Back to GetFilings.com
1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
----------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
COMMISSION FILE NUMBER 1-10059
STERLING CHEMICALS HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0185186
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1200 SMITH STREET, SUITE 1900
HOUSTON, TEXAS 77002-4312 (713) 650-3700
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
COMMISSION FILE NUMBER 333-04343-01
STERLING CHEMICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0502785
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1200 SMITH STREET SUITE 1900
HOUSTON, TEXAS 77002-4312 (713) 650-3700
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
STERLING CHEMICALS, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION I(1)(a) AND (b) OF FORM 10-K, AND IS THEREFORE FILING
THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PROVIDED FOR BY GENERAL
INSTRUCTION I(2) OF FORM 10-K
-------------------------------
Indicate by check mark whether each of the registrants (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of each of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K or
any amendment to this Form 10-K. X
---
As of December 6, 1999, Sterling Chemicals Holdings, Inc. had
12,751,793 shares of common stock outstanding. As of such date, the aggregate
market value of such common stock held by nonaffiliates, based upon the last
sales price of these shares as reported on the OTC Electronic Bulletin Board
maintained by the National Association of Securities Dealers, Inc., was
approximately $36 million. As of December 6, 1999, all outstanding equity
securities of Sterling Chemicals, Inc. were owned by Sterling Chemicals
Holdings, Inc.
Portions of the definitive Proxy Statement relating to the 2000 Annual
Meeting of Stockholders of Sterling Chemicals Holdings, Inc. are incorporated by
reference in Part III of this Form 10-K.
================================================================================
2
TABLE OF CONTENTS
PAGE
----
PART I
Important Information Regarding this Form 10-K........................................................ 1
Item 1. Business.............................................................................................. 2
Business Strategy................................................................................. 2
Recent Developments............................................................................... 2
Industry Overview................................................................................. 3
Product Summary................................................................................... 5
Products.......................................................................................... 6
Sales and Marketing............................................................................... 8
Contracts......................................................................................... 9
Raw Materials for Products and Energy Resources................................................... 10
Technology and Licensing.......................................................................... 12
Competition....................................................................................... 12
Environmental Matters............................................................................. 13
Employees......................................................................................... 15
Insurance......................................................................................... 15
Item 2. Properties............................................................................................ 15
Item 3. Legal Proceedings..................................................................................... 17
Item 4. Submission of Matters to Vote of Security Holders..................................................... 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................. 19
Item 6. Selected Financial Data of the Company................................................................ 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 22
Overview.......................................................................................... 22
Liquidity and Capital Resources................................................................... 23
New Accounting Standards.......................................................................... 26
Certain Known Events, Trends, Uncertainties, and Risk Factors..................................... 26
Results of Operations............................................................................. 32
Comparison of Fiscal 1999 to Fiscal 1998.......................................................... 33
Comparison of Fiscal 1998 to Fiscal 1997.......................................................... 35
Item 7A. Qualitative and Quantitative Disclosure about Market Risk............................................. 38
Item 8. Financial Statements and Supplementary Data........................................................... 39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 107
PART III
Item 10. Directors and Executive Officers of the Registrant.................................................... 107
Item 11. Executive Compensation................................................................................ 107
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................ 107
Item 13. Certain Relationships and Related Transactions........................................................ 107
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K.......................... 108
i
3
IMPORTANT INFORMATION REGARDING THIS FORM 10-K
Readers should consider the following information as they review this
Form 10-K.
FORWARD-LOOKING STATEMENTS
This Form 10-K includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical facts
included in this Form 10-K, including without limitation the statements under
"Business", "Management's Discussion and Analysis of Financial Condition and
Results of Operations", and "Qualitative and Quantitative Disclosure about
Market Risk" regarding the cyclicality of our industry, current and future
industry conditions, the potential effects of such matters on our business
strategy, results of operations and financial position, and our market sensitive
financial instruments are forward-looking statements. Although we believe that
the expectations reflected in the forward-looking statements contained herein
are reasonable, no assurance can be given that such expectations will prove to
have been correct. Certain important factors that could cause actual results to
differ materially from expectations are stated herein in cautionary statements
made in conjunction with the forward-looking statements or are included
elsewhere in this Form 10-K. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Certain Known Events, Trends,
Uncertainties and Risk Factors." All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by these cautionary statements.
SUBSEQUENT EVENTS, ETC.
All statements contained in this Form 10-K, including the forward-looking
statements discussed above, are made as of December 16, 1999, except for those
statements that are expressly made as of another date. We disclaim any
responsibility for the correctness of any information contained in this Form
10-K to the extent such information is affected or impacted by events,
circumstances, or developments occurring after December 16, 1999, or by the
passage of time after such date and, except as required by applicable securities
laws, we do not intend to update such information.
DOCUMENT SUMMARIES
Statements contained in this Form 10-K describing documents and
agreements are provided in summary form only and such summaries are qualified in
their entirety by reference to the actual documents and agreements filed as
exhibits to this Form 10-K.
FISCAL YEAR
We keep our books of record and account based on annual accounting
periods ending on September 30 of each year. Accordingly, all references in this
Form 10-K to a particular fiscal year refers to the twelve calendar month period
ending on September 30 of that year.
1
4
PART I
This combined Form 10-K is separately filed by Sterling Chemicals
Holdings, Inc. ("Holdings") and Sterling Chemicals, Inc. ("Chemicals").
Information contained herein relating to Chemicals is filed by Holdings and
separately by Chemicals on its own behalf. Unless otherwise indicated, Holdings
and its subsidiaries, including Chemicals, are collectively referred to as the
"Company," "we," "our," "ours," and "us."
ITEM 1. BUSINESS
We were organized as a Delaware corporation in 1986 and have our
principal executive offices in Houston, Texas. In connection with our August 21,
1996 merger with STX Acquisition Corp., we recapitalized and reorganized into a
holding company structure, with our only material asset after the merger being
the capital stock of Chemicals, our wholly owned operating subsidiary. Through
Chemicals and its subsidiaries, we manufacture seven commodity petrochemicals at
our Texas City, Texas plant. We also manufacture chemicals for use primarily in
the pulp and paper industry at five plants in Canada and one plant in Valdosta,
Georgia, and acrylic fibers at our plant near Pensacola, Florida. At our Texas
City facility, we produce styrene, acrylonitrile, acetic acid, plasticizers,
methanol, tertiary butylamine, or "TBA", and sodium cyanide. We generally sell
our petrochemicals products to customers for use in the manufacture of other
chemicals and products, which in turn are used in the production of a wide array
of consumer goods and industrial products. We produce regular textile fibers,
specialty textile fibers, and technical fibers at our acrylic fibers facility,
as well as licensing our acrylic fibers manufacturing technology to producers
worldwide. Sodium chlorate is produced at our five plants in Canada and at our
Valdosta facility. Sodium chlorite is produced at one of our Canadian locations.
In addition, chlor-alkali and calcium hypochlorite are produced at one of our
Canadian locations. We license, engineer, and oversee construction of
large-scale chlorine dioxide generators for the pulp and paper industry as part
of our pulp chemicals business. These generators convert sodium chlorate into
chlorine dioxide at pulp mills.
BUSINESS STRATEGY
Our objectives are to be a premier producer of chemicals, to maintain a
strong market position, to achieve first quartile cost performance in all of our
major products, and to provide superior customer service. Our management team
has adopted the following strategies in pursuit of these objectives:
o Continue to improve our cost structure;
o Pursue growth opportunities through facility expansions, upgrades,
and strategic alliances; and
o Optimize capacity utilization rates through long-term supply
arrangements.
The cyclicality of the markets for our primary products, however, subjects us to
periods of overcapacity accompanied by lower prices and profit margins. In
addition, the instruments governing our outstanding debt limit our ability to
incur additional debt to finance additional acquisitions and other expenditures.
These and other factors may limit our ability to successfully implement our
business strategy.
RECENT DEVELOPMENTS
During fiscal 1999, we reduced our pulp chemicals workforce by
approximately 50 employees and reduced our Texas City facility and corporate
office workforce by approximately 140 employees. We also completed a new labor
contract with our unionized employees at our Texas City facility in December of
1998, which allows reduced staffing levels and improved work practices. In
connection with these workforce reductions and new labor contract, we took
one-time non-cash pre-tax charges of approximately $11 million in fiscal 1999.
We expect these actions to generate combined annual savings of approximately $11
million to $13 million. We cannot, however, give you any assurance of the level
of savings that will actually be achieved.
We entered into several agreements with Monsanto Company on October 22,
1999, related to the construction by Monsanto of a new disodium iminodiacetate,
or "DSIDA", plant at our Texas City facility. DSIDA is an essential intermediate
in the production of Monsanto's Roundup(R), a glyphosate based herbicide. We
believe the DSIDA project, as currently planned, could generate additional
annual cash flows of up to $8 million, depending on operating rates and market
conditions. We cannot, however, give you any assurance that the DSIDA project
will generate any specific amount of additional cash flows.
2
5
On July 23, 1999, we completed a private offering of $295,000,000 of
12 3/8% Senior Secured Notes due 2006. In addition, on July 23, 1999, we
established two new secured revolving credit facilities providing for up to
$155,000,000 in revolving credit loans under a single revolving credit
agreement. The proceeds from the sale of the 12 3/8% Notes and the initial
borrowings under these revolving credit facilities were used to fully repay and
terminate Chemicals' prior senior credit facility.
During the fourth quarter of fiscal 1999, we recorded pre-tax non-cash
impairment expense related to our methanol plant of $26.4 million. This
impairment was precipitated in part by recently enacted legislation in the State
of California, and similar legislation proposed by other States and the
Environmental Protection Agency's Blue Ribbon Panel, mandating the rapid
phase-out of MTBE in reformulated gasoline. The MTBE market consumes a
significant portion of the methanol produced in the United States. The
impairment of our methanol plant also reflects the competitive advantage that
foreign methanol producers have over domestic methanol producers due to the
significant disparity between prices for foreign and domestic natural gas, one
of the primary raw materials for methanol.
Selling prices and margins for styrene, which have a profound effect on
our earnings, have increased significantly during the first quarter of fiscal
2000 as a result of increased global demand and restrictions on supply of these
products. We cannot, however, be sure that these increases can be sustained or
whether prices and margins will increase or decrease in the future.
INDUSTRY OVERVIEW
The primary markets in which we compete, especially styrene and
acrylonitrile, are cyclical and are sensitive to several factors including:
o changes in the balance between supply and demand;
o the price of raw materials; and
o the level of general worldwide economic activity.
Historically, these markets have experienced alternating periods of tight supply
and rising prices and profit margins, followed by periods of large capacity
additions resulting in overcapacity and declining prices and profit margins.
During the last several years large global capacity additions of styrene and
acrylonitrile and events in the financial markets in certain Asian countries
have had a negative impact on sales volumes, prices, and margins, particularly
for styrene and acrylonitrile.
Petrochemicals
Styrene. The global styrene capacity is approximately 45 billion pounds.
Total North American styrene capacity is currently approximately 13 billion
pounds per year. Similar to other petrochemicals, styrene tends to experience
periods of strong demand resulting in tight supply and high prices and margins.
This tight balance in supply and demand often results in new capacity additions.
In most cases, incremental capacity comes in the form of large new plants or
major expansions of existing facilities. As this new capacity comes on line, it
often exceeds current demand growth and results in a decline in prices and
margins.
The North American styrene industry ran at high utilization rates during
1994 and 1995, resulting from strong demand growth from worldwide economic
expansion. Strong demand growth and high utilization rates resulted in high
styrene prices and margins. In response to favorable market conditions, several
major producers announced new capacity increases in 1997 and 1998, particularly
in the Far East. At the time of this announced new capacity, there was a general
slowdown in the worldwide economic growth rate, prompting customers to begin
utilizing their available inventories and decrease purchases of additional
product. As a result, our styrene prices declined by approximately 41% from
fiscal 1995 to fiscal 1996. This decline in styrene pricing intensified in
fiscal 1997 and fiscal 1998, as the previously announced new capacity came on
line at the same time that economic events in various Asian countries
significantly reduced demand growth for styrene.
In light of conditions at the time, several planned capacity expansion
programs, including announced plans by Dow Chemical Company, Chevron Chemical
Company, and Huntsman Corporation, were either canceled or delayed in 1998.
Except for 1998, when the Asian economic crisis impacted demand growth for all
petrochemical products, styrene demand growth has significantly exceeded growth
in global GDP since 1985.
3
6
During the first quarter of fiscal 2000, styrene prices and margins have
increased significantly from levels experienced in fiscal 1999. These
improvements were driven by a combination of increased demand from Asia and
operating problems at several styrene plants. We cannot, however, be sure that
these increases can be sustained or whether prices and margins will increase or
decrease in the future.
Acrylonitrile. Global acrylonitrile capacity is currently approximately
12 billion pounds per year. The acrylonitrile market exhibits similar
characteristics regarding capacity utilization, selling prices, and profit
margins as those of styrene. Moreover, as a result of our high percentage of
export acrylonitrile sales, demand for our acrylonitrile is significantly
influenced by export customers, particularly those that supply acrylic fibers to
customers in China. During 1995, strong demand for acrylic fibers and ABS
resins, particularly in China, increased demand for acrylonitrile resulting in
high prices and margins. High utilization rates and prices prompted many major
producers to announce new capacity increases and approximately two billion
pounds of capacity increases came on line between 1996 and 1998. At the same
time, acrylonitrile demand began to weaken in late 1995 for many of the same
reasons that caused the deterioration in the styrene market. As new
acrylonitrile capacity in the United States and Asia came on line and demand
growth in Asian markets weakened, acrylonitrile prices and margins decreased
significantly from 1996 through 1999.
Solutia Inc. is constructing a new acrylonitrile production facility in
North America, which is expected to have a rated annual production capacity of
approximately 500 million pounds and which is currently expected to begin
production in the third calendar quarter of 2000.
Acrylic Fibers. We and Solutia Inc. are only two manufacturers of acrylic
fibers in North America. In general, the two acrylic fibers producers sell to
different customers and focus on different segments of the market. Acrylic
fibers compete with other fibers, including polyester and wool. During 1998 and
1999, the acrylic fibers industry experienced decreased sales prices and margins
due to a significant drop in the demand for acrylic fibers products, which
resulted from the economic events in various countries in Asia and increased
competition from European suppliers.
Acetic Acid. United States acetic acid capacity is currently 6.5 billion
pounds per year. Several capacity additions occurred in 1998 and 1999, including
an expansion of our acetic acid unit in Texas City from 800 million pounds of
rated annual production capacity to 1 billion pounds. BP Chemicals Inc. and
Celanese AG are each building 1.1 billion pound acetic acid production units in
Malaysia and Singapore, respectively. These units are expected to startup in mid
2000.
Demand for acetic acid is linked to demand for vinyl acetate monomer, a
key intermediate in the production of a wide array of polymers.
Plasticizers. Our rated plasticizers capacity is 280 million pounds per
year. We have an agreement with BASF pursuant to which we sell all of our
plasticizers production to BASF through 2007.
Pulp Chemicals
Sodium Chlorate. Historically, sodium chlorate has experienced cycles in
capacity utilization, selling prices, and profit margins, although not to the
extremes seen in the petrochemicals markets. Since the mid-1980s, North American
demand for sodium chlorate has grown at an average annual rate of approximately
9% as pulp mills have accelerated substitution of chlorine dioxide for elemental
chlorine in bleaching applications. Substitution of chlorine dioxide for
elemental chlorine is driven primarily by environmental concerns. Chlorine
dioxide is produced from sodium chlorate, which is one of our primary pulp
chemicals products. The Environmental Protection Agency recently instituted new
regulations known as "Cluster Rules," which mandate the elimination of elemental
chlorine usage in bleaching applications, resulting in increased substitution of
chlorine dioxide for elemental chlorine by the North American pulp and paper
industry.
In 1998 and 1999, demand for sodium chlorate did not increase at
historical rates as a result of weak market conditions and lower operating rates
in the pulp and paper industry. United States operating rates remained flat from
4
7
1998 to 1999 and average prices for our sodium chlorate decreased by
approximately 8% from fiscal 1998 to fiscal 1999. We and two other companies
collectively account for more than 70% of North American sodium chlorate
production capacity.
PRODUCT SUMMARY
The following table summarizes our principal products, including our
capacity, primary end uses, raw materials, and major competitors for each
product. "Capacity" represents rated annual production capacity at September 30,
1999, which is calculated by estimating the number of days in a typical year a
production facility is expected to operate after allowing for downtime for
regular maintenance and multiplying that number by an amount equal to the
facility's optimal daily output based on the design feedstock mix. As the
capacity of a facility is an estimated amount, actual production may be more or
less than capacity.
STERLING PRODUCT INTERMEDIATE
(CAPACITY) PRODUCTS PRIMARY END PRODUCTS RAW MATERIALS MAJOR COMPETITORS
- ----------------- -------------------- ----------------------------- --------------------- -----------------------------
PETROCHEMICALS
Styrene Polystyrene, Building products, boat and Ethylene and benzene Dow Chemical Company,
(1.7 billion ABS/SAN resins, automotive components, Lyondell Chemical
pounds per year) styrene butadiene disposable cups and trays, Company, Amoco
latex, and packaging and containers, Chemical Company,
unsaturated and housewares, tires, audio and Chevron Chemical
polyester resins video cassettes, luggage, Company, Cos-Mar (a
children's toys, paper joint venture of General
coating, appliance parts, and Electric Company and
carpet backing FINA Inc.), and Nova
Corporation
Acrylonitrile Acrylic fibers and Apparel, furnishings, Ammonia and BP Chemicals Inc., Cytec
(740 million ABS/SAN resins upholstery, household propylene Industries Inc., E.I. du Pont
pounds per year) appliances, carpets, and de Nemours and Company, Asahi
plastics for automotive parts Chemical Industry Company,
using ABS and SAN Ltd., EC Erdoelchemie GmbH,
polymers and Solutia Inc.
Acrylic Fibers NA Apparel, fleece, hosiery, Acrylonitrile, vinyl Solutia Inc.
(150 million industrial, sweaters, pile acetate, sodium
pounds per year) fabrics, outdoor furniture, thiocyanate, sodium
friction materials, gaskets, bisulfate, and finish
specialty papers, and oil
non-wovens
Acetic Acid Vinyl acetate, Adhesives, PET bottles, Methanol and carbon Celanese AG, Eastman
(1 billion terephthalic acid, fibers, and surface coatings monoxide Chemical Company, and
pounds per year) and acetate solvents Millennium Chemicals Inc.
Methanol Acetic acid, Adhesives, cigarette filters, Natural gas, steam, Methanex Corporation,
(150 million MTBE, and surface coatings, and carbon dioxide Borden Chemical,
gallons per year) formaldehyde gasoline oxygenate and Lyondell Methanol
octane enhancer, and Company, L.P., Celanese
plywood adhesives AG, and Terra Industries
Plasticizers Polyvinyl chloride Flexible plastics, such as Alpha-olefins, carbon Exxon Corporation,
(280 million (PVC) shower curtains and liners, monoxide, hydrogen, Aristech Chemical, and
pounds per year) floor coverings, cable and orthoxylene Eastman Chemical
insulation, upholstery, and Company
plastic molding
TBA NA Pesticides, solvents, Isobutylene, sulfuric BASF Corporation and
(21 million pharmaceuticals, and acid, caustic soda, Nitto Chemical Industry
pounds per year) synthetic rubber and hydrogen cyanide Co., Ltd.
5
8
STERLING PRODUCT INTERMEDIATE
(CAPACITY) PRODUCTS PRIMARY END PRODUCTS RAW MATERIALS MAJOR COMPETITORS
- --------------------- ---------------- --------------------------- ------------------- ------------------------
Sodium Cyanide NA Electroplating and Caustic soda and
(85 million precious metals recovery hydrogen cyanide
pounds per year)
PULP CHEMICALS
Sodium Chlorate Chlorine dioxide Bleaching agent for pulp Electricity, salt, Akzo Nobel N.V., CXY
(500,000 tons production; downstream and water Chemicals Ltd., Kerr
per year) products include high McGee Corporation, and
quality office and coated Huron Chemicals
papers
Chlorine Dioxide NA Chlorine dioxide for use NA Akzo Nobel, N.V.
Generators in the bleaching of pulp
Sodium Chlorite Chlorine dioxide Antimicrobial agent for Sodium chlorate and Vulcan Chemicals
(3,500 tons per year) municipal water treatment hydrochloric acid
and disinfectant for fresh
produce
Chlor Alkali NA Bleaching and digesting Electricity, salt, Occidental Chemical
agent for pulp and paper, and water Company, Dow Chemical
widely used in potable Company, and Pioneer
water and wastewater Companies, Inc.
treatment programs and
in swimming pools
Calcium Hypochlorite NA Sanitizing agent to control Lime, water, caustic Olin Corporation and PPG
(8,500 metric bacteria and algae in soda, and chlorine Industries
tons per year) swimming pools
PRODUCTS
Petrochemicals
Styrene. We are the fourth largest North American producer of styrene.
Our styrene unit, located at our Texas City facility, is one of the largest in
the world and has a rated annual production capacity of approximately 1.7
billion pounds, which represents approximately 12% of total North American
capacity. We sold approximately 25% of our styrene sales volumes pursuant to
conversion and other long-term agreements during fiscal 1999. Approximately 55%
of our styrene sales volumes were exported in fiscal 1999, principally to Asia,
either directly or through arrangements with large international trading
companies.
On March 3, 1999, we announced a capital project to upgrade our styrene
plant at our Texas City facility. The project will reduce phenylacetylene, or
"PA," in our styrene by employing Raytheon/Fina technology and a Criterion
catalyst. PA is difficult to remove from styrene through conventional
distillation, but the new technology has been demonstrated to selectively remove
PA at a low processing cost and with reduced loss of styrene. We expect lower PA
styrene to be a growing segment of the styrene market. We plan to invest
approximately $7 to $8 million in this project. We began the process of
upgrading our styrene production during the shutdown of our styrene unit in
fiscal 1999 and we expect to be producing lower PA styrene product by December
31, 1999.
Acrylonitrile. We are the second largest North American producer of
acrylonitrile. Our acrylonitrile unit, located at our Texas City facility, has a
rated annual production capacity of approximately 740 million pounds, which
represents approximately 19% of total North American capacity. We sold
approximately 44% of our acrylonitrile sales volumes pursuant to conversion and
other long-term agreements during fiscal 1999. Approximately 50% of our
acrylonitrile production in fiscal 1999 was exported. In April of 1998, ANEXCO,
LLC, our joint venture with BP Chemicals Inc., commenced operations to market
both companies' acrylonitrile in Asia and South America. We currently use a
portion of our hydrogen cyanide, a by-product of acrylonitrile manufacturing, as
a raw material for the production of TBA and sodium cyanide and we burn the rest
as fuel.
As previously discussed, we and Monsanto entered into several agreements
related to the construction by Monsanto of a new DSIDA plant at our Texas City
facility. The DSIDA plant will use our previously under-utilized hydrogen
cyanide as a primary feedstock. When the DSIDA plant begins production, we
expect to use all of our hydrogen cyanide for chemical value.
Acrylic Fibers. We are one of two North American producers of acrylic
fibers. Our acrylic fibers facility's rated annual production capacity is
approximately 150 million pounds, which represents approximately 33% of total
North American capacity. Approximately 14% of our acrylic fibers production was
exported in fiscal 1999. We produce regular textile fibers, specialty textile
fibers, and technical fibers. Regular textile fibers are commodity fibers whose
sales are primarily driven by price and service rather than product
characteristics. Specialty textile fibers are targeted for specific applications
or end uses and typically have higher margins than regular textile fibers.
Technical fibers are
6
9
specially engineered for industrial, non-textile uses such as brake linings and
typically have higher margins than textile fibers.
Acetic Acid. We are the second largest North American producer of acetic
acid. Our acetic acid unit, located at our Texas City facility, has a rated
annual production capacity of approximately 1 billion pounds, which represents
approximately 16% of total North American capacity. All of our acetic acid
production is sold to BP Chemicals pursuant to a long-term contract that expires
in 2016. In March of 1999, we completed an expansion of our acetic acid
facilities in conjunction with BP Chemicals. BP Chemicals is providing its
Cativa(TM) technology and provided a significant portion of the capital for the
expansion. The expansion increased our annual acetic acid production capacity by
approximately 25% to our current rated annual capacity of 1 billion pounds.
Methanol. In August of 1996, we and BP Chemicals completed construction
of a methanol unit at our Texas City facility with a rated annual production
capacity of approximately 150 million gallons. We share capital investment in
the unit and production capacity with BP Chemicals. Approximately 54% of our
methanol production was used as a raw material in our acetic acid unit during
fiscal 1999, replacing methanol that was previously purchased from third
parties. The remaining methanol is available for sale in the merchant market and
for BP Chemicals' worldwide acetic acid business. In April of 1999, we restarted
our methanol facility, which had been shut down since August of 1998 for the
previously discussed economic reasons. We are currently evaluating the best use
of our methanol facility given the current and projected market conditions.
Plasticizers. We produce plasticizers at our Texas City facility under an
agreement with BASF Corporation pursuant to which BASF is obligated to purchase
all of our plasticizers production through 2007. Our rated annual production
capacity of plasticizers is approximately 280 million pounds.
TBA. We use a portion of our hydrogen cyanide by-product from our Texas
City acrylonitrile facility to produce TBA, which we sell to Flexsys America
L.P. pursuant to a long-term conversion agreement. The agreement automatically
renews for successive one-year periods unless terminated by either party on at
least 24 months notice. In December of 1999, Flexsys notified us of their
intention to terminate the contract as of December 31, 2001. Our rated annual
production capacity for TBA is approximately 21 million pounds.
Sodium Cyanide. Pursuant to a long-term arrangement, we operate a sodium
cyanide unit at our Texas City facility which is owned by E. I. du Pont de
Nemours and Company. This sodium cyanide unit uses our hydrogen cyanide
by-product from our Texas City acrylonitrile facility as a raw material. The
rated annual production capacity of this unit is approximately 85 million
pounds.
Pulp Chemicals
Sodium Chlorate. We are the second largest producer of sodium chlorate in
North America. Our six sodium chlorate facilities have an aggregate rated annual
production capacity of approximately 500,000 tons, which represents
approximately 23% of total North American capacity.
Chlorine Dioxide Generators. Through our ERCO Systems Group, we are the
largest worldwide supplier of patented technology for generators that certain
pulp mills use to convert sodium chlorate into chlorine dioxide. Each mill that
uses chlorine dioxide requires at least one generator. We receive revenue when a
generator is sold to a mill and also receive royalties from the mill after
start-up, generally over a ten-year period, based on the amount of chlorine
dioxide produced by the generator. We have supplied approximately two-thirds of
all existing modern pulp mill generators worldwide.
The research and development group of ERCO works to develop new and more
efficient generators. When pulp mills move to higher levels of substitution of
chlorine dioxide for elemental chlorine, they are usually required to upgrade
generator capacity or purchase new generator technology. Pulp mills may also
convert to a newer generator to take advantage of efficiency advances and
technological improvements. Each upgrade or conversion requires a licensing
agreement, which generally provides for payment of an additional ten-year
royalty.
Sodium Chlorite. We have a rated annual production capacity of sodium
chlorite of approximately 3,500 tons.
For historical information presented on a segmented basis for our
petrochemicals business and pulp chemicals business, see Note 8 of the Notes to
Consolidated Financial Statements included in this Form 10-K.
7
10
SALES AND MARKETING
We sell our petrochemicals products pursuant to:
o multi-year contracts;
o conversion agreements; and
o spot transactions in both the domestic and export markets.
We have certain long-term agreements that provide for the dedication of 100% of
our production of acetic acid, plasticizers, TBA, and sodium cyanide, each to
one customer. We also have various sales and conversion agreements that dedicate
significant portions of our production of styrene, acrylonitrile, and methanol
to certain customers. Some of these agreements provide for cost recovery plus an
agreed profit margin based upon market prices. These agreements help us to:
o optimize capacity utilization rates, which can lower our selling,
general, and administrative expenses;
o reduce our working capital requirements; and
o insulate our operations to some extent from the effects of
declining markets and changes in raw materials prices.
We compete on the basis of:
o product price;
o quality; and
o deliverability.
Prices for our petrochemicals products are determined by market factors that are
largely beyond our control and, except with respect to a number of our
multi-year contracts, we generally sell these products at prevailing market
prices.
Some of our multi-year contracts for our petrochemicals products are
structured as conversion agreements, pursuant to which the customer furnishes
raw materials that we process into finished products. In exchange, we receive a
fee typically designed to cover our fixed and variable costs of production and
to generally provide an element of profit dependent on the existing market
conditions for the product. These conversion agreements help us to maintain
lower levels of working capital and, in some cases, to gain access to certain
improvements in manufacturing process technology. We believe our conversion
agreements help insulate us to some extent from the effects of declining markets
and changes in raw materials prices, while allowing us to share in the benefits
of favorable market conditions for most of the products sold under these
arrangements. The balance of our petrochemicals products are sold by our direct
sales force or through ANEXCO, LLC, our marketing alliance with BP Chemicals.
Our acrylic fibers facility currently markets products in North America
through our internal sales staff and to international customers through
non-affiliated agents. Acrylic fibers are priced based upon market conditions,
which include, but are not limited to, raw materials costs, prices of competing
and alternative products, and type of end use.
We sell sodium chlorate primarily in Canada and the United States,
generally under one to five-year supply contracts, most of which provide for
minimum and maximum volumes or a percentage of requirements at market prices. In
addition, most of our sodium chlorate sales contracts contain certain "meet or
release" pricing clauses and some contain restrictions on the amount and timing
of future price increases.
We market chlorine dioxide generators worldwide to the pulp and paper
industry. We sell the technology and equipment, which we design and purchase
from our strategic alliance partners. In addition to being paid for the
technology and equipment, we receive royalties based on the amount of chlorine
dioxide produced by the generator, generally over a ten-year period.
8
11
For information regarding our export sales and domestic and foreign
operations, see Note 8 of the Notes to Consolidated Financial Statements
included in this Form 10-K.
CONTRACTS
Our key multi-year contracts, which collectively accounted for 26% of our
fiscal 1999 revenues, are described below. BP Chemicals accounted for
approximately 10% and 12% of our revenues in fiscal 1999 and 1998, respectively.
No other single customer accounted for more than 10% of our revenues in the last
three fiscal years.
Styrene-Bayer
We are currently operating under a conversion agreement, effective
through December 31, 2000, with Bayer Corporation, a subsidiary of Bayer AG.
Under this agreement, we provide Bayer, subject to specified minimum and maximum
quantities, with a major portion of Bayer's styrene requirements for its
manufacture of styrene-containing polymers. This agreement permits Bayer to
terminate its obligations upon twelve months' notice to us should Bayer sell its
business that uses styrene or assign the agreement, subject to our consent, to
any third-party purchaser of its business. During fiscal 1999, we delivered
approximately 12% of our styrene production pursuant to this agreement.
Acrylonitrile-Solutia
We have a multi-year conversion agreement with Solutia, formerly the
chemical business of Monsanto Company, pursuant to which we delivered
approximately 25% of our fiscal 1999 acrylonitrile production. Solutia is
constructing a new acrylonitrile production facility in Chocolate Bayou, Texas,
which is expected to have a rated annual production capacity of approximately
500 million pounds and which is currently expected to begin production in the
third calendar quarter of 2000. In anticipation of the start-up of such
facility, Solutia has elected to terminate our conversion agreement, effective
September 1, 2000.
Acrylonitrile-Cytec
In connection with the acquisition of our acrylic fibers facility from
Cytec Industries Inc. on January 31, 1997, we assumed an existing supply
contract for acrylonitrile pursuant to which our acrylic fibers facility
purchases its requirements for acrylonitrile from Cytec. Upon the expiration of
this supply contract on February 28, 2002, we expect to supply all of the
acrylonitrile requirements of our acrylic fibers facility from our Texas City
facility.
Acrylonitrile-BP Chemicals
In 1988, we entered into a long-term production agreement with BP
Chemicals, under which BP Chemicals contributed the majority of the capital
expenditures required for starting the third acrylonitrile reactor train at our
Texas City acrylonitrile facility. Under this agreement, BP Chemicals has the
option to take up to approximately one-sixth of our total acrylonitrile
capacity. BP Chemicals furnishes the necessary raw materials and pays us a
conversion fee for the amount of acrylonitrile it takes and reimburses us for a
portion of the fixed costs related to acrylonitrile production at our Texas City
facility. To protect BP Chemicals in the event we default under the production
agreement, BP Chemicals has a first priority security interest in the third
reactor and related equipment and in the first acrylonitrile produced in our
three reactor units to the extent BP Chemicals is entitled to purchase
acrylonitrile under this production agreement. This agreement was amended and
restated during April of 1998 to, among other things, encourage increased
manufacturing and technical cooperation. During fiscal 1999, we delivered
approximately 11% of our acrylonitrile production to BP Chemicals pursuant to
this agreement.
The acrylonitrile reactor in which BP Chemicals invested capital
incorporates certain BP Chemicals technological improvements under a separate
license agreement. We have the right to incorporate these and any future
improvements into our other two acrylonitrile reactors.
In order to enhance the marketing of our acrylonitrile, we and BP
Chemicals formed ANEXCO, LLC, an exclusive 50/50 joint venture to market
acrylonitrile in Asia and South America. During fiscal 1999, we sold
approximately 35% of our acrylonitrile production through ANEXCO.
9
12
Acetic Acid-BP Chemicals
BP Chemicals has the exclusive right to purchase all of our acetic acid
production until August of 2016. Under our agreement with BP Chemicals, which
has been in effect since August of 1986, BP Chemicals is obligated to make
certain unconditional monthly payments to us until August of 2006 and to
reimburse us for our operating costs. In addition, we are entitled to receive a
portion of the profits earned by BP Chemicals from the sale of the acetic acid
we produce.
Methanol-BP Chemicals
In August of 1996, we entered into a long-term production and sales
agreement with BP Chemicals, under which BP Chemicals contributed a significant
portion of the capital expenditures required for the construction of our
methanol production facility at our Texas City facility and obtained the right
to receive a substantial portion of our methanol production. The initial term of
this agreement expires July 31, 2016. A portion of the output of the methanol
facility is used in our acetic acid unit and the remainder is marketed by BP
Chemicals in the merchant market and in BP Chemicals' worldwide acetic acid
business.
In April of 1999, we restarted our methanol facility, which we had shut
down in August of 1998 for economic reasons. A significant disparity between
domestic and foreign prices for natural gas, one of the primary raw materials
for methanol, has put us and other domestic methanol producers at a disadvantage
when compared to foreign competitors. One of the primary uses of methanol is in
the production of MTBE, which is used in reformulated gasolines. The State of
California has recently announced that MTBE must be phased out of reformulated
gasoline used in California by December 31, 2002. In addition, in July of 1999,
the Environmental Protection Agency announced that it would ask Congress to
develop legislation aimed at phasing out MTBE from the existing reformulated-gas
program, and to give States the authority to ban MTBE completely. These
developments are likely to negatively impact the domestic methanol market. We
are currently evaluating the best use of our methanol facility given the current
and projected market conditions.
Plasticizers-BASF
We sell all of our plasticizers production to BASF pursuant to a product
sales agreement that has been in effect since August 1, 1986. In November of
1997, we signed a new agreement with BASF that expires at the end of 2007. BASF
provides us with some of the required raw materials and markets the plasticizers
we produce. BASF is obligated to make certain quarterly payments to us and
reimburses us monthly for actual production costs. In addition, we are entitled
to a share of the profits earned by BASF attributable to the plasticizers we
produce.
RAW MATERIALS FOR PRODUCTS AND ENERGY RESOURCES
For most of our products, the cost of raw materials, including utilities
in the case of pulp chemicals, is far greater than all other production costs
combined. Thus, an adequate supply of raw materials and utilities at reasonable
prices is critical to the success of our business. Most of the raw materials we
use are global commodities which are made by a large number of producers. Prices
for many of these raw materials are subject to wide fluctuations for a variety
of reasons beyond our control. Although we believe that we will continue to be
able to secure adequate supplies of our raw materials and energy at acceptable
prices to meet our requirements, there can be no assurance that we will be able
to do so.
Petrochemicals
Styrene. We manufacture styrene by converting ethylene and benzene into
ethylbenzene, which we then process into styrene. Ethylene and benzene are both
commodity petrochemicals. Prices for each can fluctuate widely due to
significant changes in the availability of these products. We have had
multi-year arrangements with three ethylene suppliers that provide our estimated
requirements for purchased ethylene at generally prevailing and competitive
market prices. Each of these arrangements expires between December of 1999 and
February of 2000. However, we are currently negotiating to renew or replace
these arrangements and expect to do so on terms that are, in the aggregate, at
10
13
least as favorable as the current arrangements, although we can give no
assurances to that effect. Our conversion agreements require that the other
parties to these agreements furnish us with the ethylene and benzene necessary
to fulfill our conversion obligations. Approximately 15% of our fiscal 1999
benzene requirements and approximately 15% of our fiscal 1999 ethylene
requirements were furnished by customers pursuant to conversion arrangements.
Acrylonitrile. We produce acrylonitrile by reacting propylene and
ammonia. Propylene and ammonia are both commodity chemicals and the price for
each can fluctuate widely due to significant changes in the availability of
these products. The requisite propylene and ammonia for the acrylonitrile we
produce under conversion agreements is furnished to us by the customers. We
purchase the rest of the propylene and ammonia we need for acrylonitrile
production. Approximately 47% of our fiscal 1999 propylene requirements and
approximately 42% of our fiscal 1999 ammonia requirements were furnished by
customers pursuant to conversion agreements. If various customers for whom we
now manufacture acrylonitrile under conversion agreements were to cease
furnishing their own raw materials and seek only to purchase acrylonitrile from
us without supplying their own raw materials, our requirements for purchased
propylene and ammonia could significantly increase.
Acrylic Fibers. Acrylonitrile is the most significant raw material used
in the production of acrylic fibers, representing approximately 50% of the total
cash cost of production. Pursuant to our supply agreement with Cytec, which we
assumed in connection with our purchase of the acrylic fibers facility from
Cytec, our acrylic fibers facility is required to purchase all of its
acrylonitrile requirements from Cytec until February 28, 2002. After this
agreement expires, we expect to supply the acrylonitrile requirements of our
acrylic fibers facility from our Texas City acrylonitrile facility.
Acetic Acid. Acetic acid is manufactured primarily from carbon monoxide
and methanol. We normally produce all of the methanol required by our acetic
acid unit. However, we are currently exploring other uses of our methanol
facility which could include the purchase of our methanol requirements from
third parties. In 1996, Praxair Hydrogen Supply, Inc. constructed a partial
oxidation unit at our Texas City facility that supplies us with all of the
carbon monoxide we require for the production of acetic acid. This unit was
recently expanded in conjunction with the expansion of our acetic acid unit.
Methanol. We produce methanol primarily from natural gas and steam. We
obtain our natural gas under supply contracts and on the spot market, typically
at prevailing market prices, and we produce our own steam.
Plasticizers. The primary raw materials for plasticizers are
alpha-olefins and orthoxylene, which are supplied by BASF under our long-term
conversion agreement.
TBA. We produce TBA from hydrogen cyanide, isobutylene, sulfuric acid,
and caustic soda. We use hydrogen cyanide produced as a by-product of our
acrylonitrile manufacturing process. Flexsys supplies the isobutylene, sulfuric
acid, and caustic soda needed in our TBA operations under our long-term
conversion agreement.
Sodium Cyanide. Sodium cyanide is manufactured from hydrogen cyanide and
caustic soda. We use hydrogen cyanide produced as a by-product of our
acrylonitrile manufacturing process. DuPont supplies the caustic soda under our
long-term conversion agreement.
Pulp Chemicals
Sodium Chlorate. Sodium chlorate is manufactured by passing an electric
current through an undivided cell containing a solution of sodium chloride. The
primary raw materials for the production of sodium chlorate are electricity,
salt, and water. Of these, electric power typically represents approximately 65%
of the variable cost of production of sodium chlorate. Consequently, the rates
charged by local electric utilities are an important competitive factor among
sodium chlorate producers. Electric power is purchased by each of our pulp
chemicals facilities pursuant to contracts with local electric utilities. On
average, we believe that our electrical power costs at our pulp chemical
facilities are competitive with other producers in the areas in which we
operate. We purchase most of the sodium chloride that we use in the manufacture
of sodium chlorate under requirements contracts with major suppliers.
11
14
TECHNOLOGY AND LICENSING
Petrochemicals
In 1986, Monsanto granted us a non-exclusive, irrevocable, and perpetual
right and license to use Monsanto's technology and other technology Monsanto
acquired through third-party licenses in effect at the time of the acquisition
of our Texas City facility from Monsanto. We use these licenses in the
production of styrene, acrylonitrile, methanol, TBA, acetic acid, and
plasticizers. During 1991, BP Chemicals Ltd. ("BPCL") purchased the acetic acid
technology from Monsanto, subject to existing licenses.
On December 30, 1997, we entered into an Acetic Acid Technology Agreement
with BP Chemicals and BPCL, pursuant to which BPCL granted us a non-exclusive,
irrevocable, and perpetual right and license to use BPCL's acetic acid
technology at our Texas City facility, including any new acetic technology
developed by BPCL at its acetic acid facilities in England during the term of
such agreement or pursuant to the research and development program provided by
BPCL under the terms of such agreement. This agreement was recently amended to
encompass the acetic acid technology of some of BPCL's affiliates.
BPCL has also granted us a non-exclusive, irrevocable, and perpetual
royalty-free license to use its acrylonitrile technology at our Texas City
facility as part of the 1988 acrylonitrile expansion project. This license
automatically terminates upon the termination of our acrylonitrile production
agreement with BP Chemicals. We have agreed with BPCL to cross-license any
technology or improvements relating to the manufacture of acrylonitrile at our
Texas City facility.
We believe that the manufacturing processes we utilize at our Texas City
facility are cost effective and competitive. Although we do not engage in
alternative process research with respect to our Texas City facility, we do
monitor new technology developments and, when we believe it is necessary, we
typically seek to obtain licenses for process improvements.
We own substantially all of the technology used in our acrylic fibers
operations. We license certain of our acrylic fibers manufacturing technology to
producers worldwide. We hope to capitalize on increasing demand for this
technology as developing countries seek to increase acrylic fibers production
capacity. Approximately 15% of the world's total acrylic fibers capacity is
based on our technology. The competitiveness of our acrylic fibers business with
respect to our specialty textiles and technical fibers products, which are our
higher margin products, is maintained, to a significant extent, through the
exclusive ownership or use of our product and manufacturing technology. If our
competitors gain access to the use of similar technology, or render our
technology obsolete through the introduction of superior technology, our ability
to compete would be materially affected in an adverse manner.
Pulp Chemicals
We produce sodium chlorate using state-of-the-art metal cell technology.
Our principal technology business is the design, sale, and technical service of
custom-built patented chlorine dioxide generators. Our ERCO engineering group is
involved in the technical support of our sales and marketing group through joint
calling efforts which define the scope of a project, as well as producing
technical schedules and cost estimates.
We perform detailed design of chlorine dioxide generators, which are then
fabricated by contractors. Plant installation, instrumentation testing, and
generator start-up are supervised by our joint engineering/technical service
team. Prior to 1996, we were involved in a number of patent disputes with Akzo
Nobel, N.V. regarding chlorine dioxide technology. In 1996, we reached a
settlement of these disputes that allows licensees of both companies to operate
their respective chlorine dioxide generators within the broadest range of
operating conditions.
Our pulp chemicals research and development activities are carried out at
our Toronto, Ontario laboratories. Activities include the development of new or
improved chlorine dioxide generation processes and research into new
technologies focusing on electrochemical and membrane technology related to
chlorine dioxide, including improvement of quality and reduction of quantity of
pulp mill effluents and treatment of municipal water supplies.
COMPETITION
The industries in which we operate are highly competitive. Many of our
competitors, particularly in the petrochemicals industry, are larger and have
substantially greater financial resources than we have. Among our competitors
are some of the world's largest chemical companies that, in contrast to us, have
their own raw materials resources. In addition, a significant portion of our
business is based upon widely available technology. The entrance of new
competitors into the industry and the addition by existing competitors of new
capacity could have a negative
12
15
impact on our ability to maintain existing market share or maintain or increase
profit margins, even during periods of increased demand for our products. You
can find a list of our principal competitors in the "Product Summary" table.
Historically, profitability of the petrochemicals industry has been
affected by vigorous price competition, which may intensify due to, among other
things, new domestic and foreign industry capacity. Our businesses are subject
to changes in the world economy, including changes in currency exchange rates.
In general, weak economic conditions, either in the United States or worldwide,
tend to reduce demand and put pressure on the margins for our products.
Beginning in fiscal 1997, economic events in various Asian countries negatively
impacted the demand growth for our products and, along with increases in supply,
had a negative impact on sales volumes, prices, and margins. Operations outside
the United States are subject to the economic and political risks inherent in
the countries in which they operate. Additionally, the export and domestic
markets can be affected significantly by import laws and regulations. During
fiscal 1999, our export sales were approximately 28% of our total revenues. It
is not possible to predict accurately how changes in raw materials costs, market
conditions, or other factors will affect future sales volumes, prices, and
margins for our products.
ENVIRONMENTAL MATTERS
General
Our operations involve the handling, production, transportation,
treatment, and disposal of materials that are classified as hazardous or toxic
waste and that are extensively regulated by environmental and health and safety
laws, regulations, and permit requirements. Environmental permits required for
our operations are subject to periodic renewal and can be revoked or modified
for cause or when new or revised environmental requirements are implemented.
Changing and increasingly strict environmental requirements can affect the
manufacture, handling, processing, distribution, and use of our chemical
products and, if so affected, our business and operations may be materially and
adversely affected. In addition, changes in environmental requirements can cause
us to incur substantial costs in upgrading or redesigning our facilities and
processes, including our waste treatment, storage, disposal, and other waste
handling practices and equipment.
We conduct environmental management programs designed to maintain
compliance with applicable environmental requirements at all of our facilities.
We routinely conduct inspection and surveillance programs designed to detect and
respond to leaks or spills of regulated hazardous substances and to correct
identified regulatory deficiencies. We believe that our procedures for waste
handling are consistent with industry standards and applicable requirements. In
addition, we believe that our operations are consistent with good industry
practice through participation in the Responsible Care initiatives as a part of
membership in the Chemical Manufacturers Association in the United States and
the Canadian Chemical Producers Association. However, a business risk inherent
with chemical operations is the potential for personal injury and property
damage claims from employees, contractors and their employees, and nearby
landowners and occupants. While we believe our business operations and
facilities generally are operated in compliance in all material respects with
all applicable environmental and health and safety requirements, we cannot be
sure that past practices or future operations will not result in material claims
or regulatory action, require material environmental expenditures, or result in
exposure or injury claims by employees, contractors and their employees, and the
public. Some risk of environmental costs and liabilities is inherent in our
operations and products, as it is with other companies engaged in similar
businesses.
Our operating expenditures for environmental matters, mostly waste
management and compliance, were approximately $30 million for fiscal 1999 and
$52 million for fiscal 1998. We also spent approximately $6 million for
environmentally related capital projects in fiscal 1999 and $2 million for these
types of capital projects in fiscal 1998. In fiscal 2000, we anticipate spending
approximately $8 million for capital projects related to waste management and
environmental compliance. There are no capital expenditures related to
remediation of environmental conditions projected for fiscal 2000.
In light of our historical expenditures and expected future results of
operations, we believe we will have adequate resources to conduct our operations
in compliance with applicable environmental and health and safety requirements.
Nevertheless, we may be required to make significant site and operational
modifications that are not currently contemplated in order to comply with
changing facility permitting requirements and regulatory standards.
Additionally, we have incurred and may continue to incur liability for
investigation and cleanup of waste or contamination at our own facilities or at
facilities operated by third parties where we have disposed of waste. We
continually review all estimates of potential environmental liabilities but can
give no assurances that all potential liabilities arising out of our past or
13
16
present operations have been identified or fully assessed or that the amount
necessary to investigate and remediate such conditions will not be significant
to us.
We believe that we would be able to recover certain losses that may arise
out of claims related to environmental conditions at each of our facilities that
existed prior to their acquisition by us through contractual indemnities and/or
statutory law and common law principles, although there can be no assurance that
we would prevail against any prior owner of any of our facilities with respect
to any such claim.
Petrochemicals
Air emissions from our Texas City facility and our acrylic fibers
facility are subject to certain permit requirements and self-implementing
emission limitations and standards under state and federal laws. Our Texas City
facility is located in an area that the Environmental Protection Agency has
classified as not having attained the ambient air quality standards for ozone,
which is controlled by direct regulation of volatile organic compounds and
nitrogen oxide. The Texas Natural Resource Conservation Commission has imposed
strict requirements on regulated facilities, including our Texas City facility,
to ensure that the air quality control region will achieve the ambient air
quality standards for ozone. Our acrylic fibers facility is located in an area
currently designated as being in attainment for ozone under the Clean Air Act.
Our Texas City facility and our acrylic fibers facility are subject to the
federal government's June 1997 National Ambient Air Quality Standards which
lower the ozone and particulate matter threshold for attainment. Local
authorities also may impose new ozone and particulate matter standards.
Compliance with these stricter standards may substantially increase our future
nitrogen oxide and particulate matter control costs, the amount and full impact
of which cannot be determined at this time.
To reduce the risk of offsite consequences from unanticipated events, we
acquired a greenbelt buffer zone adjacent to our Texas City facility in 1991
and, in connection with the acquisition of our acrylic fibers facility, acquired
a greenbelt area for our acrylic fibers facility. We also participate in a
regional air monitoring network to monitor ambient air quality in the Texas City
community. These programs are part of our commitment to the Responsible Care
initiatives of the Chemical Manufacturers Association, Inc.
A December 1994 Florida Department of Environmental Protection waiver for
use of an onsite nonhazardous landfill applies to our acrylic fibers facility.
This waiver was obtained in connection with Cytec's July 1994 petition for a
rulemaking to avoid a January 1995 rule prohibiting disposal of industrial waste
in other than a Class I landfill. Upon consummation of the acquisition of the
acrylic fibers business, we succeeded to the rights of Cytec under that petition
and waiver. Should the petition be denied or the waiver be revoked, there are
administrative options available to us. However, we do not believe the
additional cost of sending all of our waste to an offsite facility would have a
material adverse impact on us if that were required.
A settlement agreement entered into by the Environmental Protection
Agency, the Florida Department of Environmental Protection, and an environmental
group may also potentially apply to our acrylic fibers facility. This settlement
agreement imposes a no-migration standard for injection wells in underground
drinking water zones without regard to actual risk considerations. We and
several similarly situated companies have been contesting this settlement. An
April of 1999 ruling by the United States Court of Appeals for the 11th Circuit
may reduce the likelihood that the no-migration rule becomes enforceable,
although we can give you no assurance in that regard. In the event that the
no-migration rule becomes enforceable, we may incur material costs in
redesigning our waste water handling systems.
One of the primary uses of methanol is in the production of MTBE used in
reformulated gasolines. The State of California has recently announced that MTBE
must be phased out of reformulated gasoline used in California by December 31,
2002. In addition, in July of 1999, the Environmental Protection Agency
announced that it would ask Congress to develop legislation aimed at phasing out
MTBE from the existing reformulated-gas program, and to give States the
authority to ban MTBE completely. These developments are likely to negatively
impact the domestic methanol market.
Pulp Chemicals
Our pulp chemicals business is sensitive to potential environmental
regulations. On November 14, 1997, the Environmental Protection Agency enacted
regulations that support substitution of chlorine dioxide for elemental chlorine
in paper pulp bleaching processes to reduce the amount of absorbable organic
halides and other chlorine derivatives in bleach plant effluent. Chlorine
dioxide is produced from sodium chlorate, which is one of our pulp
14
17
chemicals products. Therefore, regulations restricting, but not altogether
banning, absorbable organic halides and other chlorine derivatives in bleach
plant effluent have a favorable effect on our business.
Conversely, a significant ban on all chlorine containing compounds could
have a materially adverse effect on us. British Columbia has a regulation in
place requiring elimination of the use of all chlorine products, including
chlorine dioxide, in the bleaching process by the year 2002. The pulp and paper
industry believes that a ban of chlorine dioxide in the bleaching process will
yield no measurable environmental or public health benefit and is working to
change this regulation, but there can be no assurance that this regulation will
be changed. In the event such a regulation is implemented, we would seek to sell
the products we manufacture at our British Columbia facility to customers in
other markets. We are not aware of any other laws or regulations in place in
North America that would restrict the use of such products for other purposes.
We acquired four of our Canadian pulp chemicals facilities from Tenneco
Canada, Inc. in 1992. Groundwater data obtained during the acquisition of these
facilities indicated elevated concentrations of certain chemicals in the soil
and groundwater. Prior to completion of the acquisition, we conducted a focused
baseline sampling of groundwater conditions beneath the facilities and confirmed
the previous data. We have addressed or are addressing elevated soil or
groundwater concentrations of chemicals that we have encountered from time to
time at these facilities. We also reviewed air emissions sources during the
acquisition of these facilities and considered all available dustfall and
vegetation stress studies. This review indicated emission excursion episodes at
specific locations in the scrubber systems at the Thunder Bay, Buckingham, and
Vancouver facilities. The conditions at these three sites have been addressed
and satisfactorily resolved. We believe that all four of these facilities are
otherwise in compliance in all material respects with all permit requirements
under applicable provincial law.
EMPLOYEES
As of September 30, 1999, we had approximately 1,180 employees, including
approximately 790 assigned to our petrochemicals operations and approximately
390 assigned to our pulp chemicals operations. Approximately 37% of our
employees are covered by union agreements. The primary union agreement at our
Texas City facility is with the Texas City, Texas Metal Trades Council, AFL-CIO,
of Galveston County, Texas, which covers all hourly employees at our Texas City
facility. This agreement was renegotiated as of December 28, 1998 and will
expire on May 1, 2002. Employees at our Vancouver facility are represented by
the Pulp, Paper, and Woodworkers Union. The Vancouver labor agreement was
renegotiated in November of 1997 and is subject to further renegotiation in
November of 2000. Employees at our Buckingham facility are represented by either
the Communications, Energy, and Paperworkers Union or an office and professional
workers union. Both Buckingham labor agreements were renegotiated in November of
1997 and are subject to renegotiation in November of 1999. We are currently
negotiating new Buckingham labor agreements. Approximately 75% of the employees
at our Saskatoon facility are represented by the Communications, Energy, and
Paperworkers of Canada. Our collective agreement with this union expires
September 30, 2001. In April of 1998, production and maintenance workers at our
Valdosta facility voted to be represented by the United Paper Workers
International Union. However, on October 1, 1999, these workers voted to
decertify that union. Although we believe our relationship with our employees is
generally good, a strike by one or more of the unions representing our employees
could have a material adverse effect on us.
INSURANCE
We maintain full replacement value insurance coverage for property damage
to all of our facilities and business interruption insurance. Nevertheless, a
significant interruption in the operation of one or more of our facilities could
have a material adverse effect on us. We also maintain other insurance coverages
for various risks associated with our business. There can be no assurance that
we will not incur losses beyond the limits of, or outside the coverage of, our
insurance. From time to time various types of insurance for companies in the
chemical industry have been very expensive or, in some cases, unavailable. There
can be no assurance that in the future we will be able to maintain our existing
coverage or that premiums will not increase substantially.
ITEM 2. PROPERTIES
Our Texas City facility is located approximately 45 miles south of
Houston in Texas City, Texas, on a 290-acre site on Galveston Bay near many
other chemical manufacturing complexes and refineries. We have facilities to
load our products in trucks, railcars, barges, and ocean-going tankers for
shipment to customers. The site offers room for future expansion and includes a
greenbelt around the northern edge of the plant site. We own or lease all of the
real property
15
18
which comprises our Texas City facility and all of the equipment and facilities
located there, other than the sodium cyanide unit which is owned by DuPont, a
cogeneration facility owned by a joint venture between us and Praxair Energy
Resources, Inc., and the partial oxidation unit constructed at the site by
Praxair Hydrogen Supply, Inc. In addition, Monsanto will own the DSIDA plant
being constructed at our Texas City facility. We also own storage facilities,
approximately 200 rail cars, and an acetic acid barge in connection with our
petrochemicals business.
Our acrylic fibers facility is located on 1,100 acres near Pensacola in
Santa Rosa County, Florida. We own all of the real property on which our acrylic
fibers facility is situated and own or lease all of the facilities and equipment
located there. We have recently entered into an agreement for the construction
of a co-generation facility at our acrylic fibers facility that will be owned by
Polsky Energy Corporation.
Our pulp chemicals business includes five manufacturing facilities in
Canada and our Valdosta, Georgia facility. We own the property on which our
Buckingham, Quebec and Vancouver, British Columbia manufacturing facilities are
located, with each site comprising approximately 20 acres. We also own the
property on which our Saskatoon manufacturing facility is located, which
consists of approximately 270 acres. We lease the property for our Thunder Bay,
Ontario, and Grande Prairie, Alberta manufacturing facilities. Our Valdosta
facility was constructed in conjunction with, and is leased from, the
Valdosta-Lowndes County Industrial Authority. We also lease approximately 487
rail cars in connection with our pulp chemicals business. Headquarters for our
pulp chemicals operations are located in Toronto, Ontario in an office building
that we lease.
We lease our principal executive offices, located in Houston, Texas.
We believe our properties and equipment are sufficient to conduct our
business.
16
19
ITEM 3. LEGAL PROCEEDINGS
Ammonia Release
On May 8, 1994, an ammonia release occurred at our Texas City facility
while a reactor in our acrylonitrile unit was being restarted after a shutdown
for routine maintenance. Approximately 52 lawsuits and interventions involving
approximately 6,000 plaintiffs were filed against us seeking an unspecified
amount of money for alleged damages from the ammonia release. Many of these
lawsuits were filed in April and early May of 1996.
Approximately 2,600 of the plaintiffs agreed to submit their damage
claims to binding arbitration. A two-week evidentiary hearing was conducted in
July of 1996 before an arbitration panel to determine the amount of damages. On
May 1, 1997, the panel awarded the plaintiffs an amount of damages which was
well within the limits of our insurance coverage.
Thirty-nine of the plaintiffs tried their cases to a jury in Harris
County District Court. After approximately five months of trial, the jury
returned a verdict on September 2, 1997. The total amount awarded for all 39
plaintiffs was well within the limits of our insurance coverage.
Over 5,900 of these claims have now been resolved or are pending final
resolution, and we continue to vigorously defend against the claims of the
approximately 20 remaining plaintiffs. We are engaged in ongoing settlement
discussions with the remaining plaintiffs. We believe that all or substantially
all of our future out-of-pocket costs and expenses, including settlement
payments and judgments, relating to these claims will be covered by our
liability insurance policies.
We do not believe the claims and litigation arising out of this incident
will have a material adverse effect on us, although we cannot give any
assurances to that effect.
The following ammonia lawsuits are outstanding:
1. Otis Pointer Jr., individually and on behalf of all others
similarly situated, v. Sterling Chemicals, Inc., Paul Saunders,
and an unknown chemical operator; Cause No. 94CV0514; In the 56th
Judicial District Court of Galveston County, Texas.
2. Lilly Gordon, et al. v. Sterling Chemicals, Inc.; Cause No.
95-36592; In the 281st Judicial District Court of Harris County,
Texas.
The following ammonia lawsuits were settled or dismissed after September 30,
1998:
1. Holly Benefiel, et al. v. Sterling Chemicals, Inc.; Cause No.
95CV0246; In the 56th Judicial District Court of Galveston County,
Texas.
2. Versell Allums, et al. v. Sterling Chemicals, Inc., Paul Saunders,
and an unknown chemical operator; Cause No. 95CV1017; In the 10th
Judicial District Court of Galveston County, Texas.
3. Lee Arvie, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0431;
In the 56th Judicial District Court of Galveston County, Texas.
4. Nita Moore, et al. v. Sterling Chemicals, Inc.; Cause No.
96-22420; In the 270th Judicial District Court of Harris County,
Texas.
5. Gloria Cotton, et al. v. Sterling Chemicals, Inc.; Cause No.
96CV0446; In the 122nd Judicial District Court of Galveston
County, Texas.
6. Timothy McClurkin, Sr. v. Sterling Chemicals, Inc.; Cause No.
96CV0451; In the 56th Judicial District Court of Galveston County,
Texas.
7. Allen E. Kitchens v. Sterling Chemicals, Inc., et al.; Cause No.
43,352; In the Galveston County Court, Galveston County, Texas.
Nickel Carbonyl Release
On July 30, 1997, as our methanol unit at our Texas City facility was
being shut down for repair, nickel carbonyl was formed when carbon monoxide
reacted with nickel catalyst in the unit's reformer. After isolating the nickel
carbonyl within the methanol unit, we worked with the permission and guidance of
the Texas Natural Resources Conservation Commission to destroy the nickel
carbonyl by incineration on-site.
17
20
Prior to its incineration, several of our employees and contractor
employees may have been exposed to nickel carbonyl in the methanol unit. Two
lawsuits and two interventions involving approximately 306 plaintiffs were filed
against us seeking an unspecified amount for alleged damages from the nickel
carbonyl release. Since the filing of the lawsuits, approximately 14 plaintiffs'
claims (including one intervenor) have been resolved, some of which are subject
to the completion of documentation, and we continue to vigorously defend against
the claims of the approximately 292 remaining plaintiffs. Additional claims and
litigation against us relating to this incident may ensue. We believe that all
or substantially all of our future out-of-pocket costs and expenses, including
settlement payments and judgments, relating to these lawsuits will be covered by
our liability insurance policies or indemnification from third parties. We do
not believe that the claims and litigation arising out of this incident will
have a material adverse effect on us, although we cannot give any assurances to
that effect.
Ethylbenzene Release
On April 1, 1998, a chemical leak occurred when a line failed in the
ethylbenzene unit at our Texas City facility. The released chemicals included
ethylbenzene, benzene, polyethylbenzene, and hydrochloric acid. We do not
believe any serious injuries were sustained, although a number of citizens
sought medical examinations at local hospitals after a precautionary alert was
given to neighboring communities. There are no lawsuits pending against us based
on this release, but we have received, and in some instances resolved, claims
from individuals for alleged damage from this incident. We believe that our
general liability insurance coverage is sufficient to cover all costs and
expenses, including settlement payments and judgements, related to this incident
in excess of the deductible.
Other Claims
We are subject to various other claims and legal actions that arise in
the ordinary course of our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for our common stock, par
value $.01 per share, although our common stock is traded on the OTC Electronic
Bulletin Board maintained by the National Association of Securities Dealers,
Inc. under the symbol "STXX." The following table sets forth the high and low
bid information of our common stock as reported on the OTC Electronic Bulletin
Board for the fiscal years ended September 30, 1999 and 1998.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1999 High $7 $7 1/4 $7 $5 3/4
Low $4 $3 1/2 $5 $2 5/8
1998 High $13 $12 $9 1/2 $9 1/8
Low $11 $8 $8 $7
As of December 6, 1999, there were approximately 481 record holders of our
common stock.
We have not paid dividends on our common stock in any of the last three
fiscal years and do not anticipate paying dividends in the foreseeable future.
Any future determination as to the payment of dividends will be made at the
discretion of our Board of Directors and will depend upon our operating results,
financial condition, capital requirements, general business conditions, and such
other factors that our Board of Directors deems relevant. The payment of
dividends on our common stock is also restricted by the terms of the indenture
governing our 13 1/2% Senior Secured Discount Notes due 2008 and the terms of
both series of our outstanding preferred stock. In addition, our subsidiaries
(including Chemicals) are parties to various debt agreements that limit their
ability to provide funds to us by way of dividends, distributions, and advances.
19
22
ITEM 6. SELECTED FINANCIAL DATA OF HOLDINGS
The following table sets forth selected financial data with respect to our
consolidated financial condition and consolidated results of operations and
should be read in conjunction with "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our Consolidated Financial
Statements and related notes in Item 8 of this Form 10-K.
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
1999 1998 1997(1) 1996(2) 1995
----------- ----------- ----------- ----------- -----------
OPERATING DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 720,752 $ 822,590 $ 908,787 $ 790,465 $ 1,030,198
Gross profit 38,158 77,267 85,522 102,168 263,083
Net income (loss) attributable to
common stockholders(3) (112,712) (48,579) (28,965) 31,604 150,049
Net cash provided by (used in)
operating activities (13,890) 45,884 47,314 63,601 191,838
Net cash used in investing activities (25,957) (26,622) (196,351) (95,957) (53,962)
Net cash provided by (used in)
financing activities 43,274 (15,238) 151,610 7,190 (109,017)
EBITDA(4) 54,134 88,753 107,318 121,200 281,480
PER SHARE DATA:
Net income (loss) per common
share (8.94) (3.99) (2.58) 0.62 2.70
Cash dividends -- -- -- -- --
BALANCE SHEET DATA:
Working capital $ 102,478 $ 91,910 $ 120,104 $ 76,933 $ 74,620
Total assets 775,099 765,956 878,971 689,684 609,939
Long-term debt (excluding current
maturities) 964,555 873,616 876,281 714,632 103,581
Redeemable preferred stock 20,932 18,249 15,793 -- --
Stockholders' equity (deficiency in
assets) (455,387) (348,179) (288,528) (272,439) 239,318
(1) During fiscal 1997 we acquired our acrylic fibers facility and our
Saskatoon facility. See Note 7 of Notes to Consolidated Financial Statements for
a discussion of these acquisitions.
(2) In August of 1996 we recapitalized.
(3) During fiscal 1999, we recorded pre-tax charges of $4 million for
costs associated with workforce reductions, $7 million related to early
retirement programs and benefit changes, and $26 million related to the
impairment of our methanol production assets. During fiscal 1998, we recorded a
pre-tax charge of $6 million for costs associated with workforce reductions.
(4) EBITDA (earnings before interest, taxes, depreciation, amortization,
stock appreciation rights ("SARs"), certain merger-related expenses, impairment
of assets, and certain non-cash charges related to an early retirement program
and benefit changes) is presented because it is a widely accepted financial
indicator of a company's ability to incur and service debt. It is not intended
as an alternative measure of performance to net income (loss). Because EBITDA
excludes some, but not all, items that affect net income (loss) and may vary
among companies, the EBITDA calculation presented above may not be comparable to
similarly titled measures of other companies. SARs expense (income) was
20
23
$8,540,000 and $(2,767,000) for the years ended September 30, 1996 and 1995,
respectively. Certain merger-related expenses were $3,633,000 for the year ended
September 30, 1996. Certain non-cash charges related to an early retirement
program and benefit changes were $6,781,000 for the year ended September 30,
1999. Non-cash charges related to the impairment of our methanol production
assets was $26,368,000 for the year ended September 30, 1999.
SELECTED FINANCIAL DATA FOR CHEMICALS
The following table sets forth selected financial data with respect to
Chemicals' consolidated financial condition and consolidated results of
operations and should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Chemicals' Consolidated Financial Statements and related notes in Item 8 of this
Form 10-K. All issued and outstanding shares of Chemicals are held by Holdings,
and accordingly, per share data is not presented.
PERIOD FROM
YEAR ENDED SEPTEMBER 30, MAY 14, 1996
------------------------------------------ (DATE OF INCEPTION)
1999 1998 1997(1) TO SEPTEMBER 30, 1996(2)
---------- ---------- ---------- ------------------------
OPERATING DATA: (Dollars in Thousands)
Revenues $ 720,752 $ 822,590 $ 908,787 $ 83,410
Gross profit 38,158 77,267 85,522 (1,659)
Net income (loss) (94,722) (33,669) (14,851) 174
BALANCE SHEET DATA:
Working capital $ 104,006 $ 91,997 $ 119,829 $ 77,299
Total assets 752,106 762,503 875,317 685,451
Long-term debt
(excluding current maturities) 816,927 745,709 768,870 619,875
Stockholder's equity
(deficiency in assets) (309,590) (220,445) (175,587) (184,302)
(1) During fiscal 1997, we acquired our acrylic fibers facility and our
Saskatoon facility. See Note 7 of Notes to Consolidated Financial Statements for
a discussion of these acquisitions.
(2) In August of 1996 we recapitalized. Prior to August 21, 1996,
Chemicals had no operating activities, other than those related to merger
activities.
21
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a holding company whose only material asset is our investment in
Chemicals, our primary operating subsidiary. Chemicals owns substantially all of
our consolidated operating assets. Other than additional interest expense
associated with our 13 1/2% Notes, our results of operations are essentially the
same as Chemicals.
The primary markets in which we compete, especially styrene and
acrylonitrile, are cyclical and are sensitive to factors such as:
o changes in the balance between supply and demand;
o the price of raw materials; and
o the level of general worldwide economic activity.
Historically, these markets have experienced alternating periods of tight supply
and rising prices and profit margins, followed by periods of large capacity
additions resulting in overcapacity and declining prices and profit margins.
Large global capacity additions of styrene and acrylonitrile were completed
during 1997 and 1998. In addition, events in the financial markets in certain
Asian countries impacted the demand growth for our products, particularly
styrene and acrylonitrile, resulting in a negative impact on sales volumes,
prices, and margins in fiscal 1998 and fiscal 1999.
Styrene prices are cyclical and sensitive to overall supply relative to
demand and the level of general business activity. During 1994 and the first
half of 1995, the styrene industry ran at high utilization rates resulting from
demand growth from worldwide economic expansion, which in turn resulted in high
styrene prices and margins. During the second half of 1995, styrene prices
decreased significantly as demand growth weakened. Increased capacity additions,
particularly in Asia, resulted in lower styrene prices and margins beginning in
1996 and continuing to date. Economic events in various Asian countries in 1997
and 1998 reduced demand growth for styrene and contributed further to the
declines. Global production capacity for styrene is estimated at approximately
45 billion pounds, including approximately eight billion pounds of net capacity
which was added by competitors in 1997, 1998, and 1999. The average sales prices
we received for our styrene declined by approximately 41% from fiscal 1995 to
fiscal 1996, approximately 2% from fiscal 1996 to fiscal 1997, and approximately
17% from fiscal 1997 to fiscal 1998. However, the average prices we received for
our styrene was approximately the same in fiscal 1998 and fiscal 1999. During
the first quarter of fiscal 2000, styrene prices have increased significantly
from levels experienced in fiscal 1999 due to a combination of increased demand
from Asia and operating problems at several styrene plants. We cannot, however,
be sure that these increases can be sustained or whether prices and margins will
increase or decrease in the future.
The acrylonitrile market exhibits characteristics in capacity
utilization, selling prices, and profit margins similar to those of styrene.
Moreover, as a result of our high percentage of export acrylonitrile sales,
demand for our acrylonitrile is significantly influenced by export customers,
particularly those that supply acrylic fibers to China. During 1995, strong
demand for acrylic fibers and ABS resins, particularly in China, increased
demand for acrylonitrile resulting in high prices and margins. Acrylonitrile
demand began to weaken in late 1995 for the same reasons that caused the
deterioration in the styrene market. Increased acrylonitrile capacity, primarily
in Asia, and weakened demand growth in Asian markets resulted in lower
acrylonitrile prices and margins beginning in fiscal 1996 and continuing through
fiscal 1999. Global production capacity for acrylonitrile is estimated at over
12 billion pounds, including approximately one billion pounds which was added by
competitors in 1997 and 1998. In addition, Solutia is constructing a new
acrylonitrile production facility in Chocolate Bayou, Texas which is expected to
have a rated annual production capacity of approximately 500 million pounds and
is expected to begin production in the third calendar quarter of 2000. The
average acrylonitrile sales prices we received declined by approximately 29%
from fiscal 1995 to fiscal 1996, approximately 3% from fiscal 1996 to fiscal
1997, approximately 29% from fiscal 1997 to fiscal 1998, and approximately 32%
from fiscal 1998 to fiscal 1999.
The sodium chlorate market has historically experienced cycles in
capacity utilization, selling prices, and profit margins. Since the mid-1980s,
North American demand for sodium chlorate has grown at an average annual rate of
approximately 9% as pulp mills have accelerated substitution of chlorine dioxide
for elemental chlorine in bleaching applications. During fiscal 1998 and fiscal
1999, demand for sodium chlorate did not increase at historical rates as a
result of weak market conditions and lower operating rates in the pulp and paper
industry. Our average sodium chlorate
22
25
prices decreased by approximately 5% from fiscal 1996 to fiscal 1997,
approximately 7% from fiscal 1997 to fiscal 1998, and approximately 8% from
fiscal 1998 to fiscal 1999.
We market substantial volumes of petrochemicals and generate substantial
revenues under our conversion and long-term agreements. The approximate
percentages of our total petrochemicals sales volumes and revenues from our
conversion and long-term agreements in the last three fiscal years are shown in
the following table:
1997 1998 1999
----- ----- -----
Percentage of total sales volumes.................. 51% 52% 56%
Percentage of total revenues....................... 33% 38% 41%
Under our conversion agreements, the customer furnishes some or all of the raw
materials, which we process into other petrochemicals in exchange for a fee
designed to cover our fixed and variable costs of production. These conversion
agreements help us to maintain lower levels of working capital and, in some
cases, to gain access to certain improvements in manufacturing process
technology. We believe that our petrochemicals conversion agreements:
o help us optimize capacity utilization rates;
o help us lower our selling, general, and administrative expenses;
and
o insulate us to some extent from the effects of declining markets
and increases in raw materials prices.
LIQUIDITY AND CAPITAL RESOURCES
Long-Term Debt
As of September 30, 1999, our long-term debt, including current
maturities, totaled approximately $969 million and consisted of:
o Chemicals' two secured revolving credit facilities;
o two secured term loans under a credit facility at our Saskatoon
subsidiary;
o Chemicals' 11 1/4% Senior Subordinated Notes, 11 3/4% Senior
Subordinated Notes, and 12 3/8% Senior Secured Notes; and
o Holdings' 13 1/2% Senior Secured Discount Notes.
On July 23, 1999, Chemicals completed a refinancing of all senior debt
outstanding under its old senior credit facility by issuing its 12 3/8% Notes
and establishing a revolving credit facility secured by its and some of its
subsidiaries' fixed assets and certain other assets and a revolving credit
facility secured by its and some of its subsidiaries' working capital. The two
revolving credit facilities provide an aggregate borrowing capacity of $155
million. All indebtedness under the old senior credit facility was repaid and
the old senior credit facility was terminated upon consummation of the
refinancing. The refinancing increased our liquidity by eliminating near-term
debt amortization and financial covenants associated with the old senior credit
facility, as well as by increasing revolving credit availability. Although no
assurances can be given, we believe the additional liquidity provided by the
refinancing, when combined with cash flows from operations and other sources of
available capital, will be sufficient to enable us to operate through the
current cyclical downturn in the markets for our primary petrochemicals
products. This belief is largely based upon assumptions regarding the condition
of the markets of our primary products over the next 18-24 months, which
assumptions are based in part on published reports of industry experts. If these
assumptions prove to be incorrect, there is a strong possibility that we would
be unable to fund our operations and meet our debt service requirements over an
extended period. Additional information regarding our liquidity, both short-term
and long-term, appear below in "Certain Known Events, Trends, Uncertainties, and
Risk Factors."
The 12 3/8% Notes are senior secured obligations of Chemicals and rank
equally in right of payment with all other existing and future senior
indebtedness of Chemicals and senior in right of payment to all existing and
future subordinated indebtedness of Chemicals. The 12 3/8% Notes are guaranteed
by all of Chemicals' existing direct and indirect United States subsidiaries
(other than Sterling Chemicals Acquisitions, Inc.) on a joint and several basis.
Each subsidiary's guarantee ranks equally in right of payment with all of that
subsidiary's existing and future senior indebtedness and senior in right of
payment to all existing and future subordinated indebtedness of that subsidiary.
23
26
However, the 12 3/8% Notes, and each subsidiary's guarantee, is subordinated to
the extent of the collateral securing our secured revolving credit facilities.
The 12 3/8% Notes and the subsidiary guarantees are secured by:
o a second priority lien on all of Chemicals' United States
production facilities and related assets,
o a second priority pledge of all of the capital stock of each
subsidiary guarantor, and
o a first priority pledge of 65% of the stock of certain of our
subsidiaries incorporated outside of the United States.
Under the secured revolving credit facilities, Chemicals and each of its
direct and indirect United States subsidiaries, other than Sterling Chemicals
Acquisitions, Inc., are co-borrowers and are jointly and severally liable for
any indebtedness thereunder. The secured revolving credit facilities consist of:
o a $70,000,000 revolving credit facility secured by a first
priority lien on all of our United States production facilities
and related assets, all of Chemicals' capital stock, and all of
the capital stock of each co-borrower and a second priority lien
on all accounts receivable, inventory, and other specified assets
of Chemicals and each co-borrower; and
o an $85,000,000 revolving credit facility secured by a first
priority lien on all accounts receivable, inventory, and other
specified assets of Chemicals and each co-borrower.
Available credit under the current assets revolver is subject to a
monthly borrowing base consisting of 85% of eligible accounts receivable and 65%
of eligible inventory, with an inventory cap of $42,500,000. In addition, the
borrowing base for the current assets revolver must exceed outstanding
borrowings thereunder by $12,000,000 at all times.
The commitments for each of the secured revolving credit facilities will
be permanently reduced to the extent required under the credit agreement upon
prepayments made out of specific sources of funds, including assets sales by
Chemicals and the co-borrowers and certain equity issuances by Holdings.
The indentures governing the 13 1/2% Notes, the 12 3/8% Notes, the
11 3/4% Notes, and the 11 1/4% Notes and our credit agreement contain numerous
covenants, including, but not limited to, restrictions on our ability to incur
indebtedness, pay dividends, create liens, sell assets, engage in mergers and
acquisitions, and refinance existing indebtedness. In addition, these indentures
and the credit agreement specify various circumstances that will constitute,
upon occurrence and subject in certain cases to notice and grace periods, an
event of default thereunder. However, none of these indentures or the credit
agreement require us to satisfy any financial ratios or maintenance tests.
The indentures governing the 12 3/8% Notes, the 11 1/4% Notes, and the
11 3/4% Notes and the credit agreement contain provisions which restrict the
payment of advances, loans, and dividends from Chemicals to Holdings. The most
restrictive of these covenants limits those payments during fiscal 2000 to
approximately $2.0 million, plus any amounts due to Holdings from Chemicals
under the intercompany tax sharing agreement.
At September 30, 1999, the total credit available under the secured
revolving credit facilities was $155 million and approximately $55 million was
drawn under the fixed assets revolver. Therefore, at September 30, 1999, we had
additional borrowing capacity of approximately $100 million.
Standby Equity Commitments
In December of 1998, we entered into separate Standby Purchase Agreements
with each of Gordon A. Cain, William A. McMinn, James Crane, Frank P. Diassi,
Frank J. Hevrdejs, and Koch Capital Services, Inc. Pursuant to the terms of the
Standby Purchase Agreements, the purchasers committed to purchase up to 2.5
million shares of our common stock, at a price of $6.00 per share, if, as, and
when requested by us at any time or from time to time prior to December 15,
2001. Under each of the Standby Purchase Agreements, we may only require the
purchasers to purchase these shares if we believe that such capital is necessary
to maintain, reestablish, or enhance our borrowing ability under our revolving
credit facilities or to satisfy any requirement thereunder to raise additional
equity. To induce the purchasers to enter into the Standby Purchase Agreements,
we issued warrants to purchase an aggregate of 300,000 shares of our common
stock to the purchasers at an exercise price of $6.00 per share. Under the
Standby Purchase Agreements, we are obligated to issue additional warrants to
purchase up to 300,000 additional shares of our common stock to the purchasers
if, as, and when they purchase shares of our common stock under the Standby
Purchase Agreements.
24
27
Saskatoon Facility
In July of 1997, Sterling Pulp Chemicals (Sask) Ltd., our Canadian
subsidiary that operates our Saskatoon facility, entered into a credit agreement
with The Chase Manhattan Bank of Canada, individually and as administrative
agent, and certain other financial institutions. The indebtedness under the
Saskatoon credit agreement is secured by substantially all of the assets of this
subsidiary, including the Saskatoon facility. The Saskatoon credit agreement
requires that certain amounts of "Excess Cash Flow" be used to prepay amounts
outstanding under the term portion of the credit facility. A mandatory
prepayment in the amount of approximately Cdn. $2 million will be made in the
first quarter of fiscal 2000 pursuant to this obligation.
The Saskatoon credit agreement provides a revolving credit facility of
Cdn. $8 million to be used by the Saskatoon subsidiary solely for its general
corporate purposes. No borrowings were outstanding under the Saskatoon revolving
credit facility as of September 30, 1999. We believe the credit available under
the Saskatoon revolving credit facility, when added to internally generated
funds and other sources of capital, will be sufficient to meet the Saskatoon
subsidiary's liquidity needs for the reasonably foreseeable future, although we
can give no assurances to that effect.
Because of restrictions in the Saskatoon credit agreement, we will
generally not have access to the cash flows of our Saskatoon subsidiary. In
addition, because of its designation as an "Unrestricted Subsidiary" under the
credit agreement and the indentures for the 13 1/2% Notes , the 12 3/8% Notes,
the 11 3/4% Notes, and the 11 1/4% Notes, , the Saskatoon subsidiary's results
are not considered in determining compliance with the covenants contained
therein.
The Saskatoon credit agreement contains provisions which restrict the
payment of advances, loans, and dividends from our Saskatoon subsidiary to us or
Chemicals. The most restrictive of these covenants limits such payments during
fiscal 2000 to approximately $1 million, plus any amounts due to us from our
Saskatoon subsidiary under the intercompany tax sharing agreement.
Working Capital
Working capital at September 30, 1999 was $102 million, an increase of
$11 million from September 30, 1998. This increase was the result of the
following changes:
Current Assets Current Liabilities
-------------- -------------------
(In Millions) (In Millions)
Cash and cash equivalents $ 4 Accounts payable $ (26)
Inventories (3) Accrued liabilities (8)
Accounts receivable 27 Current portion long-term debt 5
------
Deferred income tax benefit 12
Other -- $ (29)
-----
$ 40
( ) - Decrease in assets, increase in liabilities
Cash Flow
Net cash used in our operations was $14 million in fiscal 1999, a
decrease of $60 million from the net cash provided from our operations in fiscal
1998. This decrease in net cash resulted primarily from a decrease in earnings
between the same periods and slightly higher working capital requirements. Net
cash flow used in our investing activities was $26 million in fiscal 1999
compared to $27 million in fiscal 1998. Net cash flow provided by our financing
activities was $43 million in fiscal 1999 compared to net cash flows used in our
financing activities of $15 million in fiscal 1998. This increase in cash
provided by financing activities was primarily due to the increase in borrowings
under our secured revolving credit facilities.
Capital Expenditures
Our capital expenditures were $30 million in fiscal 1999, $27 million in
fiscal 1998, and $43 million in fiscal 1997. Our capital expenditures in 1999
were primarily related to the acetic acid expansion, our project to reduce the
25
28
levels of phenylacetylene, or "PA," in the styrene produced at our Texas City
facility, and routine safety, environmental, and replacement capital. Our fiscal
1998 capital expenditures were primarily related to routine safety,
environmental, and replacement capital. Our fiscal 1997 capital expenditures
were primarily for construction costs related to our methanol unit and our
Valdosta facility, along with the distributive control systems upgrades at our
acrylonitrile unit. In addition, we incurred capital expenditures in fiscal 1997
for process modernization in styrene and acrylonitrile and for routine safety,
environmental, and replacement capital.
Capital expenditures are expected to be approximately $30 to $40 million
in fiscal 2000, with about $20 to $25 million dedicated to our petrochemicals
business and $10 to $15 million dedicated to our pulp chemicals business. These
capital expenditures will be primarily for process enhancements for styrene, the
DSIDA project, and routine safety, environmental, and replacement capital.
Our capital expenditures for environmentally-related prevention,
containment, and process improvements were $6 million and $2 million for fiscal
years 1999 and 1998, respectively. We do not anticipate a material increase in
these types of expenditures during fiscal 2000, although no assurances can be
given to that effect. During fiscal years 1999 and 1998, we did not incur any
other infrequent or non-recurring material environmental expenditures which were
required under existing environmental regulations. See "Certain Known Events,
Trends, Uncertainties, and Risk Factors - Environmental and Safety Matters."
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," established standards for reporting and displaying of
comprehensive income and its components. Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information," establishes standards for the way that public business enterprises
report information about operating segments in interim and annual financial
statements. Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," establishes
revisions to employers' disclosure about pension and other post retirement
benefit plans. We adopted these statements as of October 1, 1998.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. We are
evaluating the accounting impact and disclosures that will be required when this
statement is adopted in the first quarter of fiscal 2001.
CERTAIN KNOWN EVENTS, TRENDS, UNCERTAINTIES, AND RISK FACTORS
The amount of our outstanding indebtedness is substantial and may limit
our ability to fund future working capital needs and increase our exposure
during adverse economic conditions. Additionally, our debt level could prevent
us from fulfilling our obligations under our indebtedness.
Our substantial indebtedness of $969 million and deficiency in assets of
$455 million at September 30, 1999 could have important negative consequences.
For example, it could:
o make it more difficult for us to satisfy our obligations with
respect to all of our indebtedness;
o make us more vulnerable to a continued downturn in our industry or
a downturn in the economy in general;
o require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, acquisitions, and other general corporate
requirements;
o limit our flexibility in planning for, or reacting to, changes in
our businesses and the industries in which we operate;
o impact the availability of raw materials and financial terms of
our business with suppliers;
o place us at a competitive disadvantage compared to our competitors
that have less debt; and
o limit our ability to borrow additional funds.
26
29
The covenants in our debt instruments restrict our flexibility.
The covenants in our indentures and the credit agreement restrict our
ability to:
o incur indebtedness;
o pay dividends and make other restricted payments or investments;
o sell assets;
o engage in certain mergers and acquisitions; and
o refinance existing indebtedness.
Despite current indebtedness levels, we may still be able to incur substantially
more debt, which could further exacerbate the risks described above.
The terms of the agreements governing our indebtedness restrict but do
not prohibit us from incurring more debt. As of September 30, 1999, we had
additional borrowing capacity under our secured revolving credit facilities of
up to approximately $100 million. If new debt is added to our current debt
levels, the related risks that we now face could increase.
Factors beyond our control may impact our ability to meet our debt service
requirements.
Our ability to meet our debt service requirements will depend on our
future performance, which in turn is dependent upon conditions in the markets
for our products, the economy generally, and other factors that are beyond our
control. We cannot assure you that our business will generate sufficient cash
flow from operations or that future borrowings will be available to us under our
secured revolving credit facilities in amounts sufficient to enable us to pay
our indebtedness or to fund our other liquidity needs. Moreover, we may need to
refinance all or a portion of our indebtedness on or before maturity. We cannot
assure you that we will be able to refinance any of our indebtedness on
commercially reasonable terms or at all. If we are unable to make scheduled debt
payments or comply with the other provisions of our debt instruments, our
various lenders will be permitted to accelerate the maturity of the indebtedness
owing to them and exercise other remedies provided for in those instruments.
Chemicals may be unable to pay dividends to Holdings, which may prevent Holdings
from fulfilling its obligations under its 13 1/2% Notes and may lead to a change
in control.
The dividend restrictions in the indentures governing the 12 3/8% Notes,
the 11 3/4% Notes, and the 11 1/4% Notes allow Chemicals to pay dividends to
Holdings in connection with our required interest payments on the 13 1/2% Notes
only if the ratio of the consolidated EBITDA of Chemicals and certain of its
subsidiaries to their interest expense is 2.0 to 1.0 or greater, on a trailing
four quarter basis, after giving pro-forma effect to the dividend. Holdings
currently has no source of funds other than dividends and must make the first
interest payment on the 13 1/2% Notes on February 15, 2002. For the four
quarters ended September 30, 1999, the consolidated EBITDA coverage ratio under
these indentures was 0.4 to 1.0, significantly below the required ratio. All of
the capital stock of Chemicals is pledged to secure the 13 1/2% Notes and the
new fixed assets revolver. An event of default under the indenture for the
13 1/2% Notes or the new fixed assets revolver may prompt those lenders to
foreclose upon Chemicals' stock. Among other things, that foreclosure would
likely constitute a change of control under the indenture for the 13 1/2% Notes
and the credit agreement. In the event that the consolidated EBITDA coverage
ratio is insufficient to make the required dividends, we would need to pursue
other permissible methods of distributing cash to or otherwise acquiring cash
for Holdings. However, the number of permissable methods is limited in scope and
amount and no assurances can be given that any such permissible methods will be
available or sufficient at that time.
27
30
We may be unable to repurchase the notes upon a change of control, and a change
of control may trigger defaults under our debt instruments.
Upon the occurrence of specific kinds of change of control events,
Holdings and Chemicals are required to offer to repurchase all of their
respective notes. It is possible that we will not have sufficient funds at the
time of a change of control to make the required repurchases. In addition,
provisions in the credit agreement prohibit these repurchases. Further, specific
kinds of change of control events would constitute an event of default under the
credit agreement. An event of default under the credit agreement, unless cured
or waived, would also be an event of default under each of the indentures. Some
important corporate events, such as leveraged recapitalizations that would
increase the level of our indebtedness, would not constitute a change of control
event and would not trigger the required offer to repurchase under these
indentures.
The industries in which we participate are cyclical and many of our major
products are currently experiencing significantly depressed market conditions,
which has negatively affected our business and may make it difficult for us to
repay our debts.
The markets for our petrochemicals and pulp chemicals products are
cyclical, and prices typically vary in response to changes in overall supply
relative to demand and the level of general business activity. As prices
decline, our profit margins generally decrease, which adversely affects our
business and our ability to pay interest and principal on our indebtedness.
Large global capacity additions of styrene and acrylonitrile were completed in
1997 and 1998. For styrene, approximately five billion pounds of net new
capacity was added and, for acrylonitrile, approximately one billion pounds of
net new capacity was added. In addition, Solutia is constructing a new
acrylonitrile production facility which is expected to have a rated annual
production capacity of approximately 500 million pounds and begin production in
the third calendar quarter of 2000. Further capacity additions for both styrene
and acrylonitrile are planned in fiscal 2000 and later years. Further, reduced
operating rates at pulp mills have reduced the rate of growth in demand for our
pulp chemicals products and services. The resulting impact on prices and margins
negatively impacted our results in fiscal 1997, 1998, and 1999, and could
negatively impact our results in the future. Although recently there has been
some improvement in the market for styrene, conditions can change quickly and we
can give no assurances that this improvement can be sustained or whether it will
improve or worsen in the future. If the markets for our primary products do not
improve significantly, we may be unable to fulfill our obligations to repay the
principal on our indebtedness when that indebtedness matures. We may need to
refinance all or a portion of our indebtedness on or before maturity, but we may
be unable to do so on commercially reasonable terms or at all. If market
conditions for our products decline significantly from current levels, we may be
unable to make scheduled interest payments on our indebtedness.
The petrochemicals, acrylic fibers, and pulp chemicals industries are highly
competitive.
Many of our competitors, particularly in the petrochemicals industry, are
larger and have substantially greater financial resources than we have. We
compete with some of the world's largest chemical companies, many of whom, in
contrast to us, supply much of their own raw materials requirements. In
addition, a significant portion of our business is based upon widely available
technology. The entrance of new competitors into the industry or the addition by
existing competitors of new capacity may reduce our ability to maintain profit
margins or preserve our market share, even during periods of increased demand
for our products.
Our business may be adversely affected if we are unable to obtain raw materials
from third-party suppliers at reasonable prices.
For most of our products, the combined cost of raw materials, including
utilities in the case of pulp chemicals, is far greater than all other costs of
production combined. Therefore, an adequate supply of raw materials at
reasonable prices is critical to the success of our business. If we are unable
to obtain raw materials at reasonable prices, our results of operations would be
negatively impacted by an increase in our costs or a decrease in our capacity or
both. Most of the raw materials we use are supplied by others, and many of them
are subject to wide price fluctuations for a variety of reasons beyond our
control. For example, changes in the availability of these products may result
from major capacity additions or significant facility operating problems. We can
give no assurances that we will continue to be able to secure adequate supplies
of any of our raw materials at reasonable prices.
Our industry is subject to extensive environmental regulation, which creates
uncertainty regarding future environmental expenditures and liabilities.
Our operations involve the handling, production, transportation,
treatment, and disposal of materials that are classified as hazardous or toxic
waste and that are extensively regulated by environmental and health and safety
laws, regulations, and permit requirements. This regulation, and the potential
for further expanded regulation, may increase
28
31
our costs and thereby negatively affect our business. Environmental permits
required for our operations are subject to periodic renewal and can be revoked
or modified for cause or when new or revised environmental requirements are
implemented. Changing and increasingly strict environmental requirements and the
potential for further expanded regulation may increase our costs and thereby
negatively affect our business. Changing and increasingly strict environmental
requirements can affect the manufacturing, handling, processing, distribution,
and use of our products and, if so affected, our business and operations may be
materially and adversely affected. In addition, changes in these requirements
may cause us to incur substantial costs in upgrading or redesigning our
facilities and processes, including our waste treatment, storage, disposal, and
other waste handling practices and equipment. For these reasons, we are
uncertain as to the amount of our future environmental expenditures and
liabilities.
The regulatory outlook for our pulp chemicals business is uncertain.
Our pulp chemicals business is sensitive to environmental regulations.
Regulations restricting, but not altogether banning, absorbable organic halides
and other chlorine derivatives in bleach plant effluent have a favorable effect
on our pulp chemicals business. Several pending lawsuits are challenging an
important group of these regulations known as the "Cluster Rules." Although we
believe that the Cluster Rules will ultimately be upheld in this litigation, we
cannot be sure that they will. Even if the Cluster Rules are upheld, the
existence of these actions adds uncertainty as to the rate of implementation of
the Cluster Rules, which may negatively affect the performance of our pulp
chemicals business. Conversely, any significant ban on all chlorine-containing
compounds in the pulp bleaching process could have a material adverse effect on
our financial condition and results of operations. British Columbia has adopted
regulations that require the elimination of the use of all chlorine products,
including chlorine dioxide, in the pulp bleaching process by the year 2002,
although the pulp and paper industry is working to change this regulation.
We are subject to many operating risks, some of which may not be covered by
insurance.
A business risk inherent in all chemical operations is the potential for
personal injury and property damage claims from employees, contractors and their
employees, and nearby landowners and occupants. While we attempt to operate our
facilities responsibly and in compliance in all material respects with all
applicable environmental and health and safety requirements, we may face
expenses and liabilities as a result of our past or future operations. Some risk
of environmental costs and liabilities is inherent in our operations and
products, as it is with other companies engaged in similar businesses, and we
maintain insurance at levels that we believe are typical for our industry. A
major incident or other event at any of our facilities, however, could result in
liabilities in excess of our insurance coverages or uncovered liabilities or
claims beyond the financial ability of the insurance carrier to pay.
Current and future legal proceedings may have unfavorable outcomes.
We are currently a party to several legal proceedings, and additional
legal proceedings could be filed against us in the future. We are not able to
predict the final outcome of the current proceedings, and we cannot guarantee
that the ultimate resolution of current or future proceedings will not have a
material adverse effect on us. For more information, see Note 6 of the Notes to
Consolidated Financial Statement included in this Form 10-K.
We depend upon the continued operation of our Texas City facility.
All of the petrochemicals we manufacture, including all of our styrene,
acrylonitrile, and acetic acid, are produced at our Texas City facility.
Significant unscheduled downtime at our Texas City facility could have a
material adverse affect on our results. Downtime can occur for a variety of
reasons, including equipment breakdowns, interruptions in the supply of raw
materials, power failures, natural forces, or other normal hazards associated
with the production of petrochemicals. Although we maintain business
interruption insurance that we consider to be adequate under the circumstances,
we cannot guarantee that a significant interruption in the operation of our
Texas City facility would be covered by this insurance or would not otherwise
have a material adverse effect on us.
We may have difficulty forming strategic joint ventures.
An element of our long-term business strategy is to pursue attractive
strategic joint ventures. However, restrictions under the indentures and the
credit agreement limit our ability to do so, such as restrictions on our ability
to sell assets, incur indebtedness, create liens, and make investments and other
restricted payments.
29
32
We depend upon our long-term contracts and significant customers.
We sell significant portions of our acrylonitrile, methanol, and styrene
production and all of our acetic acid and plasticizers production under
long-term contracts. These contracts are intended to provide stability in the
event that the demand for or prices of these products decline significantly, but
also limit our ability to take full advantage of attractive market conditions
during periods of higher prices for these products. During fiscal 1999, a
significant portion of the production from our Texas City facility was dedicated
to multi-year contracts with Solutia, Bayer AG, BP Chemicals, and BASF. If the
markets for these products are depressed, the loss of one or more of these
customers or a material reduction in the amount of product purchased by one or
more of them could have a material adverse effect on us. Solutia is building an
acrylonitrile manufacturing facility in Chocolate Bayou, Texas and, in
anticipation of the completion of this facility, has elected to terminate its
acrylonitrile purchase agreement with us effective September 1, 2000. We do not
believe this termination will have a material adverse effect on us, although we
can give no assurance to that effect.
The success of our acrylic fibers business is dependent on our proprietary
technology.
The competitiveness of our acrylic fibers operations with respect to its
specialty textiles and technical fibers products, our higher margin acrylic
fibers products, is maintained, to a significant extent, through the exclusive
ownership or use of certain product and manufacturing technology. If competitors
of our acrylic fibers operations gain access to the use of similar technology,
or render our technology obsolete through the introduction of superior
technology, our acrylic fibers operations would be materially adversely
affected.
We face risks related to our foreign operations that may negatively affect our
business.
Approximately 26% of our fiscal 1999 revenues were derived from our
Canadian-based pulp chemicals business and approximately 28% were derived from
export sales of our products. Our international operations and exports to
foreign markets make us subject to a number of special risks such as:
o currency exchange rate fluctuations;
o foreign economic conditions;
o trade barriers;
o exchange controls;
o national and regional labor strikes;
o political risks and risks of increases in duties;
o taxes;
o governmental royalties; and
o changes in laws and policies governing operations of foreign-based
companies.
The occurrence of any one or a combination of these factors may increase our
costs or have other negative effects on our business. In addition, earnings of
foreign subsidiaries and intercompany payments are subject to foreign income tax
rules that may reduce cash flow available to meet our required debt service and
other obligations.
As we derive most of our pulp chemicals revenues from production and
sales by our subsidiaries within Canada, we have organized our subsidiary
structure and our operations in part based on assumptions regarding various
Canadian tax laws, currency exchange laws, capital repatriation laws, and other
relevant laws. While we believe that these assumptions are correct, we cannot
guarantee that Canadian taxing or other authorities will reach the same
conclusion. If our assumptions are incorrect, or if the Canadian government
changes or modifies such laws or the current interpretations thereof, we may
suffer material adverse tax and financial consequences.
A portion of our expenses and sales are denominated in Canadian dollars
and, accordingly, our revenues, cash flows, and earnings may be affected by
fluctuations in the exchange rate between the United States dollar and the
Canadian dollar, which may also have material adverse tax consequences. These
currency fluctuations could have a material adverse impact on us as increases in
the value of the Canadian dollar relative to the United States dollar have
30
33
the effect of increasing the United States dollar equivalent of cost of goods
sold and other expenses with respect to our Canadian production facilities. We
have historically entered into forward foreign exchange contracts to hedge our
exposure, although we do not engage in currency speculation. While these hedges
limit our exposure to relative increases in the value of the Canadian dollar,
they also limit the benefits that we may realize from relative decreases in that
value. The last of our existing forward exchange contracts expires in March of
2000, and we do not currently intend to enter into any additional forward
exchange contracts.
Our right to directly participate in the earnings of our subsidiaries is limited
by our organizational structure and our debt instruments.
All of our operations are conducted, and all of our assets are owned, by
our subsidiaries (including Chemicals). Our right, and thus the right of our
stockholders, to participate in any distribution of earnings or assets of our
subsidiaries is subject to the claims of creditors of our subsidiaries. In
addition, our subsidiaries are parties to various debt documents and other
agreements that limit their ability to incur additional indebtedness and to
provide funds to us by way of dividends, distributions, and advances. A
substantial portion of Chemicals' operations are conducted, and a substantial
portion of Chemicals' assets are owned, by its subsidiaries. The right of
Chemicals, and thus our right to participate in any distribution of earnings or
assets of Chemicals' subsidiaries is subject to the claims of creditors of such
subsidiaries. Chemicals' subsidiaries are parties to various debt documents and
other agreements that limit their ability to incur additional indebtedness and
to provide funds to Chemicals by way of dividends, distributions, and advances.
We are subject to risks related to the Year 2000 that could negatively impact
our business.
Some computer systems and other equipment with computer chips store dates
as two digits rather than four to define the applicable year. For example, these
computer systems would store the year "1999" as "99." Any clock or date
recording mechanism, including date sensitive software, which uses only two
digits to represent the year may interpret the digits "00" as the Year 1900
rather than the Year 2000. This could result in a system failure or
miscalculations causing serious disruption of operations. We went through the
process of using both internal and external resources to address the Year 2000
issue. We recently completed a comprehensive project intended to upgrade our
information technology systems, which include our computer systems and software,
and our non-information technology systems, which include our process control
systems and other equipment that utilize embedded chips to control various
functions, to systems that will consistently and properly recognize the Year
2000 and subsequent years.
We have conducted an inventory of our hardware and software and made a
preliminary assessment of the Year 2000 compliance of our business and process
control systems. We believe this assessment helped determine which of our
business and process control systems are critical to our business, and those
systems which we deemed to be critical were assigned a higher priority in our
Year 2000 remediation effort. In this phase of the project, we discovered some
Year 2000 deficiencies in our business systems and initiated plans to rectify
these issues in the remediation and replacement phase of the project. The
preliminary assessment of our process control systems did not detect any
material Year 2000 difficulties. We then engaged a nationally recognized
independent consultant to perform a more detailed survey of all of our business
and process control systems, including critical and non-critical systems, to
confirm the absence of any additional material Year 2000 deficiencies. This
survey has been completed and did not reveal any additional material Year 2000
deficiencies.
In the second phase of our Year 2000 project, we believe we have taken
the necessary steps to rectify all material Year 2000 deficiencies. A major
component of this effort involved the replacement of all critical business
systems which may not be Year 2000 compliant with new business systems intended
to be Year 2000 compliant. All of these projects were completed by October of
1999. If we determine that any additional systems under review have material
Year 2000 deficiencies, we plan to take appropriate remedial action. At this
time, the instrumentation in the laboratory at our Texas City facility requires
significant remediation or replacement. However, this instrumentation can be
successfully operated with minimal manual intervention. Even without remediation
or replacement, this instrumentation would not jeopardize the successful
operation of our Texas City facility.
The final phase of our Year 2000 project involved testing all critical
systems to confirm that these systems will react properly to the advent of the
Year 2000. We have conducted tests on all of our current information technology
and non-information technology systems that were not identified as having Year
2000 deficiencies. In addition, we conducted tests on all newly installed and
updated systems to determine if they are Year 2000 compliant. All of this
testing was recently completed and indicated no material problems.
31
34
The total estimated expense for our Year 2000 compliance projects is
approximately $11 to $13 million, of which we have incurred approximately $9
million through September 30, 1999. We have been funding and will continue to
fund this expense out of our operating cash flows or borrowings under our
secured revolving credit facilities.
Irrespective of our efforts, some Year 2000 problems, such as processing
failures, error messages, or incorrect data may still occur in some of our
computer systems if we receive programs or data from third parties who are not
Year 2000 compliant. Moreover, our business may be disrupted in other ways by
Year 2000 problems of third parties, which may affect, for example, our ability
to obtain needed materials or deliver our products. We endeavored to determine
whether our significant vendors, customers, and others with whom we deal are
Year 2000 compliant and requested that such persons complete and return surveys
with respect to their Year 2000 issues. We did not receive any survey response
that indicated that any of these persons have any specific Year 2000 problems.
However, we cannot be sure that a Year 2000 problem will not occur for us as a
result of a Year 2000 problem of one of our vendors or customers or some other
person with whom we deal.
While our principal Year 2000 compliance projects have been completed, it
is possible that our compliance efforts may be ineffective. A failure to
properly and timely correct any Year 2000 deficiencies would affect us on
several levels. If our Year 2000 remediation efforts were to prove unsuccessful,
we might be unable to operate one or more of our manufacturing facilities, take
orders, sell products, or otherwise generally conduct our business. Since our
business is characterized by large volume sales to a relatively limited number
of customers, we believe that, with the engagement of additional personnel,
orders could be processed and deliveries completed through manual means. In
preparation for this type of scenario, we have outlined a contingency plan to
guide the hiring and training of additional personnel and the processing of
paperwork manually.
Although we believe that we have taken the appropriate courses of action
to ensure that we are Year 2000 compliant, we cannot be sure that the actions
discussed above will have the anticipated results or that Year 2000 problems
will not have a material adverse effect on our financial condition or results of
operations. Specific factors that might affect the success of our Year 2000
efforts and the occurrence of Year 2000 disruption or expense include:
o our failure or the failure of our consultant to properly identify
deficient systems;
o the failure of the selected remedial action to adequately address
any deficiencies;
o unforeseen expenses related to the remediation of existing systems
or the transition to replacement systems; and
o the failure of third parties to become compliant or to adequately
notify us of potential non-compliance.
Labor Relations
Approximately 37% of our employees are covered under various union
contracts. Approximately 21% of our employees are covered by one union contract
at our Texas City facility, which expires on May 1, 2002.
Although we believe our relationship with our employees is generally
good, a strike by one or more of the unions representing our employees could
have a material adverse effect on our financial condition, results of
operations, or cash flows.
RESULTS OF OPERATIONS
The following table sets forth revenues, gross profit, and operating
income (loss) for our segments for the years ended September 30, 1999, 1998, and
1997.
YEAR ENDED SEPTEMBER 30,
-----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Millions)
REVENUES:
Petrochemicals........................... $ 531 $ 622 $ 728
Pulp Chemicals........................... 190 201 181
-------- -------- --------
$ 721 $ 823 $ 909
======== ======== ========
GROSS PROFIT:
Petrochemicals........................... $ -- $ 31 $ 33
Pulp Chemicals........................... 38 46 53
-------- -------- --------
$ 38 $ 77 $ 86
======== ======== ========
OPERATING INCOME (LOSS):
Petrochemicals........................... $ (64) $ (3) $ 11
Pulp Chemicals........................... 27 36 46
-------- -------- --------
$ (37) $ 33 $ 57
======= ======== ========
32
35
COMPARISON OF FISCAL 1999 TO FISCAL 1998
Our revenues were approximately $721 million in fiscal 1999, a
decrease of approximately 12% from our revenues of approximately $823 million in
fiscal 1998. This decrease in our revenues resulted primarily from lower
acrylonitrile, sodium chlorate, and methanol sales prices and reduced
acrylonitrile sales volumes, partially offset by increased styrene sales
volumes. We recorded a net loss of approximately $112.7 million, or $8.94 per
share, for fiscal 1999 compared to a net loss of approximately $48.6 million, or
$3.99 per share, that we recorded for fiscal 1998. This increase in net loss
resulted primarily from:
o reduced acrylonitrile, sodium chlorate, and methanol margins;
o decreased acrylonitrile sales volumes;
o turnarounds of our styrene and acetic acid facilities;
o weak markets in acrylic fibers;
o expense of $26.4 million related to the impairment of our methanol
production assets;
o increased costs associated with early retirement programs, benefit
changes, and workforce reductions; and
o an extraordinary loss related to unamortized debt issue costs as a
result of the refinancing completed on July 23, 1999.
Revenues, Gross Profit, and Operating Income (Loss)
Petrochemicals. Revenues from our petrochemicals operations were
approximately $531 million in fiscal 1999, a decrease of approximately 15% from
our fiscal 1998 revenues from our petrochemicals operations of approximately
$622 million. This decrease in revenues resulted primarily from reduced
acrylonitrile, acrylic fibers, and methanol sales prices and decreased
acrylonitrile sales volumes. The economic conditions in Asia negatively impacted
market conditions in fiscal 1999, particularly for our styrene, acrylonitrile,
and acrylic fibers products. Our petrochemicals operations recorded operating
losses of approximately $64 million for fiscal 1999, compared to operating
losses of approximately $3 million from our petrochemicals operations for fiscal
1998. The increased losses resulted primarily from weaker operational
performance in acrylonitrile, acrylic fibers, and methanol and the expense
related to the impairment of our methanol plant.
Revenues from our styrene operations were approximately $246 million in
fiscal 1999, an increase of approximately 4% from our fiscal 1998 revenues from
our styrene operations of approximately $237 million. Sales prices for our
styrene was approximately the same in fiscal 1999 and fiscal 1998. In addition,
sales volume of our styrene increased approximately 3% for fiscal 1999 from
sales volumes of our styrene for fiscal 1998. The increase in sales volumes of
our styrene resulted primarily from improved market conditions in the fourth
quarter of fiscal 1999, particularly in Asia. During fiscal 1999, prices for
benzene, one of the primary raw materials for styrene, were approximately 7%
lower than the prices we paid for benzene in fiscal 1998 and prices for
ethylene, the other primary raw material for styrene, were approximately 6%
higher than the prices we paid for ethylene in fiscal 1998. Margins on our
styrene sales during fiscal 1999 increased from margins on our styrene sales
during fiscal 1998, due to the aforementioned reasons.
Revenues from our acrylonitrile and derivatives operations, including
sodium cyanide and TBA, were approximately $93 million in fiscal 1999, a
decrease of approximately 30% from our fiscal 1998 revenues from these
operations of approximately $132 million. Sales prices for our acrylonitrile
decreased approximately 32% in fiscal 1999 from sales prices for our
acrylonitrile in fiscal 1998. This decrease in sales prices resulted primarily
from weaker market conditions, particularly in Asia. Sales volume of our
acrylonitrile decreased approximately 18% in fiscal 1999 from
33
36
sales volumes of our acrylonitrile in fiscal 1998. During fiscal 1999, prices
for propylene, one of the primary raw materials for acrylonitrile, were
approximately 25% lower than the prices we paid for propylene in fiscal 1998 and
prices for ammonia, the other primary raw material for acrylonitrile, were
approximately 9% lower than the prices we paid for ammonia in fiscal 1998.
Margins on our acrylonitrile sales during fiscal 1999 decreased from the margins
on our acrylonitrile sales during fiscal 1998, primarily as a result of lower
acrylonitrile sales prices, which more than offset our lower raw materials
costs.
Revenues from our acrylic fibers operations in fiscal 1999 were
approximately $67 million, a decrease of approximately 33% from our fiscal 1998
revenues from our acrylic fibers operations of approximately $100 million. Sales
prices and volumes for our acrylic fibers decreased 10% and 25%, respectively,
in fiscal 1999 compared to fiscal 1998. In addition, our acrylic fibers
operations' performance in fiscal 1999 continued to be negatively impacted by
weak market conditions and imports from European suppliers.
Revenues from our other petrochemicals operations, including acetic acid,
plasticizers, and methanol, were approximately $126 million for fiscal 1999, a
decrease of approximately 17% from our fiscal 1998 revenues from our other
petrochemicals operations of approximately $152 million. This decrease in
revenues resulted primarily from a 24% decrease in methanol sales prices which
resulted from overcapacity in the global methanol market. Our other
petrochemicals products reported a decrease in operating earnings in fiscal 1999
compared to fiscal 1998. This decrease in operating earnings was primarily due
to weaker margins in methanol.
Pulp Chemicals. Revenues from our pulp chemicals operations were
approximately $190 million for fiscal 1999, a decrease of approximately 5% from
our fiscal 1998 revenues from our pulp chemicals operations of approximately
$201 million. This decrease in revenues resulted primarily from the
approximately 8% decrease in sales prices for our sodium chlorate in fiscal 1999
compared to sales prices for our sodium chlorate in fiscal 1998. This decrease
in sales prices of sodium chlorate resulted primarily from the increase in North
American sodium chlorate capacity and generally weak market conditions in the
pulp and paper industry. Our pulp chemicals operations recorded operating
earnings of approximately $27 million in fiscal 1999, a decrease of
approximately 25% from our fiscal 1998 operating earnings from our pulp
chemicals operations of approximately $36 million. This decrease in operating
earnings resulted primarily from reduced sodium chlorate sales prices in fiscal
1999, which were partially offset by slightly increased sodium chlorate sales
volumes.
Selling, General, and Administrative Expenses
Our SG&A expenses in fiscal 1999 and fiscal 1998 remained constant at
approximately $38 million. Our SG&A expenses were impacted favorably in fiscal
1999 by cost reduction programs. However, these positive impacts were offset by
increased costs in fiscal 1999 for upgrades of certain of our information
technology systems, including year 2000 compliance activities.
Other Expense
We had other expense of approximately $11 million in fiscal 1999 from our
one-time non-cash charges related to early retirement programs and benefit
changes and workforce reductions. We had other expense of approximately $6
million in fiscal 1998 which was primarily related to the voluntary severance
programs we offered in January and April of 1998 at our Texas City facility.
Interest and Debt Related Expenses
Our interest and debt related expenses for fiscal 1999 and fiscal 1998
remained constant at approximately $104 million.
Benefit for Income Taxes
Our benefit for income taxes in fiscal 1999 was approximately $35
million, with an effective tax rate of approximately 25%, whereas our benefit
for income taxes was approximately $26 million, with an effective tax rate of
approximately 36%, in fiscal 1998. This increase in our benefit for income taxes
resulted primarily from our pre-tax
34
37
loss of approximately $141 million in fiscal 1999, compared to a pre-tax loss of
approximately $72 million in fiscal 1998.
Extraordinary Item
We had a $4 million after-tax ($6 million pre-tax) extraordinary item in
fiscal 1999 related to unamortized debt issue costs which were expensed in
fiscal 1999 as a result of the refinancing completed in July of 1999.
COMPARISON OF FISCAL 1998 TO FISCAL 1997
Our revenues were approximately $823 million in fiscal 1998, a
decrease of approximately 9% from our revenues of approximately $909 million in
fiscal 1997. This decrease in our revenues resulted primarily from lower
styrene, acrylonitrile, and methanol sales prices and reduced styrene sales
volumes, partially offset by a full year of operations from our acrylic fibers
facility and our Saskatoon facility, each of which was acquired by us during
fiscal 1997. Revenues excluding the impact of the acquisitions of our acrylic
fibers facility and our Saskatoon facility would have been $676 million in
fiscal 1998 and $807 million in 1997. We recorded a net loss of approximately
$48.6 million, or $3.99 per share, for fiscal 1998, compared to a net loss of
approximately $29.0 million, or $2.58 per share, that we recorded for fiscal
1997. This increase in net loss resulted primarily from:
o reduced styrene, acrylonitrile, sodium chlorate, and methanol
margins;
o decreased styrene sales volumes;
o weak markets in acrylic fibers;
o increased interest expense resulting from financings related to
the acquisitions of our acrylic fibers facility and our Saskatoon
facility and the issuance of our 11 1/4% Senior Subordinated
Notes, the proceeds of which were used to prepay outstanding
indebtedness under our then existing senior credit facility;
o increased SG&A expense; and
o costs associated with workforce reductions.
Revenues, Gross Profit, and Operating Income (Loss)
Petrochemicals. Revenues from our petrochemicals operations were
approximately $622 million in fiscal 1998, a decrease of approximately 15% from
our fiscal 1997 revenues from our petrochemicals operations of approximately
$728 million. This decrease in revenues resulted primarily from reduced styrene,
acrylonitrile, and methanol sales prices and decreased styrene sales volumes.
The economic conditions in Asia negatively impacted market conditions in the
fiscal 1998 period, particularly for our styrene, acrylonitrile, and acrylic
fibers products. Our petrochemicals operations recorded operating losses of
approximately $3 million for fiscal 1998, whereas our petrochemicals operations
recorded operating income of approximately $11 million for fiscal 1997. This
difference resulted primarily from weaker operational performance in styrene,
acrylonitrile, and methanol, partially offset by stronger performance in acetic
acid.
Revenues from our styrene operations were approximately $237 million in
fiscal 1998, a decrease of approximately 24% from our fiscal 1997 revenues from
our styrene operations of approximately $310 million. Sales prices for our
styrene decreased approximately 17% in fiscal 1998 from sales prices for our
styrene in fiscal 1997. In addition, sales volume of our styrene decreased
approximately 16% for fiscal 1998 from sales volumes of our styrene for fiscal
1997. These decreases in sales prices and volumes of our styrene resulted
primarily from weaker market conditions, particularly in Asia. During fiscal
1998, prices for benzene, one of the primary raw materials for styrene, were
approximately 14% lower than the prices we paid for benzene in fiscal 1997 and
prices for ethylene, the other primary raw material for styrene, were
approximately 25% lower than the prices we paid for ethylene in fiscal 1997.
Margins on our styrene sales during fiscal 1998 decreased from margins on our
styrene sales during fiscal 1997, primarily as a result of lower sales prices,
which more than offset our lower raw materials costs.
Revenues from our acrylonitrile operations were approximately $112
million in fiscal 1998, a decrease of approximately 23% from our fiscal 1997
revenues from our acrylonitrile operations of approximately $146 million.
35
38
Sales prices for our acrylonitrile decreased approximately 29% in fiscal 1998
from sales prices for our acrylonitrile in fiscal 1997. This decrease in sales
prices resulted primarily from weaker market conditions, particularly in Asia.
Sales volume of our acrylonitrile increased approximately 2% in fiscal 1998 from
sales volumes of our acrylonitrile in fiscal 1997. During fiscal 1998, prices
for propylene, one of the primary raw materials for acrylonitrile, were
approximately 28% lower than the prices we paid for propylene in fiscal 1997 and
prices for ammonia, the other primary raw material for acrylonitrile, were
approximately 25% lower than the prices we paid for ammonia in fiscal 1997.
Margins on our acrylonitrile sales during fiscal 1998 decreased from the margins
on our acrylonitrile sales during fiscal 1997, primarily as a result of lower
acrylonitrile sales prices, which more than offset our lower raw materials
costs.
Revenues from our acrylic fibers operations in fiscal 1998 were
approximately $100 million. We acquired the business on January 31, 1997 and
recorded revenues of approximately $92 million in fiscal 1997. The performance
of our acrylic fibers operation in fiscal 1998 was negatively impacted by weak
market conditions, particularly in Asia, and imports from European suppliers.
Revenues from our other petrochemicals operations, including acetic acid,
plasticizers, methanol, TBA, and sodium cyanide, were approximately $173 million
for fiscal 1998, a decrease of approximately 5% from our fiscal 1997 revenues
from our other petrochemicals operations of approximately $181 million. This
decrease in revenues resulted primarily from a 16% decrease in methanol sales
prices which resulted from overcapacity in the global methanol market, which was
partially offset by better operating performance of our acetic acid operations.
Our other petrochemicals products reported an increase in operating earnings in
fiscal 1998 compared to fiscal 1997. This increase in operating earnings was
primarily due to better operating performance in acetic acid, partially offset
by weaker pricing in methanol.
Pulp Chemicals. Revenues from our pulp chemicals operations were
approximately $201 million for fiscal 1998, an increase of approximately 11%
from our fiscal 1997 revenues from our pulp chemicals operations of
approximately $181 million. This increase in revenues resulted primarily from
the approximately 12% increase in our sales volume of sodium chlorate in fiscal
1998 from our sales volume of sodium chlorate in fiscal 1997. Our increase in
sales volume of sodium chlorate resulted primarily from the additional volumes
we had available for sale after the acquisition of our Saskatoon facility in
July of 1997 and the startup of our Valdosta facility in December of 1996.
Average sales prices for our sodium chlorate declined approximately 7% in fiscal
1998 compared to the average sales prices for our sodium chlorate in fiscal
1997. This decline in our sodium chlorate sales prices was primarily due to
decreased demand for sodium chlorate resulting from lower pulp mill operating
rates, partially due to the economic environment in various countries in Asia.
Our pulp chemicals operations recorded operating earnings of approximately $36
million in fiscal 1998, a decrease of approximately 22% from our fiscal 1997
operating earnings from our pulp chemicals operations of approximately $46
million. This decrease in operating earnings resulted primarily from reduced
sodium chlorate sales prices and higher energy costs in fiscal 1998, which were
partially offset by increased sodium chlorate sales volumes.
Selling, General, and Administrative Expenses
Our SG&A expenses in fiscal 1998 were approximately $39 million, whereas
we had SG&A expenses of approximately $28 million in fiscal 1997. This increase
in our SG&A expenses resulted primarily from the additional SG&A expenses
associated with our new acrylic fibers facility, our new Saskatoon facility,
increased corporate development activities, and costs associated with upgrades
of certain of our information technology systems, including Year 2000 compliance
activities.
Other Expense
We had other expense of approximately $6 million in fiscal 1998 which was
primarily related to the voluntary severance programs we offered in January and
April of 1998 at our Texas City facility. We did not have any other expense
during fiscal 1997.
Interest and Debt Related Expenses
Our interest and debt related expenses for fiscal 1998 were approximately
$16 million higher than our interest and debt related expenses for fiscal 1997.
This increase in our interest and debt related expenses was primarily due to the
acquisitions of our acrylic fibers business and our Saskatoon facility and the
issuance of our 11 1/4% Senior Subordinated
36
39
Notes. The proceeds of the sale of our 11 1/4% Senior Subordinated Notes were
used to prepay outstanding indebtedness under our then existing senior credit
facility.
Benefit for Income Taxes
Our benefit for income taxes in fiscal 1998 was approximately $26
million, with an effective tax rate of approximately 36%, whereas our benefit
for income taxes was approximately $7 million, with an effective tax rate of
approximately 23%, in fiscal 1997. This increase in our benefit for income taxes
resulted primarily from our pre-tax loss of approximately $72 million in fiscal
1998, compared to a pre-tax loss of approximately $31 million in fiscal 1997.
Extraordinary Item
We had a $4 million after-tax ($6 million pre-tax) extraordinary item in
fiscal 1997 related to unamortized debt issue costs which were expensed in April
of 1997 as a result of the partial prepayment of the indebtedness under our then
existing senior credit facility.
37
40
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about our market sensitive financial
instruments and constitutes a "forward-looking statement." Our major financial
market risk exposure is changing interest rates, primarily in the United States.
Interest rate swaps may be used to adjust interest rate exposure, when
appropriate, based upon market conditions. A portion of our borrowings and
transactions are denominated in foreign currencies which exposes us to market
risk associated with exchange rate movements. We have historically entered into
forward foreign exchange contracts to hedge our exposure, although we do not
engage in currency speculation. While these hedges limit our exposure to
relative increases in the value of the Canadian dollar, they also limit the
benefits that we may realize from relative decreases in that value. The last of
our existing forward exchange contracts expires in March of 2000, and we do not
currently intend to enter into any additional forward exchange contracts. These
contracts are entered into with major financial institutions thereby minimizing
the risk of credit loss. All items described are non-trading and are stated in
United States dollars.
FAIR VALUE
EXPECTED MATURITY DATES SEPTEMBER
(IN THOUSANDS) 2000 2001 2002 2003 2004 THEREAFTER TOTAL 30, 1999
-------- -------- -------- -------- -------- ---------- -------- ----------
DEBT
United States $ denominated $ 2,196 $ 583 $ 1,530 $ 23,317 $ 52,827 $ 877,063 $957,516 $ 671,302
Average interest rates
- fixed -- -- -- -- -- 12.2%
Average interest rates
- variable (c) (c) (c) (a)(c) (a)(c) (a)(c)
Interest rate swaps(b) $ 31,250 $ 13,393 $ -- -- -- -- $ 500
Canadian $ denominated $ 2,050 $ 2,040 $ 3,196 $ 3,999 $ -- $ -- $ 11,285 $ 11,285
Average interest rates
- variable (c) (c) (c) (c) --
FIRM COMMITMENTS,
FORWARD CONTRACTS
Contract notional amount
- United States $ sold(b) $ 6,000 $ -- -- -- -- -- $ 6,000 $ 300
Average contractual
exchange rate 1.40 -- -- -- -- --
(a) Borrowings under our fixed assets revolver bear interest, at Chemicals'
option, at an annual rate of either the "LIBOR Rate" plus 3.75% or the
"Alternate Base Rate" plus 2.25%. Borrowings under our current assets
revolver bear interest, at Chemicals' option, at an annual rate of either
the LIBOR Rate plus 3.00% or the Alternate Base Rate plus 1.50%. The
"Alternate Base Rate" is equal to the greater of the "Base Rate" as
announced from time to time by The Chase Manhattan Bank in New York, New
York or the "Federal Funds Effective Rate" plus 1/2%. At September 30,
1999, the weighted average interest rate in effect for our fixed assets
revolver was 9.3%.
(b) Expected maturity amounts represent notional amounts. Fair value of
September 30, 1999 represents unrealized loss.
(c) The Saskatoon tranche A term loan, which is denominated in Canadian
dollars, and the Saskatoon revolver borrowings bear interest, at
Saskatoon's option, at an annual rate of either the "Bankers Acceptance
Rate" or the "Base Rate" plus an "Applicable Margin" ranging from 1% to
2.5% depending upon Saskatoon's "Leverage Ratio". The Saskatoon tranche B
term loan, which is denominated in United States dollars, bears interest,
at Saskatoon's option, at an annual rate of either the "Eurodollar Rate" or
the "Base Rate" plus an Applicable Margin ranging from 0% to 2.5% depending
upon Saskatoon's Leverage Ratio. The "Base Rate" for the tranche A term
loan and the Saskatoon revolver is equal to the greater of the Prime Rate
for Canadian Dollar commercial loans made in Canada, as announced from time
to time by the agent bank, or the rate for Canadian Dollar Bankers
Acceptances accepted by the agent with a term to maturity of 30 days plus
1%. The "Base Rate" for the tranche B term loan is equal to the greater of
the Prime Rate as announced from time to time by the agent bank, the
"Federal Funds Effective Rate" plus 1/2% or the "Base CD Rate" plus 1%. At
September 30, 1999, the interest rates in effect for the Saskatoon tranche
A and tranche B term loans were 7.5% and 8.5%, respectively.
38
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
STERLING CHEMICALS HOLDINGS, INC. AND STERLING CHEMICALS, INC.
Sterling Chemicals Holdings, Inc. Consolidated Statements of Operations for the years ended September
30, 1999, 1998, and 1997................................................................................. 41
Sterling Chemicals Holdings, Inc. Consolidated Balance Sheets as of September 30, 1999 and 1998............. 42
Sterling Chemicals Holdings, Inc. Consolidated Statements of Changes in Stockholders' Equity
(Deficiency in Assets) for the years ended September 30, 1999, 1998, and 1997............................ 43
Sterling Chemicals Holdings, Inc. Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998, and 1997....................................................................... 44
Sterling Chemicals, Inc. Consolidated Statements of Operations for the years ended September 30, 1999,
1998, and 1997......................................................................................... 45
Sterling Chemicals, Inc. Consolidated Balance Sheets as of September 30, 1999 and 1998...................... 46
Sterling Chemicals, Inc. Consolidated Statements of Changes in Stockholder's Equity (Deficiency in
Assets) for the years ended September 30, 1999, 1998, and 1997 .......................................... 47
Sterling Chemicals, Inc. Consolidated Statements of Cash Flows for the years ended September 30, 1999,
1998, and 1997.......................................................................................... 48
Notes to Consolidated Financial Statements.................................................................. 49
Independent Auditors' Reports............................................................................... 73
STERLING CHEMICALS U.S. SUBSIDIARIES
Sterling Chemicals U.S. Subsidiaries Combined Statements of Operations for the years ended
September 30, 1999, 1998, and 1997....................................................................... 75
Sterling Chemicals U.S. Subsidiaries Combined Balance Sheets as of September 30, 1999 and 1998.............. 76
Sterling Chemicals U.S. Subsidiaries Combined Statements of Changes in Stockholder's Equity for the
years ended September 30, 1999, 1998, and 1997........................................................... 77
Sterling Chemicals U.S. Subsidiaries Combined Statements of Cash Flows for the years ended
September 30, 1999, 1998, and 1997....................................................................... 78
39
42
Notes to Combined Financial Statements...................................................................... 79
Independent Auditors' Report................................................................................ 90
STERLING PULP CHEMICALS, LTD.
Sterling Pulp Chemicals, Ltd. Statements of Operations for the years ended September 30, 1999, 1998,
and 1997................................................................................................. 91
Sterling Pulp Chemicals, Ltd. Balance Sheets as of September 30, 1999 and 1998.............................. 92
Sterling Pulp Chemicals, Ltd. Statements of Changes in Stockholder's Equity for the years ended
September 30, 1999, 1998, and 1997....................................................................... 93
Sterling Pulp Chemicals, Ltd. Statements of Cash Flows for the years ended September 30, 1999, 1998,
and 1997................................................................................................. 94
Notes to Financial Statements............................................................................... 95
Independent Auditors' Report................................................................................ 104
Report of Management....................................................................................... 105
40
43
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
Revenues ..................................................... $ 720,752 $ 822,590 $ 908,787
Cost of goods sold ........................................... 682,594 745,323 823,265
--------- --------- ---------
Gross profit ................................................. 38,158 77,267 85,522
Selling, general, and administrative expenses ................ 37,649 38,515 28,053
Impairment of assets ......................................... 26,369 -- --
Other expense ................................................ 10,832 5,962 --
Interest and debt related expenses, net of interest income ... 104,061 104,455 88,901
--------- --------- ---------
Loss before taxes and extraordinary item ..................... (140,753) (71,665) (31,432)
Benefit for income taxes .................................... (34,936) (25,546) (7,296)
--------- --------- ---------
Loss before extraordinary item ............................... (105,817) (46,119) (24,136)
Extraordinary item, loss on early extinguishment of debt,
net of tax ............................................... 4,212 -- 3,924
--------- --------- ---------
Net loss ..................................................... (110,029) (46,119) (28,060)
Preferred stock dividends .................................... 2,683 2,460 905
--------- --------- ---------
Net loss attributable to common stockholders ................. $(112,712) $ (48,579) $ (28,965)
========= ========= =========
Per share data:
Loss before extraordinary item ............................... $ (8.60) $ (3.99) $ (2.23)
Extraordinary item ........................................... (0.34) -- (0.35)
--------- --------- ---------
Loss per common share ........................................ $ (8.94) $ (3.99) $ (2.58)
========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
41
44
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30,
------------------------
1999 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 14,921 $ 11,168
Accounts receivable ................................................... 141,059 114,571
Inventories ........................................................... 70,464 73,225
Prepaid expenses ...................................................... 16,236 15,571
Deferred income tax benefit ........................................... 16,888 5,140
--------- ---------
Total current assets ................................................ 259,568 219,675
Property, plant, and equipment, net ...................................... 402,723 450,315
Deferred income tax benefit .............................................. 26,158 --
Other assets ............................................................. 86,650 95,966
--------- ---------
Total assets ........................................................ $ 775,099 $ 765,956
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable ...................................................... $ 72,961 $ 46,983
Accrued liabilities ................................................... 79,883 71,873
Current portion of long-term debt ..................................... 4,246 8,909
--------- ---------
Total current liabilities ........................................... 157,090 127,765
Long-term debt ........................................................... 964,555 873,616
Deferred income tax liability ............................................ 8,815 11,123
Deferred credits and other liabilities ................................... 76,893 80,289
Common stock held by ESOP ................................................ 2,946 5,938
Less: unearned compensation .............................................. (745) (2,845)
Redeemable preferred stock ............................................... 20,932 18,249
Commitments and contingencies (Note 6) ................................... -- --
Stockholders' equity (deficiency in assets):
Common stock, $.01 par value, 20,000,000 shares authorized,
12,305,000 shares issued and 12,097,000 outstanding at
September 30, 1999; and 12,273,000 shares issued and
12,073,000 outstanding at September 30, 1998 ........................ 123 123
Additional paid-in capital ............................................ (542,712) (542,701)
Retained earnings ..................................................... 118,490 229,590
Accumulated other comprehensive income ................................ (28,768) (32,680)
Deferred compensation ................................................. (58) (111)
--------- ---------
(452,925) (345,779)
Treasury stock, at cost, 208,000 and 200,000 shares at
September 30, 1999 and 1998, respectively ........................... (2,462) (2,400)
--------- ---------
Total stockholders' equity (deficiency in assets) ................. (455,387) (348,179)
--------- ---------
Total liabilities and stockholders' equity
(deficiency in assets)........................................ $ 775,099 $ 765,956
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
42
45
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
(AMOUNTS IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE DEFERRED TREASURY
SHARES AMOUNT CAPITAL EARNINGS INCOME COMPENSATION STOCK TOTAL
--------- --------- ---------- --------- ------------- ------------ --------- ---------
Balance, September 30, 1996 ..... 10,599 $ 106 $(560,077) $ 306,656 $ (19,124) $ -- $ -- $(272,439)
Comprehensive loss:
Net loss ........................ -- -- -- (28,060) -- -- --
Other comprehensive loss,
net of tax:
Cumulative translation
adjustments ................. -- -- -- -- (1,969) -- --
Pension adjustment ............ -- -- -- -- (31) -- --
Comprehensive loss ......... -- -- -- -- -- -- -- (30,060)
Common stock issued in
connection with AFB
Acquisition, net .............. 778 8 9,331 -- -- -- -- 9,339
Preferred stock dividends ....... -- -- -- (905) -- -- -- (905)
Employee stock purchase ......... (44) -- (531) -- -- -- -- (531)
Treasury stock purchases ........ (228) -- -- -- -- -- (2,730) (2,730)
Common stock issued in
connection with the
Saskatoon Acquisition,
net ........................... 609 6 6,379 -- -- -- -- 6,385
Stock warrants .................. -- -- 2,413 -- -- -- -- 2,413
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, September 30, 1997 ..... 11,714 120 (542,485) 277,691 (21,124) -- (2,730) (288,528)
Comprehensive loss:
Net loss ........................ -- -- -- (46,119) -- -- --
Other comprehensive loss, net
of tax:
Cumulative translation
adjustments ................. -- -- -- -- (11,466) -- --
Pension adjustment ............ -- -- -- -- (90) -- --
Comprehensive loss ......... -- -- -- -- -- -- -- (57,675)
Common stock issued in
connection with the
exercise of warrants .......... 345 3 -- -- -- -- -- 3
Preferred stock dividends ....... -- -- -- (2,460) -- -- -- (2,460)
Treasury shares issued as
restricted stock .............. 23 -- (48) -- -- (222) 270 --
Treasury shares issued to ESOP... -- -- (168) -- -- -- 168 --
Revaluation of ESOP shares to
independently appraised
market value .................. -- -- -- 478 -- -- -- 478
Amortization of deferred
compensation .................. -- -- -- -- -- 111 -- 111
Treasury stock purchases ........ (9) -- -- -- -- -- (108) (108)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, September 30, 1998 ..... 12,073 123 (542,701) 229,590 (32,680) (111) (2,400) (348,179)
Comprehensive loss:
Net loss ........................ -- -- -- (110,029) -- -- --
Other comprehensive income
(loss), net of tax:............
Cumulative translation
adjustments ................. -- -- -- -- 3,972 -- --
Pension adjustment ............ -- -- -- -- (60) -- --
Comprehensive loss ......... -- -- -- -- -- -- -- (106,117)
Common stock issued in
connection with the
exercise of warrants .......... 32 -- -- -- -- -- -- --
Preferred stock dividends ....... -- -- -- (2,683) -- -- -- (2,683)
Treasury shares issued
as restricted stock ........... 1 -- (11) -- -- (7) 18 --
Revaluation of ESOP shares to
independently appraised
market value .................. -- -- -- 1,612 -- -- -- 1,612
Amortization of deferred
compensation .................. -- -- -- -- -- 60 -- 60
Treasury stock purchases ........ (9) -- -- -- -- -- (80) (80)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, September 30, 1999 ..... 12,097 $ 123 $(542,712) $ 118,490 $ (28,768) $ (58) $ (2,462) $(455,387)
========= ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
43
46
STERLING CHEMICALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
Cash flows from operating activities:
Net loss ....................................................... $(110,029) $ (46,119) $ (28,060)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ............................. 57,677 55,963 49,849
Interest amortization ..................................... 3,105 4,376 4,163
Extraordinary item, loss on early extinguishment of debt .. 4,212 -- 3,924
Deferred tax benefit ...................................... (38,024) (19,722) (3,107)
Early retirement programs and benefit changes ............. 6,781 -- --
Discount notes amortization ............................... 19,483 16,878 15,499
Impairment of assets ...................................... 26,369 -- --
Other ..................................................... 1,016 1,820 2,328
Change in assets/liabilities:
Accounts receivable ....................................... (11,547) 44,419 (8,985)
Inventories ............................................... 3,207 13,675 (6,674)
Prepaid expenses .......................................... (10,760) (2,852) (7,767)
Other assets .............................................. (1,477) 654 (1,754)
Accounts payable .......................................... 19,137 (32,896) (1,424)
Accrued liabilities ....................................... 4,619 (9,300) 27,305
Other liabilities ......................................... 12,341 18,988 2,017
--------- --------- ---------
Net cash provided by (used in) operating activities ............ (13,890) 45,884 47,314
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures ...................................... (29,540) (26,622) (43,428)
Proceeds from sale of assets .............................. 3,583 -- --
Business acquisitions ..................................... -- -- (152,923)
--------- --------- ---------
Net cash used in investing activities .......................... (25,957) (26,622) (196,351)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt .............................. 814,105 59,862 375,260
Repayment of long-term debt ............................... (751,001) (75,152) (236,104)
Issuance of common stock .................................. -- 3 18,721
Sale of warrants .......................................... -- -- 2,413
Debt issuance costs ....................................... (16,480) -- (9,684)
Issuance of preferred stock ............................... -- -- 4,887
Purchase of treasury stock ................................ (80) (105) (3,256)
Other ..................................................... (3,270) 154 (627)
--------- --------- ---------
Net cash provided by (used in) financing activities ............ 43,274 (15,238) 151,610
Effect of United States /Canadian exchange rate on cash ........ 326 (814) (224)
--------- --------- ---------
Net increase in cash and cash equivalents ...................... 3,753 3,210 2,349
Cash and cash equivalents - beginning of year .................. 11,168 7,958 5,609
--------- --------- ---------
Cash and cash equivalents - end of year ........................ $ 14,921 $ 11,168 $ 7,958
========= ========= =========
Supplemental disclosures of cash flow information:
Interest paid, net of interest income received ............ $ (83,167) $ (80,223) $ (60,387)
Income taxes received ..................................... 4,750 6,653 3,116
The accompanying notes are an integral part of the consolidated
financial statements.
44
47
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
Revenues .............................................. $ 720,752 $ 822,590 $ 908,787
Cost of goods sold .................................... 682,594 745,323 823,265
--------- --------- ---------
Gross profit .......................................... 38,158 77,267 85,522
Selling, general, and administrative expenses ......... 36,980 37,319 27,358
Impairment of assets .................................. 26,369 -- --
Other expense ......................................... 10,832 5,962 --
Interest and debt related expenses .................... 83,897 86,618 72,931
Interest income from parent ........................... -- -- (1,692)
--------- --------- ---------
Loss before taxes and extraordinary item .............. (119,920) (52,632) (13,075)
Benefit for income taxes .............................. (29,410) (18,963) (2,148)
--------- --------- ---------
Loss before extraordinary item ........................ (90,510) (33,669) (10,927)
Extraordinary item, loss on early extinguishment
of debt, net of tax ................................ 4,212 -- 3,924
--------- --------- ---------
Net loss .............................................. $ (94,722) $ (33,669) $ (14,851)
========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
45
48
STERLING CHEMICALS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30,
------------------------
1999 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 14,899 $ 11,159
Accounts receivable ................................................ 143,556 116,398
Inventories ........................................................ 70,464 73,225
Prepaid expenses ................................................... 15,059 13,632
Deferred income tax benefit ........................................ 16,888 5,140
--------- ---------
Total current assets ............................................. 260,866 219,554
Property, plant and equipment, net .................................... 402,723 450,315
Deferred income tax benefit ........................................... 8,384 --
Other assets .......................................................... 80,133 92,634
--------- ---------
Total assets ..................................................... $ 752,106 $ 762,503
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable ................................................... $ 72,731 $ 46,775
Accrued liabilities ................................................ 79,883 71,873
Current portion of long-term debt .................................. 4,246 8,909
--------- ---------
Total current liabilities .......................................... 156,860 127,557
Long-term debt ........................................................ 816,927 745,709
Deferred income tax liability ......................................... 8,815 23,301
Deferred credits and other liabilities ................................ 76,893 83,288
Common stock held by ESOP ............................................. 2,946 5,938
Less: unearned compensation .......................................... (745) (2,845)
Commitments and contingencies ......................................... -- --
Stockholder's equity (deficiency in assets):
Common stock, $.01 par value ....................................... -- --
Additional paid-in capital ......................................... (139,786) (139,786)
Accumulated deficit ................................................ (140,978) (47,868)
Accumulated other comprehensive income ............................. (28,768) (32,680)
Deferred compensation .............................................. (58) (111)
--------- ---------
Total stockholder's equity (deficiency in assets) .................. (309,590) (220,445)
--------- ---------
Total liabilities and stockholder's equity (deficiency in assets) .. $ 752,106 $ 762,503
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
46
49
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
(AMOUNTS IN THOUSANDS)
RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER
COMMON STOCK PAID-IN (ACCUMULATED COMPREHENSIVE DEFERRED
SHARES AMOUNT CAPITAL DEFICIT) INCOME COMPENSATION TOTAL
------------ ------ ----------- ------------ ------------- ------------ ---------
Balance, September 30, 1996 .... 1 $ -- $(165,352) $ 174 $ (19,124) $ -- $(184,302)
Comprehensive loss:
Net loss ....................... -- -- -- (14,851) -- --
Other comprehensive loss, net
of tax:
Cumulative translation
adjustments ................ -- -- -- -- (1,969) --
Pension adjustment ........... -- -- -- -- (31) --
Comprehensive loss ........ -- -- -- -- -- -- (16,851)
Earned ESOP shares ............. -- -- (2,118) -- -- -- (2,118)
Contribution from parent ....... -- -- 27,684 -- -- -- 27,684
--------- ----- --------- --------- --------- --------- ---------
Balance, September 30, 1997 .... 1 -- (139,786) (14,677) (21,124) -- (175,587)
Comprehensive loss:
Net loss ....................... -- -- -- (33,669) -- --
Other comprehensive loss, net
of tax:
Cumulative translation
adjustments ................ -- -- -- -- (11,466) --
Pension adjustment ........... -- -- -- -- (90) --
Comprehensive loss ........ -- -- -- -- -- -- (45,225)
Issuance of restricted stock ... -- -- -- -- -- (222) (222)
Revaluation of ESOP shares to
independently appraised
market value ................. -- -- -- 478 -- -- 478
Amortization of deferred
compensation ................. -- -- -- -- -- 111 111
--------- ----- --------- --------- --------- --------- ---------
Balance, September 30, 1998 .... 1 -- (139,786) (47,868) (32,680) (111) (220,445)
Comprehensive loss:
Net loss ....................... -- -- -- (94,722) -- --
Other comprehensive income
(loss), net of tax:
Cumulative translation
adjustments .................. -- -- -- -- 3,972 --
Pension adjustment ........... -- -- -- -- (60) --
Comprehensive loss ........ -- -- -- -- -- -- (90,810)
Issuance of restricted stock ... -- -- -- -- -- (7) (7)
Revaluation of ESOP shares to
independently appraised
market value ................. -- -- -- 1,612 -- -- 1,612
Amortization of deferred
compensation ................. -- -- -- -- -- 60 60
--------- ----- --------- --------- --------- --------- ---------
Balance, September 30, 1999 .... 1 $ -- $(139,786) $(140,978) $ (28,768) $ (58) $(309,590)
========= ===== ========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
47
50
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
Cash flows from operating activities:
Net loss ..................................................... $ (94,722) $ (33,669) $ (14,851)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization ............................. 60,349 59,151 53,680
Deferred tax expense (benefit) ............................ (32,498) (13,139) 1,869
Extraordinary item ........................................ 4,212 -- 3,924
Early retirement and benefit charges ...................... 6,781 -- --
Impairment of assets ...................................... 26,368 -- --
Other ..................................................... 1,016 2,020 2,173
Change in assets/liabilities:
Accounts receivable ....................................... (10,877) 45,484 (13,510)
Inventories ............................................... 3,207 13,675 (6,674)
Prepaid expenses .......................................... (11,522) (1,838) (5,733)
Other assets .............................................. 4,811 2,078 (2,271)
Accounts payable .......................................... 17,797 (35,102) (1,288)
Accrued liabilities ....................................... 4,619 (3,441) 27,218
Other liabilities ......................................... 6,556 10,654 2,037
--------- --------- ---------
Net cash provided by (used in) operating activities .......... (13,903) 45,873 46,574
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures ...................................... (29,540) (26,622) (43,428)
Business acquisitions ..................................... -- -- (152,923)
Proceeds from sale of assets .............................. 3,583 -- --
--------- --------- ---------
Net cash used in investing activities ........................ (25,957) (26,622) (196,351)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt .............................. 814,105 59,862 375,260
Repayment of long-term debt ............................... (751,001) (75,153) (236,104)
Debt issuance costs ....................................... (16,480) -- (9,684)
Intercompany financing .................................... -- 1 3,000
Contribution from parent .................................. -- -- 22,286
Other ..................................................... (3,350) 54 (2,380)
--------- --------- ---------
Net cash provided by (used in) financing activities .......... 43,274 (15,236) 152,378
Effect of United States/Canadian exchange rate on cash ....... 326 (814) (224)
--------- --------- ---------
Net increase in cash and cash equivalents .................... 3,740 3,201 2,377
Cash and cash equivalents - beginning of period .............. 11,159 7,958 5,581
--------- --------- ---------
Cash and cash equivalents - end of year ...................... $ 14,899 $ 11,159 $ 7,958
========= ========= =========
Supplement disclosures of cash flow information:
Interest paid, net of interest income received ............ $ (83,180) $ (80,251) $ (60,402)
Income taxes received ..................................... 4,750 6,653 3,116
The accompanying notes are an integral part of the consolidated
financial statements.
48
51
STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sterling Chemicals Holdings, Inc. ("Holdings" and, together with its
subsidiaries, the "Company") manufactures seven commodity petrochemicals at its
Texas City, Texas plant (the "Texas City Plant"). Additionally, the Company
manufactures chemicals for use primarily in the pulp and paper industry at five
plants in Canada and one plant in Valdosta, Georgia (the "Valdosta Plant"), and
manufactures acrylic fibers in a plant near Pensacola, Florida (the "Santa Rosa
Plant"). At its Texas City Plant, the Company produces styrene, acrylonitrile,
acetic acid, plasticizers, methanol, tertiary butylamine ("TBA"), and sodium
cyanide. The Company generally sells its petrochemicals products to customers
for use in the manufacture of other chemicals and products, which in turn are
used in the production of a wide array of consumer goods and industrial
products. The Company produces regular textiles, specialty textiles, and
technical fibers at the Santa Rosa Plant, as well as licensing its acrylic
fibers manufacturing technology to producers worldwide. Sodium chlorate is
produced at the Company's five plants in Canada and the Valdosta Plant. Sodium
chlorite is produced at one of the Company's Canadian locations. In addition,
chlor-alkali and calcium hypochlorite are produced at one of the Canadian
locations. The Company licenses, engineers, and oversees construction of
large-scale chlorine dioxide generators for the pulp and paper industry as part
of the pulp chemicals business. These generators convert sodium chlorate into
chlorine dioxide at pulp mills.
Holdings is a holding company whose only material asset is its investment
in Sterling Chemicals, Inc. ("Chemicals"). Chemicals and its subsidiaries are
substantially all of the consolidated operating assets.
The significant accounting policies of the Company are described below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all wholly
owned and majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The Company's investment in a cogeneration
joint venture of a 50% equity interest and a 50/50 acrylonitrile marketing joint
venture are accounted for under the equity method with the Company's share of
the operating results of the joint ventures recorded in its Statement of
Operations.
CASH EQUIVALENTS
The Company considers all investments purchased with a remaining maturity
of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market; cost is primarily
determined on the first-in, first-out basis except for stores and supplies,
which are valued at average cost.
The Company enters into agreements with other companies to exchange
chemical inventories in order to minimize working capital requirements and to
facilitate distribution logistics. Balances related to quantities due to or
payable by the Company are included in inventory.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Major renewals and
improvements, which extend the useful lives of the equipment, are capitalized.
Major planned maintenance expenses are accrued for during the periods prior to
the maintenance, while routine repair and maintenance expenses are charged to
operations as incurred. Disposals are removed at carrying cost less accumulated
depreciation with any resulting gain or loss reflected in operations.
Depreciation is provided using the straight-line method over estimated useful
lives ranging from 5 to 25 years with the predominant life of the plant and
equipment being 15 years. The Company capitalizes interest costs, which are
incurred as part of the cost of constructing major facilities and equipment. The
amount of interest capitalized for the fiscal years 1999, 1998, and 1997 was
$1.4 million, $0.8 million, and $3.8 million, respectively.
49
52
IMPAIRMENT OF LONG-LIVED ASSETS
Impairment tests of long-lived assets are made when conditions indicate
their carrying cost may not be recoverable. Such impairment tests are based on a
comparison of undiscounted future cash flows or the market value of similar
assets to the carrying cost of the asset. If an impairment is indicated, the
asset value is written down to its estimated fair value. During fiscal 1999, the
Company incurred an impairment loss of $26.4 million related to its methanol
production assets.
PATENTS AND ROYALTIES
The cost of patents is amortized on a straight-line basis over their
estimated useful lives which approximates ten years. The Company capitalized the
value of the chlorine dioxide generator technology acquired in fiscal 1992 based
on the net present value of all estimated remaining royalty payments associated
with the technology. The resulting intangible amount is included in other assets
and is amortized over the average life for these royalty payments of ten years.
DEBT ISSUE COSTS
Debt issue costs relating to long-term debt are amortized over the term of
the related debt instrument using the effective interest method and are included
in other assets.
INCOME TAXES
Deferred income taxes are recorded to reflect the tax effect of the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities at enacted rates.
REVENUE RECOGNITION
The Company generates revenues through sales in the open market, raw
material conversion agreements, and long-term supply contracts. In addition, the
Company has entered into shared profit arrangements with respect to certain
petrochemicals products. The Company recognizes revenue from sales in the open
market, raw material conversion agreements, and long-term supply contracts when
the products are shipped. Revenues from shared profit arrangements are estimated
and accrued monthly. Deferred credits are amortized over the life of the
contract which gave rise to them. The Company also generates revenues from the
construction and sale of chlorine dioxide generators, which are recognized using
the percentage of completion method. The Company also receives prepaid
royalties, which are recognized over a period, which is typically ten years. In
addition, the Company generates revenues from the sale of acrylic fibers
manufacturing technology to producers worldwide, which are recognized as earned.
FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE
The Company's Canadian subsidiaries use the Canadian dollar as their
functional currency. For financial reporting purposes, assets and liabilities of
these subsidiaries denominated in Canadian dollars are translated into United
States dollars at year-end exchange rates and revenues and expenses are
translated at the average monthly exchange rates. Translation adjustments are
reported as a separate component of stockholders' equity, while transaction
gains and losses are included in operations when incurred.
The Company's Canadian subsidiaries enter into forward foreign exchange
contracts to minimize the short-term impact of Canadian dollar fluctuations on
certain of its Canadian dollar denominated commitments. Gains or losses on these
contracts are deferred and are included in operations in the same period in
which the related transactions are settled.
HEDGING
The Company periodically enters into contracts to hedge against the
volatility in the price of natural gas, which is used in the production of
styrene and methanol. These transactions generally take the form of price
collars, and are placed with major financial institutions and industrial
companies. The results of the hedging transactions are included in Cost of Goods
Sold as the related production of styrene and methanol occurs.
50
53
EARNINGS PER SHARE
For purposes of computing net income (loss) per common share, net income
(loss) has been reduced by an amount equal to the fair market value of Released
Shares (as hereinafter defined) at the end of the period, minus the sum of the
amount previously recognized as compensation expense with respect to Released
Shares and the amount of depreciation/appreciation in value of Released Shares
in prior periods. This reduction results from the Company being required, under
certain circumstances, to purchase for cash common stock distributed to
participants by the Sterling Chemicals ESOP (the "ESOP"). "Released Shares" are
shares held by the ESOP but allocated to employees. The weighted average number
of outstanding shares and computation of the net income (loss) per common share
is as follows (in thousands, except per share data):
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
Net loss attributable to common stockholders .................... $(112,712) $ (48,579) $ (28,965)
Plus depreciation in value of Released Shares ................... 1,048 298 --
--------- --------- ---------
Net loss for purpose of computing net income (loss) per share ... $(111,664) $ (48,281) $ (28,965)
========= ========= =========
Net loss per common share ....................................... $ (8.94) $ (3.99) $ (2.58)
========= ========= =========
Weighted average shares outstanding ............................. 12,495 12,104 11,237
========= ========= =========
As losses were incurred in fiscal 1999, 1998, and 1997, basic and diluted EPS
are the same amount for these periods.
COMPREHENSIVE INCOME (LOSS)
As of October 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS
No. 130 establishes standards for the reporting and displaying of comprehensive
net income and its components. Accumulated Other Comprehensive Income consists
of the following (in thousands):
CUMULATIVE
TRANSLATION
ADJUSTMENT PENSION ADJUSTMENT TOTAL
---------------- ------------------ ---------------
Balance, September 30, 1996 $ (19, 124) $ -- $ (19,124)
Changes (1,969) (31) (2,000)
---------------- --------------- ---------------
Balance, September 30, 1997 (21,093) (31) (21,124)
Changes (11,466) (90) (11,556)
---------------- --------------- ---------------
Balance, September 30, 1998 (32,559) (121) (32,680)
Changes 3,972 (60) 3,912
---------------- --------------- ---------------
Balance, September 30, 1999 $ (28,587) $ (181) $ (28,768)
================ =============== ===============
There is no tax expense or benefit associated with the cumulative translation
adjustment amounts above. The pension adjustment amounts are net of tax benefit
of $32,000, $49,000, and $17,000 for the fiscal years ended September 30, 1999,
1998, and 1997, respectively.
ENVIRONMENTAL COSTS
Environmental costs are expensed unless the expenditures extend the
economic useful life of the assets. Costs that extend the economic life of the
assets are capitalized and depreciated over the remaining life of such assets.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable, and the cost can be reasonably estimated.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In preparing disclosures about the fair value of financial instruments,
the Company has assumed that the carrying amount approximates fair value for
cash and cash equivalents, receivables, short-term borrowings, accounts payable,
and certain accrued expenses because of the short maturities of those
instruments. The fair values of long-term debt instruments are estimated based
upon quoted market values (if applicable) or on the current interest rates
available to the Company for debt with similar terms and remaining maturities.
Considerable judgment is required in developing
51
54
these estimates and, accordingly, no assurance can be given that the estimated
values presented herein are indicative of the amounts that would be realized in
a free market exchange.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. Significant estimates include environmental reserves, litigation
contingencies, maintenance costs related to shut downs, taxes, and revenues.
Actual results could differ from these estimates.
RECLASSIFICATION
Certain amounts reported in the financial statements for the prior periods
have been reclassified to conform with the current financial statement
presentation with no effect on net income (loss) or stockholders' equity
(deficiency in assets).
52
55
2. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
SEPTEMBER 30,
------------------------
1999 1998
--------- ---------
(Dollars in Thousands)
Inventories:
Finished products ....................................... $ 37,484 $ 42,436
Raw materials ........................................... 10,355 8,089
--------- ---------
Inventories at cost ........................................ 47,839 50,525
--------- ---------
Inventories under exchange agreements ................... 2,562 3,031
Stores and supplies ..................................... 20,063 19,669
--------- ---------
$ 70,464 $ 73,225
========= =========
Property, plant, and equipment:
Land .................................................... $ 10,274 $ 12,897
Buildings ............................................... 56,728 51,362
Plant and equipment ..................................... 673,108 652,872
Construction in progress ................................ 39,388 30,506
Less: accumulated depreciation ......................... (376,775) (297,322)
--------- ---------
$ 402,723 $ 450,315
========= =========
Other assets:
Patents and technology, net ............................. $ 21,630 $ 26,821
Debt issue costs ........................................ 34,055 28,248
Other ................................................... 30,965 40,897
--------- ---------
$ 86,650 $ 95,966
========= =========
Accrued liabilities:
Repairs ................................................. $ 9,635 $ 16,890
Interest ................................................ 20,778 14,433
Compensation ............................................ 18,174 5,489
Property taxes .......................................... 8,243 7,754
Other ................................................... 23,053 27,307
--------- ---------
$ 79,883 $ 71,873
========= =========
Deferred credits and other liabilities:
Deferred revenue ........................................ $ 7,667 $ 15,168
Accrued postretirement benefits ......................... 54,084 37,663
Other ................................................... 15,142 27,458
--------- ---------
$ 76,893 $ 80,289
========= =========
3. LONG-TERM DEBT:
Long-term debt consisted of the following:
SEPTEMBER 30,
------------------------
1999 1998
--------- ---------
(Dollars in Thousands)
Revolving credit facilities ........................... $ 54,643 $ --
Term loans ............................................ -- 274,000
Saskatoon term loans .................................. 44,045 49,552
ESOP term loan ........................................ -- 3,250
11 1/4% notes ......................................... 152,485 152,816
11 3/4% notes ......................................... 275,000 275,000
12 3/8% notes ......................................... 295,000 --
--------- ---------
Total Chemicals' debt outstanding .................. 821,173 754,618
13 1/2% notes ......................................... 147,628 127,907
--------- ---------
Total Holdings' debt outstanding ................... 968,801 882,525
========= =========
Less:
Current maturities ................................. (4,246) (8,909)
--------- ---------
Total long-term debt .................................. $ 964,555 $ 873,616
========= =========
53
56
On July 23, 1999, Chemicals completed a private offering (the "12 3/8%
Notes Offering") of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006.
On November 5, 1999, Chemicals completed a registered exchange offer, pursuant
to which all of these notes were exchanged for publicly registered 12 3/8% Notes
with substantially similar terms (the "12 3/8% Notes"). The 12 3/8% Notes are
senior secured obligations of Chemicals and rank equally in right of payment
with all other existing and future senior indebtedness of Chemicals and senior
in right of payment to all existing and future subordinated indebtedness of
Chemicals. The 12 3/8% Notes are guaranteed by all of Chemicals' existing direct
and indirect United States subsidiaries (other than Sterling Chemicals
Acquisitions, Inc.) on a joint and several basis. Each subsidiary's guarantee
ranks equally in right of payment with all of such subsidiary's existing and
future senior indebtedness and senior in right of payment to all existing and
future subordinated indebtedness of such subsidiary. However, the 12 3/8% Notes,
and each subsidiary's guarantee, is subordinated to the extent of the collateral
securing Chemicals' new secured revolving credit facilities described below. The
12 3/8% Notes and the subsidiary guarantees are secured by (i) a second priority
lien on all of Chemicals' and the subsidiary guarantors' United States
production facilities and related assets, (ii) a second priority pledge of all
of the capital stock of each subsidiary guarantor, and (iii) a first priority
pledge of 65% of the stock of certain of the Company's subsidiaries incorporated
outside of the United States.
The 12 3/8% Notes bear interest at the annual rate of 12 3/8%, payable
semi-annually on January 15 and July 15 of each year commencing January 15,
2000. Except as otherwise provided below, the 12 3/8% Notes may not be redeemed
by Chemicals prior to July 15, 2003. From that date until July 15, 2004, the
12 3/8% Notes may be redeemed at a premium of the principal amount thereof at
maturity of 106.188% and from July 15, 2004 until July 15, 2005, the 12 3/8%
Notes may be redeemed at a premium of the principal amount thereof at maturity
of 103.094%. Thereafter, Chemicals may redeem the 12 3/8% Notes at their face
value plus accrued and unpaid interest. Prior to July 15, 2002, Chemicals may
redeem in the aggregate up to 35% of the original principal amount of the
12 3/8% Notes with the proceeds of one or more Public Equity Offerings, as
defined. Such redemptions may be made at a redemption price of 112.375 of the
face value plus accrued and unpaid interest to the redemption date. After such
redemption, at least $191.75 million aggregate principal amount of the 12 3/8%
Notes must remain outstanding.
In addition, on July 23, 1999, Chemicals established two new secured
revolving credit facilities providing up to $155,000,000 in revolving credit
loans (the "New Revolvers") under a single Revolving Credit Agreement (the "New
Credit Agreement"). Under the New Credit Agreement, Chemicals and each of its
direct and indirect United States subsidiaries (other than Sterling Chemicals
Acquisitions, Inc.) are co-borrowers and are jointly and severally liable for
any indebtedness thereunder. The New Revolvers consist of (i) a $70,000,000
revolving credit facility (the "Fixed Assets Revolver") secured by a first
priority lien on all United States production facilities and related assets of
Chemicals and the other co-borrowers, all of the capital stock of Chemicals and
all of the capital stock of each co-borrower and a second priority lien on all
accounts receivable, inventory, and other specified assets of Chemicals and the
other co-borrowers, and (ii) an $85,000,000 revolving credit facility (the
"Current Assets Revolver") secured by a first priority lien on all accounts
receivable, inventory, and other specified assets of Chemicals and the other
co-borrowers.
Funding under the 12 3/8% Notes Offering and the New Revolvers occurred on
July 23, 1999. The proceeds of the 12 3/8% Notes Offering and the initial
borrowings under the New Revolvers were used to completely repay all outstanding
indebtedness under Chemicals existing senior credit facility.
Approximately $54.6 million was drawn under the Fixed Assets Revolver at
September 30, 1999. Borrowings under the Fixed Assets Revolver bear interest, at
Chemicals' option, at an annual rate of either the "LIBOR Rate" (as defined in
the New Credit Agreement) plus 3.75% or the Alternate Base Rate plus 2.25%.
Borrowings under the Current Assets Revolver bear interest, at Chemicals'
option, at an annual rate of either the LIBOR Rate plus 3.00% or the Alternate
Base Rate plus 1.50%. The "Alternate Base Rate" is equal to the greater of the
Base Rate as announced from time to time by The Chase Manhattan Bank in New
York, New York or the "Federal Funds Effective Rate" plus 1/2% (as such terms
are defined in the New Credit Agreement.). At September 30, 1999, the weighted
average interest rate in effect was 9.3%. The New Credit Agreement also requires
Chemicals and the co-borrowers to pay an aggregate commitment fee ranging from
0.75% to 1.25% on the unused portion of the commitment for the Fixed Assets
Revolver, depending on the amount drawn, and an aggregate commitment fee of 0.5%
on the unused portion of the commitment for the Current Assets Revolver.
Available credit under the Current Assets Revolver is subject to a monthly
borrowing base consisting of 85% of eligible accounts receivable and 65% of
eligible inventory with an inventory cap of $42,500,000. In addition, the
borrowing base for the Current Assets Revolver must exceed outstanding
borrowings thereunder by $12,000,000 at all times.
The Fixed Assets Revolver matures in five years, with quarterly commitment
reductions totaling 28% of the total commitment in year four and the balance in
year five. The Current Assets Revolver matures in five years, with no scheduled
commitment reductions prior to that time. However, the commitments for each of
the Fixed Assets Revolver
54
57
and the Current Assets Revolver will be permanently reduced to the extent
required under the New Credit Agreement upon prepayments made out of specific
sources of funds, including asset sales and certain equity issuances by
Holdings.
On July 10, 1997, Sterling Pulp Chemicals (Sask) Ltd. ("Sterling Sask"),
an indirect wholly owned subsidiary of Holdings and Chemicals, acquired
substantially all of the assets of Saskatoon Chemicals Ltd. ("Saskatoon
Chemicals"), a subsidiary of Weyerhaeuser Canada Ltd. (the "Saskatoon
Acquisition"). In connection with the Saskatoon Acquisition, Sterling Sask
entered into a credit agreement (the "Saskatoon Credit Agreement") with The
Chase Manhattan Bank of Canada, individually and as administrative agent.
Funding under the Saskatoon Credit Agreement occurred July 10, 1997, upon
consummation of the Saskatoon Acquisition. The Saskatoon Credit Agreement
provides for a revolving credit facility of Cdn. $8.0 million (the "Saskatoon
Revolver"), and a term loan facility consisting of Cdn. $21.2 million Tranche A
term loan due June 30, 2003, and $36.4 million Tranche B term loan due June 30,
2005 (the "Saskatoon Term Loans"). Advances under the Saskatoon Revolver are
subject to a borrowing base consisting of 85% of eligible accounts receivable
and 65% of eligible inventory with an inventory cap of 50% of the borrowing
base. At September 30, 1999, the borrowing base did not limit such available
credit and there were no borrowings outstanding under the Saskatoon Revolver.
Sterling Sasks' obligations under the Saskatoon Credit Agreement are secured by
substantially all of the assets of Sterling Sask. The Saskatoon Credit Agreement
requires Sterling Sask to satisfy certain financial covenants and tests. In
addition, the Saskatoon Credit Agreement requires that certain amounts of Excess
Cash Flow (as defined therein) be used to prepay amounts outstanding under the
Saskatoon Term Loans. A mandatory prepayment of Cdn. $2 million will be required
in fiscal 2000.
The Sterling Sask Tranche A term loan and the Saskatoon Revolver
borrowings bear interest, at Sterling Sask's option, at an annual rate of either
the Bankers Acceptance Rate or the Base Rate plus an Applicable Margin ranging
from 1% to 2.5% depending upon Sterling Sask's Leverage Ratio (as defined in the
Saskatoon Credit Agreement). The Tranche B term loan bears interest, at Sterling
Sask's option, at an annual rate of either the Eurodollar Rate or the Base Rate
plus an Applicable Margin ranging from 0% to 2.5% depending upon Sterling Sask's
Leverage Ratio. The "Base Rate" for the Tranche A term loan and the Saskatoon
Revolver is equal to the greater of the Prime Rate for Canadian Dollar
commercial loans made in Canada, as announced from time to time by the agent
bank, or the rate for Canadian Dollar Bankers Acceptances accepted by the agent
with a term to maturity of 30 days plus 1% (as such terms are defined in the
Saskatoon Credit Agreement). The "Base Rate" for the Tranche B term loan is
equal to the greater of the Prime Rate as announced from time to time by the
agent bank, the "Federal Funds Effective Rate" plus 1/2% or the "Base CD Rate"
plus 1% (as such terms are defined in the Saskatoon Credit Agreement). At
September 30, 1999, the interest rates in effect for the Tranche A and Tranche B
term loans were 7.5% and 8.5%, respectively. The Saskatoon Credit Agreement also
requires Sterling Sask to pay a commitment fee in the amount of 1/2% of the
unused commitment under the Saskatoon Revolver.
As part of the recapitalization of the Company in August of 1996,
Chemicals also issued $275.0 million of its 11 3/4% Senior Subordinated Notes
due 2006 (the "11 3/4% Notes") and Holdings issued $191.8 million of discount
notes ($100 million initial proceeds) representing 191,751 Units, with each Unit
consisting of one 13 1/2% Senior Secured Discount Note due 2008 (collectively,
the "13 1/2% Notes") and one warrant to purchase three shares of the common
stock, par value $0.01 per share, of Holdings ("Holdings Common Stock") for
$0.01 per share.
The 11 3/4% Notes are unsecured senior subordinated obligations of
Chemicals, ranking subordinate in right of payment to all existing and future
senior debt of Chemicals, but pari passu with the 11 1/4% Notes and all future
senior subordinated indebtedness. The 11 3/4% Notes bear interest at the annual
rate of 11 3/4%, payable semi-annually on February 15 and August 15 of each year
commencing February 15, 1997. The 13 1/2% Notes are senior secured obligations
of Holdings and rank equally in right of payment with all other senior
indebtedness of Holdings and senior in right of payment to all subordinated
indebtedness of Holdings. The 13 1/2% Notes will accrete interest until August
15, 2001, with no interest payable in cash until February 15, 2002, at an annual
rate of 13 1/2%, compounded semi-annually. Commencing in 2002, interest will be
payable semi-annually on February 15 and August 15 of each year until maturity.
Except as otherwise provided below, the 11 3/4% Notes may not be redeemed
by Chemicals prior to August 15, 2001. From that date through August 15, 2004,
the 11 3/4% Notes may be redeemed at a premium of the principal amount thereof
at maturity varying between 105.875% and 101.958%. Subsequent to August 15,
2004, Chemicals may redeem the 11 3/4% Notes at their face value plus accrued
and unpaid interest.
Except as otherwise provided below, the 13 1/2% Notes may not be redeemed
by Holdings prior to August 15, 2001. From that date through August 15, 2006,
the 13 1/2% Notes may be redeemed at a premium of the principal amount thereof
at maturity varying between 106.75% and 101.35%. Subsequent to August 15, 2006,
Holdings may redeem the 13 1/2% Notes at their principal amount plus accrued
interest.
55
58
On April 7, 1997, Chemicals issued $150.0 million of its 11 1/4% Senior
Subordinated Notes due 2007 (the "11 1/4% Notes"). The 11 1/4% Notes are
unsecured senior subordinated obligations of Chemicals, ranking subordinate in
right of payment to all existing and future senior debt of Chemicals, but pari
passu with the 11 3/4% Notes and all future senior subordinated indebtedness of
Chemicals.
The 11 1/4% Notes bear interest at the annual rate of 11 1/4%, payable
semi-annually on April 1 and October 1 of each year commencing October 1, 1997.
Except as otherwise provided below, the 11 1/4% Notes may not be redeemed by
Chemicals prior to April 1, 2002. From that date through April 1, 2005, the
11 1/4% Notes may be redeemed at a premium of the principal amount thereof at
maturity varying between 105.625% and 101.875%. Subsequent to April 1, 2005,
Chemicals may redeem the 11 1/4% Notes at their face value plus accrued and
unpaid interest. Prior to April 1, 2000, Chemicals may redeem in the aggregate
up to 35% of the original principal amount of the 11 1/4% Notes with the
proceeds of one or more public equity offerings, as defined. Such redemptions
may be made at a redemption price of 111.25% of the face value plus accrued and
unpaid interest to the redemption date. After such redemption, at least $97.5
million aggregate principal amount of the 11 1/4% Notes must remain outstanding.
Under the terms of our New Credit Agreement, we cannot redeem all or any
portion of Chemicals' 12 3/8% Notes, 11 3/4% Notes, or 11 1/4% Notes at any time
unless expressly required to do so under the relevant indentures. In addition,
our ability to redeem all of any portion of Chemicals' 11 3/4% Notes or 11 1/4%
Notes is restricted under the indenture governing the 12 3/8% Notes.
The indentures governing the 12 3/8% Notes, 11 1/4% Notes, 11 3/4% Notes,
and 13 1/2% Notes (the "Indentures") contain numerous financial and operating
covenants, including, but not limited to, restrictions on Chemicals' or
Holdings' ability to incur indebtedness, pay dividends, create liens, sell
assets, engage in mergers and acquisitions, and refinance existing indebtedness.
In addition, the Indentures include various circumstances that will constitute,
upon occurrence and subject in certain cases to notice and grace periods, an
event of default thereunder. However, neither the Indentures nor the New Credit
Agreement requires the Company or Chemicals to satisfy any financial ratios or
maintenance tests.
The indentures governing the 11 1/4% Notes, the 11 3/4% Notes, and the
12 3/8% Notes and the New Credit Agreement contain provisions which restrict the
payment of advances, loans and dividends from Chemicals to Holdings. The most
restrictive of the covenants limits such payments during fiscal 2000 to
approximately $2.0 million, plus any amounts due Holdings from Chemicals under
the intercompany tax sharing agreement. The Saskatoon Credit Agreement contains
provisions, which restrict the payment of advances, loans and dividends from
Sterling Sask to Chemicals. The most restrictive of the covenants limits such
payments during fiscal 2000 to approximately $1.0 million, plus any amounts due
to Chemicals or Holdings from Sterling Sask under the intercompany tax sharing
agreement.
DEBT MATURITIES
The estimated remaining principal payments on the outstanding debt
follows:
YEAR ENDING PRINCIPAL
SEPTEMBER 30, PAYMENTS
- ------------- --------
(Dollars in Thousands)
2000 ................................................ $ 4,246
2001 ................................................ 2,623
2002 ................................................ 4,726
2003 ................................................ 27,316
2004 ................................................ 52,827
Thereafter .......................................... 877,063
---------
Total Debt................................... $ 968,801
=========
56
59
4. INCOME TAXES
A reconciliation of federal statutory income taxes to the Company's
effective tax benefit before extraordinary item follows:
YEAR ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
Benefit for income taxes at statutory rates ................... $(51,526) $(26,968) $(11,001)
Taxable foreign dividends ..................................... 4,295 -- --
Change in valuation allowance ................................. 1,514 -- --
Non-deductible expenses ....................................... 815 -- --
State and foreign income taxes ................................ 550 1,422 3,782
Other ......................................................... 9,416 -- (77)
-------- -------- --------
Effective tax benefit ......................................... $(34,936) $(25,546) $ (7,296)
======== ======== ========
The benefit for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
From operations:
Current federal .................... $ 2,246 $ (5,900) $ (6,131)
Deferred federal ................... (36,724) (21,854) (9,211)
Deferred foreign ................... (1,300) 2,132 6,104
Current state ...................... 842 76 1,942
-------- -------- --------
Total tax benefit ....................... $(34,936) $(25,546) $ (7,296)
======== ======== ========
The components of the Company's deferred income tax assets and liabilities
are summarized below:
YEAR ENDED SEPTEMBER 30,
------------------------
1999 1998
--------- ---------
(Dollars in Thousands)
Deferred tax assets:
Accrued liabilities ................................... $ 12,050 $ 12,074
Accrued postretirement cost ........................... 11,991 10,010
Tax loss and credit carry forwards .................... 64,044 24,783
Discount note interest ................................ 17,393 11,103
Other ................................................. 1,628 17,980
--------- ---------
Total deferred tax assets ............................. 107,106 75,950
--------- ---------
Deferred tax liabilities:
Property, plant and equipment ......................... $ (68,732) $ (78,113)
Other ................................................. (2,629) (3,820)
--------- ---------
Total deferred tax liabilities ........................ (71,361) (81,933)
Valuation allowance ................................... (1,514) --
--------- ---------
Net deferred tax assets (liabilities) ................. 34,231 (5,983)
Less: current deferred tax assets ..................... (16,888) (5,140)
--------- ---------
Long-term deferred tax assets (liabilities) ........... $ 17,343 $ (11,123)
========= =========
The Company has approximately $155 million in United States net operating
losses which will be carried forward and if not utilized in future years, will
expire from fiscal 2018 to 2019. The Company also has approximately Cdn. $6.6
million in Canadian non-capital loss carryforwards and Cdn. $6.5 million of
investment tax credits which will expire from 2000 through 2006.
57
60
5. EMPLOYEE BENEFITS
The Company has established the following benefit plans:
RETIREMENT BENEFIT PLANS
The Company has non-contributory pension plans in the United States and
employer and employee contributory plans in Canada which cover all salaried and
wage employees. The benefits under these plans are based primarily on years of
service and employees' pay near retirement. For those Company employees who were
employed by the Company as of September 30, 1986, and were previously employed
by Monsanto, the Company recognizes their Monsanto pension years of service for
purposes of determining benefits under the Company's plans. For those Company
employees who were employed by the Company on August 21, 1992, and were
previously employed by Tenneco Inc., the Company recognizes their Tenneco Inc.
pension years of service for purposes of determining benefits under the
Company's plans. The Company's funding policy is consistent with the funding
requirements of federal law and regulations. Plan assets consist principally of
common stocks and government and corporate securities.
For those Company employees as of January 31, 1997, who: (i) were
previously employed by Cytec Industries Inc. and (ii) elect to retire from the
Company on or before January 31, 1999, the Company supplements the standard
pension payable such that the employee's total combined pension from the Company
and from the Cytec Nonbargaining Employees' Retirement Plan equals the amount
the employee would have received had he or she remained an employee of Cytec
until retirement. The estimated liability for such supplements as of September
30, 1999 and 1998 is immaterial.
The Company adopted SFAS No. 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits", which is effective for the Company for the
year ended September 30, 1999 and revises the required disclosures about
pensions and postretirement benefits other than pensions.
58
61
Information concerning the pension obligation, plan assets, amounts
recognized in the Company's financial statements, and underlying actuarial
assumptions is stated below.
AUGUST 31,
------------------------
1999 1998
--------- ---------
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year ............... $ 96,327 $ 82,971
Currency rate conversion .............................. 556 (1,314)
Service cost .......................................... 5,198 5,093
Interest cost ......................................... 6,735 6,153
Plan amendments ....................................... 2,878 --
FAS 88 additional benefits ............................ 10,765 --
Actuarial loss (gain) ................................. (1,205) 7,534
Benefits paid ......................................... (6,864) (4,110)
--------- ---------
Benefit obligation at end of year ..................... $ 114,390 $ 96,327
========= =========
Change in plan assets:
Fair value at beginning of year ....................... $ 86,187 $ 84,598
Currency rate conversion .............................. 498 (1,463)
Actual return on plan assets .......................... 18,705 13
Employer contributions ................................ 765 7,070
Participants' contributions ........................... -- 79
Benefits paid ......................................... (6,864) (4,110)
--------- ---------
Fair value at end of year ............................. $ 99,291 $ 86,187
========= =========
Development of net amount recognized:
Funded status ......................................... $ (15,100) $ (10,140)
Unrecognized cost:
Actuarial loss (gain) .............................. (4,197) 8,145
Prior service cost ................................. 7,561 5,867
Transition liability ............................... 1,354 1,737
--------- ---------
Net amount recognized ................................. $ (10,382) $ 5,609
========= =========
Amounts recognized in the statement of financial position:
Prepaid pension cost .................................. $ 529 $ 8,855
Accrued pension cost .................................. (13,531) (3,620)
Intangible asset ...................................... 2,341 189
Accumulated other comprehensive income (pre-tax) ...... 279 185
--------- ---------
Net amount recognized ................................. $ (10,382) $ 5,609
========= =========
Net periodic pension costs (income) consist of the following components:
AUGUST 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
Components of net pension costs:
Service cost-benefits earned during the year ...................... $ 5,198 $ 5,093 $ 4,857
Interest on prior year's projected benefit obligation ............. 6,735 6,153 5,941
Expected return on plan assets .................................... (7,538) (7,411) (6,009)
Net amortization:
Actuarial loss (gain) .......................................... 634 (130) (207)
Prior service cost ............................................. 73 658 660
Transition liability ........................................... 376 378 378
Settlement/Curtailment loss ....................................... 11,337 -- --
-------- -------- --------
Net pension costs ................................................. $ 16,815 $ 4,741 $ 5,620
======== ======== ========
Weighted-average assumptions:
Discount Rate ..................................................... 7.50% 7.00% 7.75%
Rates of increase in salary compensation level .................... 5.38% 4.75% 5.25%
Expected long-term rate of return on plan assets .................. 8.77% 8.00% 8.50%
59
62
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care benefits and life insurance
benefits for retired employees. Substantially all of the Company's employees
become eligible for these benefits at normal retirement age. The Company accrues
the cost of these benefits during the period in which the employee renders the
necessary service.
Health care benefits are provided to employees who retire from the Company
with ten or more years of service credit except for Canadian employees covered
by collective bargaining agreements. All of the Company's employees are eligible
for postretirement life insurance. Postretirement health care benefits for
United States plans are non-contributory. Benefit provisions for most hourly and
some salaried employees are subject to collective bargaining. In general, the
plans stipulate that retiree health care benefits are paid as covered expenses
are incurred. For United States employees, postretirement medical plan
deductibles are assumed to increase at the rate of the long-term consumer price
index.
As previously discussed, SFAS No. 132 revises the required disclosures
about postretirement benefit plans. Information concerning the plan obligation,
the funded status, amounts recognized in the Company's financial statements, and
underlying actuarial assumptions is stated below.
AUGUST 31,
----------------------
1999 1998
-------- --------
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year .......................................... $ 43,131 $ 38,617
Service cost ..................................................................... 1,200 1,466
Interest cost .................................................................... 3,005 2,818
Plan amendments, curtailments, and special termination benefit ................... (2,472) --
Actuarial loss ................................................................... 3,124 1,602
Benefits paid .................................................................... (2,314) (1,372)
-------- --------
Benefit obligation at end of year ................................................ $ 45,674 $ 43,131
======== ========
Development of net amount recognized:
Funded status .................................................................... $(45,674) $(43,131)
Unrecognized cost:
Actuarial loss ................................................................ 11,380 3,578
Prior service cost ............................................................ (5,943) 165
-------- --------
Net amount recognized ............................................................ $(40,237) $(39,388)
======== ========
Net periodic plan costs (income) consist of the following components:
AUGUST 31,
-----------------------------------
1999 1998 1997
------- ------- -------
(Dollars in Thousands)
Components of net plan costs:
Service cost ................................................. $ 1,200 $ 1,466 $ 1,343
Interest cost ................................................ 3,005 2,818 2,494
Expected return on plan assets ............................... -- -- --
Net amortization:
Actuarial loss (gain) ..................................... 340 (3) 29
Prior service cost ........................................ (233) 29 --
Curtailment and special termination benefit .................. (1,150) -- --
------- ------- -------
Net plan costs ............................................... $ 3,162 $ 4,310 $ 3,866
======= ======= =======
Weighted-average assumptions:
Discount Rate ................................................ 6.75% 7.50% 7.50%
60
63
The weighted average annual assumed health care trend rate is assumed to
be 7.5% for 1999. The rate is assumed to decrease gradually to 5.8% in 2027 and
remain level thereafter. Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plans. A one percentage point
change in assumed health care trend rates would have the following effects:
1% Increase 1% Decrease
------------- ------------
(Dollars in Thousands)
Effect on total of service and interest cost components............... $ 232 $ (201)
Effect on post-retirement benefit obligation.......................... 2,257 (1,959)
The Company recorded a $10.2 million charge, included in Other Expense,
increasing its pension liability and other postretirement benefits liability in
the second quarter of fiscal 1999 as a result of an early retirement program for
employees at the Texas City, Texas plant and certain benefit changes for all
U.S. employees. The early retirement program resulted in curtailment expense for
the pension plan and special termination benefits expenses for both the pension
and the other postretirement benefits plans, partially offset by the curtailment
gain from the reduction of postretirement life insurance benefits for currently
active U.S. employees.
EMPLOYEE STOCK OWNERSHIP TRUST
In connection with the recapitalization of the Company in August of 1996,
an Employee Stock Ownership Trust (the "ESOT") was established which covers
substantially all United States employees. Allocations of shares of common stock
are made annually to participants. The ESOT primarily invests in shares of
Holdings Common Stock and borrowed $6.5 million from Chemicals to purchase
approximately 542,000 shares of Holdings Common Stock. This ESOP loan is payable
in 16 quarterly installments during the period beginning December 31, 1996, and
ending September 30, 2000. The shares of Holdings Common Stock purchased by the
ESOT have been pledged as security for the ESOP loan and such shares are
released and allocated to the ESOT participants' accounts as the ESOP Loan is
discharged. Until the ESOP loan is paid in full, contributions to the ESOT will
be used to pay the outstanding principal and interest on the ESOP loan. In
addition, during fiscal 1998 and 1997, the ESOT purchased 14,000 and 99,000,
respectively, shares of Holdings Common Stock. In fiscal 1999, 1998, and 1997,
160,000, 172,000, and 49,000, respectively, ESOT shares had been allocated to
employees. The Company recorded $0.7 million, $1.4 million, and $1.6 million of
expense related to the ESOT in fiscal 1999, 1998, and 1997, respectively.
SAVINGS AND INVESTMENT PLAN
The Company's Amended and Restated Savings and Investment Plan (the
"Savings Plan") covers substantially all United States employees, including
executive officers. The Savings Plan is qualified under Section 401(k) of the
Internal Revenue Code (the "Code"). Each participant has the option to defer
taxation of a portion of his or her earnings by directing the Company to
contribute a percentage of such earnings to the Savings Plan. A participant may
direct up to a maximum of 15% of eligible earnings to the Savings Plan, subject
to certain limitations set forth in the Code for "highly compensated"
participants. A participant's contributions become distributable upon the
termination of his or her employment. The Company does not make any contribution
to the Savings Plan.
PROFIT SHARING AND BONUS PLANS
In January 1997, the Board of Directors, upon recommendation of the
Compensation Committee, approved the establishment of a Profit Sharing Plan that
is designed to benefit all qualified employees, and a Bonus Plan that will
provide for bonuses to certain exempt salaried employees based on the Company's
annual financial performance. No expenses for profit sharing or bonuses were
incurred in fiscal 1999, 1998, or 1997.
OMNIBUS STOCK AWARDS AND INCENTIVE PLAN
In April 1997, the Board of Directors approved the establishment of the
Omnibus Stock Awards and Incentive Plan (as amended, the "Omnibus Plan"). Under
the Omnibus Plan, the Company may grant to key employees incentive and
nonqualified stock options, SARs, restricted stock awards, performance awards,
and phantom stock awards. One million shares of the Company's stock are reserved
for issuance under the Omnibus Plan. The terms and amounts of the awards
(including vesting schedule) are determined by the Compensation Committee of the
Board of Directors. Generally, outstanding stock options become exercisable
(vest) in equal annual installments beginning a year from date of grant and
ending five years from date of grant. In the event of a specified change of
control of the Company or a qualified public offering of Holdings Common Stock,
all awards will immediately vest and become exercisable.
61
64
During fiscal 1999 and 1998, the Company issued 1,500 and 23,000,
respectively, restricted stock awards to certain employees. These restricted
stock awards vested 25% immediately and 25% per year over the next three years.
NONQUALIFIED STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
Also in April 1997, the Board of Directors approved the establishment of
the Nonqualified Stock Option Plan for Non-Employee Directors (the "Nonqualified
Plan"). Each non-employee director of the Company is eligible to participate in
the Nonqualified Plan. Each eligible director on the date of adoption of the
Nonqualified Plan was granted an option to acquire 2,000 shares of Holdings
Common Stock (4,000 shares for the Vice-Chairman), and each eligible director
who is serving on the Board of Directors on each subsequent October 1st is
automatically granted an option to acquire 1,000 shares of Holdings Common Stock
(2,000 shares for the Vice-Chairman). All options expire ten years from date of
grant. All options are granted with an exercise price at or above the fair
market value of a share of Holdings Common Stock on the date of grant (as
determined by the Board of Directors) and vest and are exercisable immediately.
A total of 160,000 shares of Holdings Common Stock are reserved for issuance
under the Nonqualified Plan.
OUTSTANDING STOCK OPTIONS
A summary of the status of the Company's outstanding stock options as of
September 30, 1999 and 1998, and changes during the years then ended is
presented below:
1999 1998 1997
--------------------------- --------------------------- ---------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
(IN EXERCISE (IN EXERCISE (IN EXERCISE
THOUSANDS) PRICE(1) THOUSANDS) PRICE THOUSANDS) PRICE
------------ --------------- ----------- -------------- ----------- -------------
Outstanding at beginning of year 692 $ 11.74 241 $ 12.00 -- --
Granted 95 $ 6.08 489 $ 11.62 274 $ 12.00
Exercised -- -- -- --
Forfeited (105) $ 6.00 (38) $ 11.94 (33) $ 12.00
-------- ------ ------ --------
Outstanding at end of year 682 $ 6.14 692 $ 11.74 241 $ 12.00
======== ======== ====== ======== ====== ========
Options exercisable at end of year 178 86 14
======== ====== ======
(1) On December 14, 1998, the Company issued to all of its employees who held
stock options on that date new options with an exercise price of $6.00 per
share. The new options were issued in exchange for and cancellation of stock
options previously issued to those employees for the same number of shares and
with the same vesting schedules.
The range of exercise prices for options outstanding at September 30,
1999, was $6.00 - $12.00, with all exercisable options having an exercise price
range of $6.00 - $12.00.
During fiscal 1998, Holdings granted certain employees rights to purchase
an aggregate of 230,000 shares of Holdings Common Stock, at then current market
prices. These rights expired without being exercised.
All stock options are granted with an exercise price at or above fair
market value of a share of Holdings Common Stock at the grant date. The weighted
average fair value of the stock options granted during fiscal 1999, 1998, and
1997 was $0.6 million, $1.9 million, and $0.5 million, respectively. The fair
value of each such stock option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for the grants in fiscal 1999, 1998, and 1997: risk free
interest rate of 5.9%, 4.4% and 6.1%, respectively; expected dividend yield of
0.0% for all years; expected life of ten years for all years; and expected
volatility of 59%, 29%, and 44%, respectively. Stock options generally expire
ten years from the date of grant and fully vest after five years. The
outstanding stock options at September 30, 1999 have a weighted average
contractual life of approximately 8 years.
In accordance with SFAS 123, "Accounting for Stock-Based Compensation",
the Company utilizes the intrinsic value method of accounting for stock-based
compensation, and no compensation costs have been recognized for stock option
awards described above. Had compensation cost for all option issuances been
determined consistent with SFAS No. 123, it would not have had a material impact
on the Company's pro forma net loss and loss per share for fiscal 1999, 1998,
and 1997.
62
65
6. COMMITMENTS AND CONTINGENCIES
PRODUCT CONTRACTS
The Company has certain long-term agreements, which provide for the
dedication of 100% of the Company's production of acetic acid, plasticizers,
TBA, sodium cyanide, and calcium hypochlorite each to one customer. The Company
also has various sales and conversion agreements, which dedicate significant
portions of the Company's production of styrene, acrylonitrile, and methanol to
various customers. Some of these agreements generally provide for cost recovery
plus an agreed margin or element of profit based upon market price.
LEASE COMMITMENTS
The Company has entered into various long-term noncancellable operating
leases. Future minimum lease commitments at September 30, 1999, are as follows:
fiscal 2000 -- $5.3 million; fiscal 2001 -- $4.9 million; fiscal 2002 -- $4.8
million; fiscal 2003 -- $4.1 million; fiscal 2004 -- $3.7 million; and $7.6
million thereafter.
ENVIRONMENTAL AND SAFETY MATTERS
The Company's operations involve the handling, production, transportation,
treatment, and disposal of materials that are classified as hazardous or toxic
waste and that are extensively regulated by environmental and health and safety
laws, regulations, and permit requirements. Environmental permits required for
the Company's operations are subject to periodic renewal and can be revoked or
modified for cause or when new or revised environmental requirements are
implemented. Changing and increasingly strict environmental requirements can
affect the manufacture, handling, processing, distribution, and use of the
Company's chemical products and, if so, the Company's business and operations
may be materially and adversely affected. In addition, changes in affected
environmental requirements can cause the Company to incur substantial costs in
upgrading or redesigning its facilities and processes, including waste
treatment, storage, disposal, and other waste handling practices and equipment.
The Company conducts environmental management programs designed to
maintain compliance with applicable environmental requirements at all of its
facilities. The Company routinely conducts inspection and surveillance programs
designed to detect and respond to leaks or spills of regulated hazardous
substances and to correct identified regulatory deficiencies. The Company
believes that its procedures for waste handling are consistent with industry
standards and applicable requirements. In addition, the Company believes that
its operations are consistent with good industry practice through participation
in the Responsible Care initiatives as a part of membership in the Chemical
Manufacturers Association in the United States and the Canadian Chemical
Producers Association. However, a business risk inherent in chemical operations
is the potential for personal injury and property damage claims from employees,
contractors and their employees, and nearby landowners and occupants. While the
Company believes its business operations and facilities generally are operated
in compliance in all material respects with all applicable environmental and
health and safety requirements, it cannot be sure that past practices or future
operations will not result in material claims or regulatory action, require
material environmental expenditures, or result in exposure or injury claims by
employees, contractors and their employees, and the public. Some risk of
environmental costs and liabilities is inherent in the Company's operations and
products, as it is with other companies engaged in similar businesses.
The Company's operating expenditures for environmental matters, mostly
waste management and compliance, were approximately $30 million, $52 million,
and $50 million for fiscal 1999, 1998, and 1997, respectively. The Company also
spent approximately $6 million and $2 million for environmentally related
capital projects in fiscal 1999 and 1998 respectively.
Any significant ban on all chlorine containing compounds could have a
materially adverse effect on the Company's financial condition and results of
operations. British Columbia has a regulation in place requiring elimination of
the use of all chlorine products, including chlorine dioxide, in the bleaching
process by the year 2002. Chlorine dioxide is produced from sodium chlorate,
which is one of the Company's pulp chemicals products. The pulp and paper
industry believes that a ban of chlorine dioxide in the bleaching process will
yield no measurable environmental or public health benefit and is working to
change this regulation, but there can be no assurance that this regulation will
be changed. In the event such a regulation is implemented, the Company would
seek to sell the products it manufactures at its British Columbia facility to
customers in other markets. The Company is not aware of any other laws or
regulations in place in North America that would restrict the use of such
products for other purposes.
63
66
LEGAL PROCEEDINGS
Ammonia Release
On May 8, 1994, an ammonia release occurred at the Texas City Plant while
a reactor in the acrylonitrile unit was being restarted after a shutdown for
routine maintenance. Approximately 52 lawsuits and interventions involving
approximately 6,000 plaintiffs were filed against the Company seeking an
unspecified amount of money for alleged damages from the ammonia release.
Approximately 2,600 of the plaintiffs agreed to submit their damage claims
to binding arbitration. A two-week evidentiary hearing was conducted in July
1996 before a three-judge panel to determine the amount of damages. On May 1,
1997, the three-judge panel awarded the plaintiffs an amount of damages which
was well within the limits of the Company's insurance coverage.
Thirty-nine of the plaintiffs tried their cases to a jury in Harris County
District Court. After approximately five months of trial, the jury returned a
verdict on September 2, 1997. The total amount awarded for all 39 plaintiffs was
well within the limits of the Company's insurance coverage.
Approximately 5,980 of the claims in litigation have now been resolved or
are pending final resolution and the Company continues to vigorously defend
against the claims of the approximately 20 remaining plaintiffs.
Nickel Carbonyl Release
On July 30, 1997, as the Company's methanol unit at the Texas City Plant
was being shut down for repair, nickel carbonyl was formed when carbon monoxide
reacted with nickel catalyst in the unit's reformer. After isolating the nickel
carbonyl within the methanol unit, the Company worked with the permission and
guidance of the Texas Natural Resources Conservation Commission to destroy the
nickel carbonyl by incineration on-site.
Prior to its incineration, several Company employees and contractor
employees may have been exposed to nickel carbonyl in the methanol unit. Two
lawsuits and two interventions involving approximately 306 plaintiffs were filed
against the Company seeking an unspecified amount for alleged damages from the
nickel carbonyl release. Since the filing of the lawsuits, approximately 14
plaintiffs' claims (including one intervenor) have been resolved, some of which
are subject to the completion of documentation. The Company continues to
vigorously defend against the claims of the approximately 292 remaining
plaintiffs. Additional claims and litigation against the Company relating to
this incident may ensue.
Ethylbenzene Release
On April 1, 1998, a chemical leak occurred when a line failed in the
ethylbenzene unit at the Texas City Plant. The released chemicals included
ethylbenzene, benzene, polyethylbenzene, and hydrochloric acid. The Company does
not believe any serious injuries were sustained, although a number of citizens
sought medical examinations at local hospitals after a precautionary alert was
given to neighboring communities. There is no lawsuit pending against the
Company based on this release, but the Company has received, and in some
instances resolved, claims from individuals for alleged damage from this
incident.
Other Claims
The Company is subject to various other claims and legal actions that
arise in the ordinary course of its business.
LITIGATION CONTINGENCY
The Company has made estimates of the reasonably possible range of
liability with regard to its outstanding litigation for which it may incur
liability. These estimates are based on the Company's judgments using currently
available information as well as consultation with the Company's insurance
carriers and outside legal counsel. A number of the claims in these litigation
matters are covered by the Company's insurance policies or by third-party
indemnification of the Company. The Company, therefore, has also made estimates
of its probable recoveries under insurance policies or from third-party
indemnitors based on its understanding of its insurance policies and
indemnifications, discussions with its insurers and indemnitors, and
consultation with outside legal counsel, in addition to the Company's judgments.
Based on the foregoing, as of September 30, 1999, the Company has accrued
approximately $2.8 million as its estimate of aggregate contingent liability for
these matters and has also recorded
64
67
aggregate receivables from its insurers and third-party indemnitors of
approximately $2.2 million. At September 30, 1999, management estimates that the
aggregate reasonably possible range of loss for all litigation combined, in
addition to the amount accrued, is from $0 to $5 million. The Company believes
that this additional reasonably possible loss is substantially covered by
insurance.
While the Company has based its estimates on its evaluation of available
information to date and the other matters described above, much of the
litigation remains in the discovery stage and it is impossible to predict with
certainty the ultimate outcome. The Company will adjust its estimates as
necessary as additional information is developed and evaluated. However, the
Company believes that the final resolution of these contingencies will not have
a material adverse impact on the financial position, results of operations, or
cash flows of the Company. In addition, the timing of probable insurance and
indemnity recoveries, and payment of liabilities, if any, is not expected to
have a material adverse effect on the financial position, results of operations,
or cash flows of the Company.
7. BUSINESS ACQUISITIONS
On January 31, 1997, the Company acquired the acrylic fibers business (the
"AFB") from Cytec (the "AFB Acquisition"). The AFB, now owned by two wholly
owned subsidiaries of the Company (collectively "Sterling Fibers"), recorded
sales of approximately $92 million during the eight months of operations in
fiscal 1997 and consists of an acrylic fibers plant located near Pensacola,
Florida, and several associated marketing and research offices. Sterling Fibers
is one of two acrylic fibers manufacturers in the United States. Cytec supplies
acrylonitrile to Sterling Fibers through a five-year supply agreement ending in
2002. The acquisition was financed through the incurrence of $81 million of term
debt and the issuance of $10 million (liquidation value) of Series A "pay in
kind" mandatory redeemable preferred stock ("Series A Preferred") to Cytec, and
the sale of $10 million of Holdings Common Stock in a private placement. The
Company used the purchase method to account for the acquisition, and operating
results of Sterling Fibers, beginning February 1, 1997, are included with those
of the Company.
On July 10, 1997, Sterling Sask acquired substantially all of the assets
of Saskatoon Chemicals (the "Saskatoon Acquisition"). The acquired assets
include a manufacturing plant near Saskatoon, Saskatchewan, which manufactures
sodium chlorate, caustic soda, calcium hypochlorite, chlorine, and hydrochloric
acid. Total consideration of $69.2 million was financed with: (i) approximately
$54.6 million under a new credit facility established by Sterling Sask with a
group of lenders, (ii) approximately $7.3 million pursuant to a private
placement of Holdings Common Stock, and (iii) approximately $7.3 million
pursuant to a private placement of Units, each Unit consisting of shares of
Holdings' Series B "pay in kind" mandatory Cumulative Redeemable Preferred Stock
("Series B Preferred") and warrants to purchase shares of Holdings Common Stock.
The Saskatoon Acquisition was accounted for under the purchase method, and
operating results of Sterling Sask, beginning July 10, 1997, are included with
those of the Company.
The following table presents the unaudited pro forma results of operations
of the Company as if the AFB Acquistion and the Saskatoon Acquisition had
occurred on October 1, 1996. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what would have
occurred had the AFB Acquistion and the Saskatoon Acquisition been made at the
beginning of the fiscal year 1997 or of results which may occur in the future
(in thousands, except per share amounts).
Pro Forma
Twelve Months
Ended
September 30,
1997
---------------
Revenues................................................................... $ 988,000
Income (loss) before extraordinary items................................... $ (27,300)
Net income (loss) attributable to common stockholders...................... $ (34,200)
Net income (loss) per common share......................................... $ (2.85)
65
68
8. SEGMENT AND GEOGRAPHIC INFORMATION:
Effective October 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" and has restated its
segment disclosures for all reporting periods. The Company's operations are
divided into two reportable segments: petrochemicals and pulp chemicals. The
petrochemicals segment manufactures commodity petrochemicals and acrylic fibers.
The pulp chemicals segment manufactures chemicals for use primarily in the pulp
and paper industry. Operating segment information for 1999, 1998, and 1997 is
presented below.
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in Thousands)
Segment Information (1)
Revenues:
Petrochemicals $ 530,927 $ 621,605 $ 728,215
Pulp chemicals 189,825 200,985 180,572
--------- --------- ---------
Total $ 720,752 $ 822,590 $ 908,787
Operating income (loss):
Petrochemicals $ (63,710) $ (3,442) $ 11,524
Pulp chemicals 27,018 36,232 45,945
--------- --------- ---------
Total $ (36,692) $ 32,790 $ 57,469
Depreciation and amortization expenses:
Petrochemicals $ 34,001 $ 31,894 $ 31,504
Pulp chemicals 23,676 24,069 18,345
--------- --------- ---------
Total $ 57,677 $ 55,963 $ 49,849
Interest expenses:
Petrochemicals $ 65,426 $ 59,617 $ 53,814
Pulp chemicals 38,635 44,838 35,087
--------- --------- ---------
Total $ 104,061 $ 104,455 $ 88,901
Capital expenditures:
Petrochemicals $ 21,252 $ 16,768 $ 22,664
Pulp chemicals 8,288 9,854 20,764
--------- --------- ---------
Total $ 29,540 $ 26,622 $ 43,428
Property, plant, and equipment, net:
Petrochemicals $ 223,519 $ 263,692 $ 282,630
Pulp chemicals 179,204 186,623 209,406
--------- --------- ---------
Total $ 402,723 $ 450,315 $ 492,036
(1) The petrochemicals segment is based in the United States. The pulp chemicals
segment is primarily based in Canada.
Sales to individual customers constituting 10% or more of total revenues
and sales by segment were as follows:
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
1999 1998 1997
--------- ----------- -----------
(Dollars in Thousands)
Major Customers:
British Petroleum plc and subsidiaries $ 71,803 $ 100,610 *
Export Sales:
Export revenues $ 200,448 $ 233,165 $ 274,139
Percentage of total revenues 28% 28% 30%
*DOES NOT COMPRISE 10% OF TOTAL REVENUE FOR FISCAL 1997, THEREFORE NOT REPORTED.
9. FINANCIAL INSTRUMENTS
FOREIGN EXCHANGE
The Company enters into forward foreign exchange contracts to hedge
Canadian dollar currency transactions on a continuing basis for periods
consistent with its committed exposures. The forward foreign exchange contracts
have
66
69
varying maturities with none exceeding 18 months. The Company makes net
settlements of United States dollars for Canadian dollars at rates agreed to at
inception of the contracts.
The Company enters into forward foreign exchange contracts to reduce risk
due to Canadian dollar exchange rate movements. The Company does not engage in
currency speculation. The Company had a notional amount of approximately $6
million and $54 million of forward foreign exchange contracts outstanding to buy
Canadian dollars at September 30, 1999 and 1998, respectively. The deferred loss
on these forward foreign exchange contracts at September 30, 1999 and 1998 was
$0.3 million and $4.7 million, respectively. The last of the Company's existing
forward exchange contracts expires in March of 2000, and it does not intend to
enter into any additional forward exchange contracts.
GAS HEDGE
The Company hedged a portion of its natural gas to be used in the
production of styrene and methanol during fiscal 1999, 1998, and 1997. At
September 30, 1999, there were no outstanding natural gas hedges. The Company
had a net loss of $1.5 million, $1.0 million, and $0.1 million due to natural
gas hedging contracts in fiscal 1999, 1998, and 1997.
INTEREST RATE SWAPS
The Company has entered into a declining balance interest rate swap
contract to hedge a portion of its interest rate risk that expires in January
2002. At September 30, 1999, the Company had a contractual notional amount of
$49.1 million outstanding with a fixed rate of 6.66% and a floating rate based
on LIBOR. The Company's interest rate swap is settled on a quarterly basis, with
the interest rate differential received or paid by the Company recognized as
adjustments to interest expense.
CONCENTRATION OF RISK
The Company sells its products primarily to companies involved in the
petrochemicals, acrylic fibers, and pulp and paper manufacturing industries. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral for accounts receivable. However, letters of credit are
required by the Company on many of its export sales. Historically, the Company's
credit losses have been minimal.
The Company maintains cash deposits with major banks, which from time to
time may exceed federally insured limits. The Company periodically assesses the
financial condition of the institutions and believes that the likelihood of any
possible loss is minimal.
Approximately 37% of the Company's employees are covered by union
agreements. Approximately 5% of the Company's employees are covered by union
agreements which could expire within one year.
INVESTMENTS
It is the policy of the Company to invest its excess cash in investment
instruments or securities whose value is not subject to market fluctuations,
such as certificates of deposit, repurchase agreements, or Eurodollar deposits
with domestic or foreign banks or other financial institutions. Other permitted
investments include commercial paper of major United States corporations with
ratings of A1 by Standard & Poor's Ratings Group or P1 by Moody's Investor
Services, Inc., loan participations of major United States corporations with a
short term credit rating of A1/P1 and direct obligations of the United States
Government or its agencies. In addition, not more than $5 million will be
invested by the Company with any single bank, financial institution, or United
States corporation.
67
70
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheet for cash
and cash equivalents, receivables, payables, and certain accrued expenses
approximate fair value due to the short maturities. The following table presents
the carrying values and fair values of the Company's long-term debt at September
30, 1999.
CARRYING VALUE FAIR VALUE
-------------- -------------
(Dollars in Thousands)
Revolving credit facilities $ 54,643 $ 54,643
Saskatoon Term Loans 44,045 44,045
11 1/4% Notes 152,485 85,500
11 3/4% Notes 275,000 170,500
12 3/8% Notes 295,000 295,000
13 1/2% Notes 147,628 32,598
The fair values of the 13 1/2% Notes, 11 1/4 % Notes, and 11 3/4% Notes
are based on quoted market prices. Due to the 12 3/8% Notes being issued near
the Company's September 30, 1999 fiscal year-end, the fair value approximates
the carrying value. In addition, due to the New Revolvers and the Saskatoon Term
Loans having variable interest rates, the fair value equals their carrying
value.
At September 30, 1999, the foreign exchange contracts had a fair value of
$0.3 million loss based on then current exchange rates. In addition, the
interest rate swaps had a fair market value of $0.5 million loss, based on the
Company's estimate of what it would have to pay to terminate the swap at
September 30, 1999.
10. RELATED PARTY TRANSACTIONS
In May of 1999, the Company engaged Credit Suisse First Boston Corporation
("CSFB") and Donaldson Lufkin & Jenrette Securities Corporation ("DLJ") as
Joint-Book Running Managers in connection with the issuance by Chemicals of the
12 3/8% Notes. CSFB and DLJ also underwrote the New Credit Agreement with The
CIT Group/Business Credit, Inc. The Company paid CSFB a total of $5,218,750
under these arrangement in fiscal 1999. John L. Garcia, one of the Company's
directors, was a Managing Director and the Head of the Global Chemical
Investment Banking Group of CSFB from 1994 until April of 1999.
Since October 1, 1991, the Company has had ongoing commercial
relationships in the ordinary course of business with certain affiliates of Koch
Industries, Inc., including agreements for the supply of raw materials, sales of
petrochemicals, and transportation of natural gas. During the fiscal years of
the Company ended September 30, 1999, 1998, and 1997:
o the Company made product sales to and purchased raw materials from
Koch Chemical, an indirect wholly owned subsidiary of Koch
Industries, Inc.;
o the Company made payments to John Zink Company, an indirect wholly
owned subsidiary of Koch Industries, Inc., in consideration for
certain contracting and construction services performed at the
Texas City Plant; and
o the Company made payments to Koch Gateway Pipeline Company for the
transportation of natural gas to the Santa Rosa Plant through a
pipeline in which it is a partner.
Each of these relationships represented less than 5% of the Company's revenues
in each of such fiscal years. In addition, in 1998 the Company filed a lawsuit
against John Zink Company seeking recovery for certain types of damages
sustained in connection with a release of nickel carbonyl from the Company's
methanol unit on July 30, 1997. This lawsuit has been voluntarily dismissed but,
under a tolling agreement between the parties, may be refiled at any time. Koch
Capital Services, Inc., an affiliate of Koch Industries, Inc., is a significant
stockholder of the Company and, under the Voting Agreement described below, has
the right to designate a member of the Board of Directors of the Company.
In connection with the Saskatoon Acquisition, the Company paid a one-time
fee of $100,000 to Clipper Capital Associates, Inc. ("Clipper") and Olympus
Partners ("Olympus") to act as placement agents for the Series B Preferred
Stock. Rolf H. Towe, a director of the Company, and Robert Calhoun, a former
director of the Company, are officers of Clipper and affiliates of Clipper.
Affiliates of Clipper and Olympus are significant stockholders of the Company.
In
68
71
addition, under the Voting Agreement described below, an affiliate of Clipper
has the right to designate a member of the Board of Directors of the Company.
The holders of 6,654,963 shares of Holdings Common Stock, representing
approximately 52% of Holdings outstanding shares, are parties to a Third Amended
and Restated Voting Agreement dated as of February 1, 1999 (the "Voting
Agreement"). Four directors of the Company, Frank P. Diassi, Frank J. Hevrdejs,
T. Hunter Nelson and William A. McMinn, are parties to the Voting Agreement.
Other parties to the Voting Agreement include Koch Capital Services, Inc. (an
affiliate of Koch Industries), affiliates of Clipper ("The Clipper Group"),
affiliates of Olympus, CSFB, and Gordon A. Cain. The parties to the Voting
Agreement are required to vote any shares of Holdings Common Stock owned by them
in favor of three nominees to the Board of Directors of Holdings, one to be
designated by each of Koch Capital Services, Inc., The Clipper Group, and Mr.
Cain. George J. Damiris is the current designee of Koch Capital Services, Inc.,
Rolf H. Towe is the current designee of The Clipper Group, and William A. McMinn
is the current designee of Mr. Cain. The rights of each of Koch Capital
Services, Inc. and The Clipper Group to designate nominees under the Voting
Agreement terminates on the earlier of August 21, 2006 or the time at which they
beneficial own less than 5% of the outstanding shares of Holdings Common Stock,
respectively. The right of Mr. Cain to designate a nominee terminates upon the
earlier of (i) December 15, 2008 and (ii) the later of (a) the expiration of the
Standby Purchase Agreement to which he is a party (described below) and (b) the
time at which Mr. Cain beneficial owns less than 5% of the outstanding shares of
Holdings Common Stock.
The Company paid The Sterling Group, Inc. ("TSG") a one-time transaction
fee of approximately $1.1 million in connection with the AFB Acquisition and a
one-time fee of approximately $0.7 million in connection with the Saskatoon
Acquisition. In addition, the Company paid TSG approximately $12,782 in fiscal
1999 in advisory fees and reimbursement of expenses. Two directors of the
Company, Frank J. Hevrdejs and T. Hunter Nelson, are principals of TSG, with Mr.
Hevrdejs also serving as the President of TSG. Frank P. Diassi, Chairman of the
Board of the Company, Peter W. De Leeuw, President and Chief Executive Officer
of the Company, Robert W. Roten, Vice Chairman of the Board of the Company and
former President and Chief Executive Officer of the Company, William A. McMinn,
a director of the Company, Gary M. Spitz, Chief Financial Officer and a Vice
President of the Company, Richard K. Crump, Vice President--Strategic Planning
of the Company, and David G. Elkins, Vice President, General Counsel and
Secretary of the Company, have all previously co-invested with principals of TSG
in various transactions unrelated to the Company.
Under engagement letters dated April 15, 1998 and April 27, 1998, the
Company engaged Chem Systems, an IBM company, to perform certain consulting
services related to the Company's styrene monomer business. In addition, on
August 10, 1998, the Company engaged Chem Systems to conduct a site study of the
Texas City Plant and to benchmark the Company's best practices and
organizational structures against top quartile performers in the industry.
Finally, in connection with the refinancing in July of 1999, the Company paid
Chem Systems amounts owed to them by DLJ related to the performance of an
appraisal of some of the Company's assets required for the refinancing. During
fiscal 1999, the Company paid Chem Systems an aggregate of $421,164 pursuant to
these arrangements. Peter Spitz, who is the father of Gary M. Spitz (Chief
Financial Officer and a Vice President of the Company), was the Director of Chem
Systems until August of 1999. Peter Spitz did not personally perform any direct
services under any of these arrangements.
As of December 15, 1998, Holdings entered into separate Standby Purchase
Agreements with each of Gordon A. Cain, William A. McMinn, James Crane, Frank P.
Diassi, Frank J. Hevrdejs, and Koch Capital Services, Inc. as described below in
Footnote 11.
11. CAPITAL STOCK
On January 31, 1997, the Company issued 778,232 shares of Holdings Common
Stock in connection with the AFB Acquisition. In addition, on July 10, 1997, the
Company issued 608,334 shares of Holdings Common Stock in connection with the
Saskatoon Acquisition.
In connection with the issuance of the 13 1/2% Notes (see Note 3),
Holdings issued 191,751 warrants to purchase three shares of Holdings Common
Stock for $0.01, exercisable beginning in August 1998 until August 2008. During
fiscal 1999 and 1998, 32,460 and 345,123 shares, respectively, of Holdings
Common Stock were issued as a result of 10,820 and 115,041, respectively, of
these warrants being exercised. In connection with the Saskatoon Acquisition,
Holdings also issued to holders of the Series B Preferred Stock warrants to
purchase 201,048 shares of Holdings Common Stock for $0.01, exercisable
beginning in July 1997 until December 2007.
In December 1998, the Company entered into separate Standby Purchase
Agreements (collectively, the "Purchase Agreements") with each of Gordon A.
Cain, William A. McMinn, James Crane, Mr. Diassi, Mr. Hevrdejs, and Koch Capital
Services, Inc. (collectively, the "Purchasers"). Pursuant to the terms of the
Purchase Agreements, the Purchase
69
72
committed to purchase up to 2.5 million shares of Common Stock, at a price of
$6.00 per share, if, as, and when requested by the Company at any time or from
time to time prior to December 15, 2001. Under each of the Purchase Agreements,
the Company may only require the Purchasers to purchase such shares if it
believes that such capital is necessary to maintain, reestablish, or enhance its
borrowing ability under the Company's revolving credit facilities or to satisfy
any requirement thereunder to raise additional equity. To induce the Purchasers
to enter into the Purchase Agreements, the Company issued to them warrants to
purchase an aggregate of 300,000 shares of Common Stock at an exercise price of
$6.00 per share. Pursuant to the Purchase Agreements, the Company agreed to
issue to the Purchasers additional warrants to purchase up to 300,000 additional
shares of Common Stock if, as, and when they purchase shares of Common Stock
under the Purchase Agreements. Any shares of Common Stock purchased under the
Purchase Agreement and the warrants issued to the Purchasers as contemplated by
the Purchase Agreements will be subject to the terms of the Third Amended and
Restated Voting Agreement dated as of February 1, 1999, the Sterling Chemicals
Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, as
amended, and the Tag-Along Agreement dated as of August 21, 1996.
At September 30, 1999, warrants to purchase an aggregate of 698,718 shares
Holdings Common Stock were outstanding.
12. MANDATORY REDEEMABLE PREFERRED STOCK
In connection with the AFB Acquisition, the Company authorized 350,000
shares and issued 104,110 shares of non-voting Series A Preferred Stock with a
fair value and carrying value of $10.0 million. The Series A Preferred Stock has
a cumulative dividend rate of 10%, payable in kind semi-annually on January 1
and July 1 of each year commencing July 1, 1997. The Company may redeem all or
any number of shares of Series A Preferred Stock at any time with proper written
notice at a price of $100 per share plus accrued dividends. The holders of
Series A Preferred Stock may elect to have the Company redeem shares on any
dividend payment date after June 30, 2009 with proper written notice at a price
of $100 per share plus accrued dividends. The carrying value of the Series A
Preferred Stock at September 30, 1999 and 1998, was $13.0 million and $11.8
million, respectively (liquidation value of $100 per share).
In connection with the Saskatoon Acquisition, the Company authorized
58,000 shares and issued approximately 7,532 shares of non-voting Series B
Preferred Stock with a fair value of $4.9 million. The Series B Preferred Stock
has a 14% dividend rate through July 10, 2002, and thereafter a variable rate
between 14% and 18% depending on payment terms until redeemed. The dividend is
payable in kind on January 1, April 1, July 1, and October 1 of each year,
commencing October 1, 1997. The Company may redeem all or any number of shares
of Series B Preferred Stock at any time with proper written notice at a price of
$1,000 per share plus a premium ranging from 5% to 1% depending on the date of
redemption plus accrued dividends. The holders of Series B Preferred Stock may
elect to have the Company redeem shares on any dividend payment date after June
30, 2009, with proper written notice at a price of $1,000 per share plus accrued
dividends. The carrying value of the Series B Preferred Stock at September 30,
1999 and 1998, was $7.9 million and $6.5 million, respectively (liquidation
value of $1,000 per share). The difference in the carrying value and the
redemption amount will be accreted as a charge to retained earnings over the
holding period using the effective interest rate method.
13. NEW ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Management is currently evaluating the
accounting impact and disclosures required when this statement is adopted in the
first quarter of fiscal 2001.
70
73
STERLING CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Except as modified below, the Notes to the Company's Consolidated
Financial Statements are incorporated herein by reference insofar as they relate
to Chemicals.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES
Chemicals is included in the consolidated federal tax return filed by its
parent, Holdings. A tax sharing agreement between Holdings and Chemicals defines
the computation of Chemicals' obligations to Holdings. Chemicals' provision for
income taxes is computed as if Chemicals and its subsidiaries file their annual
tax return on a separate company basis. Deferred income taxes are recorded to
reflect the tax effect of the temporary differences between the financial
reporting basis and the tax basis of Chemicals' assets and liabilities at
enacted rates.
EARNINGS PER SHARE
All issued and outstanding shares of Chemicals are held by Holdings, and
accordingly, earnings per share are not presented.
2. INCOME TAXES
A reconciliation of federal statutory income taxes to Chemicals' effective
tax benefit before extraordinary item follows:
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in Thousands)
Benefit for income taxes at statutory rates................... $ (44,235) $ (20,385) $ (4,576)
Taxable foreign dividends..................................... 4,295 -- --
Change in valuation allowance................................. 1,514 -- --
Non-deductible expenses....................................... 195 -- --
State and foreign income taxes................................ 550 1,422 3,782
Other......................................................... 8,271 -- (1,354)
---------- ---------- ----------
Effective tax benefit......................................... $ (29,410) $ (18,963) $ (2,148)
========== ========== ==========
The benefit for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30,
--------------------------------------
1999 1998 1997
--------- --------- ----------
(Dollars in Thousands)
From operations:
Current federal............................................... $ 2,246 $ (5,900) $ (5,959)
Deferred federal.............................................. (31,198) (15,271) (4,235)
Deferred foreign.............................................. (1,300) 2,132 6,104
Current state................................................. 842 76 1,942
--------- ---------- ----------
Total tax provision (benefit)................................. $ (29,410) $ (18,963) $ (2,148)
========= ========== ==========
71
74
The components of Chemicals' deferred income tax assets and liabilities are
summarized below:
SEPTEMBER 30,
----------------------
1999 1998
-------- --------
(Dollars in Thousands)
Deferred tax assets:
Accrued liabilities ......................... $ 12,050 $ 12,074
Accrued postretirement cost ................. 11,991 10,010
Tax loss and credit carryforward and other .. 63,663 24,783
Other ....................................... 1,628 17,980
-------- --------
Total deferred tax assets ................... 89,332 64,847
======== ========
Deferred tax liabilities:
Property, plant and equipment ............... $(68,732) $(78,113)
Other ....................................... (2,629) (4,895)
-------- --------
Total deferred tax liabilities .............. (71,361) (83,008)
Valuation allowance ......................... (1,514) --
-------- --------
Net deferred tax assets (liabilities) ....... 16,457 (18,161)
Less current deferred tax assets ............ (16,888) (5,140)
-------- --------
Long-term deferred tax liabilities .......... $ (431) $(23,301)
======== ========
72
75
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Sterling Chemicals Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Sterling
Chemicals Holdings, Inc. and subsidiaries as of September 30, 1999 and 1998, and
the related consolidated statements of operations, changes in stockholders'
equity (deficiency in assets), and cash flows for each of the three years in the
period ended September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sterling Chemicals Holdings, Inc.
and subsidiaries as of September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
December 9, 1999
73
76
INDEPENDENT AUDITORS' REPORT
To the Stockholder of Sterling Chemicals, Inc.
We have audited the accompanying consolidated balance sheets of Sterling
Chemicals, Inc. and subsidiaries as of September 30, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholder's equity
(deficiency in assets), and cash flows for each of the three years in the period
ended September 30, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sterling Chemicals, Inc. and
subsidiaries as of September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the period ended
September 30, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
December 9, 1999
74
77
STERLING CHEMICALS UNITED STATES SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
Revenues ............................................. $ 222,353 $ 261,990 $ 262,256
Cost of goods sold ................................... 188,296 209,883 197,555
--------- --------- ---------
Gross profit ......................................... 34,057 52,107 64,701
Selling, general and administrative expenses ......... 19,280 22,098 15,637
Interest and debt related expenses ................... 38,877 36,366 35,165
--------- --------- ---------
Net income (loss) before income taxes ................ (24,100) (6,357) 13,899
Provision (benefit) for income taxes ................. (3,727) (2,217) 6,290
--------- --------- ---------
Net income (loss) .................................... $ (20,373) $ (4,140) $ 7,609
========= ========= =========
The accompanying notes are an integral part
of the combined financial statements.
75
78
STERLING CHEMICALS UNITED STATES SUBSIDIARIES
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30,
------------------------
1999 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 9,323 $ 4,093
Accounts receivable ..................................... 45,139 38,562
Inventories ............................................. 29,207 32,532
Prepaid expenses ........................................ 12,748 6,090
--------- ---------
Total current assets .................................. 96,417 81,277
Property, plant and equipment, net ......................... 196,877 207,177
Due from affiliates ........................................ 121,506 131,771
Other assets ............................................... 40,275 51,635
--------- ---------
Total assets .......................................... $ 455,075 $ 471,860
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ........................................ $ 22,399 $ 20,432
Accrued liabilities ..................................... 16,515 16,277
--------- ---------
Total current liabilities ............................. 38,914 36,709
Long-term debt due to parent ............................... 325,402 323,303
Deferred income taxes ...................................... 7,272 6,509
Deferred credits and other liabilities ..................... 7,227 12,019
Commitments and contingencies (Note 7) ..................... -- --
Stockholder's equity:
Common stock ............................................ -- --
Additional paid-in capital .............................. 92,734 92,734
Retained earnings ....................................... 11,026 31,399
Accumulated other comprehensive income .................. (27,500) (30,813)
--------- ---------
Total stockholder's equity ............................ 76,260 93,320
--------- ---------
Total liabilities and stockholder's equity ......... $ 455,075 $ 471,860
========= =========
The accompanying notes are an integral part
of the combined financial statements.
76
79
STERLING CHEMICALS UNITED STATES SUBSIDIARIES
COMBINED STATEMENTS OF
CHANGES IN STOCKHOLDER'S EQUITY
(AMOUNTS IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
------ --------- --------- --------- ---------
Balance, September 30, 1996 .......... -- $ 83,395 $ 27,930 $ (19,124) $ 92,201
Acquisition of acrylic fibers business -- 9,339 -- -- 9,339
Comprehensive income:
Net income ........................ -- -- 7,609 --
Translation adjustment ............ -- -- -- (1,648)
Comprehensive income ........... -- -- -- -- 5,961
------ --------- --------- --------- ---------
Balance, September 30, 1997 .......... -- 92,734 35,539 (20,772) 107,501
Comprehensive income:
Net loss .......................... -- -- (4,140) --
Translation adjustment ............ -- -- -- (10,041)
Comprehensive loss ............. -- -- -- -- (14,181)
------ --------- --------- --------- ---------
Balance, September 30, 1998 .......... -- 92,734 31,399 (30,813) 93,320
Comprehensive income:
Net loss .......................... -- -- (20,373) --
Translation adjustment ............ -- -- -- 3,313
Comprehensive loss ............. -- -- -- -- (17,060)
------ --------- --------- --------- ---------
Balance, September 30, 1999 .......... -- $ 92,734 $ 11,026 $ (27,500) $ 76,260
====== ========= ========= ========= =========
The accompanying notes are an integral part
of the combined financial statements.
77
80
STERLING CHEMICALS UNITED STATES SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net income (loss)............................................................... $(20,373) $ (4,140) $ 7,609
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization ............................................... 24,153 23,502 20,537
Deferred tax expense (benefit) .............................................. (2,404) (2,479) 5,894
Other ....................................................................... (233) 447 74
Change in assets/liabilities:
Accounts receivable ......................................................... (6,577) 14,331 10,824
Inventories ................................................................. 3,325 (77) (24,897)
Prepaid expenses ............................................................ (6,658) (3,291) 570
Due from affiliates ......................................................... 14,135 1,174 66,042
Other assets ................................................................ 5,189 (613) (11,909)
Accounts payable ............................................................ 1,966 665 6,509
Accrued liabilities ......................................................... 238 (531) 4,266
Other liabilities ........................................................... (2,182) 298 (2,221)
-------- -------- --------
Net cash flows provided by operating activities ................................ 10,579 29,286 83,298
-------- -------- --------
Cash flows from investing activities:
Capital expenditures ........................................................ (7,682) (10,550) (24,065)
-------- -------- --------
Net cash used in investing activities .......................................... (7,682) (10,550) (24,065)
-------- -------- --------
Cash flows from financing activities:
Net change in long-term debt due to Parent .................................. 2,099 (20,411) (57,156)
-------- -------- --------
Net cash provided by (used in) financing activities ............................ 2,099 (20,411) (57,156)
Effect of United States/Canadian exchange rate on cash ......................... 234 (447) (205)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ........................... 5,230 (2,122) 1,872
Cash and cash equivalents--beginning of year ................................... 4,093 6,215 4,343
-------- -------- --------
Cash and cash equivalents--end of year.......................................... $ 9,323 $ 4,093 $ 6,215
======== ======== ========
Supplemental disclosures of cash flow information:
Income taxes paid............................................................ $ (749) $ (541) $ (766)
The accompanying notes are an integral part
of the combined financial statements.
78
81
STERLING CHEMICALS UNITED STATES SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
On July 23, 1999, Sterling Chemicals, Inc. ("Chemicals") completed a private
offering of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006. On
November 5, 1999, Chemicals completed a registered exchange offer, pursuant to
which all of these 12 3/8% Notes were exchanged for publicly registered 12 3/8%
Notes with substantially similar terms (the "12 3/8% Notes"). The 12 3/8% Notes
are guaranteed by all of Chemicals' existing direct and indirect United States
("United States") subsidiaries (other than Sterling Chemicals Acquisitions,
Inc.) on a joint and several basis and are secured by, among other things, a
second priority pledge of 100% of the stock of these same United States
subsidiaries. These United States subsidiaries consist of Sterling Canada, Inc.
and its United States subsidiaries, Sterling Chemicals Energy, Inc., Sterling
Chemicals International, Inc., and Sterling Fibers, Inc. The financial
statements of these companies (except for Sterling Chemicals Energy, Inc., whose
securities do not constitute a substantial portion of the collateral) have been
combined to present the accompanying financial statements of the Company.
Sterling Canada, Inc. (including its United States and Canadian subsidiaries),
Sterling Chemicals International, Inc., and Sterling Fibers, Inc. are
hereinafter collectively referred to as "Sterling Chemicals United States
Subsidiaries" or the "Company".
The Company manufactures chemicals for use primarily in the pulp and paper
industry at four plants in Canada and one plant in Valdosta, Georgia (the
"Valdosta Plant"), and manufactures acrylic fibers in a plant near Pensacola,
Florida (the "Santa Rosa Plant"). Sodium chlorate is produced at the four plants
in Canada and the Valdosta Plant. Sodium chlorite is produced at one of the
Canadian locations. The Company licenses, engineers, and overseas construction
of large-scale chlorine dioxide generators for the pulp and paper industry as
part of the pulp chemical business. These generators convert sodium chlorate
into chlorine dioxide at pulp mills. The Company produces regular textiles,
specialty textiles, and technical fibers at the Santa Rosa Plant, as well as
licensing its acrylic fibers manufacturing technology to producers worldwide
(collectively, the "acrylic fibers business" or "AFB").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are described below.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of all wholly owned
and majority-owned subsidiaries of the combined entities. All significant
intercompany accounts and transactions among entities included in the combined
financial statements have been eliminated.
CASH EQUIVALENTS
The Company considers all investments purchased with a remaining maturity
of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market; cost is primarily
determined on the first-in, first-out basis except for stores and supplies,
which are valued at average cost.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Major renewals and
improvements, which extend the useful lives of the equipment, are capitalized.
Major planned maintenance expenses are accrued for during the periods prior to
the maintenance, while routine repair and maintenance expenses are charged to
operations as incurred. Disposals are removed at carrying cost less accumulated
depreciation with any resulting gain or loss reflected in operations.
Depreciation is provided using the straight-line method over estimated useful
lives ranging from 5 to 25 years with the
79
82
predominant life of the plant and equipment being 15 years. The Company
capitalizes interest costs, which are incurred as part of the cost of
constructing major facilities and equipment. The amount of interest capitalized
for the fiscal years 1999, 1998, and 1997 was $0 million, $0 million, and $2.7
million, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
Impairment tests of long-lived assets are made when conditions indicate
their carrying cost may not be recoverable. Such impairment tests are based on a
comparison of undiscounted future cash flows or the market value of similar
assets to the carrying cost of the asset. If an impairment is indicated, the
asset value is written down to its estimated fair value.
PATENTS AND ROYALTIES
The cost of patents is amortized on a straight-line basis over their
estimated useful lives which approximates ten years. The Company capitalized the
value of the chlorine dioxide generator technology acquired in fiscal 1992 based
on the net present value of all estimated remaining royalty payments associated
with the technology. The resulting intangible amount is included in other assets
and is amortized over an average life for these royalty payments of ten years.
INCOME TAXES
The Company is included in the consolidated United States federal income
tax return filed by Chemicals' parent, Sterling Chemicals Holdings, Inc.
("Holdings"). The Company's provision (benefit) for United States income taxes
has been allocated by Chemicals as if the Company filed their annual tax returns
on a separate return basis. The Company's Canadian subsidiaries file separate
federal Canadian tax returns as well as returns in the provinces in which they
operate. For these Canadian subsidiaries, deferred income taxes are recorded to
reflect the tax effect of the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities.
REVENUE RECOGNITION
The Company generates revenues through sales in the open market and
long-term supply contracts and recognizes these revenues as the products are
shipped. Deferred credits are amortized over the life of the contract which gave
rise to them. The Company also generates revenues from the construction and sale
of chlorine dioxide generators, which are recognized using the percentage of
completion method. The Company also receives prepaid royalties, which are
typically recognized over a period of ten years. In addition, the Company
generates revenues from the sale of acrylic fibers manufacturing technology to
producers worldwide, which are recognized as earned.
FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE
Assets and liabilities denominated in Canadian dollars are translated into
United States dollars at year-end exchange rates and revenues and expenses are
translated at the average monthly exchange rates. Translation adjustments are
reported as a separate component of stockholders' equity, while transaction
gains and losses are included in operations when incurred.
The Company's Canadian subsidiaries enter into forward foreign exchange
contracts to minimize the short-term impact of Canadian dollar fluctuations on
certain of its Canadian dollar denominated commitments. Gains or losses on these
contracts are deferred and are included in operations in the same period in
which the related transactions are settled.
EARNINGS PER SHARE
All issued and outstanding shares of the entities included in the Company's
financial statements are held directly or indirectly by Chemicals, and
accordingly, earnings per share information is not presented.
80
83
ENVIRONMENTAL COSTS
Environmental costs are expensed unless the expenditures extend the
economic useful life of the assets. Costs that extend the economic life of the
assets are capitalized and depreciated over the remaining life of such assets.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable, and the cost can be reasonably estimated.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In preparing disclosures about the fair value of financial instruments, the
Company has assumed that the carrying amount approximates fair value for cash
and cash equivalents, receivables, short-term borrowings, accounts payable, and
certain accrued expenses because of the short maturities of those instruments.
The fair values of long-term debt instruments are estimated based upon quoted
market values (if applicable) or on the current interest rates available for
debt with similar terms and remaining maturities. Considerable judgment is
required in developing these estimates and, accordingly, no assurance can be
given that the estimated values presented herein are indicative of the amounts
that would be realized in a free market exchange.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported periods.
Significant estimates include environmental reserves, litigation contingencies,
maintenance costs related to shut downs, and taxes. Actual results could differ
from these estimates.
ALLOCATIONS
The Company is wholly owned by Chemicals, which incurs certain direct and
indirect expenses for the benefit and support of the Company. These services
include, among others, tax planning, treasury, legal, risk management, and the
maintenance of insurance coverage for the Company. Chemicals allocated $3.5
million, $4.1 million, and $2.7 million of such expenses to the Company in
fiscal years 1999, 1998, and 1997, respectively, which are included in selling,
general, and administrative expenses. Allocations are based on the Company's
proportionate share of the respective amount and are determined using various
criteria including headcount, payroll, number of vehicles, and revenue. In
addition, the Company is dependent on Chemicals for financing.
NEW ACCOUNTING STANDARDS
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and displaying of comprehensive income and
its components and SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," which establishes revisions to employers'
disclosure about pension and other post retirement benefit plans. Adoption of
these statements in fiscal 1999 had no effect on net income (loss). The only
item of accumulated other comprehensive income is the Company's foreign currency
translation adjustment.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Management is currently evaluating the
accounting impact and disclosures required when this statement is adopted in the
first quarter of fiscal 2001.
RECLASSIFICATION
Certain amounts reported in the financial statements for the prior periods
have been reclassified to conform with the current financial statement
presentation with no effect on net income (loss) or stockholder's equity
(deficiency in assets).
81
84
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
SEPTEMBER 30,
------------------------
1999 1998
--------- ---------
(Dollars in Thousands)
Inventories:
Finished products ......................... $ 17,513 $ 20,198
Raw materials ............................. 2,235 2,784
--------- ---------
Inventories at cost ............................ 19,748 22,982
--------- ---------
Inventories under exchange agreements ..... 170 34
Stores and supplies ....................... 9,289 9,516
--------- ---------
$ 29,207 $ 32,532
========= =========
Property, plant and equipment:
Land ...................................... $ 2,808 $ 5,440
Buildings ................................. 34,919 30,822
Plant and equipment ....................... 222,528 215,739
Construction in progress .................. 13,073 13,342
--------- ---------
Property, plant and equipment at cost ..... 273,328 265,343
Less: accumulated depreciation ............ (76,451) (58,166)
--------- ---------
$ 196,877 $ 207,177
========= =========
Other assets:
Patents and technology, net ............... $ 20,718 $ 27,017
Other ..................................... 19,557 24,618
--------- ---------
$ 40,275 $ 51,635
========= =========
Accrued liabilities:
Accrued compensation ...................... $ 4,988 $ 927
Billings in excess of costs incurred ...... 3,135 2,593
Other ..................................... 8,392 12,757
--------- ---------
$ 16,515 $ 16,277
========= =========
4. LONG-TERM DEBT
In August 1996 in connection with a recapitalization transaction, Chemicals
allocated $276.8 million of debt to the Company. In addition, debt of $81
million incurred at the time Chemicals acquired the acrylic fibers business (see
Note 8) was allocated to the Company. Principal payments are allocated to the
Company by Chemicals as scheduled principal payments are made on a basis
consistent with the original allocation. In addition, the Company makes
principal payments, from time to time, out of available cash. Interest expense
is allocated based on the terms of Chemicals' debt agreements. At September 30,
1999, interest rates ranged from 11.25% to 12.375%. Debt issue costs relating to
long-term debt have been allocated to the Company by Chemicals on a basis
consistent with long-term debt and are included in other assets.
On July 23, 1999, Chemicals completed a private offering of $295,000,000 of
its 12 3/8% Notes due 2006 which were subsequently exchanged for the 12 3/8%
Notes. The 123/8% Notes are guaranteed by all of Chemicals' existing direct and
indirect United States subsidiaries (other than Sterling Chemicals Acquisitions,
Inc.) on a joint and several basis. Each subsidiary's guarantee ranks equally in
right of payment with all of such subsidiary's existing and future senior
indebtedness and senior in right of payment to all existing and future
subordinated indebtedness of such subsidiary. However, the 12 3/8% Notes and
each subsidiary's guarantee, is subordinated to the extent of the collateral
securing Chemicals' new secured revolving credit facilities described below. The
12 3/8% Notes and the subsidiary guarantees are secured by (i) a second priority
lien on all of Chemicals' and the subsidiary guarantors' United States
production facilities and related assets, (ii) a second priority pledge of all
of the capital stock of each subsidiary guarantor, and (iii) a first priority
pledge of 65% of the stock of certain of the Chemicals' subsidiaries
incorporated outside of the United States. The proceeds of the offering of the
12 3/8% Notes were used to fully repay and terminate Chemicals' three
outstanding term loans. Upon consummation of the offering of the 12 3/8% Notes,
the debt allocated to the Company by Chemicals increased to $325.4 million.
In addition, on July 23, 1999, Chemicals established two new secured
revolving credit facilities providing for up to $155,000,000 in revolving credit
loans (the "New Revolvers") under a single Revolving Credit Agreement (the "New
82
85
Credit Agreement"). Under the New Credit Agreement, Chemicals and the Company
are co-borrowers and are jointly and severally liable for any indebtedness
thereunder. The New Revolvers consist of (i) a $70,000,000 revolving credit
facility (the "Fixed Assets Revolver") secured by a first priority lien on all
United States production facilities and related assets of Chemicals and the
Company, all of the capital stock of Chemicals and the Company and a second
priority lien on all accounts receivable, inventory, and other specified assets
of Chemicals and the Company, and (ii) an $85,000,000 revolving credit facility
(the "Current Assets Revolver") secured by a first priority lien on all accounts
receivable, inventory, and other specified assets of Chemicals and the Company.
Funding under the 12 3/8% Notes and the New Revolvers occurred on July 23,
1999. The proceeds of the 12 3/8% Notes and the initial borrowings under the New
Revolvers were used to completely repay all outstanding indebtedness under
Chemicals then existing senior credit facility.
Approximately $54.6 million was drawn by Chemicals under the Fixed Assets
Revolver at September 30, 1999, of which no amounts were allocated to the
Company. Borrowings under the Fixed Assets Revolver bear interest, at Chemicals'
option, at an annual rate of either the "LIBOR Rate" (as defined in the New
Credit Agreement) plus 3.75% or the "Alternate Base Rate" plus 2.25%. Borrowings
under the Current Assets Revolver bear interest, at Chemicals' option, at an
annual rate of either the LIBOR Rate plus 3.00% or the "Alternate Base Rate"
plus 1.50%. The "Alternate Base Rate" is equal to the greater of the "Base Rate"
as announced from time to time by The Chase Manhattan Bank in New York, New York
or the "Federal Funds Effective Rate" plus 1/2% (as such terms are defined in
the New Credit Agreement). The New Credit Agreement also requires Chemicals and
the Company to pay an aggregate commitment fee ranging from 0.75% to 1.25% on
the unused portion of the commitment for the Fixed Assets Revolver, depending on
the amount drawn, and an aggregate commitment fee of 0.5% on the unused portion
of the commitment for the Current Assets Revolver. Available credit under the
Current Assets Revolver is subject to a monthly borrowing base consisting of 85%
of eligible accounts receivable and 65% of eligible inventory with an inventory
cap of $42,500,000. In addition, the borrowing base for the Current Assets
Revolver must exceed outstanding borrowings thereunder by $12,000,000 at all
times.
The Fixed Assets Revolver matures in five years, with quarterly commitment
reductions totaling 28% of the total commitment in year four and the balance in
year five. The Current Assets Revolver matures in five years, with no scheduled
commitment reductions prior to that time. However, the commitments for each of
the Fixed Assets Revolver and the Current Assets Revolver will be permanently
reduced to the extent required under the New Credit Agreement upon prepayments
made out of specific sources of funds, including asset sales and certain equity
issuances by Holdings.
5. INCOME TAXES
The Company is included in the consolidated federal United States tax
return filed by Holdings. The Company's provision (benefit) for United States
income taxes has been allocated as if the Company filed their annual federal
United States tax returns on a separate return basis. As of September 30, 1999
and 1998, $14.6 million and $10.5 million, respectively, of deferred income tax
assets were included in Due from Affiliates. For the years ended September 30,
1999, 1998, and 1997 the Company recorded $4.0 million, $4.0 million, and $1.8
million, respectively, of United States income tax benefit in the provision
(benefit) for income taxes.
Canadian deferred income taxes are recorded to reflect the tax consequences
in future years of differences between the tax basis of assets and liabilities
and the financial reporting amounts at each year-end (the liability method).
A reconciliation of the Canadian income taxes to the Canadian effective tax
provision follows:
YEAR ENDED SEPTEMBER 30,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
Provision for federal income tax at the statutory rate ............ $ 259 $ 1,367 $ 5,798
Provincial income taxes at the statutory rate ..................... 88 563 2,672
Federal and provincial manufacturing and processing tax credits ... (50) (286) (889)
Other ............................................................. 16 156 600
-------- -------- --------
Total Canadian tax provision ...................................... $ 313 $ 1,800 $ 8,181
======== ======== ========
83
86
The provision for Canadian income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30,
---------------------------------
1999 1998 1997
------- ------- -------
(Dollars in Thousands)
Current federal .............................. $ 2,098 $ 2,852 $ 1,489
Deferred federal ............................. (1,859) (1,611) 3,717
Current provincial ........................... 619 1,427 798
Deferred provincial .......................... (545) (868) 2,177
------- ------- -------
Total Canadian tax provision ................. $ 313 $ 1,800 $ 8,181
======= ======= =======
The components of the Company's Canadian deferred income tax assets and
liabilities are summarized below:
SEPTEMBER 30,
----------------------
1999 1998
-------- --------
(Dollars in Thousands)
Deferred tax assets:
Accrued liabilities .......................... $ 318 $ 299
Accrued postretirement cost .................. 1,236 966
Investment tax credits ....................... 4,767 6,806
-------- --------
6,321 8,071
-------- --------
Deferred tax liabilities:
Property, plant, and equipment ............... (13,593) (14,459)
Other ........................................ -- (121)
-------- --------
(13,593) (14,580)
-------- --------
Net deferred tax liabilities .................... $ (7,272) $ (6,509)
======== ========
6. EMPLOYEE BENEFITS
The Company's United States employees participate in various employee
benefit plans of Chemicals. Costs, assets, and liabilities associated with
United States employees participating in these various plans are allocated to
the Company by Chemicals based on the number of employees. In addition, the
Company sponsors various employee benefit plans in Canada.
RETIREMENT BENEFIT PLANS
Chemicals has non-contributory pension plans in the United States which
cover all salaried and wage employees. The benefits under these plans are based
primarily on years of service and employees' pay near retirement. Chemicals'
funding policy is consistent with the funding requirements of federal law and
regulations. Plan assets consist principally of common stocks and government and
corporate securities. The liability relating to United States employees
allocated to the Company by Chemicals for the retirement benefit plans and
included in Due from Affiliates was $3.6 million and $2.5 million at September
30, 1999 and 1998, respectively. The total pension expense relating to United
States employees allocated to the Company was $1.1 million, $1.1 million, and
$0.9 million for the years ended September 30, 1999, 1998, and 1997,
respectively.
84
87
The Company has employer and employee contributor plans in Canada which
cover all salaried and wage employees. Information for Canadian benefit plans
concerning the pension obligation, plan assets, amounts recognized in the
Company's financial statements, and underlying actuarial assumptions is stated
below.
AUGUST 31,
----------------------
1999 1998
-------- --------
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year ........................... $ 14,577 $ 13,348
Currency rate conversion .......................................... 556 (1,314)
Service cost ...................................................... 919 748
Interest cost ..................................................... 1,112 1,016
Actuarial loss (gain) ............................................. (124) 1,008
Benefits paid ..................................................... (757) (229)
-------- --------
Benefit obligation at end of year ................................. $ 16,283 $ 14,577
======== ========
Change in plan assets:
Fair value at beginning of year ................................... $ 13,062 $ 14,859
Currency rate conversion .......................................... 498 (1,463)
Actual return on plan assets ...................................... 1,858 (882)
Employer contributions ............................................ 669 698
Participants' contributions ....................................... -- 79
Benefits paid ..................................................... (757) (229)
-------- --------
Fair value at end of year ......................................... $ 15,330 $ 13,062
======== ========
Development of net amount recognized:
Funded status ..................................................... $ (953) $ (1,515)
Unrecognized cost:
Actuarial loss (gain) .......................................... (22) 962
Prior service cost ............................................. 333 348
-------- --------
Net amount recognized ............................................. $ (642) $ (205)
======== ========
Amounts recognized in the statement of financial position:
Prepaid pension cost .............................................. $ 529 $ 655
Accrued pension cost .............................................. (1,198) (1,054)
Intangible asset .................................................. 27 175
Accumulated other comprehensive income ............................ -- 19
-------- --------
Net amount recognized ............................................. $ (642) $ (205)
======== ========
Net periodic pension costs (income) for the Canadian pension plan consist of the
following components:
AUGUST 31,
-----------------------------------
1999 1998 1997
------- ------- -------
(Dollars in Thousands)
Components of net pension costs:
Service cost-benefits earned during the year ................. $ 919 $ 748 $ 830
Interest on prior year's projected benefit obligation ........ 1,112 1,016 1,127
Expected return on plan assets ............................... (963) (1,092) (1,212)
Net amortization:
Actuarial loss (gain) ..................................... 68 (130) (144)
Prior service cost ........................................ 29 15 16
------- ------- -------
Net pension costs ............................................ $ 1,165 $ 557 $ 617
======= ======= =======
Weighted-average assumptions:
Discount Rate ................................................ 7.50% 7.00% 8.00%
Rates of increase in salary compensation level ............... 4.50% 4.00% 5.00%
Expected long-term rate of return on plan assets ............. 7.50% 7.00% 8.00%
85
88
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Chemicals and the Company provide certain health care benefits and life
insurance benefits for retired employees. Substantially all employees become
eligible for these benefits at normal retirement age. The cost of these benefits
are accrued during the period in which the employee renders the necessary
service.
Health care benefits are provided to employees who retire with ten or more
years of service except for Canadian employees covered by collective bargaining
agreements. All employees are eligible for postretirement life insurance.
Postretirement health care benefits for United States. Plans are
non-contributory. Benefit provisions for most hourly and some salaried employees
are subject to collective bargaining. In general, the plans stipulate that
retiree health care benefits are paid as covered expenses are incurred. The
liability relating to United States employees allocated to the Company by
Chemicals for the postretirement benefits other than pensions and included in
Due from Affiliates was $7.3 million and $7.2 million at September 30, 1999 and
1998, respectively. The total postretirement benefits other than pensions
expense for United States employees allocated to the Company was $0.8 million,
$0.8 million, and $0.8 million for the years ended September 30, 1999, 1998, and
1997, respectively. In addition, a curtailment gain of $0.8 million was
allocated during fiscal 1999 related to the reduction of postretirement life
insurance benefits for currently active U.S. employees.
Information for Canadian benefit plans concerning the plan obligation, the
funded status, amounts recognized in the Company's financial statements, and
underlying actuarial assumptions is stated below.
AUGUST 31,
--------------------
1999 1998
------- -------
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year ............ $ 4,306 $ 3,831
Service cost ....................................... 307 264
Interest cost ...................................... 299 286
Actuarial loss (gain) .............................. -- (50)
Benefits paid ...................................... (26) (25)
------- -------
Benefit obligation at end of year .................. $ 4,886 $ 4,306
======= =======
Development of net amount recognized:
Funded status ...................................... $(4,886) $(4,306)
Unrecognized cost:
Actuarial loss (gain) ........................... 637 669
Prior service cost .............................. -- --
------- -------
Net amount recognized .............................. $(4,249) $(3,637)
======= =======
Net periodic plan costs (income) for the Canadian postretirement benefit consist
of the following components:
AUGUST 31,
--------------------------
1999 1998 1997
------ ------ ------
(Dollars in Thousands)
Components of net plan costs:
Service cost ............................ $ 307 $264 $ 208
Interest cost ........................... 299 286 202
Net amortization
Actuarial loss (gain) ................ 32 -- --
------ ------ ------
Net plan costs (income) ................. $ 638 $ 550 $ 410
====== ====== ======
Weighted-average assumptions:
Discount Rate ........................... 6.75% 7.5% 7.5%
The weighted average annual assumed health care trend rate is assumed to be
7.5% for 1999. The rate is assumed to decrease gradually to 5.8% in 2027 and
remain level thereafter. Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plans. A one-percentage point
change in assumed health care trend rates would have the following effects:
1% INCREASE 1% DECREASE
----------- -----------
(Dollars in Thousands)
Effect on total of service and interest cost components............... $ 33 $ (29)
Effect on post-retirement benefit obligation........................ 230 (200)
86
89
SAVINGS AND INVESTMENT PLAN
Chemicals' Amended and Restated Savings and Investment Plan (the "Savings
Plan") covers substantially all United States employees of the Company,
including executive officers. The Savings Plan is qualified under Section 401(k)
of the Internal Revenue Code (the "Code"). Each participant has the option to
defer taxation of a portion of his or her earnings by directing the Company to
contribute a percentage of such earnings to the Savings Plan. A participant may
direct up to a maximum of 15% of eligible earnings to the Savings Plan, subject
to certain limitations set forth in the Code for "highly compensated"
participants. A participant's contributions become distributable upon the
termination of his or her employment. The Company does not make any
contributions to the Savings Plan.
PROFIT SHARING AND BONUS PLANS
In January 1997, the Board of Directors of Holdings, upon recommendation of
its Compensation Committee, approved the establishment of a Profit Sharing Plan
that is designed to benefit all qualified employees, and a Bonus Plan that will
provide for bonuses to exempt salaried employees based on the annual financial
performance of Holdings.
No expenses for profit sharing or bonuses were incurred by Chemicals or
allocated to the Company in fiscal 1999, 1998, or 1997.
PHANTOM STOCK PLAN
The Company introduced a phantom stock plan to all eligible full-time
Canadian employees. The effective date of the plan was August 21, 1996. At the
end of each plan year, the plan administrator establishes a "determined
percentage" for the preceding plan year. This percentage is then multiplied be
each participant's compensation for the plan year to determine the award amount.
The award amount is then divided be the fair market value of one share of the
common stock of 'Holdings, as of December 31 of that plan year, to determine the
number of rights to be credited to participants. Upon termination of employment,
the benefit amount becomes payable to the participant. The benefit amount will
be the number of vested rights in the participant's account, multiplied by the
fair market value of one share of common stock of Holdings as of the most recent
valuation date.
The Company has recorded expense of $248,000, $238,000, and $346,000
related to the phantom stock plan for the years ended September 30, 1999, 1998,
or 1997.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company has entered into various long-term non-cancelable operating
leases. Future minimum lease commitments at September 30, 1999, are as follows:
fiscal 2000 -- $4.5 million; fiscal 2001 -- $4.2 million; fiscal 2002 -- $4.1
million; fiscal 2003 -- $3.9 million; fiscal 2004 -- $3.7 million; and $7.6
million thereafter.
ENVIRONMENTAL AND SAFETY MATTERS
The Company's operations involve the handling, production, transportation,
treatment, and disposal of materials that are classified as hazardous or toxic
waste and that are extensively regulated by environmental and health and safety
laws and regulations. Environmental permits required for the Company's
operations are subject to periodic renewal and can be revoked or modified for
cause or when new or revised environmental laws or permit requirements are
implemented. Changing and increasingly strict environmental laws, regulations,
and permit requirements can affect the manufacturing, handling, processing,
distribution, and use of the Company's products and, if so, the Company's
business and operations may be materially and adversely affected. In addition,
changes in the law, regulations, and permit requirements can cause the Company
to incur substantial costs in upgrading or redesigning its facilities and
processes, including waste treatment, storage, disposal, and other waste
handling practices and equipment.
87
90
While the Company believes that its business operations and facilities
generally are operated in compliance with all material aspects of applicable
environmental and health and safety laws, regulations, and disclosure
requirements, there can be no assurance that past practices and future
operations will not result in material claims or regulatory action, require
material environmental expenditures, or result in exposure or injury claims by
employees and the public. Some risk of environmental costs and liabilities is
inherent in the operations and products of the Company, as it is with other
companies engaged in similar businesses. In addition, a catastrophic event at
any of the Company's facilities could result in liabilities to the Company
substantially in excess of its insurance coverages.
Any significant ban on all chlorine containing compounds could have a
materially adverse effect on the Company's financial condition and results of
operations. British Columbia has a regulation in place requiring elimination of
the use of all chlorine products, including chlorine dioxide, in the bleaching
process by the year 2002. Chlorine dioxide is produced from sodium chlorate,
which is one of the Company's pulp chemicals products. The pulp and paper
industry believes that a ban of chlorine dioxide in the bleaching process will
yield no measurable environmental or public health benefit and is working to
change this regulation but there can be no assurance that the regulation will be
changed. In the event such a regulation is implemented, the Company would seek
to sell the products it manufactures at its British Columbia facility to
customers in other markets. The Company is not aware of any other laws or
regulations in place in North America which would restrict the use of such
products for other purposes.
LEGAL PROCEEDINGS
The Company is subject to claims and legal actions that arise in the
ordinary course of its business. The Company believes that the ultimate
liability, if any, with respect to these claims and legal actions will not have
a material effect on the financial position or results of operations of the
Company.
PLEDGE OF COMMON STOCK
In order to secure the repayment of indebtedness under the Fixed Assets
Revolver, a first priority pledge of 100% of the common stock of each of the
United States entities included in these financial statements was granted by the
holders of such stock.
In order to secure the repayment of the 123/8% Notes, a second priority
pledge of 100% of the common stock of each of the United States entities
included in these financial statements was granted by the holders of such stock.
In addition, a first priority pledge of 65% of the common stock of each of the
Company's non-United States entities was given by the holders of such stock.
8. BUSINESS ACQUISITION
On January 31, 1997, the Company acquired the AFB from Cytec Industries
Inc. ("Cytec"). The AFB, or Sterling Fibers, recorded sales of approximately $92
million during the eight months of operations in fiscal 1997 and consists of an
acrylic fibers plant located near Pensacola, Florida, and several associated
marketing and research offices. Sterling Fibers is one of two acrylic fibers
manufacturers in the United States. Cytec supplies acrylonitrile to Sterling
Fibers through a five-year supply agreement ending in 2002. The acquisition was
financed through the issuance of $81 million of debt by Chemicals, the issuance
of $10 million (liquidation value) of Series A "pay in kind" mandatory
redeemable preferred stock of Holdings ("Series A Preferred") to Cytec, and the
sale of $10 million of Holdings' common stock in a private placement. At the
acquisition date, the debt and amounts related to the Series A Preferred Stock
were allocated to the Company as long-term debt due to Holdings and amounts
related to Holdings' common stock were recorded as contributed capital. The
Company used the purchase method to account for the acquisition, and operating
results of Sterling Fibers beginning February 1, 1997, are included with those
of the Company.
88
91
The following table presents the unaudited pro forma results of operations
of the Company as if the AFB acquisition had occurred on October 1, 1996. The
pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the AFB Acquisition
been made at the beginning of the fiscal year 1996 or of results which may occur
in the future (in thousands).
PRO FORMA
TWELVE MONTHS
ENDED
SEPTEMBER 30,
1997
-----------------
Revenues..................... $ 306,756
Net income................... $ 5,408
9. FINANCIAL INSTRUMENTS
FOREIGN EXCHANGE
The Company enters into forward foreign exchange contracts to hedge
Canadian dollar currency transactions on a continuing basis for periods
consistent with its committed exposures. The forward foreign exchange contracts
have varying maturities with none exceeding 18 months. The Company makes net
settlements of United States dollars for Canadian dollars at rates agreed to at
inception of the contracts.
The Company enters into forward foreign exchange contracts to reduce risk
due to Canadian dollar exchange rate movements. The Company does not engage in
currency speculation. The Company had a notional amount of approximately $6
million and $54 million of forward foreign exchange contracts outstanding to buy
Canadian dollars at September 30, 1999 and 1998, respectively. The deferred loss
on these forward foreign exchange contracts at September 30, 1999 and 1998 was
$0.3 million and $4.7 million, respectively. The last of the Company's existing
forward exchange contracts expired in March of 2000, and it does not intend to
enter into any additional forward exchange contracts.
CONCENTRATION OF RISK
The Company sells its products primarily to companies involved in the
acrylic fiber and pulp and paper manufacturing industries. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral for accounts receivable. However, letters of credit are required by
the Company on many of its export sales. Historically, the Company's credit
losses have been minimal.
The Company maintains cash deposits with major banks, which from time to
time may exceed federally insured limits. The Company periodically assesses the
financial condition of the institutions and believes that any possible loss is
minimal.
Approximately 36% of the Company's employees are covered by union
agreements. Approximately 8% of the Company's employees are covered by union
agreements which could expire within one year.
INVESTMENTS
It is the policy of the Company to invest its excess cash in investment
instruments or securities whose value is not subject to market fluctuations such
as certificates of deposit, repurchase agreements, or Eurodollar deposits with
domestic or foreign banks or other financial institutions. Other permitted
investments include commercial paper of major United States corporations with
ratings of A1 by Standard & Poor's Ratings Group or P1 by Moody's Investor
Services, Inc., loan participations of major United States corporations with a
short term credit rating of A1/P1, and direct obligations of the United States
Government or its agencies. In addition, not more than $5 million will be
invested by the Company with any single bank, financial institution, or United
States corporation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheet for cash
and cash equivalents, receivables, payables, and certain accrued expenses
approximate fair value due to the short maturities. Based on the Company's
allocated portion of Chemicals' debt at September 30, 1999, the carrying value
is $325.4 million, and the fair value is $246.9 million.
89
92
INDEPENDENT AUDITORS' REPORT
To the Stockholder of
Sterling Canada, Inc.
Sterling Fibers, Inc.
Sterling Chemicals International, Inc.
We have audited the accompanying combined balance sheets of Sterling Chemicals
U.S. Subsidiaries (as defined in Note 1--the "Company") as of September 30, 1999
and 1998, and the related combined statements of operations, changes in
stockholder's equity, and cash flows for each of the three years in the period
ended September 30, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1999 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
December 9, 1999
90
93
STERLING PULP CHEMICALS, LTD.
STATEMENTS OF OPERATIONS
(U.S. DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
----------------------------------
1999 1998 1997
-------- -------- --------
Revenues ........................................ $109,510 $112,750 $130,114
Cost of goods sold .............................. 90,656 86,403 91,752
-------- -------- --------
Gross profit .................................... 18,854 26,347 38,362
Selling, general and administrative expenses .... 12,740 16,650 14,468
Interest and debt related expenses .............. 5,548 4,997 4,122
-------- -------- --------
Net income before income taxes .................. 566 4,700 19,772
Provision for income taxes (Note 5) ............. 313 1,800 8,181
-------- -------- --------
Net income ...................................... $ 253 $ 2,900 $ 11,591
======== ======== ========
The accompanying notes are an integral part of these financial statements.
91
94
STERLING PULP CHEMICALS, LTD.
BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
ASSETS
Current
Cash and cash equivalents ................................................ $ 8,481 $ 3,426
Accounts receivable (net of allowance for doubtful accounts of $205;
1998--$153) ........................................................... 16,840 14,015
Due from related parties (Note 8) ........................................ 1,369 954
Other receivables ........................................................ 2,254 1,744
Inventories (Note 2) ..................................................... 5,146 6,660
Prepaid expenses ......................................................... 633 592
------------- -------------
34,723 27,391
Property, plant and equipment, net (Note 3) ................................... 75,531 80,038
Other assets .................................................................. 440 4,878
------------- -------------
Total assets ............................................................. $ 110,694 $ 112,307
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current
Accounts payable ......................................................... $ 8,978 $ 13,400
Accrued generator construction costs ..................................... 2,967 1,175
Other accrued liabilities ................................................ 7,093 5,213
Due to related parties (Note 8) .......................................... 1,241 7,400
Current portion of long-term debt ........................................ -- 4,527
------------- -------------
20,279 31,715
Note payable (Note 4) ......................................................... 56,667 54,095
Deferred income taxes (Note 5) ................................................ 7,272 6,509
Deferred credits and other liabilities ........................................ 3,972 3,681
Commitments and contingencies (Note 7) ........................................ -- --
Stockholder's equity:
Common stock ............................................................. 1 1
Additional paid-in capital ............................................... 16,871 --
Retained earnings ........................................................ 14,470 25,296
Accumulated other comprehensive income ................................... (8,838) (8,990)
------------- -------------
Total stockholder's equity ............................................ 22,504 16,307
------------- -------------
Total liabilities and stockholder's equity .......................... $ 110,694 $ 112,307
============= =============
The accompanying notes are an integral part of these financial statements.
92
95
STERLING PULP CHEMICALS, LTD.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(U.S. DOLLARS IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
--------------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
--------------------- ----------- -------- ------------- --------
Balance, September 30, 1996 .... 1 $ 1 $ 36,968 $ 21,471 $ (5,277) $ 53,163
Net capital distributions ...... -- -- (29,630) -- -- (29,630)
Comprehensive income:
Net income .................. -- -- -- 11,591 --
Translation adjustment ...... -- -- -- -- (715)
Comprehensive income ..... -- -- -- -- -- 10,876
-------- -------- ----------- -------- ------------- --------
Balance, September 30, 1997 .... 1 1 7,338 33,062 (5,992) 34,409
Net capital distributions ...... -- -- (7,338) -- -- (7,338)
Dividends ...................... -- -- -- (10,666) -- (10,666)
Comprehensive income:
Net income .................. -- -- -- 2,900 --
Translation adjustment ...... -- -- -- -- (2,998)
Comprehensive loss ....... -- -- -- -- -- (98)
-------- -------- ----------- -------- ------------- --------
Balance, September 30, 1998 .... 1 1 -- 25,296 (8,990) 16,307
Net capital contributions ...... -- -- 16,871 -- -- 16,871
Dividends ...................... -- -- -- (11,079) -- (11,079)
Comprehensive income:
Net income .................. -- -- -- 253 --
Translation adjustment ...... -- -- -- -- 152
Comprehensive income ..... -- -- -- -- -- 405
-------- -------- ----------- -------- ------------- --------
Balance, September 30, 1999 .... 1 $ 1 $ 16,871 $ 14,470 $ (8,838) $ 22,504
======== ======== =========== ======== ============= ========
The accompanying notes are an integral part of these financial statements.
93
96
STERLING PULP CHEMICALS, LTD.
STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net income ..................................................... $ 253 $ 2,900 $ 11,591
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................. 7,757 7,700 8,359
Loss on disposal/write off of assets ...................... 50 70 --
Deferred tax expense/(benefit) ............................ (539) (2,479) 5,894
Other ..................................................... (31) 505 (170)
Changes in assets/liabilities:
Accounts receivable ....................................... (2,156) 6,036 3,803
Due from related parties .................................. (377) 2,216 1,482
Other receivables ......................................... (436) 4,136 1,504
Inventories ............................................... 1,791 (1,113) 434
Prepaid expenses .......................................... (21) 117 (1)
Other assets--net ......................................... 4,530 846 1,339
Accounts payable .......................................... (607) 5,496 (1,336)
Accrued generator construction costs ...................... 2,450 (4,414) 1,298
Other accrued liabilities ................................. (2,467) (1,252) 869
Due to related parties .................................... (6,505) 3,702 2,133
Other liabilities ......................................... 299 (4,240) (814)
-------- -------- --------
Net cash provided by operating activities ........................... 3,991 20,226 36,385
-------- -------- --------
Cash flows from investing activities:
Proceeds on disposal of fixed assets ........................... 3,578 -- --
Capital expenditures ........................................... (3,465) (4,381) (3,336)
-------- -------- --------
Net cash provided by (used in) investing activities ................. 113 (4,381) (3,336)
-------- -------- --------
Cash flows from financing activities:
Repayment of long term debt .................................... (4,527) -- --
Contribution from parent ....................................... 16,871 -- --
Distribution to parent ......................................... -- (7,338) (29,630)
Dividends ...................................................... (11,079) (10,666) --
-------- -------- --------
Net cash provided by (used in) financing activities ................. 1,265 (18,004) (29,630)
Effect of exchange rate on cash ..................................... (314) 405 (1,469)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ................ 5,055 (1,754) 1,950
Cash and cash equivalents, beginning of year ........................ 3,426 5,180 3,230
-------- -------- --------
Cash and cash equivalents, end of year .............................. $ 8,481 $ 3,426 $ 5,180
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid, net of interest income received ................. $(11,608) $ (92) $ (1,076)
Income taxes paid .............................................. (749) (541) (766)
The accompanying notes are an integral part of these financial statements.
94
97
STERLING PULP CHEMICALS, LTD.
NOTES TO THE FINANCIAL STATEMENTS
(U.S. DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
Sterling Pulp Chemicals, Ltd. (the "Company") is a Canadian company which
operates four pulp chemical facilities in Canada. These plants primarily produce
sodium chlorate, a chemical used primarily to make chlorine dioxide, which in
turn is used by pulp mills in the pulp bleaching process. The Company sells
sodium chlorate to customers in Canada and the United States. The Company also
oversees construction of large-scale chlorine dioxide generators for the pulp
and paper industry. The Company is a wholly owned subsidiary of Sterling Canada,
Inc. ("Parent"), which is a wholly-owned subsidiary of Sterling Chemicals, Inc.
("Chemicals").
The financial statements of the Company are presented in accordance with
generally accepted accounting principles in the United States of America
("U.S.") and have been translated from Canadian dollars, the Company's
functional currency to U.S. dollars, the reporting currency of the Parent,
following the guidelines established by SFAS No. 52 "Foreign Currency
Translation".
CASH EQUIVALENTS
The Company considers all investments purchased with a remaining maturity
of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost and market; cost is primarily
determined on the first-in, first-out basis except for stores and supplies,
which are valued at average cost.
The Company enters into agreements with other companies to exchange
chemical inventories in order to minimize working capital requirements and to
facilitate distribution logistics. Balances related to quantities due to or
payable by the Company are included in inventory.
IMPAIRMENT OF LONG-LIVED ASSETS
Impairment tests of long-lived assets are made when conditions indicate
their carrying costs may not be recoverable. Such impairment tests are based on
a comparison of undiscounted future cash flows or the market value of similar
assets to the carrying cost of the asset. If an impairment is indicated, the
asset value is written down to its estimated fair value.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Major renewals and
improvements which extend the useful lives of the equipment are capitalized,
while repair and maintenance expenses are charged to operations as incurred.
Disposals are removed at carrying costs less accumulated depreciation with any
resulting gain or loss reflected in operations. Depreciation is provided using
the straight-line method over estimated useful lives ranging from 5 to 25 years
with the predominant life of the plant and equipment being 15 years.
INCOME TAXES
The Company files a federal Canadian tax return as well as returns in the
provinces in which it operates.
95
98
Deferred income taxes are recorded to reflect the tax consequences in
future years of differences between the tax bases of assets and liabilities and
the financial reporting amounts at each year-end (the liability method).
REVENUE RECOGNITION
The Company generates revenues through sales in the open market pursuant to
short-term and long-term contracts with its customers. The Company recognizes
revenue from sales as the products are shipped. Revenues associated with the
constructing of chlorine dioxide generators are recognized using the percentage
of completion method based on cost incurred compared to total estimated cost.
FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE
The Company's functional currency is the Canadian dollar. The Parent's
reporting currency is the U.S. dollar. For financial reporting purposes, assets
and liabilities denominated in Canadian dollars are translated into U.S. dollars
at year-end rates of exchange and revenues and expenses are translated at the
average monthly exchange rates. Translation adjustments are reported as a
separate component of stockholder's equity while transaction gains and losses
are included in operations.
ENVIRONMENTAL COSTS
Environmental costs are expensed unless the expenditures extend the
economic useful life of the assets. Costs that extend the economic life of the
assets are capitalized and depreciated over the remaining life of such assets.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable and the cost can be reasonably estimated.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In preparing disclosures about the fair value of financial instruments, the
Company has assumed that the carrying amount approximates fair value for cash
and cash equivalents, receivables, short-term borrowings, accounts payable, and
certain accrued expenses because of the short maturities of those instruments.
The fair values of long-term debt instruments are estimated based upon quoted
market values (if applicable) or on the current interest rates available to the
Company for debt with similar terms and remaining maturities. Considerable
judgement is required in developing these estimates and, accordingly, no
assurances can be given that the estimated values presented herein are
indicative of the amounts that would be realized in a free market exchange.
ACCOUNTING ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
EARNINGS PER SHARE
All issued and outstanding shares of the Company are held by the Parent.
Accordingly, earnings per share information is not presented.
NEW ACCOUNTING STANDARDS
Effective October 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and displaying
of comprehensive income and its components and SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which establishes
revisions to employers' disclosure about pension and other post retirement
benefit plans. Adoption of these statements in fiscal 1999 had no
96
99
effect on net income (loss). The only item of accumulated other comprehensive
income is the Company's foreign currency translation adjustment.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Management is currently evaluating the
accounting impact and disclosures required when this statement is adopted in the
first quarter of fiscal 2001.
2. INVENTORIES
SEPTEMBER 30,
------------------------
1999 1998
------------ ----------
(Dollars in Thousands)
Inventories:
Finished products........................ $ 1,872 $ 3,455
Raw materials............................ 209 253
------------ ----------
Inventories at cost........................... 2,081 3,708
Inventories under exchange agreements......... 77 78
Stores and supplies........................... 2,988 2,874
------------ ----------
$ 5,146 $ 6,660
============ ==========
3. PROPERTY, PLANT, AND EQUIPMENT
SEPTEMBER 30,
-------------------------
1999 1998
------------ ------------
(Dollars in Thousands)
Property, plant, and equipment:
Land..................................... $ 1,448 $ 4,079
Buildings................................ 13,808 11,864
Plant and equipment...................... 110,711 106,408
------------ -----------
Property, plant, and equipment at cost... 125,967 122,351
Less accumulated depreciation............ (50,436) (42,313)
------------ -----------
$ 75,531 $ 80,038
============ ===========
4. NOTE PAYABLE
On August 20, 1992, the Company entered into an agreement for a $109.1
million demand note facility with Sterling NRO, Ltd. ("Sterling NRO"). Sterling
NRO is also owned by the Parent and is therefore related by virtue of common
control. The note has no scheduled terms of repayment and interest is calculated
and payable monthly in arrears at 1.5% above the Bank of Nova Scotia prime rate.
Interest expensed for the years ended September 30, 1999, 1998, and 1997 were
$5.5 million, $4.9 million and $4.2 million, respectively. Principal repayments
for the years ended September 30, 1999 and 1998 were $4.5 million and nil,
respectively.
5. INCOME TAXES
A reconciliation of federal statutory income taxes to the Company's
effective tax provision follows:
YEAR ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
----------- ----------- -----------
(Dollars in Thousands)
Provision for federal income tax at the statutory rate.............. 259 $ 1,367 $ 5,798
Provincial income taxes at the statutory rate....................... 88 563 2,672
Federal and provincial manufacturing and processing tax credits..... (50) (286) (889)
Other............................................................... 16 156 600
----------- ----------- -----------
$ 313 $ 1,800 $ 8,181
=========== =========== ===========
97
100
The provision for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30,
---------------------------------
1999 1998 1997
------- ------- -------
(Dollars in Thousands)
Current federal .................. $ 2,098 $ 2,852 $ 1,489
Deferred federal ................. (1,859) (1,611) 3,717
Current provincial ............... 619 1,427 798
Deferred provincial .............. (545) (868) 2,177
------- ------- -------
Total tax provision ......... $ 313 $ 1,800 $ 8,181
======= ======= =======
The components of the Company's deferred income tax assets and liabilities
are summarized below:
SEPTEMBER 30,
----------------------
1999 1998
-------- --------
(Dollars in Thousands)
Deferred tax assets
Accrued liabilities ............... $ 318 $ 299
Accrued postretirement cost ....... 1,236 966
Investment tax credits ............ 4,767 6,806
-------- --------
$ 6,321 $ 8,071
-------- --------
Deferred tax liabilities
Property, plant and equipment ..... (13,593) (14,459)
Other ............................. -- (121)
-------- --------
(13,593) (14,580)
-------- --------
Net deferred tax liabilities ........... $ (7,272) $ (6,509)
======== ========
6. EMPLOYEE BENEFITS
The Company has established the following benefit plans:
RETIREMENT BENEFIT PLANS
The Company has employer and employee contributory plans which cover all
salaried and wage employees. The benefits under these plans are based primarily
on years of service and/or employee's pay near retirement. The Company's funding
policy is consistent with the funding requirements of Canadian federal and
provincial laws and regulations. Plan assets consist principally of common
stocks and government and corporate securities.
98
101
Information concerning the pension obligation, plan assets, amounts recognized
in the Company's financial statements, and underlying actuarial assumptions is
stated below.
AUGUST 31,
----------------------
1999 1998
-------- --------
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year ......................... $ 14,577 $ 13,348
Currency rate conversion ........................................ 556 (1,314)
Service cost .................................................... 919 748
Interest cost ................................................... 1,112 1,016
Actuarial loss (gain) ........................................... (124) 1,008
Benefits paid ................................................... (757) (229)
-------- --------
Benefit obligation at end of year ............................... $ 16,283 $ 14,577
======== ========
Change in plan assets:
Fair value at beginning of year ................................. $ 13,062 $ 14,859
Currency rate conversion ........................................ 498 (1,463)
Actual return on plan assets .................................... 1,858 (882)
Employer contributions .......................................... 669 698
Participants' contributions ..................................... -- 79
Benefits paid ................................................... (757) (229)
-------- --------
Fair value at end of year ....................................... $ 15,330 $ 13,062
======== ========
Development of net amount recognized:
Funded status ................................................... $ (953) $ (1,515)
Unrecognized cost:
Actuarial loss (gain) ........................................ (22) 962
Prior service cost ........................................... 333 348
-------- --------
Net amount recognized ........................................... $ (642) $ (205)
======== ========
Amounts recognized in the statement of financial position:
Prepaid pension cost ............................................ $ 529 $ 655
Accrued pension cost ............................................ (1,198) (1,054)
Intangible asset ................................................ 27 175
Accumulated other comprehensive income .......................... -- 19
-------- --------
Net amount recognized ........................................... $ (642) $ (205)
======== ========
Net periodic pension costs (income) consist of the following components:
AUGUST 31,
-----------------------------------
1999 1998 1997
------- ------- -------
(Dollars in Thousands)
Components of net pension costs:
Service cost-benefits earned during the year .............. $ 919 $ 748 $ 830
Interest on prior year's projected benefit obligation ..... 1,112 1,016 1,127
Expected return on plan assets ............................ (963) (1,092) (1,212)
Net amortization:
Actuarial loss (gain) .................................. 68 (130) (144)
Prior service cost ..................................... 29 15 16
------- ------- -------
Net pension costs ......................................... $ 1,165 $ 557 $ 617
======= ======= =======
Weighted-average assumptions:
Discount Rate ............................................. 7.50% 7.00% 8.00%
Rates of increase in salary compensation level ............ 4.50% 4.00% 5.00%
Expected long-term rate of return on plan assets .......... 7.50% 7.00% 8.00%
99
102
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care and life insurance benefits for
retired employees. Employees become eligible for these benefits at normal
retirement age.
Retiree insurance plans provide health and life insurance benefits to
employees who retire from the Company with ten or more years of service. All of
the Company's employees are eligible for postretirement life insurance and,
except for collectively bargained employees, are eligible for postretirement
medical insurance. Postretirement medical insurance is a non-contributory plan.
Benefit provisions for most hourly and some salaried employees are subject to
collective bargaining.
Information concerning the plan obligation, the funded status, amounts
recognized in the Company's financial statements, and underlying actuarial
assumptions is stated below.
AUGUST 31,
--------------------
1999 1998
------- -------
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year ... $ 4,306 $ 3,831
Service cost .............................. 307 264
Interest cost ............................. 299 286
Actuarial loss (gain) ..................... -- (50)
Benefits paid ............................. (26) (25)
------- -------
Benefit obligation at end of year ......... $ 4,886 $ 4,306
======= =======
Development of net amount recognized:
Funded status ............................. $(4,886) $(4,306)
Unrecognized cost:
Actuarial loss ......................... 637 669
------- -------
Net amount recognized ..................... $(4,249) $(3,637)
======= =======
Net periodic plan costs (income) consist of the following components:
AUGUST 31,
---------------------------------------------
1999 1998 1997
------------ ------------- ------------
(Dollars in Thousands)
Components of net plan costs:
Service cost..................... $ 307 $ 264 $ 208
Interest cost.................... 299 286 202
Net amortization:
Actuarial loss................ 32 -- --
------------ ------------- ------------
Net plan costs................... $ 638 $ 550 $ 410
============ ============= ============
Weighted-average assumptions:
Discount Rate.................... 6.75% 7.50% 7.50%
The weighted average annual assumed health care trend rate is assumed to be
7.5% for 1999. The rate is assumed to decrease gradually to 5.8% in 2027 and
remain level thereafter. Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plans. A one percentage point
change in assumed health care trend rates would have the following effects:
1% INCREASE 1% DECREASE
----------- -----------
(Dollars in Thousands)
Effect on total of service and interest cost components............... $ 33 $ (29)
Effect on post-retirement benefit obligation........................ 230 (200)
100
103
PROFIT SHARING PLANS
The Company established profit sharing plans for the benefit of salaried
and hourly employees meeting certain eligibility requirements. The Company
distributes a specified percentage of its earnings before interest, taxes,
depreciation, and amortization above a specified level to eligible employees on
a yearly basis. The amount of each eligible employee's quarterly distribution is
related to a specified percentage of each such employee's base salary or wages,
with the percentage determined by the employee's position in the Company. The
profit sharing for each of the fiscal years ended September 30, 1999, 1998, and
1997 was nil.
PHANTOM STOCK PLAN
The Company introduced a phantom stock plan to all eligible full-time
Canadian employees effective August 21, 1996. At the end of each plan year, the
plan administrator establishes a "determined percentage" for the preceding plan
year. This percentage is then multiplied by each participant's compensation for
the plan year to determine the award amount. The award amount is then divided by
the fair market value of one share of the common stock of Sterling Chemicals
Holdings, Inc. ("Holdings"), as of December 31 of that plan year, to determine
the number of rights to be credited to participants. Upon termination of
employment, the benefit amount becomes payable to the participant. The benefit
amount will be the number of vested rights in the participant's account,
multiplied by the fair market value of one share of common stock of Holdings as
of the most recent valuation date.
The Company has recorded expense of $0.2 million, $0.2 million, and $0.3
million related to the phantom stock plan for the years ended September 30,
1999, 1998, and 1997, respectively.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company has entered into various long-term noncancellable rail car and
other operating leases. Future minimum lease commitments are as follows: fiscal
2000--$4.4 million, fiscal 2001--$4.1 million, fiscal 2002--$4.1 million, fiscal
2003--$3.9 million, fiscal 2004--$3.7 million, and thereafter--$7.6 million.
ENVIRONMENTAL AND SAFETY MATTERS
The Company's operations involve the handling, production, transportation,
treatment, and disposal of materials that are classified as hazardous or toxic
waste and that are extensively regulated by environmental and health and safety
laws and regulations. Environmental permits required for the Company's
operations are subject to periodic renewal and can be revoked or modified for
cause or when new or revised environmental laws or permit requirements are
implemented. Changing and increasingly strict environmental laws, regulations,
and permit requirements can affect the manufacturing, handling, processing,
distribution, and use of the Company's products and, if so, the Company's
business and operations may be materially and adversely affected. In addition,
changes in the law, regulations, and permit requirements can cause the Company
to incur substantial costs in upgrading or redesigning its facilities and
processes, including waste treatment, storage, disposal, and other waste
handling practices and equipment.
While the Company believes that its business operations and facilities
generally are operated in compliance with all material aspects of applicable
environmental and health and safety laws, regulations, and disclosure
requirements, there can be no assurance that past practices and future
operations will not result in material claims or regulatory action, require
material environmental expenditures, or result in exposure or injury claims by
employees and the public. Some risk of environmental costs and liabilities is
inherent in the operations and products of the Company, as it is with other
companies engaged in similar businesses. In addition, a catastrophic event at
any of the Company's facilities could result in liabilities to the Company
substantially in excess of its insurance coverages.
Any significant ban on all chlorine containing compounds could have a
materially adverse effect on the Company's financial condition and results of
operations. British Columbia has a regulation in place requiring elimination of
the use of all chlorine products, including chlorine dioxide, in the bleaching
process by the year 2002. Chlorine dioxide is produced from sodium chlorate,
which is the Company's primary pulp chemicals product. The pulp
101
104
and paper industry believes that a ban of chlorine dioxide in the bleaching
process will yield no measurable environmental or public health benefit and is
working to change this regulation but there can be no assurance that the
regulation will be changed. In the event such a regulation is implemented, the
Company would seek to sell the products it manufactures at its British Columbia
facility to customers in other markets. The Company is not aware of any other
laws or regulations in place in North America which would restrict the use of
such products for other purposes.
LEGAL PROCEEDINGS
The Company is subject to claims and legal actions that arise in the
ordinary course of its business. The Company believes that the ultimate
liability, if any, with respect to these claims and legal actions will not have
a material effect on the financial position or results of operations of the
Company.
PLEDGE OF COMMON STOCK
In order to secure the repayment of a 1999 issuance of $295,000,000 of
12 3/8% Senior Secured Notes due 2006 by Chemicals, Parent granted the note
holders a first priority pledge of 65% of the Company's common stock.
8. RELATED PARTY TRANSACTIONS
In the normal course of operations of the Company, the following represents
significant transactions with related parties for the fiscal years ended
September 30, 1999, 1998, and 1997:
YEAR ENDED SEPTEMBER 30,
----------------------------
1999 1998 1997
------ ------ ------
(Dollars in Thousands)
Chemicals:
Management fees ......................... $ 869 $ 795 $ 848
Parent:
Services, marketing and R&D revenue ..... $ 921 $ 833 $ 617
Commonly controlled companies:
Sale of goods ........................... $9,295 $4,867 $ 347
Purchase of goods ....................... 6,401 4,580 --
Supply agreement revenue ................ -- -- 585
Administration fee revenue .............. 335 323 361
Interest expense ........................ 5,630 4,860 4,199
The amounts due from and to related parties for the years ended September
30, 1999 and 1998 are as follows:
SEPTEMBER 30,
---------------------
1999 1998
---------- --------
(Dollars in Thousands)
Due from related parties:
Parent............................... $ 12 $ 305
Commonly controlled companies........ 1,357 649
---------- --------
$ 1,369 $ 954
========== ========
Due to related parties:
Parent .............................. $ 132 $ 128
Commonly controlled companies........ 1,109 7,272
---------- --------
$ 1,241 $ 7,400
========== ========
9. EXPORT SALES
The Company is engaged in the sale of products for export into the United
States. These were primarily sodium chlorate sales and represented 47%, 46%, and
41% of revenues for fiscal 1999, 1998, and 1997, respectively.
102
105
10. FINANCIAL INSTRUMENTS
FORWARD EXCHANGE CONTRACTS
The Company enters into forward exchange contracts to hedge foreign
currency transactions on a continuing basis for periods consistent with its
committed exposures. The Company does not engage in currency speculation. The
effect of this practice is to minimize the impact of foreign exchange rate
movements on the Company's operating results. As of September 30, 1999 and 1998,
the Company had a notional amount of approximately $6.0 million and $54.0
million, respectively, of forward foreign exchange contracts outstanding to buy
Canadian dollars. The Company makes net settlements of Canadian dollars for U.S.
dollars at maturity, at rates agreed to at inception of the contracts. The
deferred loss on these forward foreign exchange contracts at September 30, 1999
and 1998 were $0.3 million and $4.7 million, respectively. The last of the
Company's existing forward exchange contracts expires in March of 2000, and it
does not intend to enter into any additional forward exchange contracts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value approximated the carrying value of financial instruments
included in current assets and current liabilities on the balance sheet at
September 30, 1999 due to the short maturities. The fair value of the notes
payable on the balance sheet at September 30, 1999 approximated their carrying
value, as the interest rate fluctuates with changes in market rates.
CONCENTRATIONS OF CREDIT RISK
The Company sells its products primarily to companies involved in the pulp
and paper industry. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral for accounts receivable.
The Company maintains cash deposits with major banks which from time to
time may exceed federally insured limits. Management periodically assesses the
financial condition of the institutions and believes that any possible credit
loss is minimal.
Approximately 50% of the Company's employees are covered by union
agreements.
103
106
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Sterling Pulp Chemicals, Ltd.
We have audited the accompanying balance sheets of Sterling Pulp Chemicals, Ltd.
(an indirect wholly-owned subsidiary of Sterling Chemicals, Inc.) as at
September 30, 1999 and 1998 and the related statements of operations, changes in
stockholder's equity and cash flows for each of the years ended September 30,
1999, 1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial positions of Sterling Pulp Chemicals, Ltd. as
at September 30, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years ended September 30, 1999, 1998 and 1997, in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Chartered Accountants
Mississauga, Canada
December 9, 1999
104
107
REPORT OF MANAGEMENT
Management is responsible for the preparation and content of the financial
statements and other information included in this annual report. The financial
statements have been prepared in conformity with generally accepted accounting
principles appropriate under the circumstances to reflect, in all material
respects, the substance of events and transactions that should be included. The
financial statements reflect management's judgments and estimates as to the
effects of events and transactions that are accounted for or disclosed.
Management maintains accounting systems which are supported by internal
accounting controls that provide reasonable assurance that assets are
safeguarded and that transactions are executed in accordance with management's
authorization and recorded properly to permit the preparation of financial
statements in accordance with generally accepted accounting principles. The
concept of reasonable assurance is based on the recognition that the cost of a
system of internal accounting controls should not exceed the benefits.
Deloitte & Touche LLP performed an independent audit of the Company's
financial statements for fiscal years 1999, 1998, and 1997, for the purpose of
determining that the statements are presented fairly and in accordance with
generally accepted accounting principles. The independent auditors are appointed
by the Board of Directors and meet regularly with the Audit and Compliance
Committee of the Board of Directors, which is comprised solely of outside
directors. The Audit and Compliance Committee meets periodically with the
Company's senior officers and independent accountants to review the adequacy and
reliability of the Company's accounting, financial reporting, and internal
controls.
Peter W. De Leeuw
President and Chief Executive Officer
Paul G. Vanderhoven
Controller - Principal Accounting Officer
December 16, 1999
105
108
STERLING CHEMICALS HOLDINGS, INC.
SUPPLEMENTAL FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL FIRST SECOND THIRD FOURTH
YEAR QUARTER QUARTER QUARTER QUARTER
------ ----------- ----------- ----------- -----------
Revenues 1999 $ 171,929 $ 152,472 $ 181,729 $ 214,622
1998 230,236 204,504 205,414 182,436
Gross Profit 1999 16,717 4,312 12,198 4,931
1998 19,299 11,359 22,528 24,081
Loss before extraordinary item(1) 1999 (13,100) (24,820) (16,415) (51,482)
1998 (10,145) (16,288) (13,118) (6,568)
Net loss (1) 1999 (13,100) (24,820) (16,415) (55,694)
1998 (10,145) (16,288) (13,118) (6,568)
Per Share Data:
Loss before extraordinary item 1999 $ (1.11) $ (1.96) $ (1.37) $ (4.15)
1998 (0.91) (1.37) (1.13) (0.60)
Net loss attributable to common stockholders 1999 (1.11) (1.96) (1.37) (4.49)
1998 (0.91) (1.37) (1.13) (0.60)
(1) During the first and third quarters of fiscal 1999, the Company recorded
$2.3 million and $1.7 million, respectively, of expense related to workforce
reductions in the petrochemicals and pulp chemicals businesses. In addition,
during the second quarter of fiscal 1999, the Company recorded a one-time
non-cash pretax charge of $6.8 million related to early retirement programs and
benefit changes. During the fourth quarter of fiscal 1999, the Company recorded
a $4.2 million after-tax ($6.5 million pre-tax) extraordinary item related to
unamortized debt issue costs as a result of the prepayment of certain term
loans. The Company also recorded non-cash expense related to the impairment of
its methanol production assets of $26.4 million in the fourth quarter of fiscal
1999. During the second and third quarters of fiscal 1998, the Company recorded
$3.0 million and $3.0 million, respectively, of expense related to voluntary
severance programs offered by the Company at the Company's Texas City plant.
106
109
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Proxy Statement for Holdings' 2000 Annual Meeting of Stockholders under
the headings "Election of Directors" and "Executive Officers of the Company" are
incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The Proxy Statement for Holdings' 2000 Annual Meeting of Stockholders under
the heading "Executive Compensation and Other Information" is incorporated
herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Proxy Statement for Holdings' 2000 Annual Meeting of Stockholders under
the heading "Amount and Nature of Shares Beneficially Owned" is incorporated
herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Proxy Statement for Holdings' 2000 Annual Meeting of Stockholders under
the headings "Election of Directors" and "Certain Transactions" are incorporated
herein by reference in response to this item.
107
110
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits
1. Consolidated Financial Statements
See "Item 8. Financial Statements and Supplementary Data - Index to
Financial Statements."
2. All schedules for which provision is made in Regulation S-X of the
Securities and Exchange Commission are not required under the related
instruction or are inapplicable and, therefore, have been omitted.
3. Exhibits
The following exhibits are filed as part of this Form 10-K:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
2.1 - Amended and Restated Agreement and Plan of Merger between
STX Acquisition Corp. and Sterling Chemicals, Inc. dated as
of April 24, 1996, incorporated by reference from the
Company's Current Report on Form 8-K dated April 24, 1996, as
amended by Form 8-K/A.
3.1 - Restated Certificate of Incorporation of Sterling Chemicals
Holdings, Inc., incorporated by reference from Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997.
3.2 - Certificate of Incorporation of Sterling Chemicals, Inc.,
as amended, incorporated by reference from Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1996.
3.3 - Restated Bylaws of Sterling Chemicals Holdings, Inc.,
incorporated by reference from Exhibit 3.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1996.
3.4 - Restated Bylaws of Sterling Chemicals, Inc., incorporated
by reference from Exhibit 3.2 to the Registration Statement
on Form S-4 of Sterling Chemicals, Inc. (Registration No.
333-87471).
4.1 - Warrant Agreement (including form of Warrant) dated as of
August 15, 1996 between Sterling Chemicals Holdings, Inc. and
KeyCorp Shareholder Services, Inc., as Warrant Agent,
incorporated by reference from Exhibit 4.4 to the
Registration Statement on Form S-1 of STX Acquisition Corp.
and STX Chemicals Corp. (Registration No. 333-04343).
4.2 - Warrant Agreement dated as of July 10, 1997 between
Sterling Chemicals Holdings, Inc. and Harris Trust and
Savings Bank, as Warrant Agent, incorporated by reference
from Exhibit 4.1 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997.
4.3 - Warrant Agreement dated as of December 15, 1998 between
Sterling Chemicals Holdings, Inc. and Harris Trust and
Savings Bank, as Warrant Agent.
4.4 - Registration Rights Agreement, incorporated by reference
from Exhibit 4.11 to the Registration Statement on Form S-1
of STX Acquisition Corp. and STX Chemicals Corp.
(Registration No. 333-04343).
4.5 - Indenture dated as of August 15, 1996 between Sterling
Chemicals Holdings, Inc. and Fleet National Bank governing
the 13 1/2 % Senior Secured Discount Notes due 2008 of
Sterling Chemicals Holdings, Inc., incorporated by reference
from Exhibit 4.5 to the Registration Statement on Form S-1 of
STX Acquisition Corp. and STX Chemicals Corp. (Registration
No. 333-04343).
4.5(a) - First Supplemental Indenture dated October 1, 1997
governing the 13 1/2% Senior Secured Discount Notes due 2008
of Sterling Chemicals Holdings, Inc., incorporated by
reference from Exhibit 4.2 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1998.
108
111
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
4.5(b) - Second Supplemental Indenture dated March 16, 1998
governing the 13 1/2% Senior Secured Discount Notes due 2008
of Sterling Chemicals Holdings, Inc., incorporated by
reference from Exhibit 4.3 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1998.
4.6 - Indenture dated as of August 15, 1996 between Sterling
Chemicals, Inc. and Fleet National Bank governing the 11 3/4%
Senior Subordinated Notes due 2006 of Sterling Chemicals,
Inc., incorporated by reference from Exhibit 4.7 to the
Registration Statement on Form S-1 of STX Acquisition Corp.
and STX Chemicals Corp. (Registration No. 333-04343).
4.6(a) - First Supplemental Indenture dated October 1, 1997
governing the 11 3/4% Senior Subordinated Notes due 2006 of
Sterling Chemicals, Inc., incorporated by reference from
Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1998.
4.6(b) - Second Supplemental Indenture dated March 16, 1998 governing
the 11 3/4% Senior Subordinated Notes due 2006 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.5
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998.
4.7 - Indenture dated as of April 7, 1997 between Sterling
Chemicals, Inc. and Fleet National Bank governing the 11 1/4%
Senior Subordinated Notes due 2007 of Sterling Chemicals,
Inc., incorporated by reference from Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997.
4.7(a) - First Supplemental Indenture dated March 16, 1998 governing
the 11 1/4% Senior Subordinated Notes due 2007 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.6
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998.
4.8 - Indenture dated as of July 23, 1999 among Sterling Chemicals,
Inc., as Issuer, Sterling Canada Inc., Sterling Chemicals
Energy, Inc., Sterling Chemicals International, Inc.,
Sterling Fibers, Inc., Sterling Pulp Chemicals US, Inc., and
Sterling Pulp Chemicals, Inc., as Guarantors, and Harris
Trust Company of New York, as Trustee, incorporated by
reference from Exhibit 4.9 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1999.
4.9 - Second Deed of Trust, Assignment of Leases and Rents,
Security Agreement and Fixture Filing dated as of July 23,
1999 by Sterling Chemicals, Inc., Trustor, to John Dorris,
Trustee for the benefit of Harris Trust Company of New York,
Beneficiary, incorporated by reference from Exhibit 4.10 to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1999.
4.10 - Second Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing dated as of July 23, 1999
between Sterling Fibers, Inc., Mortgagor, and The CIT
Group/Business Credit, Inc., Mortgage, incorporated by
reference from Exhibit 4.11 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1999.
4.11 - Second Leasehold Deed to Secure Debt, Assignment and
Security Agreement dated as of July 23, 1999 by Sterling Pulp
Chemicals, Inc., Grantor, to Harris Trust Company of New
York, as Collateral Agent, and U.S. Bank Trust National
Association, as Georgia co-agent, incorporated by reference
from Exhibit 4.12 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999.
4.12 - Security Agreement dated as of July 23, 1999 among Sterling
Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp
Chemicals, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Fibers, Inc., Sterling Chemicals Energy, Inc., and Sterling
Chemicals International, Inc., as Assignors, and Harris Trust
Company of New York, as Collateral Agent, incorporated by
reference from Exhibit 4.13 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1999.
4.13 - Stock Pledge and Security Agreement dated as of July 23,
1999 among Sterling Chemicals, Inc., Sterling Canada, Inc.,
and Sterling Pulp Chemicals US, Inc., as Pledgors, and Harris
Trust Company of New York, as Collateral Agent, incorporated
by reference from Exhibit 4.14 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1999.
4.14 - Stock Pledge and Security Agreement dated as of July 23,
1999 among Sterling Chemicals, Inc. and Sterling Canada,
Inc., as Pledgors, and Harris Trust Company of New York, as
Collateral Agent, incorporated by reference from Exhibit 4.15
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999.
109
112
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
4.15 - Senior Debt Intercreditor Agreement dated as of July 23,
1999 among Harris Trust Company of New York, as Trustee, The
CIT Group/Business Credit, Inc., as Administrative Agent, and
Sterling Chemicals, Inc., incorporated by reference from
Exhibit 4.17 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999.
4.16 - Sterling Chemicals Holdings, Inc. Stockholders Agreement
dated effective as of August 21, 1996, incorporated by
reference from Exhibit 4.10 to the Registration Statement on
Form S-1 of STX Acquisition Corp. and STX Chemicals Corp.
(Registration No. 333-04343).
4.16(a) - First Amendment to Sterling Chemicals Holdings, Inc.
Stockholders Agreement dated effective as of December 31,
1997, incorporated by reference from Exhibit 4.7 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998.
4.16(b) - Second Amendment to Sterling Chemicals Holdings, Inc.
Stockholders Agreement dated effective as of May 1, 1998,
incorporated by reference from Exhibit 4.9(b) of the
Company's Annual Report on Form 10-K for the fiscal year
ending September 30, 1998.
4.17 - Third Amended and Restated Voting Agreement dated as of
February 1, 1999, incorporated by reference from Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999.
4.18 - Tag-Along Agreement dated as of August 21, 1996, incorporated
by reference from Exhibit 4.13 to the Registration Statement
on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp.
(Registration No. 333-04343).
4.19 - Intercreditor Agreement dated as of August 21, 1996 between
Texas Commerce Bank National Association and Fleet National
Bank, incorporated by reference from Exhibit 4.14 to the
Registration Statement on Form S-1 of STX Acquisition Corp.
and STX Chemicals Corp. (Registration No.333-04343).
4.19(a) - Amendment of Intercreditor Agreement dated as of July 23,
1999 among Sterling Chemicals Holdings, Inc., Chase Bank of
Texas, N.A. (formerly known as Texas Commerce Bank National
Association), as Administrative Agent, and State Street Bank
and Trust Company, as Trustee, incorporated by reference from
Exhibit 4.18 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999.
4.20 - Revolving Credit Agreement dated as of July 23, 1999 among
Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling
Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc.,
Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and
Sterling Chemicals International, Inc., as the Borrowers, The
CIT Group/Business Credit, Inc., as the Administrative Agent,
Credit Suisse First Boston, as the Documentation Agent, DLJ
Capital Funding, Inc., as the Syndication Agent, and various
financial institutions, as the Lenders, incorporated by
reference from Exhibit 4.1 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1999.
**4.20(a) - First Amendment to Revolving Credit Agreement dated
effective as of December 17, 1999 among Sterling Chemicals,
Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US,
Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc.,
Sterling Chemicals Energy, Inc. and Sterling Chemicals
International, Inc., as the Borrowers, The CIT Group/Business
Credit, Inc., as the Administrative Agent, Credit Suisse
First Boston, as the Documentation Agent, DLJ Capital
Funding, Inc., as the Syndication Agent, and various
financial institutions, as the Lenders.
4.21 - Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing dated as of July 23, 1999 by
Sterling Chemicals, Inc., Trustor, to Linda H. Earle, Trustee
for the benefit of The CIT Group/Business Credit, Inc., as
Administrative and Collateral Agent, Beneficiary,
incorporated by reference from Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999.
4.22 - Mortgage, Assignment of Leases and Rents, Security Agreement
and Fixture Filing dated as of July 23, 1999 by Sterling
Fibers, Inc., Mortgagor, to The CIT Group/Business Credit,
Inc., Mortgagee, incorporated by reference from Exhibit 4.3
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999.
4.23 - Leasehold Deed to Secure Debt, Assignment and Security
Agreement dated as of July 23, 1999 by Sterling Pulp
Chemicals, Inc. to The CIT Group/Business Credit, Inc., as
Administrative Agent, and U.S. Bank Trust National
Association, as Georgia co-agent, incorporated by reference
from Exhibit 4.4 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999.
110
113
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
4.24 - Fixed Assets Security Agreement dated as of July 23, 1999
among Sterling Chemicals, Inc., Sterling Canada, Inc.,
Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals,
Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc.
and Sterling Chemicals International, Inc., as the Grantors,
and The CIT Group/Business Credit, Inc., as Administrative
Agent for each of the Fixed Assets Secured Parties,
incorporated by reference from Exhibit 4.5 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999.
4.25 - Current Assets Security Agreement dated as of July 23, 1999
among Sterling Chemicals, Inc., Sterling Canada, Inc.,
Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals,
Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc.
and Sterling Chemicals International, Inc., as the Grantors,
and The CIT Group/Business Credit, Inc., as Administrative
Agent for each of the Current Assets Secured Parties,
incorporated by reference from Exhibit 4.6 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999.
4.26 - Parent Pledge Agreement dated as of July 23, 1999 between
Sterling Chemicals Holdings, Inc. and The CIT Group/Business
Credit, Inc., as Administrative Agent for each of the Fixed
Assets Secured Parties, incorporated by reference from
Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999.
4.27 - Obligor Pledge Agreement dated as of July 23, 1999 among
Sterling Chemicals, Inc., Sterling Canada, Inc. and Sterling
Pulp Chemicals US, Inc., as the Pledgors, and The CIT
Group/Business Credit, Inc., as Administrative Agent for each
of the Fixed Assets Secured Parties, incorporated by
reference from Exhibit 4.8 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1999.
10.1 - Sterling Chemicals, Inc. Salaried Employees' Pension Plan
(Restated as of October 1, 1993), incorporated by reference
from Exhibit 10.6 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993.
10.1(a) - Supplement to the Sterling Chemicals, Inc. Salaried
Employee's Pension Plan (Restated as of January 1, 1994),
incorporated by reference from Exhibit 10.6(a) to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994.
10.1(b) - First and Second Amendments to the Sterling Chemicals, Inc.
Salaried Employees' Pension Plan dated April 27, 1994 and
September 23, 1994, respectively, incorporated by reference
from Exhibit 10.6(b) to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1994.
10.2 - Sterling Chemicals, Inc. Amended and Restated Hourly Paid
Employees' Pension Plan (Effective as of May 1, 1996),
incorporated by reference from Exhibit 10.3(c) to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1996.
10.3 - Sterling Chemicals, Inc. Amended and Restated Savings and
Investment Plan, incorporated by reference from Exhibit 10.10
to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1993.
10.3(a) - Supplements to the Sterling Chemicals, Inc. Amended and
Restated Savings and Investment Plan, incorporated by
reference from Exhibit 10.10(a) to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30,
1994.
10.3(b) - First and Second Amendments to the Sterling Chemicals, Inc.
Amended and Restated Savings and Investment Plan dated April
27, 1994 and October 26, 1994, respectively, incorporated by
reference from Exhibit 10.10(b) to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30,
1994.
10.4 - Sterling Chemicals, Inc. Pension Benefit Equalization Plan,
incorporated by reference from Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (Registration No.
33-24020).
10.5 - Sterling Chemicals Employee Stock Ownership Plan (ESOP),
incorporated by reference from Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1996.
10.6 - Sterling Chemicals, Inc. Amended and Restated Supplemental
Employee Retirement Plan, incorporated by reference from
Exhibit 10.34 to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1989 (Commission File
Number 1-10059).
111
114
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.7 - Sterling Chemicals, Inc. Deferred Compensation Plan,
incorporated by reference from Exhibit 10.35 to the Company's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1989 (Commission File Number 1-10059).
10.8 - Sterling Chemicals Holdings, Inc. Omnibus Stock Awards and
Incentive Plan effective April 23, 1997, as amended,
incorporated by reference from Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1998.
10.9 - Form of Indemnity Agreement executed between the Company
and each of its officers and directors, incorporated by
reference from Exhibit 10.17 to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1996.
10.10 - Form of Indemnity Agreement executed between the Company
and each of its officers and directors, incorporated by
reference from Exhibit 10.30 to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1994.
+10.11 - Amended and Restated Production Agreement dated March 31,
1998 between BP Chemicals, Inc. and Sterling Chemicals, Inc.,
incorporated by reference from Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1998.
+10.12 - Second Amended and Restated Production Agreement dated
effective as of August 1, 1996 between BP Chemicals Inc. and
Sterling Chemicals, Inc., incorporated by reference from
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1998.
+10.13 - Amended and Restated Product Sales Agreement dated January
1, 1997 between BASF Corporation and Sterling Chemicals,
Inc., incorporated by referenced from Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997.
10.14 - License Agreement dated August 1, 1986 between Monsanto
Company and Sterling Chemicals, Inc., incorporated by
reference from Exhibit 10.25 to the Company's Registration
Statement on Form S-1 (Registration No. 33-24020).
+10.15 - Methanol Production Agreement dated September 26, 1996
between BP Chemicals Inc. and Sterling Chemicals, Inc.,
incorporated by reference from Exhibit 10.33 to the Company's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1996.
+10.16 - Joint Venture Agreement dated March 31, 1998 between
Sterling Chemicals, Inc. and BP Chemicals, Inc., incorporated
by reference from Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
1998.
+10.16(a) - First Amendment to Joint Venture Agreement dated effective
as of March 31, 1998 between Sterling Chemicals, Inc. and BP
Chemicals Inc., incorporated by reference from Exhibit
10.26(a) to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998.
10.17 - Articles of Agreement between Sterling Chemicals, Inc., its
successors and assigns, and Texas City, Texas Metal Trades
Council, AFL-CIO Texas City, Texas, December 18, 1998 to May
1, 2002, incorporated by reference from Exhibit 10.23 to the
Registration Statement on Form S-4 of Sterling Chemicals,
Inc. (Registration No. 333-87471).
10.18 - Agreement between Sterling Pulp Chemicals Ltd., North
Vancouver, British Columbia, and Pulp, Paper and Woodworkers
of Canada Local 5 British Columbia effective December 1, 1994
to November 30, 1998, incorporated by reference from Exhibit
10.50 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994.
10.19 - Employment Agreement dated as of March 16, 1998 between
Peter W. De Leeuw and the Company, incorporated by reference
from Exhibit 10.27 to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1998.
10.20 - Employment Agreement dated as of January 19, 1998 between
Gary M. Spitz and the Company, incorporated by reference from
Exhibit 10.28 to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1998.
**10.21 - Employment Agreement dated as of November 12, 1997 between
David G. Elkins and the Company.
10.22 - Standby Purchase Agreement dated as of December 15, 1998
between Sterling Chemicals Holdings, Inc. and Frank P.
Diassi, incorporated by reference from Exhibit 10.29 to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998.
112
115
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.23 - Standby Purchase Agreement dated as of December 15, 1998
between Sterling Chemicals Holdings, Inc. and Frank J.
Hevrdejs, incorporated by reference from Exhibit 10.30 to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998.
10.24 - Standby Purchase Agreement dated as of December 15, 1998
between Sterling Chemicals Holdings, Inc. and Koch Capital
Services, Inc., incorporated by reference from Exhibit 10.31
to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998.
**10.25 - Standby Purchase Agreement dated as of December 15, 1998
between Sterling Chemicals, Holdings, Inc. and William A.
McMinn.
**21.1 - Subsidiaries of Sterling Chemicals Holdings, Inc.
**23.1 - Consent of Deloitte & Touche LLP
**27.1 - Financial Data Schedule - Sterling Chemicals Holdings, Inc.
**27.2 - Financial Data Schedule - Sterling Chemicals, Inc.
** Filed herewith.
+ Confidential treatment has been requested with respect to portions of this
Exhibit, and such request has been granted.
(b) Reports on Form 8-K.
None.
113
116
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANTS HAVE DULY CAUSED THIS REPORT TO BE SIGNED
ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
STERLING CHEMICALS HOLDINGS, INC.
STERLING CHEMICALS, INC.
(Registrants)
By /s/ PETER W. DE LEEUW
---------------------------------------
(Peter W. De Leeuw)
President and Chief Executive Officer
DATE: DECEMBER 16, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS
BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF EACH OF THE REGISTRANTS
AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ FRANK P. DIASSI Chairman of the Board of December 16, 1999
- -------------------------------------------- Directors
(Frank P. Diassi)
/s/ PETER W. DE LEEUW President, Chief Executive December 16, 1999
- -------------------------------------------- Officer and Director
(Peter W. De Leeuw) (principal executive officer)
/s/ GARY M. SPITZ Vice President-Finance and December 16, 1999
- -------------------------------------------- Chief Financial Officer
(Gary M. Spitz) (principal finance officer)
/s/ PAUL G. VANDERHOVEN Controller December 16, 1999
- -------------------------------------------- (principal accounting officer)
(Paul G. Vanderhoven)
/s/ ROBERT W. ROTEN Vice Chairman of the Board of December 16, 1999
- -------------------------------------------- Directors
(Robert W. Roten)
/s/ FRANK J. HEVRDEJS Director December 16, 1999
- --------------------------------------------
(Frank J. Hevrdejs)
/s/ T. HUNTER NELSON Director December 16, 1999
- --------------------------------------------
(T. Hunter Nelson)
/s/ JOHN L. GARCIA Director December 16, 1999
- --------------------------------------------
(John L. Garcia)
/s/ ALLAN R. DRAGONE Director December 16, 1999
- --------------------------------------------
(Allan R. Dragone)
/s/ GEORGE J. DAMIRIS Director December 16, 1999
- --------------------------------------------
(George J. Damiris )
/s/ ROLF H. TOWE Director December 16, 1999
- --------------------------------------------
(Rolf H. Towe)
/s/ WILLIAM A. MCMINN Director December 16, 1999
- --------------------------------------------
(William A. McMinn)
114