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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended September 30, 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
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Indicate by check mark whether each of the registrants (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
--- ---
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.
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TABLE OF CONTENTS
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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
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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.
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PART I
This combined Form 10-K is separately filed by Sterling Chemicals
Holdings, Inc. ("Holdings") and Sterling Chemicals, Inc. ("Chemicals").
Information contained herein relating to Chemicals is filed by Holdings and
separately by Chemicals on its own behalf. Unless otherwise indicated, Holdings
and its subsidiaries, including Chemicals, are collectively referred to as the
"Company," "we," "our," "ours," and "us."
ITEM 1. BUSINESS
We were organized as a Delaware corporation in 1986 and have our
principal executive offices in Houston, Texas. In connection with our August 21,
1996 merger with STX Acquisition Corp., we recapitalized and reorganized into a
holding company structure, with our only material asset after the merger being
the capital stock of Chemicals, our wholly owned operating subsidiary. Through
Chemicals and its subsidiaries, we manufacture seven commodity petrochemicals at
our Texas City, Texas plant. 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.
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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.
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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
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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.
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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
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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.
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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.
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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.
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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
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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.
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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
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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
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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
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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
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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.
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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.
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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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for our common stock, par
value $.01 per share, although our common stock is traded on the OTC Electronic
Bulletin Board maintained by the National Association of Securities Dealers,
Inc. under the symbol "STXX." The following table sets forth the high and low
bid information of our common stock as reported on the OTC Electronic Bulletin
Board for the fiscal years ended September 30, 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.
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ITEM 6. SELECTED FINANCIAL DATA OF HOLDINGS
The following table sets forth selected financial data with respect to our
consolidated financial condition and consolidated results of operations and
should be read in conjunction with "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our Consolidated Financial
Statements and related notes in Item 8 of this Form 10-K.
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
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
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$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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a holding company whose only material asset is our investment in
Chemicals, our primary operating subsidiary. Chemicals owns substantially all of
our consolidated operating assets. Other than additional interest expense
associated with our 13 1/2% 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
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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.
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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.
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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
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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 inc