Koch Nitrogen of $1.8 million in exchange for the revised
pricing formula. Koch Capital Services, Inc., an affiliate of Koch Industries,
Inc., is one of our significant stockholders and, under the Voting Agreement
described below, has the right to designate a member of our Board of Directors.
George J. Damiris, one of our former directors, is an executive officer of Koch.
Koch Capital has elected to waive its right to designate a member of our board.
The holders of 6,653,583 shares of Holdings Common Stock, representing
approximately 52% of our outstanding shares, are parties to a Third Amended and
Restated Voting Agreement dated as of February 1, 1999 (the "Voting Agreement").
Three of our directors, Frank P. Diassi, Frank J. Hevrdejs, and T. Hunter
Nelson, and one of our former directors, William A. McMinn, are parties to the
Voting Agreement. Other parties to the Voting Agreement include
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Koch Capital Services, Inc. (an affiliate of Koch Industries), affiliates of
Clipper ("The Clipper Group"), affiliates of Olympus, CSFB, and Gordon A. Cain.
The parties to the Voting Agreement are required to vote any shares of Holdings
Common Stock owned by them in favor of three nominees to the Board of Directors
of Holdings, one to be designated by each of Koch Capital Services, Inc., The
Clipper Group, and Mr. Cain. Rolf H. Towe is the current designee of The Clipper
Group. William A. McMinn, who recently resigned from our Board, was Mr. Cain's
designee and Mr. Cain has the right to designate Mr. McMinn's replacement. Koch
Capital has elected to waive its right to designate a member of our board. The
rights of each of Koch Capital Services, Inc. and The Clipper Group to designate
nominees under the Voting Agreement terminates on the earlier of August 21, 2006
or the time at which they beneficial own less than 5% of the outstanding shares
of our Common Stock, respectively. The right of Mr. Cain to designate a nominee
terminates upon the earlier of (i) December 15, 2008 and (ii) the later of (a)
the expiration of the Standby Purchase Agreement to which he is a party
(described below) and (b) the time at which Mr. Cain beneficial owns less than
5% of the outstanding shares of Holdings Common Stock.
Under engagement letters dated April 15, 1998 and April 27, 1998, we
engaged Chem Systems, an IBM company, to perform certain consulting services
related to our styrene monomer business. In addition, on August 10, 1998, we
engaged Chem Systems to conduct a site study of our Texas City plant and to
benchmark our best practices and organizational structures against top quartile
performers in the industry. Also, in connection with the refinancing in July of
1999, we paid Chem Systems amounts owed to them by DLJ related to the
performance of an appraisal of some of our assets required for the refinancing.
Finally, in 2000, Chem Systems performed ongoing appraisal evaluation services.
In fiscal 1999 we paid Chem Systems an aggregate of $421,164. Peter Spitz, who
is the father of Gary M. Spitz (Chief Financial Officer and a Vice President of
the Company), was the Director of Chem Systems until August of 1999. Peter Spitz
did not personally perform any direct services under any of these arrangements.
As of December 15, 1998, we entered into separate Standby Purchase
Agreements with each of Gordon A. Cain, William A. McMinn, James Crane, Frank P.
Diassi, Frank J. Hevrdejs, and Koch Capital Services, Inc. as described below in
Footnote 10.
10. CAPITAL STOCK
In connection with the issuance of the 13 1/2% Notes (see Note 3), Holdings
issued 191,751 warrants to purchase three shares of Holdings Common Stock for
$0.01, exercisable from August 1998 until August 2008. During fiscal 2000, 1999,
and 1998, 1,515, 32,460, and 345,123 shares, respectively, of Holdings Common
Stock were issued as a result of 505, 10,820, and 115,041, respectively, of
these warrants being exercised. In connection with the Saskatoon Acquisition,
Holdings also issued to holders of the Series B Preferred Stock warrants to
purchase 201,048 shares of Holdings Common Stock for $0.01, exercisable from
July 1997 until December 2007.
In December 1998, we entered into separate Standby Purchase Agreements
(collectively, the "Purchase Agreements") with each of Gordon A. Cain, William
A. McMinn, James Crane, Mr. Diassi, Mr. Hevrdejs, and Koch Capital Services,
Inc. (collectively, the "Purchasers"). Pursuant to the terms of the Purchase
Agreements, the Purchasers committed to purchase up to 2.5 million shares of
Holdings Common Stock, at a price of $6.00 per share, if, as, and when requested
by us at any time or from time to time prior to December 15, 2001. Under each of
the Purchase Agreements, we may only require the Purchasers to purchase such
shares if we believe that such capital is necessary to maintain, reestablish, or
enhance Chemicals' borrowing ability under its revolving credit facilities or to
satisfy any requirement thereunder to raise additional equity. To induce the
Purchasers to enter into the Purchase Agreements, we issued them warrants to
purchase an aggregate of 300,000 shares of Holdings Common Stock at an exercise
price of $6.00 per share In addition, we agreed to issue to the Purchasers
additional warrants to purchase up to 300,000 additional shares of Holdings
Common Stock if, as, and when they purchase shares of Holdings Common Stock
under the Purchase Agreements. Any shares of Holdings Common Stock purchased
under the Purchase Agreement and the warrants issued to the Purchasers as
contemplated by the Purchase Agreements will be subject to the terms of the
Third Amended and Restated Voting Agreement dated as of February 1, 1999, the
Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of
August 21, 1996, as amended, and the Tag-Along Agreement dated as of August 21,
1996.
At September 30, 2000, warrants to purchase an aggregate of 697,203 shares
Holdings Common Stock were outstanding.
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11. MANDATORY REDEEMABLE PREFERRED STOCK
In connection with the acquisition of our acrylic fibers facility, we
authorized 350,000 shares and issued 104,110 shares of non-voting Series A
Preferred Stock with a fair value and carrying value of $10.0 million. The
Series A Preferred Stock has a cumulative dividend rate of 10%, payable in kind
semi-annually on January 1 and July 1 of each year commencing July 1, 1997. We
may redeem all or any number of shares of Series A Preferred Stock at any time
with proper written notice at a price of $100 per share plus accrued and unpaid
dividends. The holders of Series A Preferred Stock may elect to have us redeem
shares on any dividend payment date after June 30, 2009, with proper written
notice, at a price of $100 per share plus accrued and unpaid dividends. The
carrying value of the Series A Preferred Stock at September 30, 2000 and 1999,
was $14.3 million and $13.0 million, respectively (liquidation value of $100 per
share).
In connection with the Saskatoon Acquisition, we authorized 58,000 shares
and issued approximately 7,532 shares of non-voting Series B Preferred Stock
with a fair value of $4.9 million. The Series B Preferred Stock has a 14%
dividend rate through July 10, 2002, and thereafter a variable rate between 14%
and 18% depending on payment terms until redeemed. The dividend is payable in
kind on January 1, April 1, July 1, and October 1 of each year, commencing
October 1, 1997. We may redeem all or any number of shares of Series B Preferred
Stock at any time with proper written notice at a price of $1,000 per share plus
a premium ranging from 5% to 1% depending on the date of redemption plus accrued
and unpaid dividends. The holders of Series B Preferred Stock may elect to have
us redeem shares on any dividend payment date after June 30, 2009, with proper
written notice, at a price of $1,000 per share plus accrued and unpaid
dividends. The carrying value of the Series B Preferred Stock at September 30,
2000 and 1999, was $9.6 million and $7.9 million, respectively, based on
liquidation value of $1,000 per share, reflecting a reduction in the carrying
value of the Series B Preferred Stock in an amount equal to the fair market
value of warrants issued to the holders of the Series B Preferred Stock in
connection with the financing. The difference in the carrying value and the
redemption amount is accreted as a charge to retained earnings over the holding
period using the effective interest rate method.
12. NEW ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," establish accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. We adopted these statements as of
October 1, 2000. The transition adjustment relating to the adoption of these
statements was not material.
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STERLING CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Except as modified below, the Notes to Holdings' Consolidated Financial
Statements are incorporated herein by reference insofar as they relate to
Chemicals.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES
Chemicals is included in the consolidated federal tax return filed by its
parent, Holdings. A tax sharing agreement between Holdings and Chemicals defines
the computation of Chemicals' obligations to Holdings. Chemicals' provision for
income taxes is computed as if Chemicals and its subsidiaries file their annual
tax return on a separate company basis. Deferred income taxes are recorded to
reflect the tax effect of the temporary differences between the financial
reporting basis and the tax basis of Chemicals' assets and liabilities at
enacted rates.
EARNINGS PER SHARE
All issued and outstanding shares of Chemicals are held by Holdings, and
accordingly, earnings per share are not presented.
2. INCOME TAXES
A reconciliation of federal statutory income taxes to Chemicals' effective
tax provision (benefit) before extraordinary item follows:
YEAR ENDED SEPTEMBER 30,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(Dollars in Thousands)
Benefit for income taxes at statutory rates ... $ (20,750) $ (44,235) $ (20,385)
Taxable foreign dividends ..................... 2,889 4,295 --
Change in valuation allowance ................. 23,700 1,514 --
Non-deductible expenses ....................... 182 195 --
State and foreign income taxes ................ (1,437) 550 1,422
Other ......................................... (24) 8,271 --
---------- ---------- ----------
Effective tax provision (benefit) ............. $ 4,560 $ (29,410) $ (18,963)
========== ========== ==========
The provision (benefit) for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
(Dollars in Thousands)
Current federal ..................... $ -- $ 2,246 $ (5,900)
Deferred federal .................... -- (31,198) (15,271)
Current foreign ..................... 3,328
Deferred foreign .................... (257) (1,300) 2,132
Provincial and state income taxes ... 1,489 842 76
------------ ------------ ------------
Total tax provision (benefit) ....... $ 4,560 $ (29,410) $ (18,963)
============ ============ ============
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The components of Chemicals' deferred income tax assets and liabilities are
summarized below:
SEPTEMBER 30,
----------------------------
2000 1999
------------ ------------
(Dollars in Thousands)
Deferred tax assets:
Accrued liabilities ........................... $ 11,513 $ 12,050
Accrued postretirement cost ................... 13,638 11,991
Tax loss and credit carryforward and other .... 58,452 63,663
Other ......................................... 16,275 12,707
------------ ------------
Total deferred tax assets ..................... 99,878 100,411
------------ ------------
Deferred tax liabilities:
Property, plant and equipment ................. $ (42,018) $ (68,732)
Other ......................................... (4,722) (2,629)
------------ ------------
Total deferred tax liabilities ................ (46,740) (71,361)
Valuation allowance ........................... (25,214) (1,514)
------------ ------------
Net deferred tax assets ....................... 27,924 27,536
Less current deferred tax assets .............. (8,470) (16,888)
------------ ------------
Long-term deferred tax assets (liabilities) ... $ 19,454 $ 10,648
============ ============
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Sterling Chemicals Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Sterling
Chemicals Holdings, Inc. and subsidiaries as of September 30, 2000 and 1999, and
the related consolidated statements of operations, changes in stockholders'
equity (deficiency in assets), and cash flows for each of the three years in the
period ended September 30, 2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sterling Chemicals Holdings, Inc.
and subsidiaries as of September 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2000 in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Houston, Texas
December 12, 2000
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INDEPENDENT AUDITORS' REPORT
To the Stockholder of Sterling Chemicals, Inc.
We have audited the accompanying consolidated balance sheets of Sterling
Chemicals, Inc. and subsidiaries as of September 30, 2000 and 1999, and the
related consolidated statements of operations, changes in stockholder's equity
(deficiency in assets), and cash flows for each of the three years in the period
ended September 30, 2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sterling Chemicals, Inc. and
subsidiaries as of September 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the period ended
September 30, 2000 in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Houston, Texas
December 12, 2000
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STERLING CHEMICALS GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
Revenues ........................................... $ 245,402 $ 224,116 $ 263,884
Cost of goods sold ................................. 211,632 190,059 211,777
---------- ---------- ----------
Gross profit ....................................... 33,770 34,057 52,107
Selling, general, and administrative expenses ...... 24,290 19,280 22,098
Impairment of assets ............................... 60,000 -- --
Interest and debt related expenses ................. 43,051 41,743 39,074
---------- ---------- ----------
Loss before income taxes ........................... (93,571) (26,966) (9,065)
Equity in earnings of joint venture, net of tax .... (747) (2,549) (1,872)
Provision (benefit) for income taxes ............... 2,951 (4,530) (3,192)
---------- ---------- ----------
Net Loss ........................................... $ (95,775) $ (19,887) $ (4,001)
========== ========== ==========
The accompanying notes are an integral part of the
combined financial statements.
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STERLING CHEMICALS GUARANTORS
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30,
----------------------------
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 499 $ 9,323
Accounts receivable, net ................................ 46,190 45,240
Inventories ............................................. 31,252 29,207
Prepaid expenses ........................................ 301 1,669
------------ ------------
Total current assets .................................. 78,242 85,439
Property, plant, and equipment, net ........................ 127,667 201,692
Due from affiliates ........................................ 165,531 157,882
Other assets ............................................... 30,720 43,814
------------ ------------
Total assets .......................................... $ 402,160 $ 488,827
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable ........................................ $ 20,397 $ 22,695
Accrued liabilities ..................................... 24,041 16,515
------------ ------------
Total current liabilities ............................. 44,438 39,210
Long-term debt due to parent ............................... 351,337 351,337
Deferred income taxes ...................................... 8,338 7,272
Deferred credits and other liabilities ..................... 11,574 7,227
Commitments and contingencies (Note 7) ..................... -- --
Stockholder's equity (deficiency in assets):
Common stock ............................................ -- --
Additional paid-in capital .............................. 92,735 92,735
Retained earnings (accumulated deficit) ................. (77,229) 18,546
Accumulated other comprehensive income .................. (29,033) (27,500)
------------ ------------
Total stockholder's equity (deficiency in assets) ..... (13,527) 83,781
------------ ------------
Total liabilities and stockholder's
equity (deficiency in assets) .................... $ 402,160 $ 488,827
============ ============
The accompanying notes are an integral part of the
combined financial statements.
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STERLING CHEMICALS GUARANTORS
COMBINED STATEMENTS OF
CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
(AMOUNTS IN THOUSANDS)
RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER
COMMON PAID-IN (ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT) INCOME TOTAL
------------ ------------ ------------ ------------- ------------
Balance, September 30, 1997 .... $ -- $ 92,735 $ 42,434 $ (20,772) $ 114,397
Comprehensive income:
Net loss .................... -- -- (4,001) --
Translation adjustment ...... -- -- -- (10,041)
Comprehensive loss ....... (14,042)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1998 .... -- 92,735 38,433 (30,813) 100,355
Comprehensive income:
Net loss .................... -- -- (19,887) --
Translation adjustment ...... -- -- -- 3,313
Comprehensive loss ....... (16,574)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1999 .... -- 92,735 18,546 (27,500) 83,781
Net loss .................... -- -- (95,775) --
Translation adjustment ...... -- -- -- (1,533)
Comprehensive loss ....... (97,308)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 2000 .... $ -- $ 92,735 $ (77,229) $ (29,033) $ (13,527)
============ ============ ============ ============ ============
The accompanying notes are an integral part of the
combined financial statements.
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STERLING CHEMICALS GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
---------------------------------------
2000 1999 1998
---------- ---------- ----------
Cash flows from operating activities:
Net loss ........................................................................... $ (95,775) $ (19,887) $ (4,001)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization ................................................... 26,050 24,153 23,502
Impairment of asset ............................................................. 60,000 -- --
Deferred tax expense (benefit) .................................................. 1,066 206 (2,479)
Other ........................................................................... 66 (234) 446
Change in assets/liabilities:
Accounts receivable ............................................................. (950) (6,499) 14,422
Inventories ..................................................................... (2,045) 3,325 (77)
Prepaid expenses ................................................................ 1,368 4,421 (3,291)
Due from affiliates ............................................................. (9,181) 3,512 1,055
Other assets .................................................................... 8,673 1,841 (456)
Accounts payable ................................................................ (2,298) 712 397
Accrued liabilities ............................................................. 7,524 238 (531)
Other liabilities ............................................................... 4,342 (4,792) 298
---------- ---------- ----------
Net cash flows provided by (used in) operating activities .......................... (1,160) 6,996 29,285
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures ............................................................ (7,604) (7,682) (10,550)
Proceeds from sale of assets .................................................... -- 3,583 --
---------- ---------- ----------
Net cash used in investing activities .............................................. (7,604) (4,099) (10,550)
---------- ---------- ----------
Cash flows from financing activities -
Net change in long-term debt due to Parent ...................................... -- 2,099 (20,410)
---------- ---------- ----------
Effect of United States/Canadian exchange rate on cash ............................. (60) 234 (447)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ............................... (8,824) 5,230 (2,122)
Cash and cash equivalents--beginning of year ....................................... 9,323 4,093 6,215
---------- ---------- ----------
Cash and cash equivalents--end of year ............................................. $ 499 $ 9,323 $ 4,093
========== ========== ==========
Supplemental disclosures of cash flow information:
Income taxes paid ............................................................... $ (696) $ (749) $ (541)
The accompanying notes are an integral part of the
combined financial statements.
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STERLING CHEMICALS GUARANTORS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
On July 23, 1999, Sterling Chemicals, Inc. ("Chemicals"), a wholly owned
subsidiary of Sterling Chemicals Holdings, Inc. ("Holdings"), completed a
private offering of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006.
On November 5, 1999, Chemicals completed a registered exchange offer pursuant to
which all of these notes were exchanged for publicly registered 12 3/8% Notes
with substantially similar terms (the "12 3/8% Notes"). The 12 3/8% Notes are
guaranteed by all of Chemicals' existing direct and indirect United States
subsidiaries (other than Sterling Chemicals Acquisitions, Inc.) on a joint and
several basis and are secured by, among other things, a second priority pledge
of 100% of the stock of these subsidiaries. These subsidiaries consist of
Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp
Chemicals, Inc., Sterling Chemicals Energy, Inc., Sterling Chemicals
International, Inc., and Sterling Fibers, Inc. and, together with two Canadian
subsidiaries of Sterling Canada, Inc., are collectively referred to as the
"Guarantors." The consolidated financial statements of each of these guarantor
subsidiaries have been combined to produce the accompanying financial
statements.
The Guarantors manufacture chemicals for use primarily in the pulp and
paper industry at four plants in Canada and a plant in Valdosta, Georgia, and
manufacture acrylic fibers at a plant in Santa Rosa County, Florida. Sodium
chlorate is produced at the four plants in Canada and the Valdosta plant. Sodium
chlorite is produced at one of the Canadian locations. The Guarantors also
license, engineer, and oversee construction of large-scale chlorine dioxide
generators, which convert sodium chlorate into chlorine dioxide, for the pulp
and paper industry. The Guarantors produce regular textiles, specialty textiles,
and technical fibers at the Santa Rosa plant, as well as licensing their acrylic
fibers manufacturing technology to producers worldwide.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Guarantors are described below.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of all wholly owned
and majority-owned subsidiaries of the combined entities. All significant
intercompany accounts and transactions among entities included in the combined
financial statements have been eliminated. The Guarantors' investment in a
cogeneration joint venture in which the Guarantors have a fifty percent interest
is accounted for under the equity method.
CASH EQUIVALENTS
The Guarantors consider all investments with a remaining maturity of three
months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is primarily
determined on the first-in, first-out basis, except for stores and supplies
which are valued at average cost.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Major renewals and
improvements, which extend the useful lives of 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.
IMPAIRMENT OF LONG-LIVED ASSETS
Impairment tests of long-lived assets are made when conditions indicate
their carrying cost may not be recoverable. Such impairment tests are based on a
comparison of undiscounted future cash flows or the market value of similar
assets
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to the carrying cost of the asset. If an impairment is indicated, the asset
value is written down to its estimated fair value. During fiscal 2000, the
Guarantors incurred an impairment loss of $60.0 million related to their acrylic
fibers business.
PATENTS AND ROYALTIES
The costs of patents are amortized on a straight-line basis over their
estimated useful lives, which approximate ten years. The Guarantors capitalized
the value of their chlorine dioxide generator technology acquired in fiscal 1992
based on the net present value of all estimated remaining royalty payments
associated with this technology. The resulting intangible amount is included in
other assets and is amortized over an average life for these royalty payments of
ten years.
INCOME TAXES
The Guarantors are included in the consolidated United States federal
income tax returns filed by Holdings. The Guarantors' provision (benefit) for
United States income taxes has been allocated by Holdings as if the Guarantors
filed their annual tax returns on a separate return basis. The Guarantors'
Canadian subsidiaries file separate federal Canadian tax returns, as well as
returns in the provinces in which they operate. For these Canadian subsidiaries,
deferred income taxes are recorded to reflect the tax effect of the temporary
differences between the financial reporting basis and the tax basis of the
Guarantors' assets and liabilities.
REVENUE RECOGNITION
The Guarantors generate revenues through sales in the open market and
long-term supply contracts and recognize these revenues as the products are
shipped. Deferred credits are amortized over the life of the contracts which
gave rise to them. The Guarantors also generate revenues from the construction
and sale of chlorine dioxide generators, which are recognized using the
percentage of completion method. The Guarantors also receive prepaid royalties,
which are typically recognized over a period of ten years. In addition, the
Guarantors generate revenues from the sale of acrylic fibers manufacturing
technology to producers worldwide, which are recognized as earned. We classify
amounts billed to customers for shipping and handling as revenues, with the
related shipping and handling costs included in cost of goods sold.
FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE
The Canadian companies included in the consolidated financial statements of
the Guarantors use the Canadian dollar as the functional currency. For financial
reporting purposes, assets and liabilities of these companies denominated in
Canadian dollars are translated into United States dollars at year-end exchange
rates and revenues and expenses are translated at the average monthly exchange
rates. Translation adjustments are included in accumulated other comprehensive
income, while transaction gains and losses are included in operations when
incurred.
The Guarantors' Canadian subsidiaries previously entered into forward
foreign exchange contracts to minimize the short-term impact of Canadian dollar
fluctuations on some of their Canadian dollar denominated commitments. Gains or
losses on these contracts are deferred and are included in operations in the
same period in which the related transactions are settled.
EARNINGS PER SHARE
All issued and outstanding shares of the entities included in Guarantors'
financial statements are held directly or indirectly by Chemicals and Holdings
and, accordingly, earnings per share information is not presented.
ENVIRONMENTAL COSTS
Environmental costs are expensed as incurred unless the expenditures extend
the economic useful life of the relevant assets. Costs that extend the economic
life of assets are capitalized and depreciated over the remaining life of those
assets. Liabilities are recorded when environmental assessments or remedial
efforts are probable and the cost can be reasonably estimated.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In preparing disclosures about the fair value of financial instruments, the
Guarantors have assumed that the carrying amount approximates fair value for
cash and cash equivalents, receivables, accounts payable, and certain
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80
accrued expenses due to the short maturities of those instruments. The fair
values of long-term debt instruments allocated to the Guarantors by Chemicals
are estimated based upon quoted market values (if applicable) or on the current
interest rates available for debt with similar terms and remaining maturities.
Considerable judgment is required in developing these estimates and,
accordingly, no assurance can be given that the estimated values presented
herein are indicative of the amounts that would be realized in a free market
exchange.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported periods. Significant estimates include environmental
reserves, litigation contingencies, and taxes. Actual results could differ from
these estimates.
ALLOCATIONS
The Guarantors are directly or indirectly wholly owned by Chemicals, which
incurs certain direct and indirect expenses for the benefit and support of the
Guarantors. These services include, among others, tax planning, treasury, legal,
risk management, and the maintenance of insurance coverage for the Guarantors.
Chemicals allocated $4.9 million, $3.5 million, and $4.1 million of such
expenses to the Guarantors in fiscal years 2000, 1999, and 1998, respectively,
which are included in selling, general, and administrative expenses. Allocations
are based on the Guarantors' proportionate share of the respective amounts and
are determined using various criteria including headcount, payroll, number of
vehicles, and revenue. In addition, the Guarantors are dependent on Chemicals
for financing.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," establish
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The Guarantors adopted these statements as of October 1, 2000. The transition
adjustment relating to the adoption of these statements was not material.
RECLASSIFICATION
Certain amounts reported in the financial statements for prior periods have
been reclassified to conform with the current financial statement presentation
with no effect on net income (loss) or stockholder's equity (deficiency in
assets).
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3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
SEPTEMBER 30,
-------------------------
2000 1999
----------- -----------
(Dollars in Thousands)
Inventories:
Finished products.......................... $ 20,119 $ 17,513
Raw materials.............................. 2,222 2,235
----------- -----------
Inventories at cost............................. 22,341 19,748
Inventories under exchange agreements...... 277 170
Stores and supplies........................ 8,634 9,289
----------- -----------
$ 31,252 $ 29,207
=========== ===========
Property, plant, and equipment:
Land....................................... $ 2,773 $ 2,808
Buildings.................................. 35,442 34,919
Plant and equipment........................ 236,583 230,057
Construction in progress................... 9,951 13,073
----------- -----------
Property, plant, and equipment at cost..... 284,749 280,857
Less: accumulated depreciation............. (157,082) (79,165)
----------- -----------
$ 127,667 $ 201,692
=========== ===========
Other assets:
Patents and technology, net................ $ 14,790 $ 20,718
Other...................................... 15,930 23,096
----------- -----------
$ 30,720 $ 43,814
=========== ===========
Accrued liabilities:
Accrued compensation....................... $ 5,048 $ 4,988
Accrued interest........................... 6,559 1,976
Billings in excess of costs incurred....... 787 3,135
Other...................................... 11,647 6,416
----------- -----------
$ 24,041 $ 16,515
=========== ===========
4. LONG-TERM DEBT
In August of 1996, in connection with a recapitalization transaction,
Chemicals allocated $276.8 million of debt to the Guarantors. In addition, $81
million of debt incurred at the time Chemicals acquired its acrylic fibers
business was allocated to the Guarantors. Principal payments are allocated to
the Guarantors by Chemicals as scheduled principal payments are made on a basis
consistent with the original allocation. In addition, the Guarantors have made
payments to Chemicals, from time to time, out of available cash which were
applied by Chemicals as a reduction of the principal of the previously allocated
debt. Interest expense is allocated to the Guarantors based on the terms of
Chemicals' debt agreements. At September 30, 2000, interest rates on the
allocated debt ranged from 11.25% to 12.375%. Debt issue costs relating to
long-term debt have been allocated to the Guarantors by Chemicals on a basis
consistent with long-term debt and are included in other assets.
On July 23, 1999, Chemicals completed a private offering of $295,000,000 of
its 12 3/8% Senior Secured Notes due 2006 which were subsequently exchanged for
the 12 3/8% Notes. The 12 3/8% Notes are guaranteed by all of the Guarantors
(other than the two Canadian subsidiaries of Sterling Canada, Inc.) on a joint
and several basis. Each guarantee ranks equally in right of payment with all of
the relevant Guarantor's existing and future senior indebtedness and senior in
right of payment to all of its existing and future subordinated indebtedness.
However, the 12 3/8% Notes and the guarantees are subordinated to the extent of
the collateral securing Chemicals' secured revolving credit facilities. The
12 3/8% Notes and the guarantees are secured by (i) a second priority lien on
all of Chemicals' and the Guarantors' United States production facilities and
related assets, (ii) a second priority pledge of all of the capital stock of
each Guarantor incorporated in the United States, and (iii) a first priority
pledge of 65% of the stock of certain of the Chemicals' subsidiaries
incorporated outside of the United States. The proceeds of the offering of the
12 3/8% Notes were used to fully repay and terminate Chemicals' three
outstanding term loans. Upon consummation of the offering of the 12 3/8% Notes,
the debt allocated to the Guarantors by Chemicals increased to $351.3 million.
On July 23, 1999, Chemicals also established two secured revolving credit
facilities providing for up to $155,000,000 in revolving credit loans under a
single Revolving Credit Agreement (the "Credit Agreement"). Under the Credit
Agreement, Chemicals and the Guarantors (other than the two Canadian
subsidiaries of Sterling Canada, Inc.)
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are co-borrowers and are jointly and severally liable for any indebtedness
thereunder. The revolvers consist of (i) an $85,000,000 revolving credit
facility (the "Current Assets Revolver") secured by a first priority lien on all
accounts receivable, inventory, and other specified assets of Chemicals and the
Guarantors incorporated in the United States, and (ii) a $70,000,000 revolving
credit facility (the "Fixed Assets Revolver") secured by a first priority lien
on all United States production facilities and related assets of Chemicals and
the Guarantors incorporated in the United States, all of the capital stock of
Chemicals and the Guarantors incorporated in the United States and a second
priority lien on all accounts receivable, inventory, and other specified assets
of Chemicals and the Guarantors incorporated in the United States.
Funding under the 12 3/8% Notes and the revolvers occurred on July 23,
1999. The proceeds of the 12 3/8% Notes and the initial borrowings under the
revolvers were used to completely repay all outstanding indebtedness under
Chemicals' then existing senior credit facility.
Approximately $37.2 million was drawn by Chemicals under the Fixed Assets
Revolver at September 30, 2000, of which no amounts were allocated to the
Guarantors. Borrowings under the Fixed Assets Revolver bear interest, at
Chemicals' option, at an annual rate of either the "LIBOR Rate" (as defined in
the Credit Agreement) plus 3.75% or the "Alternate Base Rate" plus 2.25%.
Borrowings under the Current Assets Revolver bear interest, at Chemicals'
option, at an annual rate of either the LIBOR Rate plus 3.00% or the "Alternate
Base Rate" plus 1.50%. The "Alternate Base Rate" is equal to the greater of the
"Base Rate" as announced from time to time by The Chase Manhattan Bank in New
York, New York or the "Federal Funds Effective Rate" plus 1/2% (as such terms
are defined in the Credit Agreement). The Credit Agreement also requires
Chemicals and the Guarantors to pay an aggregate commitment fee ranging from
0.75% to 1.25% on the unused portion of the commitment for the Fixed Assets
Revolver, depending on the amount drawn, and an aggregate commitment fee of 0.5%
on the unused portion of the commitment for the Current Assets Revolver.
Available credit under the Current Assets Revolver is subject to a monthly
borrowing base consisting of 85% of eligible accounts receivable and 65% of
eligible inventory, with an inventory cap of $42,500,000. In addition, the
borrowing base for the Current Assets Revolver must exceed outstanding
borrowings thereunder by $12,000,000 at all times.
The Fixed Assets Revolver matures on July 23, 2004, with quarterly
commitment reductions totaling 30% of the total commitment in the twelve month
period ending July 23, 2003 and the balance in the following twelve month
period. The Current Assets Revolver matures in five years, with no scheduled
commitment reductions prior to that time. However, the commitments for each of
the Fixed Assets Revolver and the Current Assets Revolver are permanently
reduced to the extent required under the Credit Agreement upon prepayments made
out of specific sources of funds, including certain equity issuances by Holdings
and certain asset sales.
5. INCOME TAXES
The Guarantors are included in the consolidated federal United States tax
return filed by Holdings. The Guarantors' provision (benefit) for United States
income taxes has been allocated as if the Guarantors filed their annual federal
United States tax returns on a separate return basis. As of September 30, 2000
and 1999, $14.6 million and $14.6 million, respectively, of deferred income tax
assets were included in Due from Affiliates. For the years ended September 30,
2000, 1999, and 1998, the Guarantors recorded zero, $4.0 million, and $4.0
million, respectively, of United States income tax benefit in the provision
(benefit) for income taxes.
Canadian deferred income taxes are recorded to reflect the tax consequences
in future years of differences between the tax basis of assets and liabilities
and the financial reporting amounts at each year-end.
A reconciliation of the Canadian income taxes to the Canadian effective tax
provision follows:
YEAR ENDED SEPTEMBER 30,
------------------------------------
2000 1999 1998
----------- ---------- -----------
(Dollars in Thousands)
Provision for federal income tax at the statutory rate.............. $ 2,308 $ 259 $ 1,367
Provincial income taxes at the statutory rate....................... 1,114 88 563
Federal and provincial manufacturing and processing tax credits..... (477) (50) (286)
Other............................................................... -- 16 156
---------- --------- --------
Total Canadian tax provision........................................ $ 2,945 $ 313 $ 1,800
========== ========= ========
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The provision for Canadian income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30,
---------------------------------------
2000 1999 1998
------------ ------------ ------------
(Dollars in Thousands)
Current federal.................................................. $ 3,328 $ 2,098 $ 2,852
Deferred federal................................................. (1,380) (1,859) (1,611)
Current provincial............................................... 1,702 619 1,427
Deferred provincial.............................................. (705) (545) (868)
---------- ---------- ---------
Total Canadian tax provision..................................... $ 2,945 $ 313 $ 1,800
========== ========== =========
The components of the Guarantors' Canadian deferred income tax assets and
liabilities are summarized below:
SEPTEMBER 30,
------------------------
1999
---------- ----------
(Dollars in Thousands)
Deferred tax assets:
Accrued liabilities ...................... $ 249 $ 318
Accrued postretirement cost .............. 1,339 1,236
Investment tax credits ................... 1,408 4,767
---------- ----------
2,996 6,321
---------- ----------
Deferred tax liabilities:
Property, plant, and equipment ........... (11,334) (13,593)
Other .................................... -- --
---------- ----------
(11,334) (13,593)
---------- ----------
Net deferred tax liabilities ................ $ (8,338) $ (7,272)
========== ==========
6. EMPLOYEE BENEFITS
The Guarantors' United States employees participate in various employee
benefit plans of Chemicals. Costs, assets, and liabilities associated with
United States employees participating in these various plans are allocated to
the Guarantors by Chemicals based on the number of employees. In addition, the
Guarantors sponsor various employee benefit plans in Canada.
RETIREMENT BENEFIT PLANS
Chemicals has non-contributory pension plans in the United States which
cover all salaried and wage employees. The benefits under these plans are based
primarily on years of service and employees' pay near retirement. Chemicals'
funding policy is consistent with the funding requirements of federal law and
regulations. Plan assets consist principally of common stocks and government and
corporate securities. The liability relating to United States employees
allocated to the Guarantors by Chemicals for the retirement benefit plans and
included in Due from Affiliates was $4.8 million and $3.6 million at September
30, 2000 and 1999, respectively. The total pension expense relating to United
States employees allocated to the Guarantors was $1.2 million, $1.1 million, and
$1.1 million for the years ended September 30, 2000, 1999, and 1998,
respectively.
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The Guarantors have employer and employee contributor plans in Canada which
cover all salaried and wage employees. Information for Canadian benefit plans
concerning the pension obligation, plan assets, amounts recognized in the
Guarantors' financial statements, and underlying actuarial assumptions is stated
below.
SEPTEMBER 30,
------------------------
2000 1999
---------- ----------
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year ..................... $ 16,283 $ 14,577
Currency rate conversion .................................... (293) 556
Service cost ................................................ 716 919
Interest cost ............................................... 1,240 1,112
Plan amendments ............................................. -- --
FAS 88 additional benefits .................................. -- --
Actuarial loss (gain) ....................................... (31) (124)
Benefits paid ............................................... (307) (757)
---------- ----------
Benefit obligation at end of year ........................... $ 17,608 $ 16,283
========== ==========
Change in plan assets:
Fair value at beginning of year ............................. $ 15,330 $ 13,062
Currency rate conversion .................................... (276) 498
Actual return on plan assets ................................ 2,412 1,858
Employer contributions ...................................... 658 669
Participants' contributions ................................. -- --
Benefits paid ............................................... (307) (757)
---------- ----------
Fair value at end of year ................................... $ 17,817 $ 15,330
========== ==========
Development of net amount recognized:
Funded status ............................................... $ 209 $ (953)
Unrecognized cost:
Actuarial loss (gain) .................................... (1,318) (22)
Prior service cost ....................................... 298 333
---------- ----------
Net amount recognized ....................................... $ (811) $ (642)
========== ==========
Amounts recognized in the statement of financial position:
Prepaid pension cost ........................................ $ 418 $ 529
Accrued pension cost ........................................ (1,229) (1,198)
Intangible asset ............................................ -- 27
---------- ----------
Net amount recognized ....................................... $ (811) $ (642)
========== ==========
Net periodic pension costs for the Canadian pension plan consist of the
following components:
SEPTEMBER 30,
----------------------------------------
2000 1999 1998
---------- ---------- ----------
(Dollars in Thousands)
Components of net pension costs:
Service cost-benefits earned during the year ................ $ 716 $ 919 $ 748
Interest on prior year's projected benefit obligation ....... 1,240 1,112 1,016
Expected return on plan assets .............................. (1,144) (963) (1,092)
Net amortization:
Actuarial loss (gain) .................................... 28 68 (130)
Prior service cost ....................................... (2) 29 15
---------- ---------- ----------
Net pension costs ........................................... $ 838 $ 1,165 $ 557
========== ========== ==========
Weighted-average assumptions:
Discount Rate ............................................... 7.5% 7.5% 7.0%
Rates of increase in salary compensation level .............. 4.5% 4.5% 4.0%
Expected long-term rate of return on plan assets ............ 7.5% 7.5% 7.0%
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POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Chemicals and the Guarantors provide certain health care benefits and life
insurance benefits for retired employees. Substantially all employees become
eligible for these benefits at normal retirement age. The cost of these benefits
are accrued during the period in which the employee renders the necessary
service.
Health care benefits are provided to employees who retire with ten or more
years of service except for Canadian employees covered by collective bargaining
agreements. All employees are eligible for postretirement life insurance.
Postretirement health care benefits for United States plans are
non-contributory. Benefit provisions for most hourly and some salaried employees
are subject to collective bargaining. In general, the plans stipulate that
retiree health care benefits are paid as covered expenses are incurred. The
liability relating to United States employees allocated to the Guarantors by
Chemicals for the postretirement benefits other than pensions and included in
Due from Affiliates was $7.6 million and $7.3 million at September 30, 2000 and
1999, respectively. The total postretirement benefits other than pensions
expense for United States employees allocated to the Guarantors was $0.7
million, $0.8 million, and $0.8 million for the years ended September 30, 2000,
1999, and 1998, respectively. In addition, a curtailment gain of $0.8 million
was allocated to the Guarantors during fiscal 1999 related to the reduction of
postretirement life insurance benefits for currently active U.S. employees of
the Guarantors.
Information for Canadian benefit plans with respect to the plan obligation,
the funded status, amounts recognized in the Guarantors' financial statements,
and underlying actuarial assumptions is stated below.
SEPTEMBER 30,
------------------------
2000 1999
---------- ----------
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year ....... $ 4,886 $ 4,306
Service cost .................................. 314 307
Interest cost ................................. 329 299
Actuarial loss (gain) ......................... -- --
Benefits paid ................................. (67) (26)
---------- ----------
Benefit obligation at end of year ............. $ 5,462 $ 4,886
========== ==========
Development of net amount recognized:
Funded status ................................. $ (5,462) $ (4,886)
Unrecognized cost:
Actuarial loss ............................. 620 637
---------- ----------
Net amount recognized ......................... $ (4,842) $ (4,249)
========== ==========
Net periodic plan costs for the Canadian postretirement benefit consist of the
following components:
SEPTEMBER 30,
---------------------------------------------
2000 1999 1998
------------ ------------- ------------
(Dollars in Thousands)
Components of net plan costs:
Service cost........................................................ 314 $ 307 $ 264
Interest cost....................................................... 329 299 286
Net amortization actuarial loss (gain).............................. 16 32 --
---------- ---------- ----------
Net plan costs (income)............................................. 659 $ 638 $ 550
========== ========== ==========
Weighted-average assumptions:
Discount Rate....................................................... 7.50% 6.75% 7.5%
The weighted average annual assumed health care trend rate is assumed to be
7.3% for 2000. The rate is assumed to decrease gradually to 5.6% in 2027 and
remain level thereafter. Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plans. A one-percentage point
change in assumed health care trend rates would have the following effects:
1% INCREASE 1% DECREASE
----------- -----------
(Dollars in Thousands)
Effect on total of service and interest cost components............... $ 36 $ (31)
Effect on post-retirement benefit obligation........................ 229 (199)
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SAVINGS AND INVESTMENT PLAN
Chemicals' Sixth Amended and Restated Savings and Investment Plan covers
substantially all United States employees of the Guarantors, including executive
officers. This United States Plan is qualified under Section 401(k) of the
Internal Revenue Code. Each participant has the option to defer taxation of a
portion of his or her earnings by directing the Guarantors to contribute a
percentage of such earnings to this Plan. A participant may direct up to a
maximum of 20% of eligible earnings to this Plan, subject to certain limitations
set forth in the Internal Revenue Code for "highly compensated" participants. A
participant's contributions become distributable upon the termination of his or
her employment. The Guarantors did not make any contributions to this Plan in
fiscal 2000. Beginning October 1, 2000, the Guarantors began matching 50% of a
participant's contributions, to the extent such contributions do not exceed 7%
of such participant's cash compensation (excluding bonuses, profit sharing, and
similar types of compensation).
EMPLOYEE SAVINGS PLAN
The Guarantors introduced an employee savings plan for all eligible
full-time Canadian employees with an effective date of October 1, 2000. Each
participant has the option to contribute a percentage of his or her earnings to
the Canadian savings plan, with no limit on the maximum percentage contributed.
The Guarantors will match 100% of a participant's contributions, to the extent
such contributions do not exceed 3.5% of such participant's cash compensation
(excluding bonuses, profit sharing, and similar types of compensation).
PROFIT SHARING AND BONUS PLANS
In January of 1997, the Board of Directors of Holdings, upon recommendation
of its Compensation Committee, approved the establishment of a profit sharing
plan that is designed to benefit all qualified employees, and a bonus plan that
is designed to provide certain exempt salaried employees of the Guarantors with
the opportunity to earn bonuses, depending, among other things, on the annual
financial performance of Holdings.
The Guarantors incurred $2.0 million and $2.0 million of expenses related
to the profit sharing plan and bonus plan, respectively, in fiscal 2000. No
expenses for profit sharing or bonuses were incurred by or allocated to the
Guarantors in fiscal 1999 or 1998.
PHANTOM STOCK PLAN
The Guarantors have a phantom stock plan for all eligible full-time
Canadian employees. The effective date of this Plan was August 21, 1996 and the
expiration date is December 31, 2000. At the end of each plan year, the plan
administrator establishes a "determined percentage" for the preceding plan year.
This percentage is then multiplied be each participant's compensation for the
plan year to determine the award amount. The award amount is then divided by the
fair market value of one share of the common stock of Holdings, as of December
31 of that plan year, to determine the number of rights to be credited to the
participant. Upon termination of employment, the benefit amount becomes payable
to the participant. The benefit amount is the number of vested rights in the
participant's account, multiplied by the fair market value of one share of
common stock of Holdings as of the most recent valuation date.
The Guarantors recorded expense of $159,000, $248,000, and $238,000 related
to the phantom stock plan for the fiscal years ended September 30, 2000, 1999,
or 1998, respectively.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Guarantors have entered into various long-term noncancelable operating
leases, some of which have been allocated to commonly controlled companies.
Future minimum lease commitments at September 30, 2000, are as follows: fiscal
2001 -- $5.0 million; fiscal 2002 -- $4.1 million; fiscal 2003 -- $4.0 million;
fiscal 2004 -- $3.8 million; fiscal 2005 -- $3.1 million; and thereafter -- $6.4
million.
ENVIRONMENTAL AND SAFETY MATTERS
The Guarantors' operations involve the handling, production,
transportation, treatment, and disposal of materials that are classified as
hazardous or toxic waste and that are extensively regulated by environmental,
health, and safety
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laws, regulations, and permit requirements. Environmental permits required for
the Guarantors' operations are subject to periodic renewal and can be revoked or
modified for cause or when new or revised environmental requirements are
implemented. Changing and increasingly strict environmental requirements can
affect the manufacturing, handling, processing, distribution, and use of the
Guarantors' chemical products and the raw materials used to produce such
products and, if so affected, the Guarantors' business and operations may be
materially and adversely affected. In addition, changes in environmental
requirements can cause the Guarantors to incur substantial costs in upgrading or
redesigning their facilities and processes, including their waste treatment,
storage, disposal, and other waste handling practices and equipment.
The Guarantors conduct environmental management programs designed to
maintain compliance with applicable environmental requirements at all of their
facilities. The Guarantors routinely conduct inspection and surveillance
programs designed to detect and respond to leaks or spills of regulated
hazardous substances and to correct identified regulatory deficiencies. The
Guarantors believe that their procedures for waste handling are consistent with
industry standards and applicable requirements. In addition, the Guarantors
believe that their operations are consistent with good industry practice.
However, a business risk inherent with chemical operations is the potential for
personal injury and property damage claims from employees, contractors and their
employees, and nearby landowners and occupants. While the Guarantors believe
that their business operations and facilities generally are operated in
compliance in all material respects with all applicable environmental, health,
and safety requirements, they cannot be sure that past practices or future
operations will not result in material claims or regulatory action, require
material environmental expenditures, or result in exposure or injury claims by
employees, contractors and their employees, or the public. Some risk of
environmental costs and liabilities is inherent in the operations and products
of the Guarantors, as it is with other companies engaged in similar businesses.
In addition, a catastrophic event at any of the Guarantors' facilities could
result in the incurrence of liabilities substantially in excess of their
insurance coverages.
Any significant ban on all chlorine containing compounds could have a
materially adverse effect on the Guarantors' financial condition and results of
operations. British Columbia has a regulation in place requiring elimination of
the use of all chlorine products, including chlorine dioxide, in the bleaching
process by the year 2002. Chlorine dioxide is produced from sodium chlorate,
which is one of the Guarantors' primary pulp chemicals products. The pulp and
paper industry believes that a ban of chlorine dioxide in the bleaching process
will yield no measurable environmental or public health benefit and is working
to change this regulation but there can be no assurance that the regulation will
be changed. In the event such a regulation is implemented, the Guarantors would
seek to sell the products they manufacture at their British Columbia facility to
customers in other markets. The Guarantors are not aware of any other laws or
regulations in place in North America which would restrict the use of such
products for other purposes.
The Guarantors operating expenditures for environmental matters, mostly
waste management and compliance, were approximately $3.3 million for fiscal 2000
and $3.8 million for fiscal 1999. The Guarantors also spent approximately $0.7
million for environmentally related capital projects in fiscal 2000 and $1.4
million for these types of capital projects in fiscal 1999. In fiscal 2001, the
Guarantors anticipate spending approximately $0.9 million for capital projects
related to waste management and environmental compliance. There are no capital
expenditures related to remediation of environmental conditions projected for
fiscal 2001.
LEGAL PROCEEDINGS
The Guarantors are subject to claims and legal actions that arise in the
ordinary course of their business. The Guarantors believe that the ultimate
liability, if any, with respect to these claims and legal actions will not have
a material effect on their financial position, results of operations, or cash
flows, although the Guarantors cannot give any assurances to that effect.
PLEDGE OF COMMON STOCK
In order to secure the repayment of indebtedness under the Fixed Assets
Revolver, a first priority pledge of 100% of the common stock of each of those
Guarantors incorporated in the United States was granted by the holders of such
stock. In order to secure the repayment of the 12 3/8% Notes, a second priority
pledge of 100% of the common stock of each of the Guarantors incorporated in the
United States was granted by the holders of such stock. In addition, a first
priority pledge of 65% of the common stock of each of the Guarantors not
incorporated in the United States was given by the holders of such stock.
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8. FINANCIAL INSTRUMENTS
FOREIGN EXCHANGE
The Guarantors have entered into forward foreign exchange contracts to
reduce risk due to Canadian dollar exchange rate movements. The forward foreign
exchange contracts had varying maturities with none exceeding 18 months. The
Guarantors made net settlements of United States dollars for Canadian dollars at
rates agreed to at inception of the contracts. The Guarantors do not engage in
currency speculation. The last of the Guarantors' existing forward exchange
contracts expired in March of 2000, and they do not intend to enter into any
additional forward exchange contracts.
CONCENTRATIONS OF RISK
The Guarantors sell their products primarily to companies involved in the
acrylic fibers and pulp and paper manufacturing industries. The Guarantors
perform ongoing credit evaluations of their customers and generally do not
require collateral for accounts receivable. However, letters of credit are
required by the Guarantors on many of their export sales. Historically, the
Guarantors' credit losses have been minimal.
The Guarantors maintain cash deposits with major banks, which from time to
time may exceed federally insured limits. The Guarantors periodically assess the
financial condition of these institutions and believe that any possible loss is
minimal.
Approximately 16% of the Guarantors' employees are covered by union
agreements.
INVESTMENTS
It is the policy of the Guarantors to invest their excess cash in
investment instruments or securities whose value is not subject to market
fluctuations, such as certificates of deposit, repurchase agreements, or
Eurodollar deposits with domestic or foreign banks or other financial
institutions. Other permitted investments include commercial paper of major
United States corporations with ratings of A1 by Standard & Poor's Ratings Group
or P1 by Moody's Investor Services, Inc., loan participations of major United
States corporations with a short term credit rating of A1/P1, and direct
obligations of the United States Government or its agencies. In addition, not
more than $5 million will be invested by the Guarantors with any single bank,
financial institution, or United States corporation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheet for cash
and cash equivalents, receivables, payables, and certain accrued expenses
approximate fair value due to the short maturities of these instruments. Based
on the Guarantors' allocated portion of Chemicals' debt at September 30, 2000,
the carrying value was $351.3 million, and the fair value is $ 300.8 million.
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Sterling Canada, Inc.
Sterling Fibers, Inc.
Sterling Chemicals International, Inc.
Sterling Chemicals Energy, Inc.
Sterling Pulp Chemicals, Inc.
Sterling Pulp Chemicals US, Inc.
We have audited the accompanying combined balance sheets of the Guarantors (as
defined in Note 1) as of September 30, 2000 and 1999, and the related combined
statements of operations, changes in stockholder's equity (deficiency in
assets), and cash flows for each of the three years in the period ended
September 30, 2000. These financial statements are the responsibility of the
Guarantors' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of the Guarantors as of September 30,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 2000 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Houston, Texas
December 12, 2000
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REPORT OF MANAGEMENT
Management is responsible for the preparation and content of the financial
statements and other information included in this annual report and in the
exhibits to this annual report. The financial statements have been prepared in
conformity with generally accepted accounting principles appropriate under the
circumstances to reflect, in all material respects, the substance of events and
transactions that should be included. The financial statements reflect
management's judgments and estimates as to the effects of events and
transactions that are accounted for or disclosed.
Management maintains accounting systems which are supported by internal
accounting controls that provide reasonable assurance that assets are
safeguarded and that transactions are executed in accordance with management's
authorization and recorded properly to permit the preparation of financial
statements in accordance with generally accepted accounting principles. The
concept of reasonable assurance is based on the recognition that the cost of a
system of internal accounting controls should not exceed the benefits.
Deloitte & Touche LLP performed an independent audit of our financial
statements for fiscal years 2000, 1999, and 1998, for the purpose of determining
that the statements are presented fairly and in accordance with generally
accepted accounting principles. The independent auditors are appointed by the
Board of Directors and meet regularly with the Audit and Compliance Committee of
the Board of Directors, which is comprised solely of outside directors. The
Audit and Compliance Committee meets periodically with our senior officers and
independent accountants to review the adequacy and reliability of our
accounting, financial reporting, and internal controls.
Frank P. Diassi
Chairman of the Board of Directors
Paul G. Vanderhoven
Vice President - Finance and Controller - Principal Accounting Officer
December 15, 2000
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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 2000 $ 246,921 $ 264,827 $ 293,049 $ 273,554
1999 171,929 152,472 181,729 214,622
Gross Profit 2000 30,568 44,355 43,523 22,445
1999 16,717 4,312 12,198 4,931
Net income (loss) before extraordinary item(1) 2000 (10,362) 3,301 575 (80,478)
1999 (13,100) (24,820) (16,415) (51,482)
Net income (loss)(1) 2000 (10,362) 3,301 575 (80,478)
1999 (13,100) (24,820) (16,415) (55,694)
Per Share Data:
Income (loss) before extraordinary item 2000 $ (0.88) $ 0.20 $ (0.05) $ (6.39)
1999 $ (1.11) $ (1.96) $ (1.37) $ (4.15)
Net income (loss) attributable to common stockholders 2000 $ (.88) 0.20 (0.05) (6.39)
1999 (1.11) (1.96) (1.37) (4.49)
(1) During the fourth quarter of fiscal 2000, we recorded $1.6 million of
expense related to workforce reductions at our acrylic fibers facility. We also
recorded non-cash expense related to the impairment of our acrylic fibers
production assets of $60.0 million in the fourth quarter of fiscal 2000. During
the first and third quarters of fiscal 1999, we recorded $2.3 million and $1.7
million, respectively, of expense related to workforce reductions in our
petrochemicals and pulp chemicals businesses. In addition, during the second
quarter of fiscal 1999, we recorded a one-time non-cash pretax charge of $6.8
million related to early retirement programs and benefit changes. During the
fourth quarter of fiscal 1999, we recorded a $4.2 million after-tax ($6.5
million pre-tax) extraordinary item related to unamortized debt issue costs as a
result of the prepayment of certain term loans. We also recorded non-cash
expense related to the impairment of our methanol production assets of $26.4
million in the fourth quarter of fiscal 1999.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The portions of the Proxy Statement for Holdings' 2001 Annual Meeting of
Stockholders under the headings "Election of Directors" and "Executive Officers
of the Company" are hereby incorporated herein by reference in response to this
item.
ITEM 11. EXECUTIVE COMPENSATION
The portion of the Proxy Statement for Holdings' 2001 Annual Meeting of
Stockholders under the heading "Executive Compensation and Other Information" is
hereby incorporated herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The portion of the Proxy Statement for Holdings' 2001 Annual Meeting of
Stockholders under the heading "Amount and Nature of Shares Beneficially Owned"
is hereby incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The portions of the Proxy Statement for Holdings' 2001 Annual Meeting of
Stockholders under the headings "Election of Directors" and "Certain
Transactions" are hereby incorporated herein by reference in response to this
item.
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PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits
1. Consolidated Financial Statements
See "Item 8. Financial Statements and Supplementary Data - Index to
Financial Statements." In addition, the consolidated financial statements of
Sterling Canada, Inc. and Sterling Pulp Chemicals, Ltd. for the years ended
September 30, 2000, 1999, and 1998 are filed as Exhibits 99.1 and 99.2 hereto.
2. All schedules for which provision is made in Regulation S-X of the
Securities and Exchange Commission are not required under the related
instruction or are inapplicable and, therefore, have been omitted.
3. Exhibits
The following exhibits are filed as part of this Form 10-K:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
2.1 - Amended and Restated Agreement and Plan of Merger between
STX Acquisition Corp. and Sterling Chemicals, Inc. dated as
of April 24, 1996, incorporated by reference from the
Company's Current Report on Form 8-K dated April 24, 1996,
as amended by Form 8-K/A.
3.1 - Restated Certificate of Incorporation of Sterling Chemicals
Holdings, Inc., incorporated by reference from Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997.
3.2 - Certificate of Incorporation of Sterling Chemicals, Inc., as
amended, incorporated by reference from Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1996.
3.3 - Restated Bylaws of Sterling Chemicals Holdings, Inc.,
incorporated by reference from Exhibit 3.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1996.
3.4 - Restated Bylaws of Sterling Chemicals, Inc., incorporated by
reference from Exhibit 3.2 to the Registration Statement on
Form S-4 of Sterling Chemicals, Inc. (Registration No.
333-87471).
4.1 - Warrant Agreement (including form of Warrant) dated as of
August 15, 1996 between Sterling Chemicals Holdings, Inc.
and KeyCorp Shareholder Services, Inc., as Warrant Agent,
incorporated by reference from Exhibit 4.4 to the
Registration Statement on Form S-1 of STX Acquisition Corp.
and STX Chemicals Corp. (Registration No. 333-04343).
4.2 - Warrant Agreement dated as of July 10, 1997 between Sterling
Chemicals Holdings, Inc. and Harris Trust and Savings Bank,
as Warrant Agent, incorporated by reference from Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997.
4.3 -
Warrant Agreement dated as of December 15, 1998 between
Sterling Chemicals Holdings, Inc. and Harris Trust and
Savings Bank, as Warrant Agent, incorporated by reference
from Exhibit 4.3 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1998.
4.4 - Registration Rights Agreement, incorporated by reference
from Exhibit 4.11 to the Registration Statement on Form S-1
of STX Acquisition Corp. and STX Chemicals Corp.
(Registration No. 333-04343).
4.5 - Sterling Chemicals Holdings, Inc. Stockholders Agreement
dated effective as of August 21, 1996, incorporated by
reference from Exhibit 4.10 to the Registration Statement on
Form S-1 of STX Acquisition Corp. and STX Chemicals Corp.
(Registration No. 333-04343).
4.5(a) - First Amendment to Sterling Chemicals Holdings, Inc.
Stockholders Agreement dated effective as of December 31,
1997, incorporated by reference from Exhibit 4.7 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998.
4.5(b) - Second Amendment to Sterling Chemicals Holdings, Inc.
Stockholders Agreement dated effective as of May 1, 1998,
incorporated by reference from Exhibit 4.9(b) of the
Company's Annual Report on Form 10-K for the fiscal year
ending September 30, 1998.
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
4.6 - Third Amended and Restated Voting Agreement dated as of
February 1, 1999, incorporated by reference from Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999.
4.7 - Tag-Along Agreement dated as of August 21, 1996,
incorporated by reference from Exhibit 4.13 to the
Registration Statement on Form S-1 of STX Acquisition Corp.
and STX Chemicals Corp. (Registration No. 333-04343).
4.8 - Indenture dated as of August 15, 1996 between Sterling
Chemicals Holdings, Inc. and Fleet National Bank governing
the 13 1/2% Senior Secured Discount Notes due 2008 of
Sterling Chemicals Holdings, Inc., incorporated by reference
from Exhibit 4.5 to the Registration Statement on Form S-1
of STX Acquisition Corp. and STX Chemicals Corp.
(Registration No. 333-04343).
4.8(a) - First Supplemental Indenture dated October 1, 1997 governing
the 13 1/2% Senior Secured Discount Notes due 2008 of
Sterling Chemicals Holdings, Inc., incorporated by reference
from Exhibit 4.2 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1998.
4.8(b) - Second Supplemental Indenture dated March 16, 1998 governing
the 13 1/2% Senior Secured Discount Notes due 2008 of
Sterling Chemicals Holdings, Inc., incorporated by reference
from Exhibit 4.3 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1998.
4.9 - Indenture dated as of August 15, 1996 between Sterling
Chemicals, Inc. and Fleet National Bank governing the
11 3/4% Senior Subordinated Notes due 2006 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.7
to the Registration Statement on Form S-1 of STX Acquisition
Corp. and STX Chemicals Corp. (Registration No. 333-04343).
4.9(a) - First Supplemental Indenture dated October 1, 1997 governing
the 11 3/4% Senior Subordinated Notes due 2006 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.4
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998.
4.9(b) - Second Supplemental Indenture dated March 16, 1998 governing
the 11 3/4% Senior Subordinated Notes due 2006 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.5
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998.
4.10 - Indenture dated as of April 7, 1997 between Sterling
Chemicals, Inc. and Fleet National Bank governing the
11 1/4% Senior Subordinated Notes due 2007 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997.
4.10(a) - First Supplemental Indenture dated March 16, 1998 governing
the 11 1/4% Senior Subordinated Notes due 2007 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.6
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998.
4.11 - Indenture dated as of July 23, 1999 among Sterling
Chemicals, Inc., as Issuer, Sterling Canada Inc., Sterling
Chemicals Energy, Inc., Sterling Chemicals International,
Inc., Sterling Fibers, Inc., Sterling Pulp Chemicals US,
Inc., and Sterling Pulp Chemicals, Inc., as Guarantors, and
Harris Trust Company of New York, as Trustee, incorporated
by reference from Exhibit 4.9 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1999.
4.12 - Second Deed of Trust, Assignment of Leases and Rents,
Security Agreement and Fixture Filing dated as of July 23,
1999 by Sterling Chemicals, Inc., Trustor, to John Dorris,
Trustee for the benefit of Harris Trust Company of New York,
Beneficiary, incorporated by reference from Exhibit 4.10 to
the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999.
4.13 - Second Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing dated as of July 23, 1999
between Sterling Fibers, Inc., Mortgagor, and Harris Trust
Company of New York, Mortgagee, incorporated by reference
from Exhibit 4.11 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999.
92
95
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
4.14 - Second Leasehold Deed to Secure Debt, Assignment and
Security Agreement dated as of July 23, 1999 by Sterling
Pulp Chemicals, Inc., Grantor, to Harris Trust Company of
New York, as Collateral Agent, and U.S. Bank Trust National
Association, as Georgia co-agent, incorporated by reference
from Exhibit 4.12 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999.
4.15 - Security Agreement dated as of July 23, 1999 among Sterling
Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp
Chemicals, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Fibers, Inc., Sterling Chemicals Energy, Inc., and Sterling
Chemicals International, Inc., as Assignors, and Harris
Trust Company of New York, as Collateral Agent, incorporated
by reference from Exhibit 4.13 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1999.
4.16 - Stock Pledge and Security Agreement dated as of July 23,
1999 among Sterling Chemicals, Inc., Sterling Canada, Inc.,
and Sterling Pulp Chemicals US, Inc., as Pledgors, and
Harris Trust Company of New York, as Collateral Agent,
incorporated by reference from Exhibit 4.14 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999.
4.17 - Stock Pledge and Security Agreement dated as of July 23,
1999 among Sterling Chemicals, Inc. and Sterling Canada,
Inc., as Pledgors, and Harris Trust Company of New York, as
Collateral Agent, incorporated by reference from Exhibit
4.15 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999.
4.18 - Revolving Credit Agreement dated as of July 23, 1999 among
Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling
Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc.,
Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and
Sterling Chemicals International, Inc., as the Borrowers,
The CIT Group/Business Credit, Inc., as the Administrative
Agent, Credit Suisse First Boston, as the Documentation
Agent, DLJ Capital Funding, Inc., as the Syndication Agent,
and various financial institutions, as the Lenders,
incorporated by reference from Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999.
4.18(a) - First Amendment to Revolving Credit Agreement dated
effective as of December 17, 1999 among Sterling Chemicals,
Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US,
Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc.,
Sterling Chemicals Energy, Inc. and Sterling Chemicals
International, Inc., as the Borrowers, The CIT
Group/Business Credit, Inc., as the Administrative Agent,
Credit Suisse First Boston, as the Documentation Agent, DLJ
Capital Funding, Inc., as the Syndication Agent, and various
financial institutions, as the Lenders, incorporated by
reference from Exhibit 4.20(a) of the Company's Annual
Report on Form 10-K for the fiscal year ended September 30,
1999.
4.19 - Parent Pledge Agreement dated as of July 23, 1999 between
Sterling Chemicals Holdings, Inc. and The CIT Group/Business
Credit, Inc., as Administrative Agent for each of the Fixed
Assets Secured Parties, incorporated by reference from
Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999.
4.20 - Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing dated as of July 23, 1999 by
Sterling Chemicals, Inc., Trustor, to Linda H. Earle,
Trustee for the benefit of The CIT Group/Business Credit,
Inc., as Administrative and Collateral Agent, Beneficiary,
incorporated by reference from Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999.
4.21 - Mortgage, Assignment of Leases and Rents, Security Agreement
and Fixture Filing dated as of July 23, 1999 by Sterling
Fibers, Inc., Mortgagor, to The CIT Group/Business Credit,
Inc., Mortgagee, incorporated by reference from Exhibit 4.3
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999.
4.22 - Leasehold Deed to Secure Debt, Assignment and Security
Agreement dated as of July 23, 1999 by Sterling Pulp
Chemicals, Inc. to The CIT Group/Business Credit, Inc., as
Administrative Agent, and U.S. Bank Trust National
Association, as Georgia co-agent, incorporated by reference
from Exhibit 4.4 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999.
93
96
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
4.23 - Fixed Assets Security Agreement dated as of July 23, 1999
among Sterling Chemicals, Inc., Sterling Canada, Inc.,
Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals,
Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc.
and Sterling Chemicals International, Inc., as the Grantors,
and The CIT Group/Business Credit, Inc., as Administrative
Agent for each of the Fixed Assets Secured Parties,
incorporated by reference from Exhibit 4.5 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999.
4.24 - Current Assets Security Agreement dated as of July 23, 1999
among Sterling Chemicals, Inc., Sterling Canada, Inc.,
Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals,
Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc.
and Sterling Chemicals International, Inc., as the Grantors,
and The CIT Group/Business Credit, Inc., as Administrative
Agent for each of the Current Assets Secured Parties,
incorporated by reference from Exhibit 4.6 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999.
4.25 - Obligor Pledge Agreement dated as of July 23, 1999 among
Sterling Chemicals, Inc., Sterling Canada, Inc. and Sterling
Pulp Chemicals US, Inc., as the Pledgors, and The CIT
Group/Business Credit, Inc., as Administrative Agent for
each of the Fixed Assets Secured Parties, incorporated by
reference from Exhibit 4.8 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1999.
4.26 - Intercreditor Agreement dated as of August 21, 1996 between
Texas Commerce Bank National Association and Fleet National
Bank, incorporated by reference from Exhibit 4.14 to the
Registration Statement on Form S-1 of STX Acquisition Corp.
and STX Chemicals Corp. (Registration No. 333-04343).
4.26(a) - Amendment of Intercreditor Agreement dated as of July 23,
1999 among Sterling Chemicals Holdings, Inc., Chase Bank of
Texas, N.A. (formerly known as Texas Commerce Bank National
Association), as Administrative Agent, and State Street Bank
and Trust Company, as Trustee, incorporated by reference
from Exhibit 4.18 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999.
4.27 - Senior Debt Intercreditor Agreement dated as of July 23,
1999 among Harris Trust Company of New York, as Trustee, The
CIT Group/Business Credit, Inc., as Administrative Agent,
and Sterling Chemicals, Inc., incorporated by reference from
Exhibit 4.17 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999.
**10.1 - Amended and Restated Stock Plan for Non-Employee Directors.
10.2 - Amended and Restated Key Employee Protection Plan,
incorporated by reference from Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2000.
**10.3 - Sterling Chemicals Holdings, Inc. Omnibus Stock Awards and
Incentive Plan, as amended.
**10.4 - Sterling Chemicals, Inc. Amended and Restated Salaried
Employees' Pension Plan (Effective as of May 1, 1996).
**10.4(a) - First Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
January 31, 1997).
**10.4(b) - Second Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
January 1, 1997).
**10.4(c) - Third Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
November 1, 1998).
**10.4(d) - Fourth Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
December 31, 1998).
**10.4(e) - Fifth Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
April 1, 1999).
**10.4(f) - Sixth Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
May 14, 1999).
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).
94
97
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
10.6 - Sterling Chemicals, Inc. Amended and Restated Supplemental
Employee Retirement Plan, incorporated by reference from
Exhibit 10.34 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1989 (Commission
File Number 1-10059).
10.7 - Sterling Chemicals, Inc. Amended and Restated Hourly Paid
Employees' Pension Plan (Effective as of May 1, 1996),
incorporated by reference from Exhibit 10.3(c) to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1996.
**10.7(a) - First Amendment to the Sterling Chemicals, Inc. Amended and
Restated Hourly Paid Employees' Pension Plan (Effective as
of December 31, 1998).
**10.7(b) - Second Amendment to the Sterling Chemicals, Inc. Amended and
Restated Hourly Paid Employees' Pension Plan (Effective as
of December 17, 1998).
**10.7(c) - Third Amendment to the Sterling Chemicals, Inc. Amended and
Restated Hourly Paid Employees' Pension Plan (Effective as
of September 20, 1999).
**10.8 - Sterling Chemicals, Inc. Sixth Amended and Restated Savings
and Investment Plan dated as of October 1, 2000.
10.9 - Sterling Chemicals ESOP, incorporated by reference from
Exhibit 10.6 to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996.
**10.9(a) - Sterling Chemicals ESOP (First Amendment) (Effective as of
December 27, 1996).
**10.9(b) - Sterling Chemicals ESOP (Second Amendment) (Effective as of
August 21, 1996).
**10.9(c) - Third Amendment to Sterling Chemicals ESOP (Effective as of
January 31, 1997).
**10.9(d) - Fourth Amendment to Sterling Chemicals ESOP (Effective as of
November 1, 1998).
**10.9(e) - Fifth Amendment to Sterling Chemicals ESOP (Effective as of
December 31, 1998).
10.10 - Articles of Agreement between Sterling Chemicals, Inc., its
successors and assigns, and Texas City, Texas Metal Trades
Council, AFL-CIO Texas City, Texas, December 18, 1998 to May
1, 2002, incorporated by reference from Exhibit 10.23 to the
Registration Statement on Form S-4 of Sterling Chemicals,
Inc. (Registration No. 333-87471).
**10.11 - Agreement between Sterling Pulp Chemicals Ltd., North
Vancouver, British Columbia, and Pulp, Paper and Woodworkers
of Canada, Local 5, British Columbia effective December 1,
1997 to November 30, 2000.
10.12 - Standby Purchase Agreement dated as of December 15, 1998
between Sterling Chemicals Holdings, Inc. and Frank P.
Diassi, incorporated by reference from Exhibit 10.29 to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998.
10.13 - Standby Purchase Agreement dated as of December 15, 1998
between Sterling Chemicals Holdings, Inc. and Frank J.
Hevrdejs, incorporated by reference from Exhibit 10.30 to
the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998.
10.14 - Standby Purchase Agreement dated as of December 15, 1998
between Sterling Chemicals Holdings, Inc. and Koch Capital
Services, Inc., incorporated by reference from Exhibit 10.31
to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998.
10.15 - Standby Purchase Agreement dated as of December 15, 1998
between Sterling Chemicals, Holdings, Inc. and William A.
McMinn, incorporated by reference from Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1999.
10.16 - Form of Indemnity Agreement executed between the Company
and each of its officers and directors, incorporated by
reference from Exhibit 10.17 to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1996.
10.17 - Form of Indemnity Agreement executed between the Company
and each of its officers and directors, incorporated by
reference from Exhibit 10.30 to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1994.
**10.18 - Severance Agreement dated as of May 1, 2000 among Peter W.
De Leeuw and the Company.
10.19 - Employment Agreement dated as of January 19, 1998 between
Gary M. Spitz and the Company, incorporated by reference
from Exhibit 10.28 to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1998.
95
98
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
10.20 - Employment Agreement dated as of November 12, 1997 between
David G. Elkins 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, 1999.
+10.21 - Amended and Restated Production Agreement dated March 31,
1998 between BP Chemicals, Inc. and Sterling Chemicals,
Inc., incorporated by reference from Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998.
+10.22 - Second Amended and Restated Production Agreement dated
effective as of August 1, 1996 between BP Chemicals Inc. and
Sterling Chemicals, Inc., incorporated by reference from
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1998.
+10.23 - Amended and Restated Product Sales Agreement dated effective
as of January 1, 1998 between BASF Corporation and Sterling
Chemicals, Inc., incorporated by referenced from Exhibit
10.11 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997.
10.24 - License Agreement dated August 1, 1986 between Monsanto
Company and Sterling Chemicals, Inc., incorporated by
reference from Exhibit 10.25 to the Company's Registration
Statement on Form S-1 (Registration No. 33-24020).
+10.25 - Joint Venture Agreement dated March 31, 1998 between
Sterling Chemicals, Inc. and BP Chemicals, Inc.,
incorporated by reference from Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1998.
+10.25(a) - First Amendment to Joint Venture Agreement dated effective
as of March 31, 1998 between Sterling Chemicals, Inc. and BP
Chemicals Inc., incorporated by reference from Exhibit
10.26(a) to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998.
**21.1 - Subsidiaries of Sterling Chemicals Holdings, Inc.
**23.1 - Consent of Deloitte & Touche LLP
**27.1 - Financial Data Schedule - Sterling Chemicals Holdings, Inc.
**27.2 - Financial Data Schedule - Sterling Chemicals, Inc.
**99.1 - Sterling Canada, Inc. consolidated financial statements and
notes thereto for the years ended September 30, 2000, 1999,
and 1998, including independent auditors' report.
**99.2 - Sterling Pulp Chemicals, Ltd. consolidated financial
statements and notes thereto for the years ended September
30, 2000, 1999, and 1998, including independent auditors'
report.
** Filed herewith.
+ Confidential treatment has been requested with respect to portions of this
Exhibit, and such request has been granted.
(b) Reports on Form 8-K.
None.
96
99
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/ FRANK P. DIASSI
----------------------------------
Chairman of the Board of Directors
DATE: DECEMBER 15, 2000
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 15, 2000
- -------------------------------------------- Directors
(Frank P. Diassi) (principal executive officer)
/s/ GARY M. SPITZ Executive Vice President-Finance December 15, 2000
- -------------------------------------------- and Chief Financial Officer
(Gary M. Spitz) (principal finance officer)
/s/ PAUL G. VANDERHOVEN Vice President - Finance and Controller December 15, 2000
- -------------------------------------------- (principal accounting officer)
(Paul G. Vanderhoven)
/s/ ROBERT W. ROTEN Vice Chairman of the Board of December 15, 2000
- -------------------------------------------- Directors
(Robert W. Roten)
/s/ FRANK J. HEVRDEJS Director December 15, 2000
- --------------------------------------------
(Frank J. Hevrdejs)
/s/ T. HUNTER NELSON Director December 15, 2000
- --------------------------------------------
(T. Hunter Nelson)
/s/ ALLAN R. DRAGONE Director December 15, 2000
- --------------------------------------------
(Allan R. Dragone)
/s/ ROLF H. TOWE Director December 15, 2000
- --------------------------------------------
(Rolf H. Towe)
100
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 - Amended and Restated Agreement and Plan of Merger between
STX Acquisition Corp. and Sterling Chemicals, Inc. dated as
of April 24, 1996, incorporated by reference from the
Company's Current Report on Form 8-K dated April 24, 1996,
as amended by Form 8-K/A.
3.1 - Restated Certificate of Incorporation of Sterling Chemicals
Holdings, Inc., incorporated by reference from Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997.
3.2 - Certificate of Incorporation of Sterling Chemicals, Inc., as
amended, incorporated by reference from Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1996.
3.3 - Restated Bylaws of Sterling Chemicals Holdings, Inc.,
incorporated by reference from Exhibit 3.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1996.
3.4 - Restated Bylaws of Sterling Chemicals, Inc., incorporated by
reference from Exhibit 3.2 to the Registration Statement on
Form S-4 of Sterling Chemicals, Inc. (Registration No.
333-87471).
4.1 - Warrant Agreement (including form of Warrant) dated as of
August 15, 1996 between Sterling Chemicals Holdings, Inc.
and KeyCorp Shareholder Services, Inc., as Warrant Agent,
incorporated by reference from Exhibit 4.4 to the
Registration Statement on Form S-1 of STX Acquisition Corp.
and STX Chemicals Corp. (Registration No. 333-04343).
4.2 - Warrant Agreement dated as of July 10, 1997 between Sterling
Chemicals Holdings, Inc. and Harris Trust and Savings Bank,
as Warrant Agent, incorporated by reference from Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997.
4.3 -
Warrant Agreement dated as of December 15, 1998 between
Sterling Chemicals Holdings, Inc. and Harris Trust and
Savings Bank, as Warrant Agent, incorporated by reference
from Exhibit 4.3 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1998.
4.4 - Registration Rights Agreement, incorporated by reference
from Exhibit 4.11 to the Registration Statement on Form S-1
of STX Acquisition Corp. and STX Chemicals Corp.
(Registration No. 333-04343).
4.5 - Sterling Chemicals Holdings, Inc. Stockholders Agreement
dated effective as of August 21, 1996, incorporated by
reference from Exhibit 4.10 to the Registration Statement on
Form S-1 of STX Acquisition Corp. and STX Chemicals Corp.
(Registration No. 333-04343).
4.5(a) - First Amendment to Sterling Chemicals Holdings, Inc.
Stockholders Agreement dated effective as of December 31,
1997, incorporated by reference from Exhibit 4.7 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998.
4.5(b) - Second Amendment to Sterling Chemicals Holdings, Inc.
Stockholders Agreement dated effective as of May 1, 1998,
incorporated by reference from Exhibit 4.9(b) of the
Company's Annual Report on Form 10-K for the fiscal year
ending September 30, 1998.
101
EXHIBIT
NUMBER DESCRIPTION
------ -----------
4.6 - Third Amended and Restated Voting Agreement dated as of
February 1, 1999, incorporated by reference from Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999.
4.7 - Tag-Along Agreement dated as of August 21, 1996,
incorporated by reference from Exhibit 4.13 to the
Registration Statement on Form S-1 of STX Acquisition Corp.
and STX Chemicals Corp. (Registration No. 333-04343).
4.8 - Indenture dated as of August 15, 1996 between Sterling
Chemicals Holdings, Inc. and Fleet National Bank governing
the 13 1/2% Senior Secured Discount Notes due 2008 of
Sterling Chemicals Holdings, Inc., incorporated by reference
from Exhibit 4.5 to the Registration Statement on Form S-1
of STX Acquisition Corp. and STX Chemicals Corp.
(Registration No. 333-04343).
4.8(a) - First Supplemental Indenture dated October 1, 1997 governing
the 13 1/2% Senior Secured Discount Notes due 2008 of
Sterling Chemicals Holdings, Inc., incorporated by reference
from Exhibit 4.2 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1998.
4.8(b) - Second Supplemental Indenture dated March 16, 1998 governing
the 13 1/2% Senior Secured Discount Notes due 2008 of
Sterling Chemicals Holdings, Inc., incorporated by reference
from Exhibit 4.3 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1998.
4.9 - Indenture dated as of August 15, 1996 between Sterling
Chemicals, Inc. and Fleet National Bank governing the
11 3/4% Senior Subordinated Notes due 2006 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.7
to the Registration Statement on Form S-1 of STX Acquisition
Corp. and STX Chemicals Corp. (Registration No. 333-04343).
4.9(a) - First Supplemental Indenture dated October 1, 1997 governing
the 11 3/4% Senior Subordinated Notes due 2006 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.4
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998.
4.9(b) - Second Supplemental Indenture dated March 16, 1998 governing
the 11 3/4% Senior Subordinated Notes due 2006 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.5
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998.
4.10 - Indenture dated as of April 7, 1997 between Sterling
Chemicals, Inc. and Fleet National Bank governing the
11 1/4% Senior Subordinated Notes due 2007 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997.
4.10(a) - First Supplemental Indenture dated March 16, 1998 governing
the 11 1/4% Senior Subordinated Notes due 2007 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.6
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998.
4.11 - Indenture dated as of July 23, 1999 among Sterling
Chemicals, Inc., as Issuer, Sterling Canada Inc., Sterling
Chemicals Energy, Inc., Sterling Chemicals International,
Inc., Sterling Fibers, Inc., Sterling Pulp Chemicals US,
Inc., and Sterling Pulp Chemicals, Inc., as Guarantors, and
Harris Trust Company of New York, as Trustee, incorporated
by reference from Exhibit 4.9 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1999.
4.12 - Second Deed of Trust, Assignment of Leases and Rents,
Security Agreement and Fixture Filing dated as of July 23,
1999 by Sterling Chemicals, Inc., Trustor, to John Dorris,
Trustee for the benefit of Harris Trust Company of New York,
Beneficiary, incorporated by reference from Exhibit 4.10 to
the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999.
4.13 - Second Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing dated as of July 23, 1999
between Sterling Fibers, Inc., Mortgagor, and Harris Trust
Company of New York, Mortgagee, incorporated by reference
from Exhibit 4.11 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999.
102
EXHIBIT
NUMBER DESCRIPTION
------ -----------
4.14 - Second Leasehold Deed to Secure Debt, Assignment and
Security Agreement dated as of July 23, 1999 by Sterling
Pulp Chemicals, Inc., Grantor, to Harris Trust Company of
New York, as Collateral Agent, and U.S. Bank Trust National
Association, as Georgia co-agent, incorporated by reference
from Exhibit 4.12 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999.
4.15 - Security Agreement dated as of July 23, 1999 among Sterling
Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp
Chemicals, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Fibers, Inc., Sterling Chemicals Energy, Inc., and Sterling
Chemicals International, Inc., as Assignors, and Harris
Trust Company of New York, as Collateral Agent, incorporated
by reference from Exhibit 4.13 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1999.
4.16 - Stock Pledge and Security Agreement dated as of July 23,
1999 among Sterling Chemicals, Inc., Sterling Canada, Inc.,
and Sterling Pulp Chemicals US, Inc., as Pledgors, and
Harris Trust Company of New York, as Collateral Agent,
incorporated by reference from Exhibit 4.14 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999.
4.17 - Stock Pledge and Security Agreement dated as of July 23,
1999 among Sterling Chemicals, Inc. and Sterling Canada,
Inc., as Pledgors, and Harris Trust Company of New York, as
Collateral Agent, incorporated by reference from Exhibit
4.15 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999.
4.18 - Revolving Credit Agreement dated as of July 23, 1999 among
Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling
Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc.,
Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and
Sterling Chemicals International, Inc., as the Borrowers,
The CIT Group/Business Credit, Inc., as the Administrative
Agent, Credit Suisse First Boston, as the Documentation
Agent, DLJ Capital Funding, Inc., as the Syndication Agent,
and various financial institutions, as the Lenders,
incorporated by reference from Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999.
4.18(a) - First Amendment to Revolving Credit Agreement dated
effective as of December 17, 1999 among Sterling Chemicals,
Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US,
Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc.,
Sterling Chemicals Energy, Inc. and Sterling Chemicals
International, Inc., as the Borrowers, The CIT
Group/Business Credit, Inc., as the Administrative Agent,
Credit Suisse First Boston, as the Documentation Agent, DLJ
Capital Funding, Inc., as the Syndication Agent, and various
financial institutions, as the Lenders, incorporated by
reference from Exhibit 4.20(a) of the Company's Annual
Report on Form 10-K for the fiscal year ended September 30,
1999.
4.19 - Parent Pledge Agreement dated as of July 23, 1999 between
Sterling Chemicals Holdings, Inc. and The CIT Group/Business
Credit, Inc., as Administrative Agent for each of the Fixed
Assets Secured Parties, incorporated by reference from
Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999.
4.20 - Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing dated as of July 23, 1999 by
Sterling Chemicals, Inc., Trustor, to Linda H. Earle,
Trustee for the benefit of The CIT Group/Business Credit,
Inc., as Administrative and Collateral Agent, Beneficiary,
incorporated by reference from Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999.
4.21 - Mortgage, Assignment of Leases and Rents, Security Agreement
and Fixture Filing dated as of July 23, 1999 by Sterling
Fibers, Inc., Mortgagor, to The CIT Group/Business Credit,
Inc., Mortgagee, incorporated by reference from Exhibit 4.3
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999.
4.22 - Leasehold Deed to Secure Debt, Assignment and Security
Agreement dated as of July 23, 1999 by Sterling Pulp
Chemicals, Inc. to The CIT Group/Business Credit, Inc., as
Administrative Agent, and U.S. Bank Trust National
Association, as Georgia co-agent, incorporated by reference
from Exhibit 4.4 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999.
103
EXHIBIT
NUMBER DESCRIPTION
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4.23 - Fixed Assets Security Agreement dated as of July 23, 1999
among Sterling Chemicals, Inc., Sterling Canada, Inc.,
Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals,
Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc.
and Sterling Chemicals International, Inc., as the Grantors,
and The CIT Group/Business Credit, Inc., as Administrative
Agent for each of the Fixed Assets Secured Parties,
incorporated by reference from Exhibit 4.5 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999.
4.24 - Current Assets Security Agreement dated as of July 23, 1999
among Sterling Chemicals, Inc., Sterling Canada, Inc.,
Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals,
Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc.
and Sterling Chemicals International, Inc., as the Grantors,
and The CIT Group/Business Credit, Inc., as Administrative
Agent for each of the Current Assets Secured Parties,
incorporated by reference from Exhibit 4.6 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999.
4.25 - Obligor Pledge Agreement dated as of July 23, 1999 among
Sterling Chemicals, Inc., Sterling Canada, Inc. and Sterling
Pulp Chemicals US, Inc., as the Pledgors, and The CIT
Group/Business Credit, Inc., as Administrative Agent for
each of the Fixed Assets Secured Parties, incorporated by
reference from Exhibit 4.8 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1999.
4.26 - Intercreditor Agreement dated as of August 21, 1996 between
Texas Commerce Bank National Association and Fleet National
Bank, incorporated by reference from Exhibit 4.14 to the
Registration Statement on Form S-1 of STX Acquisition Corp.
and STX Chemicals Corp. (Registration No. 333-04343).
4.26(a) - Amendment of Intercreditor Agreement dated as of July 23,
1999 among Sterling Chemicals Holdings, Inc., Chase Bank of
Texas, N.A. (formerly known as Texas Commerce Bank National
Association), as Administrative Agent, and State Street Bank
and Trust Company, as Trustee, incorporated by reference
from Exhibit 4.18 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999.
4.27 - Senior Debt Intercreditor Agreement dated as of July 23,
1999 among Harris Trust Company of New York, as Trustee, The
CIT Group/Business Credit, Inc., as Administrative Agent,
and Sterling Chemicals, Inc., incorporated by reference from
Exhibit 4.17 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999.
**10.1 - Amended and Restated Stock Plan for Non-Employee Directors.
10.2 - Amended and Restated Key Employee Protection Plan,
incorporated by reference from Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2000.
**10.3 - Sterling Chemicals Holdings, Inc. Omnibus Stock Awards and
Incentive Plan, as amended.
**10.4 - Sterling Chemicals, Inc. Amended and Restated Salaried
Employees' Pension Plan (Effective as of May 1, 1996).
**10.4(a) - First Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
January 31, 1997).
**10.4(b) - Second Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
January 1, 1997).
**10.4(c) - Third Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
November 1, 1998).
**10.4(d) - Fourth Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
December 31, 1998).
**10.4(e) - Fifth Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
April 1, 1999).
**10.4(f) - Sixth Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
May 14, 1999).
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).
104
EXHIBIT
NUMBER DESCRIPTION
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10.6 - Sterling Chemicals, Inc. Amended and Restated Supplemental
Employee Retirement Plan, incorporated by reference from
Exhibit 10.34 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1989 (Commission
File Number 1-10059).
10.7 - Sterling Chemicals, Inc. Amended and Restated Hourly Paid
Employees' Pension Plan (Effective as of May 1, 1996),
incorporated by reference from Exhibit 10.3(c) to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1996.
**10.7(a) - First Amendment to the Sterling Chemicals, Inc. Amended and
Restated Hourly Paid Employees' Pension Plan (Effective as
of December 31, 1998).
**10.7(b) - Second Amendment to the Sterling Chemicals, Inc. Amended and
Restated Hourly Paid Employees' Pension Plan (Effective as
of December 17, 1998).
**10.7(c) - Third Amendment to the Sterling Chemicals, Inc. Amended and
Restated Hourly Paid Employees' Pension Plan (Effective as
of September 20, 1999).
**10.8 - Sterling Chemicals, Inc. Sixth Amended and Restated Savings
and Investment Plan dated as of October 1, 2000.
10.9 - Sterling Chemicals ESOP, incorporated by reference from
Exhibit 10.6 to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996.
**10.9(a) - Sterling Chemicals ESOP (First Amendment) (Effective as of
December 27, 1996).
**10.9(b) - Sterling Chemicals ESOP (Second Amendment) (Effective as of
August 21, 1996).
**10.9(c) - Third Amendment to Sterling Chemicals ESOP (Effective as of
January 31, 1997).
**10.9(d) - Fourth Amendment to Sterling Chemicals ESOP (Effective as of
November 1, 1998).
**10.9(e) - Fifth Amendment to Sterling Chemicals ESOP (Effective as of
December 31, 1998).
10.10 - Articles of Agreement between Sterling Chemicals, Inc., its
successors and assigns, and Texas City, Texas Metal Trades
Council, AFL-CIO Texas City, Texas, December 18, 1998 to May
1, 2002, incorporated by reference from Exhibit 10.23 to the
Registration Statement on Form S-4 of Sterling Chemicals,
Inc. (Registration No. 333-87471).
**10.11 - Agreement between Sterling Pulp Chemicals Ltd., North
Vancouver, British Columbia, and Pulp, Paper and Woodworkers
of Canada, Local 5, British Columbia effective December 1,
1997 to November 30, 2000.
10.12 - Standby Purchase Agreement dated as of December 15, 1998
between Sterling Chemicals Holdings, Inc. and Frank P.
Diassi, incorporated by reference from Exhibit 10.29 to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998.
10.13 - Standby Purchase Agreement dated as of December 15, 1998
between Sterling Chemicals Holdings, Inc. and Frank J.
Hevrdejs, incorporated by reference from Exhibit 10.30 to
the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998.
10.14 - Standby Purchase Agreement dated as of December 15, 1998
between Sterling Chemicals Holdings, Inc. and Koch Capital
Services, Inc., incorporated by reference from Exhibit 10.31
to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998.
10.15 - Standby Purchase Agreement dated as of December 15, 1998
between Sterling Chemicals, Holdings, Inc. and William A.
McMinn, incorporated by reference from Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1999.
10.16 - Form of Indemnity Agreement executed between the Company
and each of its officers and directors, incorporated by
reference from Exhibit 10.17 to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1996.
10.17 - Form of Indemnity Agreement executed between the Company
and each of its officers and directors, incorporated by
reference from Exhibit 10.30 to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1994.
**10.18 - Severance Agreement dated as of May 1, 2000 among Peter W.
De Leeuw and the Company.
10.19 - Employment Agreement dated as of January 19, 1998 between
Gary M. Spitz and the Company, incorporated by reference
from Exhibit 10.28 to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1998.
94
105
EXHIBIT
NUMBER DESCRIPTION
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10.20 - Employment Agreement dated as of November 12, 1997 between
David G. Elkins 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, 1999.
+10.21 - Amended and Restated Production Agreement dated March 31,
1998 between BP Chemicals, Inc. and Sterling Chemicals,
Inc., incorporated by reference from Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998.
+10.22 - Second Amended and Restated Production Agreement dated
effective as of August 1, 1996 between BP Chemicals Inc. and
Sterling Chemicals, Inc., incorporated by reference from
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1998.
+10.23 - Amended and Restated Product Sales Agreement dated effective
as of January 1, 1998 between BASF Corporation and Sterling
Chemicals, Inc., incorporated by referenced from Exhibit
10.11 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997.
10.24 - License Agreement dated August 1, 1986 between Monsanto
Company and Sterling Chemicals, Inc., incorporated by
reference from Exhibit 10.25 to the Company's Registration
Statement on Form S-1 (Registration No. 33-24020).
+10.25 - Joint Venture Agreement dated March 31, 1998 between
Sterling Chemicals, Inc. and BP Chemicals, Inc.,
incorporated by reference from Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1998.
+10.25(a) - First Amendment to Joint Venture Agreement dated effective
as of March 31, 1998 between Sterling Chemicals, Inc. and BP
Chemicals Inc., incorporated by reference from Exhibit
10.26(a) to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998.
**21.1 - Subsidiaries of Sterling Chemicals Holdings, Inc.
**23.1 - Consent of Deloitte & Touche LLP
**27.1 - Financial Data Schedule - Sterling Chemicals Holdings, Inc.
**27.2 - Financial Data Schedule - Sterling Chemicals, Inc.
**99.1 - Sterling Canada, Inc. consolidated financial statements and
notes thereto for the years ended September 30, 2000, 1999,
and 1998, including independent auditors' report.
**99.2 - Sterling Pulp Chemicals, Ltd. consolidated financial
statements and notes thereto for the years ended September
30, 2000, 1999, and 1998, including independent auditors'
report.