<PAGE>   1

================================================================================

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 For the fiscal year ended September 30, 1997

                                       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)

<TABLE>
  <S>                                                              <C>
                               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)
</TABLE>

       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)

<TABLE>
  <S>                                                              <C>
                                   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)
</TABLE>

       SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:   NONE
       SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:   NONE

   STERLING CHEMICALS, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL
   INSTRUCTION J(1)(a) AND (b) OF FORM 10-K, AND IS THEREFORE FILING THIS FORM
   WITH THE REDUCED DISCLOSURE FORMAT PROVIDED FOR BY GENERAL INSTRUCTION J(2)
   OF FORM 10-K

                             ----------------------

     Indicate by check mark whether each of the registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  X         No     
                                              ---           ---

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of each of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K
or any amendment to this Form 10-K.  X 
                                    ---
     As of December 8, 1997, Sterling Chemicals Holdings, Inc. had 12,357,191
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 $82 million.  As of December 8, 1997, all outstanding equity
securities of Sterling Chemicals, Inc. were owned by Sterling Chemicals
Holdings, Inc.

      Portions of the definitive Proxy Statement relating to the 1998 Annual
Meeting of Stockholders of Sterling Chemicals Holdings, Inc. are incorporated
by reference in Part III of this Form 10-K.
================================================================================


<PAGE>   2



                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                       Page
                                                                                                       ----
<S>         <C>                                                                                         <C>
                                                      PART I
Item 1.     Business  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       1
Item 2.     Properties  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      15
Item 3.     Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      15
Item 4.     Submission of Matters to Vote of Security Holders . . . . . . . . . . . . . . . . . . .      17

                                                     PART II

Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . .      18
Item 6.     Selected Financial Data of the Company  . . . . . . . . . . . . . . . . . . . . . . . .      19
Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations .      21
Item 8.     Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . .      33
Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial
            Disclosure  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      67

                                                     PART III

Item 10.    Directors and Executive Officers of the Registrant  . . . . . . . . . . . . . . . . . .      67
Item 11.    Executive Compensation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      67
Item 12.    Security Ownership of Certain Beneficial Owners and Management  . . . . . . . . . . . .      67
Item 13.    Certain Relationships and Related Transactions  . . . . . . . . . . . . . . . . . . . .      67

                                                     PART IV

Item 14.    Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K  . . . . .      68
</TABLE>




NOTE REGARDING FORWARD-LOOKING STATEMENTS

  This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.  All statements other than
statements of historical facts included in this Form 10-K, including without
limitation the statements under "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the
cyclicality of the Company's industry, current and future industry conditions
and the potential effects of such matters on the Company's business strategy,
results of operations and financial position, are forward-looking statements.
Although the Company believes that the expectations reflected in the
forward-looking statements contained herein are reasonable, no assurance can be
given that such expectations will prove to have been correct.  Certain
important factors that could cause actual results to differ materially from
expectations ("Cautionary Statements") are stated herein 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 the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.




                                       i
<PAGE>   3


                                     PART I

     This combined Form 10-K is separately filed by Sterling Chemicals
Holdings, Inc. ("Holdings") and Sterling Chemicals, Inc. ("Chemicals").
Information contained herein relating to Chemicals is filed by Holdings and
separately by Chemicals on its own behalf.  Unless otherwise indicated,
Holdings and its subsidiaries, including Chemicals, are collectively referred
to as the "Company."


ITEM 1. BUSINESS

     The Company was organized as a Delaware corporation in 1986 and has its
principal executive offices in Houston, Texas.  In connection with the
Company's August 1996 merger with STX Acquisition Corp. (the "Merger"), the
Company recapitalized and reorganized into a holding company whose only
material asset is the capital stock of Chemicals, its wholly owned operating
subsidiary (the "1996 Recapitalization"). Through Chemicals and its
subsidiaries, the Company manufactures seven commodity petrochemicals at its
Texas City, Texas plant (the "Texas City Plant"). Additionally, the Company
manufactures chemicals for use primarily in the pulp and paper industry at five
plants in Canada and one in Valdosta, Georgia, and manufactures acrylic fibers
in a plant near Pensacola, Florida (the "Santa Rosa Plant"). At its Texas City
Plant, the Company produces styrene, acrylonitrile, acetic acid, plasticizers,
methanol, tertiary butylamine ("TBA"), and sodium cyanide. The Company
generally sells its petrochemical products to customers for use in the
manufacture of other chemicals and products, which in turn are used in the
production of a wide array of consumer goods and industrial products.  The
Company produces regular textile fibers, specialty textile fibers, and
technical fibers at the Santa Rosa Plant, as well as licensing the acrylic
fibers manufacturing technology to producers worldwide.   Sodium chlorate is
produced at the five plants in Canada and in Valdosta, Georgia.  Sodium
chlorite is produced at one of the Canadian locations.  In addition,
chlor-alkali and calcium hypochlorite are produced at one of the Canadian
locations.  The Company licenses, engineers, and oversees construction of
large-scale chlorine dioxide generators for the pulp and paper industry as part
of the pulp chemical business.  These generators convert sodium chlorate into
chlorine dioxide at pulp mills.

     The Company's business strategy is to capitalize on its market position to
take advantage of periods of tight supply and high prices and margins for its
primary products, which historically have occurred on a cyclical basis, and to
expand its production capacity to capture future growth opportunities in the
petrochemical, acrylic fibers, and pulp chemical industries.  Key elements of
this strategy are to: (i) maintain a competitive cost position by investing in
new technology and equipment; (ii) pursue low cost expansions such as its 30%
expansion in 1996 of acetic acid capacity and construction of a 150 million
gallon per year methanol unit; (iii) pursue growth opportunities through the
construction of additional capacity; (iv) continue to build strong industry
partnerships through securing long-term supply contracts with key customers;
and (v) pursue a focused acquisition strategy, targeting chemical businesses
and assets which will strengthen the Company's existing market positions,
provide upstream or downstream integration, or produce complementary chemical
products. During fiscal 1997, the Company commenced its acquisition strategy,
as discussed below. The cyclicality of the markets for the Company's primary
products, however, also subjects the Company to periods of overcapacity
accompanied by lower prices and profit margins for such products.  In addition,
the instruments governing the debt incurred by the Company to finance the
Merger limit the Company's ability to incur additional debt to finance
acquisitions and other expenditures.  These and other factors may limit the
Company's ability to successfully implement its business strategy.


FISCAL 1997 DEVELOPMENTS

     At the end of fiscal 1996, the Company completed construction of a
world-scale, 150 million gallon per year methanol unit at the Texas City Plant.
Capital investment in the unit and production capacity are shared by the
Company and BP Chemicals Inc. ("BP").  Approximately 44% of the methanol
production was used as a raw material in the Company's acetic acid unit during
fiscal 1997, replacing methanol that was previously purchased from third
parties. The remaining methanol production is available for the merchant market
and for BP's worldwide acetic acid business.  The unit was constructed at
significantly less than normal replacement cost because available equipment
already at the Company's Texas City Plant was refurbished and used in the
project.

     The Company finished the construction of a 110,000-ton per year sodium
chlorate plant in Valdosta, Georgia (the "Valdosta Plant") in fiscal 1997.  The
new facility increased the Company's total annual sodium chlorate capacity by
more than 30% to nearly 460,000 tons.  Valdosta, Georgia was selected because
of its proximity to existing customers which were being supplied from the
Company's Canadian plants, and its proximity to reliable, competitively priced





                                       1
<PAGE>   4
electricity, the most important variable in sodium chlorate production costs.
The new facility is intended to meet the growing market demand from the pulp
and paper industry in the Southeastern United States.

     On January 31, 1997, the Company acquired (the "AFB Acquisition") the
acrylic fibers business (the "AFB") from Cytec Industries Inc. ("Cytec") for a
purchase price of approximately $100 million.  The AFB, now owned by two
wholly-owned subsidiaries of the Company (collectively "Sterling Fibers"),
recorded sales of approximately $92 million during the eight months of
operations in fiscal 1997 and consists of the Santa Rosa Plant and several
associated marketing and research offices.  Sterling Fibers is one of two
acrylic fibers manufacturers in the United States.  Cytec will supply
acrylonitrile to Sterling Fibers through a five-year supply agreement ending in
2002.

     On July 10, 1997, Sterling Pulp Chemicals (Sask) Ltd. ("Sterling Sask"),
an indirect wholly-owned subsidiary of Holdings and Chemicals, acquired
substantially all of the assets of Saskatoon Chemicals Ltd. ("Saskatoon
Chemicals"), a subsidiary of Weyerhaeuser Canada Ltd. (the "Saskatoon
Acquisition") for a purchase price of approximately $70 million.  The acquired
assets include a manufacturing plant near Saskatoon, Saskatchewan (the
"Saskatoon Plant"), which manufactures sodium chlorate, caustic soda, calcium
hypochlorite, chlorine, and hydrochloric acid.


SALES AND MARKETING

     The Company primarily sells its petrochemical products pursuant to
multi-year contracts and spot transactions in both the domestic and export
markets through its commercial organization and sales force. The Company has
certain long- term agreements which provide for the dedication of 100% of the
Company's production of acetic acid, plasticizers, TBA, and sodium cyanide,
each to one customer.  The Company also has various sales and conversion
agreements which dedicate significant portions of the Company's production of
styrene, acrylonitrile, and methanol, the Company's major petrochemical
products, to various customers.  These agreements generally provide for cost
recovery plus an agreed margin or element of profit based upon market price.
This long-term, high volume focus allows the Company to maintain relatively low
selling, general and administrative expenses related to the marketing of its
petrochemical products.  The Company competes on the basis of product price,
quality, and deliverability.  Prices for the Company's commodity chemicals are
determined by market factors that are largely beyond the Company's control and,
except with respect to a number of its multi-year contracts, the Company
generally sells its products at prevailing market prices.

     Some of the Company's multi-year contracts for its petrochemical products
are structured as conversion agreements, pursuant to which the customer
furnishes raw materials that the Company processes into finished products.  In
exchange, the Company receives a fee typically designed to cover its fixed and
variable costs of production and to generally provide an element of profit
dependent on the existing market conditions for the product.  These conversion
agreements allow the Company to maintain lower levels of working capital and,
in some cases, to gain access to certain improvements in manufacturing process
technology.  The Company believes its conversion agreements help insulate the
Company to some extent from the effects of declining markets and changes in raw
material prices, while allowing it to share in the benefits of favorable market
conditions for most of the products sold under these arrangements.  The balance
of the Company's petrochemical products are sold by its direct sales force.

     Sterling Fibers currently markets its acrylic fibers to North American
customers through internal sales staff and to international customers through
non-affiliated agents.  The sales effort is closely coordinated with and
supported by Sterling Fibers' Technical Support and Customer Service groups.
Working in tandem, these groups facilitate sales and product development by
strengthening the interface between Sterling Fibers and its customer base.
This approach provides Sterling Fibers with insight into customer needs for new
and existing products and equipment compatibility issues.  Researchers and
sales staff work together to develop new specialty applications for acrylic
fibers.  The sales staff then markets the sample products to the ultimate
seller of an acrylic fiber product such as a mass retailer to create a demand
for the end product.  Once the market demand is established, the textile
manufacturers (Sterling Fibers' customers) receive orders for additional
specialty fiber products.

     The Company sells 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 sales contracts contain certain "meet or release"
pricing clauses and some contain restrictions on the amount of future price
increases.  Certain contracts are evergreen and require advance notice before
termination.





                                       2
<PAGE>   5


CONTRACTS

     The Company's key multi-year contracts and conversion agreements, which
collectively accounted for 21% of the Company's fiscal 1997 revenues are
described below:

Styrene-Bayer

     The Company and Bayer Corporation ("Bayer"), a subsidiary of Bayer AG, are
currently operating under a conversion agreement effective through December 21,
2000.  Under this agreement, the Company provides Bayer, subject to specified
minimum and maximum quantities, a major portion of Bayer's styrene requirements
for its manufacture of styrene-containing polymers.  The agreement permits
Bayer to terminate its obligations upon twelve months' notice to the Company
should Bayer sell its business that uses styrene or assign the agreement
(subject to the Company's consent) to a third-party purchaser of the business.
During fiscal 1997, the Company delivered approximately 8% of its styrene
production pursuant to this agreement.

Styrene-BP Chemicals

     Effective April 1, 1994, the Company and BP entered into a styrene sales
and purchase agreement.  The initial term of the agreement expired in December
1996.  The Company and BP have negotiated an extension of this agreement on
substantially the same terms but at approximately half of the original volume,
which extension expires June 30, 1999.  During fiscal 1997, the Company
delivered approximately 7% of its styrene production to BP pursuant to this
agreement.

Acrylonitrile-Solutia

     The Company and Solutia, Inc.  ("Solutia", formerly the chemical
businesses of Monsanto Company) entered into a multi-year conversion agreement
effective January 1, 1994, which superseded a prior agreement that had been in
place since 1986.  The initial term of this agreement will expire at the end of
1998, at which time the agreement will convert to an "evergreen" contract with
successive two-year terms if not terminated.  During fiscal 1997, the Company
delivered a substantial portion of its acrylonitrile production to Solutia
pursuant to this agreement.

Acrylonitrile-BP Chemicals

     In 1988, the Company entered into a long-term conversion agreement with
BP, under which BP contributed the majority of the capital expenditures
required for starting the third acrylonitrile reactor train at the Texas City
Plant and has the option to take up to approximately one-sixth of the Company's
total acrylonitrile capacity.  BP furnishes the necessary raw materials and
pays the Company a conversion fee for the amount of acrylonitrile it takes.
During fiscal 1997, the Company delivered approximately 14% of its
acrylonitrile production to BP pursuant to this agreement.  The acrylonitrile
reactor in which BP invested capital incorporates certain BP technological
improvements under a separate license agreement.  The Company has the right to
incorporate these and any future improvements into its other existing
acrylonitrile reactors.  BP has a first security interest in the third reactor
and related equipment and in the first acrylonitrile produced in the three
reactor units to the extent of the acrylonitrile which BP is entitled to
purchase under the production agreement.  These rights are only to be exercised
upon an event of default by the Company.

Acetic Acid-BP Chemicals

     An agreement with BP that has been in effect since August 1986 currently
gives BP the exclusive right to purchase all of the Company's acetic acid
production until August 2016.  In exchange for that exclusive right, BP is
obligated to make certain unconditional monthly payments to the Company until
August 2006.  BP reimburses the Company for operating costs.  In addition, the
Company is entitled to receive annually a portion of the profits earned by BP
from the sale of acetic acid produced by the Company.

Methanol-BP Chemicals

     In fiscal 1996, the Company entered into a long-term production and sales
agreement with BP, under which BP contributed a significant portion of the
capital expenditures required for the reconstruction and capacity increase of
the Company's idle methanol production facility and obtained the right to
receive a substantial portion of the Company's methanol production.  During
fiscal 1997, the Company delivered a substantial portion of its methanol
production to BP pursuant to this agreement.  The initial term of this
agreement expires July 31, 2016.  The output of the methanol





                                       3
<PAGE>   6
facility is marketed by BP to the Company's acetic acid unit, the merchant
market, and BP's worldwide acetic acid business.

Plasticizers-BASF

     A product sales agreement has been in effect with BASF Corporation
("BASF") since August 1, 1986, pursuant to which the Company sells all of its
plasticizers production to BASF.  In November 1997, the Company signed a new 10
year agreement with BASF.  The agreement expires at the end of 2007.  BASF
provides certain raw materials to the Company and markets the plasticizers
produced by the Company.  BASF is obligated to make certain unconditional
quarterly payments to the Company and reimburses the Company monthly for actual
production costs.  In addition, the Company is entitled to a share of profit
earned by BASF attributable to the plasticizers supplied by the Company.

Acrylonitrile-Cytec

     In connection with the AFB Acquisition, the Company assumed an existing
supply contract for acrylonitrile pursuant to which Sterling Fibers purchases
its requirements for acrylonitrile from Cytec.  Upon the expiration of such
supply contract on February 28, 2002, the Company may supply all of Sterling
Fibers' acrylonitrile requirements from the Texas City Plant.

     No individual customer of the Company accounted for more than 10% of the
Company's revenues in fiscal 1997. For information regarding the Company's
export sales and domestic and foreign operations, see Note 9 of Item 8, ''Notes
to Consolidated Financial Statements'' which is hereby incorporated by
reference.





                                       4
<PAGE>   7
PRODUCT SUMMARY

     The Company's principal products and their primary end uses and raw
materials are set forth below.

<TABLE>
<CAPTION>
 COMPANY PRODUCT      INTERMEDIATE PRODUCTS      PRIMARY END PRODUCTS                          RAW MATERIALS
 ---------------      ---------------------      --------------------                          -------------
 <S>                  <C>                        <C>                                           <C>
 Petrochemicals and
 Fibers               Polystyrene                Building products, boat and automotive        Ethylene and Benzene
 Styrene              ABS/SAN resins             components, disposable cups and trays,
                      Styrene butadiene latex    packaging and containers, housewares,
                      Unsaturated polyester      tires, audio and video cassettes, luggage,
                      resins                     children's toys, paper coating, appliance
                                                 parts, and carpet backing

 Acrylonitrile        Acrylic fibers             Apparel, furnishings, upholstery, household   Ammonia, Air, and
                      ABS/SAN resins             appliances, carpets; plastics for             Propylene
                                                 automotive parts using ABS and SAN polymers

 Acetic Acid          Vinyl acetate monomer      Adhesives, cigarette filters, and surface     Methanol, Carbon
                                                 coatings                                      Monoxide

 Methanol             Acetic acid                Adhesives, cigarette filters, and surface     Natural Gas, Steam, and
                      MTBE                       coatings; gasoline oxygenate and octane       Carbon Dioxide
                      Formaldehyde               enhancer; plywood adhesives

 Plasticizers         Polyvinyl chloride         Flexible plastics, such as shower curtains    Alpha-Olefins, Carbon
                      (PVC)                      and liners, floor coverings, cable            Monoxide, Hydrogen,
                                                 insulation, upholstery, and plastic molding   Orthoxylene, and Air

 TBA                  NA                         Pesticides, solvents, pharmaceuticals, and    Isobutylene and the
                                                 synthetic rubber                              acrylonitrile  by-
                                                                                               product Hydrogen Cyanide
                                                                                               ("HCN")

 Sodium Cyanide       NA                         Electroplating and precious metals recovery   Sodium Hydroxide and by-
                                                                                               product HCN


 Regular Textile      NA                         Apparel, fleece, hosiery, industrial, and     Acrylonitrile, Vinyl
                                                 sweaters                                      Acetate, Sodium
                                                                                               Thiocyanate, Sodium
                                                                                               Bisulfate, and Finish
                                                                                               Oil

 Specialty Textile    NA                         High-end hosiery, pile fabrics, and outdoor   Acrylonitrile, Vinyl
                                                 furniture                                     Acetate, Sodium
                                                                                               Thiocyanate, Sodium
                                                                                               Bisulfate, and Finish
                                                                                               Oil

 Technical            NA                         Friction materials (brake linings),           Acrylonitrile, Vinyl
                                                 gaskets, specialty papers, and non-wovens     Acetate, Sodium
                                                                                               Thiocyanate, Sodium
                                                                                               Bisulfate, and Finish
                                                                                               Oil

 Pulp Chemicals
 Sodium Chlorate      Chlorine dioxide           Bleaching agent for pulp production;          Electricity, Salt, and
                                                 Downstream products include high quality      Water
                                                 office and coated papers

 Chlorine Dioxide     NA                         Chlorine dioxide for use in the bleaching     NA
      Generators                                 of pulp

 Sodium Chlorite      Chlorine dioxide           Antimicrobial agent for municipal water       Sodium Chlorate and
                                                 treatment, disinfectant for fresh produce     Hydrochloric Acid

 Chlor-alkali
    Caustic soda      NA                         Bleaching and digesting agent for pulp and    Electricity, Salt, and
                                                 paper.                                        Water
    Chlorine          NA                         Widely used in potable water and wastewater
                                                 treatment programs, as well as swimming
                                                 pools.
    Muratic acid      NA                         Stimulation agent in oil and gas extraction
                                                 operations.

 Calcium              NA                         Sanitizing agent to control bacteria and      Lime,Water, Caustic
 Hypochlorite                                    algae in swimming pools.                      Soda, and chlorine
</TABLE>





                                       5
<PAGE>   8

PRODUCTS

Petrochemicals and Fibers

     Styrene.  The Company is the third largest North American producer of
styrene.  The Company's styrene unit is one of the largest in the world and has
an annual rated production capacity of 1.7 billion pounds, following a recent
debottlenecking, which represents approximately 12% of total North American
capacity.  The Company sold approximately 42% of its styrene sales volumes
pursuant to conversion contracts during fiscal 1997.  Approximately 40% of the
Company's styrene sales volumes were exported in fiscal 1997, principally to
the Far East, either directly or pursuant to arrangements with large
international trading companies.

     Acrylonitrile. The Company is the second largest global producer of
acrylonitrile.  The Company's acrylonitrile unit has an annual rated production
capacity of 740 million pounds, which represents approximately 21% of total
North American capacity.  The Company sold approximately 41% of its
acrylonitrile sales volumes pursuant to long-term conversion agreements during
fiscal 1997.  Approximately 51% of the Company's acrylonitrile production in
fiscal 1997 was exported, principally to the Far East, either directly or
pursuant to arrangements with large international trading companies.  Hydrogen
cyanide is a by-product of acrylonitrile manufacturing and is used by the
Company as a raw material for the production of TBA and sodium cyanide and is
also burned as fuel.

     Acetic Acid. The Company is the third largest North American
producer of acetic acid.  Following a 200 million pound capacity expansion
completed in June 1996, the Company's acetic acid unit has an annual rated
production capacity of nearly 800 million pounds, which represents
approximately 17% of total North American capacity.  All of the Company's
acetic acid production is sold to BP pursuant to a long-term contract through
2016.

     In a project related to the expanded acetic acid capacity, Praxair
Hydrogen Supply, Inc. ("Praxair") constructed a new partial oxidation unit at
the Company's Texas City Plant that supplies carbon monoxide and hydrogen to
the Company for use in the production of acetic acid and plasticizers.  The
partial oxidation unit began production in June 1996.  The Company's synthesis
gas reformer, which was previously being used to provide feedstock to the
acetic acid and plasticizers units at the Texas City Plant, is currently being
used in the methanol unit.

     Methanol.  In August 1996, the Company completed construction of a 150
million gallon per year methanol unit at the Texas City Plant.  Capital
investment in the unit and production capacity are shared by the Company and
BP.  Approximately 44% of the methanol production was used as a raw material in
the Company's acetic acid unit during fiscal 1997, replacing methanol that was
previously purchased from third parties. The remaining methanol is available
for the merchant market and for BP's worldwide acetic acid business.  The
methanol unit was constructed at significantly less than normal replacement
cost because available equipment already at the Company's Texas City Plant was
refurbished and used in the project.

     Plasticizers. The Company has an agreement with BASF pursuant to which the
Company sells all of its plasticizers production to BASF through 2007.  The
Company's plasticizers capacity is 280 million pounds per year.

     TBA.   The Company uses a portion of its by-product hydrogen cyanide from
acrylonitrile production to produce TBA.  The Company sells all of its TBA
production to Flexsys America L.P. ("Flexsys") pursuant to a long-term
conversion agreement.  The Company's capacity for TBA is currently 21 million
pounds per year.

     Sodium Cyanide.  At the Texas City Plant, the Company operates a sodium
cyanide unit which is owned by E.I. Du Pont de Nemours and Company ("DuPont").
The Company and DuPont have an agreement whereby the Company receives a fee for
operating the facility.  The facility uses, as a raw material, hydrogen cyanide
by-product generated by the Company's acrylonitrile manufacturing process.  The
capacity of this unit is 100 million pounds per year.

    Acrylic Fibers. Sterling Fibers is the second largest producer of acrylic
fibers in North America.  The Santa Rosa Plant has an annual rated production
capacity of 184 million pounds, which represents approximately 31% of total
North American capacity.

    Sterling Fibers produces regular textile fibers, specialty textile fibers,
and technical fibers.  Regular textile fibers are commodity fibers for the
general apparel, fleece, hosiery, industrial, and sweater  markets, whose sales
are primarily driven by price and service rather than product characteristics.
Specialty textile fibers are targeted for specific applications or end uses and
typically have higher margins than regular textile fibers.  Technical fibers
are specially





                                       6
<PAGE>   9
engineered for industrial, non-textile uses and typically have higher margins
than textile fibers.  The primary use of technical fibers is as a processing
aid in the manufacture of brake pads.

Pulp Chemicals

     Sodium Chlorate. Sodium chlorate is manufactured by passing an electric
current through an undivided cell containing a solution of sodium chloride
(salt). Sodium chlorate is also used as a raw material to produce sodium
chlorite.

     Upon completion of the Valdosta Plant and the Saskatoon Acquisition the
Company solidified its position as the second largest producer of sodium
chlorate in North America.  The Company's six sodium chlorate plants have an
aggregate annual rated production capacity of approximately 500,000 tons.  The
Company's total annual capacity represents approximately 26% of North American
sodium chlorate capacity.

     Chlorine Dioxide Generators.  Through its ERCO Systems Group ("ERCO"), the
Company is the largest worldwide supplier of patented technology for the
generators which certain pulp mills use to convert sodium chlorate into
chlorine dioxide. Each mill that uses chlorine dioxide requires at least one
generator.  The Company receives revenue when a generator is sold to a mill and
also receives royalties from the mill after start-up, generally over the next
ten-year period, based on the amount of chlorine dioxide produced by the
generator.  The Company has supplied approximately two-thirds of all existing
modern pulp mill generators worldwide.

     The research and development group of ERCO works to develop new and more
efficient generators.  When pulp mills move to higher levels of substitution of
chlorine dioxide for elemental chlorine, they are usually required to upgrade
generator capacity or purchase new generator technology.  Mills may also
convert to a newer generator to take advantage of efficiency advances and
technological improvements.  Each upgrade or conversion results in a licensing
agreement which generally provides for payment of an additional ten-year
royalty.

     The Company has a representative office in Beijing, China.  This office
focuses on the development of opportunities for future sales and licensing of
chlorine dioxide generators.  The first generator in China to convert sodium
chlorate to chlorine dioxide was sold by ERCO and commenced operation in fiscal
1994, and since then several more generators have been sold by ERCO for use in
China.

     Sodium Chlorite. The Company has a rated annual capacity of approximately
3,500 tons, which represents approximately 40% of total North American
capacity.

     Chlor-alkali Products. The Company's chlorine capacity is 33,000 metric
tons per year, which is less than 1% of North American elemental chlorine
capacity.  The Company has caustic soda and hydrochloric acid production
capacity of 37,000 and 45,000 metric tons per year, respectively.

     Calcium Hypochlorite.  The Company currently has calcium hypochlorite
production capacity of  8,500 metric tons per year.  This volume represents
6.5% of current North American capacity.  All of the Company's calcium
hypochlorite is marketed by BioLab, Inc., a wholly-owned subsidiary of Great
Lakes Chemical Corporation, pursuant to a long-term sales and marketing
agreement.


RAW MATERIALS FOR PRODUCTS AND ENERGY RESOURCES

     For each of the Company's products, the combined cost of raw materials and
utilities is far greater than all other production costs combined.  Thus, an
adequate supply of these materials at reasonable prices is critical to the
success of the Company's business. The only major raw material for the
Company's petrochemical and pulp chemical products which is produced by the
Company is methanol, which is used in the production of acetic acid. Although
the Company believes that it will continue to be able to secure adequate
supplies of its raw materials and energy at acceptable prices to meet its
requirements, there can be no assurance that it will be able to do so.

Petrochemicals and Fibers

     Styrene. The Company manufactures styrene from ethylene and benzene. The
Company's conversion agreements require that other parties furnish the Company
with the ethylene and/or benzene necessary to fulfill its conversion
obligations.  Approximately 19% and 15% of the Company's fiscal 1997 benzene
and ethylene requirements, respectively, were furnished by customers pursuant
to conversion arrangements.  The Company converts benzene and





                                       7
<PAGE>   10
ethylene into ethylbenzene which is then processed into styrene. Benzene and
ethylene are both commodity petrochemicals and the price for each can fluctuate
widely due to significant changes in the availability of these products. The
Company has multi-year arrangements with several ethylene suppliers that
provide for its estimated requirements for purchased ethylene at generally
prevailing and competitive market prices.

     Acrylonitrile.  The Company produces acrylonitrile by reacting propylene
and ammonia over a solid-fluidized catalyst at low pressure.  The Company's
conversion agreements require that other parties furnish to the Company the
propylene and/or ammonia necessary to fulfill its conversion obligations.
Approximately 42% of the Company's fiscal 1997 propylene and ammonia
requirements were furnished by customers pursuant to conversion arrangements.
The Company purchases propylene and ammonia for use in the remainder of its
production of acrylonitrile for sale to others.  Propylene and ammonia are both
commodity petrochemicals and the price for each can fluctuate widely due to
significant changes in the availability of these products.  If various
customers for whom the Company now manufactures acrylonitrile under conversion
arrangements were to cease furnishing their own raw materials and seek only to
purchase acrylonitrile from the Company, the Company's requirements for
purchased propylene and ammonia could significantly increase.  The Company
believes that both ammonia and propylene will, for the foreseeable future,
remain in adequate supply to meet demand.

     Hydrogen cyanide is a by-product of the acrylonitrile manufacturing
process and is used by the Company as a raw material for the production of TBA
and sodium cyanide and is also burned as fuel.

     Acetic Acid.  Acetic acid is manufactured primarily from carbon monoxide
and methanol.   The acetic acid unit's methanol needs are supplied by the
Company's methanol unit.  In a project related to the expanded acetic acid
capacity, Praxair constructed a partial oxidation unit at the Company's Texas
City Plant in fiscal 1996 that supplies carbon monoxide to the Company for
production of acetic acid.

     Methanol.  The Company produces methanol by steam reforming of natural gas
to form synthesis gas.  The synthesis gas is then converted to methanol under
elevated pressures in the presence of a catalyst.  The Company obtains its
natural gas under various supply contracts and believes that adequate supplies
will be available for the Company's needs in the foreseeable future.

     Plasticizers. Primary raw materials for plasticizers are alpha-olefins and
orthoxylene, which are supplied by BASF under its long-term contract with the
Company which expires at the end of 2007.  The Company believes that adequate
supplies of raw materials will be available for the Company's needs in the
foreseeable future.

     TBA.  TBA is produced by the addition of hydrogen cyanide to isobutylene
in an acid catalyst reaction.  The Company uses a portion of its by-product,
hydrogen cyanide, in this process.  Flexsys supplies the isobutylene, sulfuric
acid, and caustic soda under its long-term conversion agreement with the
Company.  The Company believes that supplies of these raw materials will remain
adequate for its needs in the foreseeable future.

     Sodium Cyanide.  Sodium cyanide is manufactured from the Company's
by-product, hydrogen cyanide, and caustic soda.  DuPont supplies the caustic
soda for sodium cyanide under its long-term contract with the Company.

     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 its supply agreement with Cytec,
Sterling Fibers will purchase all of its acrylonitrile requirements from Cytec
until February 28, 2002, after which the Company may supply such acrylonitrile
requirements from the Texas City Plant. The Company believes that all raw
materials used in the production of acrylic fibers will be readily available
for its needs in the foreseeable future.

Pulp Chemicals

     Sodium Chlorate.  Electric power costs typically represent approximately
65% of the variable cost of production of sodium chlorate.  Electric power is
purchased by each of the Company's facilities pursuant to contracts with local
electric utilities.  Consequently, the rates charged by local electric
utilities are an important competitive factor among sodium chlorate producers.
On average, the Company's electrical power costs are believed to be competitive
with other producers in the areas in which it operates.

     The Company also purchases sodium chloride (industrial salt) for use in
the manufacture of sodium chlorate.  Sodium chloride is purchased under
requirements contracts with major suppliers.  The Company believes that sodium
chloride will be available for its needs for the foreseeable future.





                                       8
<PAGE>   11
     Chlor-alkali. The primary raw materials for the production of chlor-alkali
are salt, water, and electricity. The Saskatoon Plant is located on top of a
bed of sodium chloride, or raw table salt, and is solution-mined on site,
supplying a concentrated brine solution to the chlor-alkali manufacturing
operations.  The other primary raw material is electrical power, which is
supplied by the Saskatchewan Power Corporation under a ten year agreement
expiring December 5, 2001.  After 2001, the agreement is renewable on a year to
year basis. In a secondary process, some of the chlorine reacts with by-product
hydrogen to produce hydrochloric acid.

     Calcium Hypochlorite.  The primary raw materials for calcium hypochlorite
are lime, water, caustic soda, and chlorine.    In the calcium hypochlorite
process, fine powdered lime is dissolved in water to produce a slurry.  The
slurry is then mixed with a caustic soda solution in a batch reactor and
chlorine gas is introduced on a carefully controlled basis.  From the resulting
slurry the solid component, calcium hypochlorite is centrifuged, dried,
granulated, and screened to meet specifications.


TECHNOLOGY AND LICENSING

Petrochemicals and Fibers

     In 1986, Monsanto Company ("Monsanto") granted the Company a nonexclusive,
irrevocable and perpetual right and license to use Monsanto's technology and
other technology Monsanto acquired through third-party licenses in effect at
the time of the acquisition of the Texas City Plant.  These licenses are used
in the production of styrene, acrylonitrile, methanol, TBA, acetic acid, and
plasticizers. During fiscal 1991, BP Chemicals Ltd. ("BPCL") purchased the
acetic acid technology from Monsanto (subject to existing licenses).

     BPCL has granted to the Company a nonexclusive, perpetual, royalty-free
license (except in the case of a breach of the related production agreement) to
use BPCL's acrylonitrile technology at the Texas City Plant as part of the
acrylonitrile expansion project.  The Company and BPCL have agreed to
cross-license any technology or improvements relating to the manufacture of
acrylonitrile at the Texas City Plant.

     The Company believes that the manufacturing processes that the Company
utilizes at the Texas City Plant are cost effective and competitive.  Although
the Company does not engage in alternative process research with respect to its
Texas City Plant, it does monitor new technology developments and, when the
Company believes it is necessary, it will seek to obtain licenses for process
improvements.

     Sterling Fibers licenses certain of its acrylic fibers manufacturing
technology to producers worldwide.  The Company expects to capitalize on
increasing demand for this technology as developing countries seek to increase
acrylic fibers production capacity.  Approximately 17% of the world's current
acrylic fibers capacity is based on Sterling Fibers' technology.  Sterling
Fibers has licensed its acrylic fibers manufacturing technology to a number of
producers internationally.  The competitiveness of Sterling Fibers with respect
to its specialty textiles and technical fibers products (which are its higher
margin products) is maintained, to a significant extent, through the exclusive
ownership or use of certain product and manufacturing technology.  If
competitors of Sterling Fibers gain access to the use of similar technology, or
render such technology obsolete through the introduction of superior
technology, the ability of Sterling Fibers to compete would be materially
affected in an adverse manner.

Pulp Chemicals

     The Company produces sodium chlorate using state-of-the-art metal cell
technology.  The principal technology business of the Company is the design,
sale, and technical service of custom-built patented chlorine dioxide
generators.  The ERCO engineering group is involved in the technical support of
the Company's sales and marketing group through joint calling efforts which
define the scope of a project, as well as producing technical schedules and
cost estimates.  The Company performs detailed design of chlorine dioxide
generators which are then fabricated by contractors.  Plant installation,
instrumentation testing, and generator start-up are supervised by a joint
engineering/technical service team of the Company.  Prior to 1996, the Company
was involved in a number of patent disputes with Akzo Nobel, N.V.  regarding
chlorine dioxide technology.  In 1996, the parties reached a settlement of such
disputes that allows licensees of both the Company and Akzo Nobel, N.V. to
operate their chlorine dioxide generators within the broadest range of
operating conditions.

     The Company's pulp chemical research and development activities are
carried out at its Toronto, Ontario, laboratories.  Activities include the
development of new or improved chlorine dioxide generation processes and
research





                                       9
<PAGE>   12
in new technologies focusing on electrochemical and membrane technology related
to chlorine dioxide, including improvement of quality and reduction of quantity
of pulp mill effluents and treatment of municipal water supplies.


COMPETITION AND INDUSTRY CONDITIONS

  GENERAL

     The industries in which the Company operates are highly competitive. Many
of the Company's competitors, particularly in the petrochemical industry, are
larger and have substantially greater financial resources than the Company.
Among the Company's competitors are some of the world's largest chemical
companies that have their own raw material resources.  In addition, a
significant portion of the Company's business is based upon widely available
technology.  The entrance of new competitors into the industry and the addition
by existing competitors of new capacity may reduce the Company's ability to
maintain profit margins or its ability to preserve its market share, or both.
Such developments could have a negative impact on the Company's ability to
obtain higher profit margins, even during periods of increased demand for the
Company's products.

     The Company's primary domestic competitors by product are set forth below:

     Styrene           Dow Chemical Company, ARCO Chemical Company, Amoco
                       Chemical Company (a subsidiary of Amoco Corporation),
                       Chevron Chemical Company (a subsidiary of Chevron
                       Corporation), Cos-Mar (a joint venture of General
                       Electric Company and FINA Inc.), and Huntsman Chemical
                       Corporation

     Acrylonitrile     BP Chemicals Inc., Cytec Industries Inc., E.I. Du Pont
                       de Nemours and Company, and Solutia, Inc.

     Acetic Acid       Celanese Ltd., Eastman Chemical Company, and Millenium
                       Chemicals

     Methanol          Methanex, Bordon Chemicals, and Beaumont Methanol

     Plasticizers      Exxon Corporation, Aristech Chemicals, and Eastman
                       Chemical Company

     TBA               BASF Corporation and Nitto Chemical Industry Co., Ltd.

     Acrylic Fibers    Solutia, Inc.

     Sodium Chlorate   Akzo Nobel N.V., CXY Chemicals Ltd., and Kerr-McGee
                       Corporation

     Chlorine Dioxide
     Generators        Akzo Nobel, N. V.

     Sodium Chlorite   Vulcan Chemicals (a subsidiary of Vulcan Materials Co.)

     Chlor-alkali      Dow Chemical Company, OxyChem, and Pioneer Companies,
                       Inc.

     Calcium
     Hypochlorite      Olin Corporation and PPG Industries

     Historically, petrochemical industry profitability has been affected by
vigorous price competition, which may intensify due to, among other things, new
domestic and foreign industry capacity.  The Company's businesses are subject
to changes in the world economy, including changes in currency exchange rates.
In general, weak economic conditions either in the United States or in the
world tend to reduce demand and put pressure on margins.  Recent events in the
financial markets in various countries in the Far East may impact the demand
growth for the Company's products, particularly styrene and acrylonitrile,
which may have a negative impact on sales volumes, prices, and margins in
fiscal 1998.  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 1997, the Company's export sales
were approximately 30% of total revenues.  It is not possible to predict
accurately how changes in raw material costs, market conditions, or other
factors will affect petrochemical industry margins in the future.





                                       10
<PAGE>   13

Petrochemicals and Fibers

     Styrene.  According to Chemical Marketing Associates, Inc. ("CMAI"), the
total North American capacity for styrene is currently 14.4 billion pounds per
year. The Company's rated capacity of 1.7 billion pounds per year represents
approximately 12% of the North American capacity.

      Styrene prices have been 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 resulting in
high styrene prices and margins.  During the second half of 1995 styrene prices
decreased significantly as demand growth weakened, prompting customers to begin
utilizing their available inventories.  Increased capacity additions,
particularly in the Far East, resulted in lower styrene prices and margins in
1996 and 1997.  Current global production capacity for styrene is estimated at
over 40 billion pounds and the Company believes over 7 billion pounds of
capacity will be added by competitors in 1997 and 1998.  Average styrene sales
prices declined by 41% from fiscal 1995 to 1996 and 2% from fiscal 1996 to
fiscal 1997.  The Company expects that prices for styrene will continue at
current depressed levels until global demand for styrene increases sufficiently
to absorb increased production capacity.

     Acrylonitrile.  The acrylonitrile market exhibits characteristics in
capacity utilization, selling prices and profit margins similar to those of
styrene.  Moreover, as a result of the Company's high percentage of export
acrylonitrile sales, demand for the Company's acrylonitrile is most
significantly influenced by export customers, particularly those that supply
acrylic fiber to China.  During 1995, strong demand for acrylic fiber and ABS
resins particularly in China, increased demand for acrylonitrile resulting in
higher prices and margins.  However, the Company believes that acrylonitrile
demand began to weaken in late 1995 for the same reasons that caused the
deterioration in the styrene market.  Increased acrylonitrile capacity in the
United States and the Far East resulted in lower acrylonitrile prices and
margins in 1996 and 1997.  Average acrylonitrile sales prices declined by 29%
from fiscal 1995 to 1996 and 3% from fiscal 1996 to 1997.  The Company believes
that during 1997 and 1998, global industry capacity will increase by
approximately 940 million pounds or 9%.  As a result of the increased global
industry capacity industry utilization rates and prices may decline further.

     Methanol.  The methanol facility production capacity is shared by the
Company and BP.  Approximately 44% of the methanol production was used as a raw
material in the Company's acetic acid unit in fiscal 1997.  The remaining
methanol production is available for the merchant market and for BP's worldwide
acetic acid business.  Significant capacity additions worldwide are expected
during 1998 and 1999, and these additions may cause a decline in prices and
margins.

     Other petrochemical products.  The Company sells all of its acetic acid,
plasticizers, and TBA production to BP, BASF, and Flexsys, respectively,
pursuant to long-term contracts.  In addition, the Company operates a sodium
cyanide unit which is owned by DuPont.

      Acrylic Fibers.   There are currently only two manufacturers of acrylic
fibers in North America, Sterling Fibers and Solutia.  In general, Sterling
Fibers and Solutia have mostly different customers and focus on different
segments of the same markets, with Sterling Fibers focusing on the higher
margin niche applications.

     The United States currently imposes import tariffs on acrylic fibers of
5-9% and are expected to continue at a rate of 4-8% through 2004.  Nevertheless
Western European shipments of high quality fibers have become an increasingly
prominent fixture in total imports due largely to the demand for fibers not
produced in the United States.  Imports from Mexico, once a significant
supplier to the United States, now account for only 5-6% of total imports.  The
volume of imported acrylic fibers is expected to be around 40-50 million pounds
per year over the next few years.

Pulp Chemicals

     Sodium Chlorate.  Historically, sodium chlorate has experienced cycles in
capacity utilization, selling prices and profit margins.  Since the mid-1980s,
however, North American demand for sodium chlorate has grown at an average
annual rate of approximately 10% as pulp mills have accelerated substitution of
chlorine dioxide, sodium chlorate's primary derivative, for elemental chlorine
in bleaching applications.  Chlorine dioxide is a powerful and highly selective
oxidizing agent suitable for pulp bleaching. It has the ability to
substantially reduce hazardous substances, including dioxins and furans, in
bleach plant effluent, as well as produce high-brightness pulp with little or
no damage to the cellulose fiber.





                                       11
<PAGE>   14
     Substitution of chlorine dioxide for elemental chlorine is driven
primarily by environmental concerns. Through the end of 1996, approximately 85%
to 90% of Canadian bleach plant capacity and approximately 55% to 60% of United
States bleach plant capacity had been converted to elemental chlorine-free
("ECF").  On November 14, 1997, the Environmental Protection Agency ("EPA")
enacted regulations that support substitution of chlorine dioxide, which is
produced from sodium chlorate, for elemental chlorine in the pulp bleaching
process (Pulp and Paper Cluster Rule).  This regulation requires increased
substitution of chlorine dioxide for elemental chlorine in the pulp bleaching
process which significantly reduces the amount of Absorbable Organic Halides
(AOX) and chlorine derivatives in bleach plant effluent.

     Chlor-alkali.   Sterling Sask is one of three Western Canadian
chlor-alkali production operations.  Dow Chemicals, located in Fort
Saskatchewan, Alberta, and CXY Chemicals, Ltd. located in North Vancouver,
British Columbia, are the others.  Sterling Sask competes in the regional
Western Canadian market by selling to small volume regional customers who
prefer the higher quality product produced by membrane technology.  This
technology and its proximity to its customers give it a competitive advantage
in terms of product quality, product availability, service, and freight costs,
and partially mitigate the Sterling Sask business exposure to the severe price
swings in the overall North American market.

       Calcium Hypochlorite.   Calcium hypochlorite is manufactured by three
North American companies.  The largest is Olin Corporation, followed by PPG
Industries, Inc. and Sterling Sask, with Sterling Sask representing
approximately 6% of North American capacity.  World markets are served
primarily by production from North America (56%) and Japan  (22%).  Major
consuming countries include the United States, Australia, and South Africa.
Demand for calcium hypochlorite is closely correlated with swimming pool starts
(linked to economic growth) and summer temperatures (hotter weather leads to
increased consumption).  Demand from the pool sector is also highly seasonal,
concentrated in the spring and summer months.

     For information regarding revenues for each of the Company's principal
products, see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

ENVIRONMENTAL MATTERS

     The Company's operations involve the handling, production, transportation,
and disposal of materials classified as hazardous or toxic and are extensively
regulated under environmental and health and safety laws. Operating permits
required for the Company's operations are subject to periodic renewal and may
be revoked or modified for cause or when new or revised environmental laws or
requirements are implemented.

     New laws or permit requirements and conditions may affect the Company's
operations, products, or waste disposal.  Past or future operations may result
in claims, regulatory action, or liabilities.  Expenditures could be required
to upgrade wastewater collection, pretreatment or disposal systems, or other
matters.  Some risk of environmental costs and liabilities are inherent in
particular operations and products of the Company, as it is with other
companies engaged in similar businesses.

     The Company conducts environmental management programs at all of its
facilities and subsidiaries to maintain compliance with applicable
environmental laws.  As part of these programs, the Company conducts or
commissions reviews of its environmental performance and addresses issues
identified.  The Company routinely conducts inspection and surveillance
programs to detect and respond to any leaks or spills of regulated hazardous
substances and to correct any identified regulatory deficiency.

     Changing and increasingly strict environmental laws and regulations might
affect the manufacture, handling, processing, distribution or use of chemical
products and the release, treatment, storage or disposal of wastes by the
Company.  Accordingly, the Company could be required from time to time to make
expenditures to upgrade its wastewater collection, pretreatment, or disposal
systems at all of its facilities.

     Production of chemical products involves the use, storage, transportation,
and disposal of materials that may be classified as hazardous or toxic under
applicable laws.  The Company believes that its procedures for the use,
storage, transportation, and disposal of these materials are consistent with
industry standards and applicable laws and that it takes precautions to protect
its employees and others from harmful exposure to such materials.  However,
there can be no assurance that past or future operations will not result in
exposure or injury or to claims of injury by employees or the public due to the
use, storage, transportation, or disposal of these materials.





                                       12
<PAGE>   15
     In connection with the Company's acquisitions, certain indemnifications
are typically obtained related to environmental liabilities.  Certain
indemnifications were obtained in the AFB Acquisition and Saskatoon Acquisition
in fiscal 1997. In connection with the Company's purchase of the pulp chemical
business in 1992, the seller, Tenneco Canada, Inc. ("Tenneco"), contractually
retained liability for costs, damages, fines, penalties, and other losses under
claims by third parties (including employees and authorities) arising from the
ownership or operation of the facilities and businesses prior to the
acquisition.  The Company is also indemnified against the breach of
environmental remediation covenants.  These covenants oblige the indemnifying
party to do specific remedial work (including decommissioning the old section
of the Vancouver facility, which has been completed but is waiting on final
approval from the Ministry of the Environment) at the facilities within set
time periods, and to do any investigation, monitoring or remedial work required
by present or future legislation governing environmental conditions predating
the acquisition.  The indemnity also protects the Company against losses
arising from the remediation of pre-acquisition environmental conditions or
from pre-acquisition violations of environmental laws.  With the exception of
any third-party claims, the losses against which the Company is indemnified do
not include consequential damages or lost profits.  The Tenneco obligations
have been assigned to Albright & Wilson UK Ltd. ("Albright & Wilson") as a
result of the sale by Tenneco of certain assets to Albright & Wilson.

     Groundwater data obtained in the course of the acquisition of the pulp
chemical business indicated elevated concentrations of certain chemicals in the
soil and groundwater at the four Canadian sites.  The Company conducted a
focused baseline sampling of groundwater conditions beneath its Canadian
facilities in connection with Tenneco's indemnification of the Company for
preclosing conditions which confirmed the previous data.  The Company from time
to time has encountered elevated concentrations of chemicals in soils or
groundwater at its Canadian plants which it has addressed or is addressing.

     During the course of the acquisition of the pulp chemical facilities by
the Company, air emissions sources were reviewed, and any available dustfall
and vegetation stress studies were considered.  This review indicated emission
excursion episodes at specific locations in the scrubber systems at the Thunder
Bay, Buckingham, and Vancouver facilities.  The conditions at Thunder Bay and
Vancouver have been addressed and satisfactorily resolved and the conditions at
Buckingham are being addressed.  The Company believes that it is otherwise in
compliance in all material respects with permit requirements under applicable
provincial law for operating emissions sources.

     The Company's pulp chemical business is sensitive to potential
environmental regulation.  On November 14, 1997, the EPA enacted regulations
that support substitution of chlorine dioxide, which is produced from sodium
chlorate, for elemental chlorine in the pulp bleaching process.  Certain
environmental groups are encouraging passage of regulations which restrict the
amount of AOX or chlorine derivatives in bleach plant effluent. These
regulations will result in increased substitution of chlorine dioxide for
elemental chlorine in the pulp bleaching process which significantly reduces
the amount of AOX and chlorine derivatives in bleach plant effluent.  As long
as there is not an outright ban on chlorine containing compounds, regulations
restricting AOX or chlorine derivatives in bleach plant effluent should favor
the use of chlorine dioxide, thus sodium chlorate.  Any significant ban on all
chlorine containing compounds could have a material adverse effect on the
Company's financial condition and results of operations.

     British Columbia has a regulation in place that would effectively
eliminate the use of chlorine dioxide in the bleaching process by the year
2002.  The pulp and paper industry is working to change this regulation and
believes that a ban of chlorine dioxide in the bleaching process will yield no
measurable environmental or public health benefit. In the event such a
regulation was implemented, the Company would seek to sell its products to
customers in other markets.  The Company is not aware of any other laws or
regulations currently in place in North America which would restrict the use of
the product.

     Emissions into the air from the Texas City Plant are subject to certain
permit requirements and self-implementing emission limitations and standards
under state and federal law.  The Texas City Plant is located in an area that
is classified by the EPA as not having attained the ambient air quality
standards for ozone, which is controlled by direct regulation of volatile
organic compounds (VOCs) and nitrogen oxide (NOx).  Additional requirements
were issued in fiscal 1994 and modified in fiscal 1996 by the Texas Natural
Resource Conservation Commission in order to achieve ambient air quality
standards for ozone.  In addition, the Federal Government in June 1997 passed
new National Ambient Air Quality Standards (NAAQS) lowering the ozone and
particulate matter ("PM") threshold for attainment.  These measures may
substantially increase the Company's NOx and PM control costs in the future,
although the cost and full impact, if any, cannot be determined at this time.
The Sterling Fibers' facility in Santa Rosa County, Florida is currently in
Ozone Attainment per the Clean Air Act.  The above described new standards
would reclassify the Santa Rosa County area into non-attainment.  The costs of
compliance with regulations that may be imposed by local authorities to meet
the new ozone and PM standards cannot be determined at this time.  However, the
Company believes any costs of compliance will not have a material adverse
effect on its financial condition.





                                       13
<PAGE>   16
     To reduce the risk of offsite consequences from any unanticipated event,
the Company acquired a greenbelt buffer zone adjacent to the Texas City Plant
in 1991 and also acquired additional greenbelt area for the Santa Rosa Plant.
The Company also participates in a regional air monitoring network to monitor
ambient air quality in the Texas City community.  These programs are part of
the Company's commitment to Responsible Care initiatives of the Chemical
Manufacturers Association and Canadian Chemical Producers Association.

     Under the Assets Purchase Agreement for the Company's acquisition of the
Texas City Plant from Monsanto, Monsanto agreed to be liable and to indemnify
the Company for certain environmental liabilities.  The contractual indemnity
expires upon certain changes of control of the Company.  Monsanto has taken the
position that the Merger constitutes such a change of control. Accordingly, any
future claims the Company may have against Monsanto may necessarily be based
upon statutory laws or common law principles, although there can be no
assurance that the Company would prevail against Monsanto with respect to any
such claim.  Based on information currently available, the Company believes the
loss of the contractual indemnity will not have a material adverse effect on
its financial condition.

     Additionally, the Clean Air Act Amendments of 1990 authorize new federal
permit requirements and provisions governing toxic and criteria air
contaminants.  The Company has incurred and will incur additional costs to
comply with this law and with requirements issued by the State of Texas to
control VOCs and NOx, as will all other similarly situated organic chemical
manufacturing facilities.

     In July 1994, Sterling Fibers submitted a petition for rulemaking for
continued use of its onsite nonhazardous landfill to avoid a January 1995 rule
prohibiting disposal of industrial waste in other than a Class I landfill.  The
Florida Department of Environmental Protection, in December 1994, granted a
waiver to Sterling Fibers for this prohibition.  Should the petition be denied
or the waiver be revoked there are certain administrative options available to
the Company.  Cost impacts of sending all of the Company's waste to an offsite
facility do not represent a material impact on the Company.

     The Company believes that it is in compliance in all material respects
with applicable environmental law.  However, there can be no assurance that
past practices or future operations will not result in material claims or
regulatory action or require material environmental expenditures.


EMPLOYEES

     As of September 30, 1997, the Company had approximately 1,700 employees,
including approximately 500 at its pulp facilities and approximately 350
employees at Sterling Fibers.  Approximately 40% of the employees at the
Company's manufacturing facilities are covered by union agreements.  The
primary union agreement is with the Texas City, Texas Metal Trades Council,
AFL-CIO, of Galveston County, Texas, and covers all hourly employees at the
Texas City Plant.  The Company signed a new labor agreement in May 1996 which
is subject to renegotiation in April 1999.  The new agreement increases the
flexibility of work rules which the Company believes will increase the overall
efficiency of the Texas City Plant.  Employees at the Vancouver plant are
represented by the Pulp, Paper, and Woodworkers Union.  The Vancouver agreement
was renegotiated in November 1997 and is subject to further renegotiation in
November 2000.  Employees at the Buckingham plant are represented by either the
Energy and Chemicals Workers Union or an office and professional workers union.
Both Buckingham agreements were negotiated in November 1994 and are subject to
renegotiation in November 1997, which was mutually agreed upon to be extended
to December 31, 1997. Approximately 70% of the employees at the Saskatoon Plant
are represented by the Communications, Energy, and Paperworks of Canada. The
current collective agreement is a four year contract expiring September 30,
2001. The Company believes its relationship with its employees is good.


INSURANCE

     The Company currently maintains full replacement value coverage for
property damage to all of its plants and resulting business interruption.
Although the Company carries such insurance, it has only one styrene
manufacturing facility, one methanol manufacturing facility, and one
acrylonitrile manufacturing facility; thus, a significant interruption in the
operation of any of these facilities could have a material adverse effect on
the Company's financial condition, results of operations or cash flows.   The
Company also maintains other insurance coverages for various risks associated
with its business.  There is no assurance that the Company will not incur
losses beyond the limits of, or outside the coverage of, it's insurance.  From
time to time various types of insurance for companies in the chemical industry
have been very expensive or, in some cases, unavailable.  There is no assurance
that in the future the Company will be able to maintain its existing coverage
or that the premiums will not increase substantially.





                                       14
<PAGE>   17
ITEM 2.  PROPERTIES

     The principal executive offices of the Company are located in Houston,
Texas, and are subleased through Citicorp, N.A.

     The Company's Texas City Plant is located approximately 45 miles south of
Houston in Texas City, Texas, on a 290- acre site on Galveston Bay near many
other chemical manufacturing complexes and refineries.  The Company has
facilities to load its products in trucks, railcars, barges, and ocean-going
tankers for shipment to customers.  The site offers room for future expansion
and includes a greenbelt around the northern edge of the plant site.

     The Company owns or leases all of the real property which comprises its
Texas City Plant and all of the facilities and equipment located there, other
than the sodium cyanide unit which is owned by DuPont, a cogeneration facility
owned by a joint venture between the Company and Praxair Energy Resources,
Inc., and the new partial oxidation unit constructed at the site by Praxair.
The Company also owns storage facilities, approximately 200 rail cars and an
acetic acid barge.  In addition, the Company leases several storage facilities
in the United States and Korea.

     The Company owns all of the real property which comprises the Santa Rosa
Plant and owns or leases all of the facilities and equipment located there.
The Santa Rosa Plant is located on 1,100 acres near Pensacola in Santa Rosa
County, Florida.

     The Company's pulp chemical business includes five manufacturing plants in
Canada and one in Valdosta, Georgia. The Buckingham, Quebec and Vancouver,
British Columbia sites are approximately 20 acres each and are owned by the
Company.  The plant located near Saskatoon, Saskatchewan is on approximately
270 acres and is owned by the Company.  The Thunder Bay, Ontario, and Grande
Prairie, Alberta sites are leased by the Company.  The Valdosta Plant was
constructed in conjunction with, and is leased from, the Valdosta-Lowndes
County Industrial Authority.  The Company also leases approximately 600 rail
cars.  Headquarters for the Canadian operations is located in Toronto in an
approximately 50,000 square foot single story office building owned by the
Company.  The building is situated on 6.56 acres owned by the Company and
serves as the headquarters for the pulp chemical business and its respective
laboratories.

     The Company believes that these properties and equipment are sufficient to
conduct the Company's business.

     See Item 1. ''Business'' for other information required by this item.


ITEM 3. LEGAL PROCEEDINGS

AMMONIA RELEASE LAWSUITS:

         On May 8, 1994, an ammonia release occurred at the Company's Texas
City Plant while a reactor in the acrylonitrile unit was being restarted after
a shutdown for routine maintenance.  Approximately 52 lawsuits and
interventions involving more than 5,500 plaintiffs were filed against the
Company seeking an unspecified amount of money for alleged damages from the
ammonia release.  Many of these lawsuits were filed in April and early May
1996.

    Approximately 2,600 of the plaintiffs agreed to submit their damage claims
to binding arbitration.  Pursuant to this agreement to arbitrate, a two week
evidentiary hearing was conducted in July 1996 before a three judge panel to
determine the amount of damages.  On May 1, 1997, the three judge panel awarded
the plaintiffs an amount of damages which was well within the limits of the
Company's insurance coverage.

    Thirty-nine of the plaintiffs tried their cases to a jury in Harris County
District Court.  After approximately five months of trial, the jury returned a
verdict on September 2, 1997.  The total amount awarded for all 39 plaintiffs
was well within the limits of the Company's insurance coverage.

    Neither the May 1, 1997 arbitration award, nor the September 2, 1997 jury
award will have a material adverse impact on the financial position, results of
operations, or cash flows of the Company.

    Approximately 1,000 of the plaintiffs have settled their claims against the
Company in fiscal 1997 and the Company continues to vigorously defend against
the claims of the approximately 1,800 remaining plaintiffs.





                                       15
<PAGE>   18

Cases 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 ("Pointer").

     2.  Holly Benefiel, et al. v. Sterling Chemicals, Inc.; Cause No.
95CV0246; In the 56th Judicial District Court of Galveston County, Texas.

     3.  Lilly Gordon, et al. v. Sterling Chemicals, Inc.; Cause No. 95-36592;
In the 281st Judicial District Court of Harris County, Texas ("Gordon").

     4.  Versell Allums, et al. v. Sterling Chemicals, Inc., Paul Saunders, and
an unknown chemical operator; Cause No.  95CV1017; In the 10th Judicial
District Court of Galveston County, Texas.

     5.  Maurice Benson, et al. v. Sterling Chemicals, Inc.; Cause No.
95CV1265; In the 56th Judicial District Court of Galveston County, Texas.

     6.  Rodney Curry, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1263;
In the 122nd Judicial District Court of Galveston County, Texas.

     7.  Jayson Rhodes, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1266;
In the 10th Judicial District Court of Galveston County, Texas.

     8.  Darrell Vick, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1262;
In the 122nd Judicial District Court of Galveston County, Texas.

     9.  Nathaniel Barron, et al. v. Sterling Chemicals, Inc., and Paul
Saunders; Cause No. 96CV0103; In the 10th Judicial District Court of Galveston
County, Texas.

    10.  Melton Avie, et al. v. Sterling Chemicals, Inc., BP America, Inc., BP
Chemicals America, Inc., n/k/a BP Chemicals, Inc., Allen Bolen,, and Paul
Saunders; Cause No. 96CV0377; In the 56th Judicial District Court of Galveston
County, Texas.

    11.  Lee Arvie, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0431; In
the 56th Judicial District Court of Galveston County, Texas.

    12.  Earl Rivas and Rosie Rivas v. Sterling Chemicals, Inc., Sterling
Chemical Company, Sterling Chemical Company, Inc., B.P. Chemicals, Inc., B.P.
Chemicals America, Inc., Paul Saunders,, and Allan Bolen; Cause No. 96CV0438;
In the 10th Judicial District Court of Galveston County, Texas.

    13.  Bertha L. Anderson, et al. v. Sterling Chemicals, Inc.; Cause No. 
96CV0440; In the 122nd Judicial District Court of Galveston County, Texas

    14. Carl Terry, et al. v. Sterling Chemicals, Inc. and Paul Saunders;
Cause No. 96CV0436; In the 212th Judicial District Court of Galveston County,
Texas.

    15.  Phyllis Cormier, et al. v. Sterling Chemicals, Inc.; Cause No.
96-023195; In the 269th Judicial District Court of Harris County, Texas.

    16.  Nita Moore, et al. v. Sterling Chemicals, Inc.; Cause No. 96-22420; In
the 270th Judicial District Court of Harris County, Texas.

    17.  Mattie Moses, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0458;
In the 56th Judicial District Court of Galveston County, Texas.

    18.  Prince Ella Green and James Green v. Sterling Chemicals, Inc.; Cause
No. 96CV0454; In the 212th Judicial District Court of Galveston County, Texas.

    19.  Jacqueline Lynch, et al. v. Sterling Chemicals, Inc.; Cause No. 43353;
In the County Court at Law No. 2 of Galveston County, Texas.

    20.  Gloria Cotton, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0446;
In the 122nd Judicial District Court of Galveston County, Texas.

    21.  Phyllis Joiner, et al. v. Sterling Chemicals, Inc.; Cause No. 56189;
In the Justice of the Precinct No. 1, Galveston County, Texas.

    22.  Timothy McClurkin, Sr. v. Sterling Chemicals, Inc.; Cause No.
96CV0451; In the 56th Judicial District Court of Galveston County, Texas.

    23.  Allen E. Kitchens v. Sterling Chemicals, Inc., et al.; Cause No.
43,352; In the Galveston County Court, Galveston County, Texas.

    24.  Patricia A. Glover v. Sterling Chemicals, Inc., Paul Saunders, Allen
Bolen, et al.; Cause No. 96CV0459; In the 212th Judicial District Court of
Galveston County, Texas.

    25.  Wayne R. Lee v. Sterling Chemicals, Inc.; Cause No. 96CV0467; In the
10th Judicial District Court of Galveston County, Texas.





                                       16
<PAGE>   19


     The following ammonia lawsuits were settled after September 30, 1996:

    1.    Feliciana Cantu, et al. v. Sterling Chemicals, Inc.; Cause No.
664459; In the County Civil Court at Law No. 4 of Harris County, Texas.

    2.  Edwin Laday v. Sterling Chemicals, Inc.; Cause No. 96CV0430; In the
212th Judicial District Court of Galveston County, Texas.

NICKEL CARBONYL LAWSUITS:

     On July 30, 1997, as the Company's methanol unit at the Texas City Plant
was being shut down for repair, nickel carbonyl was formed when carbon monoxide
reacted with nickel catalyst in the unit's reformer.  After isolating the
nickel carbonyl within the methanol unit, the Company worked with the
permission and guidance of the Texas Natural Resources Conservation Commission
to destroy the nickel carbonyl by incineration on-site.

     Prior to its incineration, several Company employees and contractor
employees may have been exposed to nickel carbonyl in the methanol unit.  Nine
contractor employees allegedly exposed to nickel carbonyl have filed a lawsuit
(Kurt Bodenshot, et. al. v. Sterling Chemicals, Inc.; Cause No. 97CV0966; In
the 212th Judicial District Court of Galveston County, Texas) against the
Company seeking unspecified damages for personal injuries.  The Company
anticipates that additional claims and litigation against the Company asserting
similar claims will ensue.  The Company believes that its general liability
insurance coverage is sufficient to cover all costs and expenses.  No employees
or other individuals outside the methanol unit were exposed to the nickel
carbonyl.

OTHER LAWSUITS:

     The Company is subject to various other claims and legal actions that
arise in the ordinary course of its business.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None





                                       17
<PAGE>   20
                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

    There is no established public trading market for Holdings' common stock,
par value $.01 per share ("Common Stock"), although the Common Stock is traded
on the OTC Electronic Bulletin Board maintained by the National Association of
Securities Dealers, Inc. under the symbol "STXX".  Prior to the Merger, the
Common Stock was listed on the New York Stock Exchange ("NYSE") under the
symbol "STX".  The following table sets forth the price range of the Common
Stock during the fiscal years ended September 30, 1997 and September 30, 1996.
The following table reflects high and low sales prices on the NYSE for the
period through August 21, 1996 and high and low bid information as reported on
the OTC Electronic Bulletin Board for the period of August 22, 1996 through
September 30, 1997.

<TABLE>
<CAPTION>
                            First          Second            Third           Fourth
                          Quarter          Quarter          Quarter          Quarter
                          -------          -------          -------          -------
<S>                       <C>              <C>              <C>              <C>
1997 High                 $ 12 3/4         $ 12 1/2         $ 12 1/4         $ 13
     Low                  $ 11             $ 11             $ 11             $ 11 3/8


1996 High                 $  9 1/4         $ 13             $ 13 1/8         $ 12 1/2
     Low                  $  7 1/2         $  8             $ 11 1/8         $ 10 7/8
</TABLE>


    As of  December 8, 1997, there were approximately 350 record holders of
Common Stock.

    Holdings has not paid dividends on the Common Stock in any of the last
three fiscal years and does not anticipate paying dividends in the foreseeable
future.  Any future determination as to the payment of dividends will be made
at the discretion of the Board of Directors of Holdings and will depend upon
the Company's operating results, financial condition, capital requirements,
general business conditions, and such other factors that the Board of Directors
deems relevant.  In addition, the payment of dividends on the Common Stock is
restricted by the terms of the indenture governing the 13 1/2% Senior Secured
Discount Notes Due 2008 ("13 1/2% Notes"), and indirectly restricted by the
terms of the Chemicals Credit Facility and the indenture governing the 11 3/4%
Senior Subordinated Notes Due 2006 ("11 3/4 Notes") and the 11 1/4% Senior
Subordinated Notes Due 2007 ("11 1/4% Notes") which restrict the ability of
Chemicals to transfer funds to Holdings.





                                       18
<PAGE>   21
ITEM 6. SELECTED FINANCIAL DATA OF THE COMPANY

The following table sets forth selected financial data with respect to the
Company's consolidated financial condition and consolidated results of
operations and should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and related notes in Item 8 of
this Form 10-K.


<TABLE>
<CAPTION>
                                                                  Year Ended September 30,
                                         ---------------------------------------------------------------------------
                                           1997(2)         1996(2)           1995            1994            1993
                                         -----------     -----------     -----------     -----------     -----------
<S>                                      <C>             <C>             <C>             <C>             <C>        
OPERATING DATA:                                              (In Thousands Except Per Share Data)

   Revenues                              $   908,787     $   790,465     $ 1,030,198     $   700,840     $   518,821

   Gross profit                               95,639         111,426         271,618          93,924          40,919

   Net income (loss) attributable to
     common stockholders                     (28,965)         31,604         150,049          19,132          (5,420)

   Net cash provided by operating
     activities                               47,314          63,601         191,838          75,249          48,114

   Net cash used in investing     
     activities                             (196,351)        (95,957)        (53,962)         (9,737)        (12,175)
                                  
                                  
   Net cash provided by (used in)
     financing activities                    151,610           7,190        (109,017)        (64,874)        (37,057)

   EBITDA(1)                                 107,318         121,200         281,480         108,600          52,477

PER SHARE DATA:

   Net income (loss) per common share          (2.58)           0.62            2.70            0.34           (0.10)

   Cash dividends                                 --              --              --              --            0.06

BALANCE SHEET DATA:

   Working capital                       $   120,104     $    76,933     $    74,620     $    20,809     $    30,952

   Total assets                              878,971         689,684         609,939         580,925         546,754

   Long-term debt (excluding current
    maturities)                              876,281         714,632         103,581         192,621         263,894

   Redeemable preferred stock                 15,793              --              --              --              --

   Stockholders' equity (deficiency
    in assets)                              (288,528)       (272,439)        239,318          89,734          70,336
</TABLE>

     (1) EBITDA (Earnings before interest, taxes, depreciation, amortization,
stock appreciation rights ("SARs"), and certain merger-related expenses) is
presented to further enhance understanding of the Company's results of
operations and cash flows.  It is not intended as an alternative measure of
performance to net income.  With certain adjustments, EBITDA is the basis for
payments to employees under the Company's profit sharing plans.

    (2) See Note 1 of Notes to Consolidated Financial Statements for a
discussion of merger activities and related financing.


                                       19
<PAGE>   22
SELECTED FINANCIAL DATA FOR CHEMICALS

     The following table sets forth selected financial data with respect to
Chemical's consolidated financial condition and consolidated results of
operations and should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Chemical's 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.


<TABLE>
<CAPTION>
                                                                                        Period from
                                                     Year Ended               May 14, 1996 (Date of Inception)
                                                 September 30, 1997              to September 30, 1996 (1)
                                                 ------------------           --------------------------------
                                                                                   (Dollars in Thousands)
<S>                                                  <C>                                <C>          
           OPERATING DATA:

             Revenues                                $ 908,787                          $  83,410    
                                                                                                     
             Gross profit                               95,639                                363    
                                                                                                     
             Net income (loss)                         (14,781)                               174    
                                                                                                     
           BALANCE SHEET DATA:                                                                       
                                                                                                     
             Working capital                         $ 125,743                          $  77,299    
                                                                                                     
             Total assets                              881,231                            685,451    
                                                                                                     
             Long-term debt (excluding                                                               
               current maturities)                     768,870                            619,875      
                                                                                                     
                                                                                                     
                                                                                                     
                                                                                                     
           Stockholders' equity                                                                      
             (deficiency in assets)                   (168,589)                          (184,302)   
</TABLE>


     (1) See Note 1 of Notes to Consolidated Financial Statements for a
discussion of merger activities and related financing.  Prior to August 21,
1996, Chemicals had no operating activities, other than those related to merger
activities.






                                       20
<PAGE>   23
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

    Holdings is a holding company whose only material asset is Chemicals.
Holdings' only material liability is its obligation to repay the 13 1/2% Notes
issued in connection with the Merger and redeem the preferred stock issued in
connection with the AFB Acquisition and the Saskatoon Acquisition. Chemicals
and its subsidiaries own substantially all of the consolidated operating assets
and are obligated for substantially all remaining liabilities of the Company.
The Merger that occurred on August 21, 1996 and related financings were
accounted for as a recapitalization, with no change in the basis of the assets
and liabilities of Chemicals.  Other than the additional interest expense
associated with the 13 1/2% Notes, results of operations for the Company are
essentially the same as those for Chemicals.  Accordingly, the discussion that
follows is applicable to both entities, except as specifically noted.  A
separate discussion of the results of operations for Chemicals, would not, in
the opinion of the Company, provide any additional meaningful information.

     The primary markets in which the Company competes, especially styrene and
acrylonitrile, are cyclical and are sensitive to changes in the balance between
supply and demand, the price of raw materials, and the level of general
worldwide economic activity.  Historically, these markets have experienced
alternating periods of tight supply and rising prices and profit margins,
followed by periods of large capacity additions resulting in overcapacity and
declining prices and profit margins.  Large global capacity additions of
styrene and acrylonitrile are projected to be completed during 1997 and 1998.
In addition, recent events in the financial markets in various countries in the
Far East may impact the demand growth for the Company's products, particularly
styrene and acrylonitrile, which may have a negative impact on sales volumes,
prices, and margins in fiscal 1998.

     Styrene prices have been 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 resulting in high styrene
prices and margins.  During the second half of 1995, styrene prices decreased
significantly as demand growth weakened, prompting customers to begin utilizing
their available inventories.  Increased capacity additions, particularly in the
Far East, resulted in lower styrene prices and margins in 1996 and 1997.
Current global production capacity for styrene is estimated at over 40 billion
pounds and the Company believes over 7 billion pounds of capacity will be added
by competitors in 1997 and 1998.  Average styrene sales prices declined by 41%
from fiscal 1995 to 1996 and 2% from fiscal 1996 to fiscal 1997.  The Company
expects that prices for styrene will continue at current depressed levels until
global demand for styrene increases sufficiently to absorb increased production
capacity.

     The acrylonitrile market exhibits characteristics in capacity utilization,
selling prices, and profit margins similar to those of styrene.  Moreover, as a
result of the Company's high percentage of export acrylonitrile sales, demand
for the Company's acrylonitrile is most significantly influenced by export
customers, particularly those that supply acrylic fiber to China.  During 1995,
strong demand for acrylic fiber and ABS resins, particularly in China,
increased demand for acrylonitrile resulting in higher prices and margins.
However, the Company believes that acrylonitrile demand began to weaken in late
1995 for the same reasons that caused the deterioration in the styrene market.
Increased acrylonitrile capacity in the United States and the Far East resulted
in lower acrylonitrile prices and margins in 1996 and 1997. Average
acrylonitrile sales prices declined by 29% from fiscal 1995 to 1996 and 3% from
fiscal 1996 to 1997.  The Company believes that during 1997 and 1998, global
industry capacity will increase by approximately 940 million pounds or 9%.  As
a result of the increased global industry capacity in 1997 and 1998, industry
utilization rates and prices may decline.

    The Company primarily sells its petrochemical products pursuant to
multi-year contracts and high volume spot transactions in both the domestic and
export markets.  This long-term, high volume focus allows the Company to
maintain relatively low selling, general and administrative expenses relating
to product marketing.  Prices for the Company's commodity chemicals are
determined by global market factors, including changes in the cost of raw
materials, that are largely beyond the Company's control and, except with
respect to certain of its multi-year contracts, the Company generally sells its
products at prevailing market prices.

    During the past five years, the Company's results of operations have varied
significantly from year to year primarily as a result of cyclical changes in
the markets for its primary products.  The Company has attempted to stabilize
these fluctuations by manufacturing two primary product groups, petrochemicals
and pulp chemicals, which have historically been subject to different market
dynamics, including timing differences in their respective cyclical upturns and
downturns.  In addition, a goal of the Company is to pursue selected strategic
acquisitions, such as the AFB Acquisition and the Saskatoon Acquisition, to
further increase the diversity of the Company's product mix and reduce





                                       21
<PAGE>   24
the Company's sensitivity to economic cycles. Despite the above-described
diversification, however, prolonged or severe softness in the market for any of
its principal products, particularly styrene and acrylonitrile, will adversely
affect the Company.  Although earnings from styrene and acrylonitrile are
expected to be significantly impacted by the global petrochemical capacity
increases in 1997 and 1998, this impact should be partially offset by the pulp
chemical business which is expected to benefit from growing demand for
generators and sodium chlorate and the approximately 50% increase in the
Company's sodium chlorate capacity as a result of the recent completion of the
Valdosta Plant and the Saskatoon Acquisition.  There can be no assurance,
however, that such favorable results in the pulp chemical business will be
realized.

    In addition, the Company markets substantial volumes of petrochemicals
(approximately 50%, 50% and 54% of total sales volumes in fiscal years 1997,
1996, and 1995, respectively) and generates substantial revenues (approximately
32%, 36%, and 30% of total revenues in fiscal years 1997, 1996, and 1995,
respectively) under conversion agreements.  Under these agreements, the
customer furnishes raw materials that the Company processes in exchange for a
fee designed to cover its fixed and variable costs of production.  The
conversion agreements allow the Company to maintain lower levels of working
capital and, in some cases, to gain access to certain improvements in
manufacturing process technology.  The Company believes that its petrochemical
conversion agreements help insulate the Company to some extent from the effects
of declining markets and increases in raw material prices, while allowing it to
share in the benefits of favorable market conditions for most of the products
sold under these arrangements.


LIQUIDITY AND CAPITAL RESOURCES

    Debt Structure.  As part of the 1996 Recapitalization, Chemicals entered
into a Credit Agreement with Texas Commerce Bank National Association, as agent
bank for a syndicate of lenders (the "Original Credit Agreement").  The
Original Credit Agreement provided for facilities consisting of a six and
one-half year revolving credit facility providing for up to $100 million
(subject to a monthly borrowing base calculation) in revolving loans (the
"Revolver"), a term loan facility consisting of a six and one-half year $200
million Tranche A term loan and an eight-year $150 million Tranche B term loan,
and a four-year $6.5 million ESOP term loan (the "Original Term Loans").

     In connection with the AFB Acquisition, Chemicals entered into a new
credit agreement with Texas Commerce Bank National Association, as agent bank
for a syndicate of lenders (the "Fibers Credit Agreement"). The Fibers Credit
Agreement provided for a term loan facility consisting of a $31 million Tranche
A term loan due March 31, 2003 and a $50 million Tranche B term loan due
September 30, 2004  (the "Fibers Term Loans").

    On July 10, 1997, Sterling Sask, an indirect wholly owned subsidiary of
Holdings and Chemicals acquired substantially all of the assets of Saskatoon
Chemicals, a subsidiary of Weyerhauser Canada Ltd.  In connection with the
Saskatoon Acquisition, Sterling Sask entered into a credit agreement (the
"Saskatoon Credit Agreement") with The Chase Manhattan Bank of Canada,
individually and as administrative agent for a syndicate of lenders.  Funding
under the Saskatoon Credit Agreement occurred July 10, 1997, upon consummation
of the Saskatoon Acquisition.  The Saskatoon Credit Agreement provides for a
revolving credit facility of Cdn. $8.0 million (the "Saskatoon Revolving
Loan"), a term loan facility consisting of a Cdn. $25.0 million Tranche A term
loan due June 30, 2003, and a $36.4 million Tranche B term loan due June 30,
2005  (the "Saskatoon Term Loans").

    At the time of the Saskatoon Acquisition, the Company consolidated and
combined the Original Credit Agreement and the Fibers Credit Agreement (as
consolidated, the "Credit Agreement"), as well as the Original Term Loans and
the Fibers Term Loans (as consolidated, the "Term Loans").  The Term Loans
consist of a $76,500,000 Tranche A term loan due March 31, 2003, a $199,166,667
Tranche B term loan due September 30, 2004, and a $5,281,250 ESOP term loan due
September 30, 2000.  For more information concerning the Credit Agreement, see
Note 4 to Consolidated Financial Statements.

    On April 7, 1997, Chemicals completed the offering of the 11 1/4% Notes
(the "11 1/4% Notes Offering"). The 11 1/4% Notes are unsecured senior
subordinated obligations of Chemicals, ranking subordinate in right of payment
to all existing and future senior debt of Chemicals, but pari passu with the 11
3/4% Notes and all future senior subordinated indebtedness of Chemicals.  For
more information concerning the 11 1/4% Notes, see Note 4 to Consolidated
Financial Statements.

    The Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, and general corporate
purposes, should it need to do so, will be affected by the covenants in its
various debt agreements and by cash requirements for debt service.  The Credit
Agreement and the indentures governing the 13 1/2% Notes, 11 3/4% Notes, and 11
1/4% Notes (the "Indentures") contain numerous financial and operational
covenants,





                                       22
<PAGE>   25
including, without limitation, restrictions on the Company's ability to incur
indebtedness, pay dividends, create liens, sell assets, engage in mergers and
acquisitions, and refinance existing indebtedness, as well as the obligation of
the Company to maintain certain financial ratios.  The 11 1/4% Notes Offering
was permitted under the pre-existing Indentures as a Refinancing of Debt
outstanding under the Credit Agreement.  At the time of the AFB Acquisition,
the Company negotiated an amendment to the Credit Agreement to permit the AFB
Acquisition and to make certain financial covenants somewhat less restrictive.
The Company further amended the Credit Agreement in connection with the 11 1/4%
Notes Offering and the partial repayment of the Term Loans with the proceeds
thereof further relaxing certain of the financial covenants therein, among
other things.  Such modifications did not, however, lessen the restrictions
under the Indentures on the Company's ability to incur additional debt.  Based
on the Company's pro forma results of operations for the four quarters ended
September 30, 1997, these restrictions currently operate to prevent the Company
from incurring any additional debt other than debt incurred under the Revolver
or pursuant to certain limited "baskets" and other exceptions.  Under limited
circumstances, the Company may, however, consummate additional acquisitions
under the Credit Agreement and the Indentures (i) through the incurrence of
debt in Unrestricted Subsidiaries (as defined in the Indentures and Credit
Agreement) or (ii) if the pro forma effect of such acquisition has a sufficient
positive impact on certain financial ratios.  The Company generally will not
have access to the cash flows of Unrestricted Subsidiaries, as in the case of
Sterling Sask.   The Credit Agreement also requires that certain amounts of
Excess Cash Flow (as defined therein) be used to prepay amounts outstanding
under the Term Loans.  No such mandatory prepayment is required in fiscal 1998.

    The Company intends to meet its liquidity needs for operating activities
and capital expenditures (other than acquisitions) through internally generated
funds and, to the extent necessary, borrowings under the Revolver.  In
connection with the 11 1/4% Notes Offering on April 7, 1997, the total
commitment under the Revolver was increased by $25 million to $125 million.  As
of September 30, 1997, the Company had drawn approximately $9.4 million and
issued approximately $2.6 million in letters of credit under the Revolver,
thereby decreasing the available commitments under the Revolver at such time to
$113.0 million (compared to an available commitment thereunder as of September
30, 1996 of $100 million).  Available credit under the Revolver for loans and
letters of credit is subject to a monthly borrowing base.  At September 30,
1997, the borrowing base did not limit such available credit.  The Revolver
matures at March 31, 2003.   The Company believes that such sources of funds
will be sufficient to permit the Company to meet its liquidity needs during
fiscal 1998.

    At September 30, 1997, the Company's long-term debt (excluding current
maturities) was $876.3 million.

    The Company's ability to comply with the covenants and other terms of its
various debt agreements, meet its debt service obligations, and repay principal
when due will depend on the future performance of the Company.  The future
performance of the Company is subject to a number of uncertainties.  See
"Certain Known Events, Trends, Uncertainties and Risk Factors."  The Company
was in compliance with its financial covenants in effect as of September 30,
1997.

    The Credit Agreement and the Indentures contain provisions which restrict
the payment of advances, loans and dividends from Chemicals to Holdings.  The
most restrictive of those covenants limits such payments during fiscal 1998 to
approximately $2.0 million plus any amounts due to Holdings from Chemicals
under the intercompany tax sharing agreement.  Such restriction is not expected
to limit Holdings' ability to meet its obligations in fiscal 1998.

    Working Capital.  Working capital at September 30, 1997 was $120 million,
an increase of $43 million from September 30, 1996.  This increase was the
result of the following changes:

<TABLE>
<CAPTION>
                            Current Assets                                  Current Liabilities
                            --------------                                  -------------------
                             (In Millions)                                     (In Millions)
               <S>                                  <C>         <C>                                  <C>
               Cash and cash equivalents            $  2        Accounts payable                     $ (14)
               Inventories                            34        Accrued liabilities                    (24)
               Accounts receivable                    34        Current portion long-term debt           6
               Other                                   5                                            
                                                    ----                                             -----
                                                    $ 75                                             $ (32)
</TABLE>

    ( ) - Decrease in assets, increase in liabilities.

    Cash Flow.  Net cash provided from operations was $47 million for fiscal
1997, a decrease of $16 million compared to fiscal 1996.  This decrease
primarily resulted from decreased earnings during fiscal 1997.  Net cash flow
used in investing activities was $196 million in fiscal 1997 compared to $96
million in fiscal 1996.  The increase was





                                       23
<PAGE>   26
primarily due to the AFB Acquisition and the Saskatoon Acquisition.  Net cash
flow provided by financing activities increased to $152 million in fiscal 1997
compared to $7 million in fiscal 1996 primarily due to proceeds from long-term
debt associated with the AFB Acquisition and the Saskatoon Acquisition.

    Capital Expenditures.   Capital expenditures for fiscal 1997, 1996, and
1995 were $43 million, $96 million, and $54 million, respectively.  The fiscal
1997 capital expenditures were primarily for additional construction costs
related to the methanol unit and the Valdosta Plant, along with the
distributive control system upgrade at the acrylonitrile unit.  In addition,
the Company incurred capital expenditures in 1997 for process modernization in
styrene and acrylonitrile, and routine safety, environmental, and replacement
capital in the Company's petrochemical, pulp chemical, and fibers businesses.
The fiscal 1996 capital expenditures were primarily for the expansion of the
acetic acid unit, construction of the methanol unit, and construction of the
Valdosta Plant.  The fiscal 1995 capital expenditures were primarily for plant
instrumentation modernization and process improvements, the acetic acid
expansion, construction of the methanol unit, and the new sodium chlorate
plant.  The acetic acid expansion was completed in June 1996, the methanol unit
was completed in August 1996, and the Valdosta Plant came on stream in December
1996.

    Capital expenditures are expected to be approximately $30 to $40 million in
fiscal 1998, with about $20 to $25 million dedicated to the petrochemical and
fibers businesses and $10 to $15 million dedicated to the pulp chemical
business.  Capital expenditures will be primarily for process modernization of
the styrene and acrylonitrile units and routine safety, environmental, and
replacement capital.

    The Company's capital expenditures for environmentally-related prevention,
containment, and process improvements were $3 million and $2 million for fiscal
years 1997 and 1996, respectively.  The Company does not anticipate a material
increase in these types of expenditures during fiscal 1998.  During both fiscal
years, the Company did not incur any other infrequent or non-recurring material
environmental expenditures which were required under existing environmental
regulations.  See "Certain Known Events, Trends, and Uncertainties -
Environmental and Safety Matters."

    The Company routinely incurs expenses associated with hazardous substance
management and pollution prevention in ongoing operations.  These operating
expenses include items such as depreciation on its waste treatment facilities,
outside waste management, fuel, electricity, and salaries.  The amounts of
these operating expenses were approximately $50 million and $47 million for
fiscal years 1997 and 1996, respectively.  The Company does not anticipate a
material increase in these types of expenses during fiscal 1998.  The Company
considers these types of environmental expenditures normal operating expenses
and includes them in cost of goods sold.

    Acquisitions.  Part of the Company's business strategy is to implement a
focused acquisition strategy, targeting chemical businesses and assets which
will strengthen the Company's existing market positions, provide upstream or
downstream integration, or produce complementary chemical products.  As
previously discussed, the Company's ability to consummate acquisitions may be
limited by restrictions in its debt agreements, results of operations, and
industry conditions.  The Company currently intends, if such acquisition
opportunities arise, to seek any necessary approvals from its existing lenders
and/or obtain necessary financing through the use of Unrestricted Subsidiaries
or otherwise, to consummate such acquisitions, although there can be no
assurance that it will be successful in obtaining such approvals or obtaining
such financing.

    Foreign Exchange.  The Company enters into forward foreign exchange
contracts to reduce risk due to Canadian dollar exchange rate movements.  The
Company does not engage in currency speculation.  The forward foreign exchange
contracts have varying maturities with none exceeding 18 months.  The Company
makes net settlements of United States dollars for Canadian dollars at rates
agreed to at inception of the contracts.  The Company had a notional amount of
approximately $20 million and $30 million of forward foreign exchange contracts
outstanding to buy Canadian dollars at September 30, 1997 and 1996,
respectively.  The deferred gain (loss) on these forward foreign exchange
contracts at September 30, 1997 and 1996 was immaterial.


ACCOUNTING CHANGES

    The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 123,  "Accounting for Stock-Based
Compensation" which permits companies to either adopt this new standard and
record expenses for stock options and other stock-based employee compensation
plans based on their fair value at date of grant, or continue to apply its
current accounting policy under Accounting Principles Board ("APB") Opinion No.
25 and increase its footnote disclosure.  The Company will continue to apply
APB Opinion No. 25, and has





                                       24
<PAGE>   27
increased its footnote disclosure to include the pro forma impact on net income
and earnings per share of the application of the fair value based method of
accounting.

    The Company adopted SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in the first
quarter of fiscal 1997.  SFAS No. 121 sets forth guidance on how to measure an
impairment of long-lived assets and when to recognize such an impairment.  The
adoption of this Statement did not have a material adverse effect on the
Company's financial position, results of operations, or cash flows.

    SFAS No 128, "Earning Per Share" establishes standards for computing and
presenting earnings per share ("EPS").  SFAS No. 128 replaces the presentation
of primary EPS previously prescribed by APB No. 15 with a presentation of basic
EPS which is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period.  The
Statement also requires dual presentation of basic and diluted EPS.  Diluted
EPS is computed similarly to fully diluted EPS pursuant to APB No. 15.  Pro
forma basic and diluted EPS for all historical periods presented, assuming that
SFAS No. 128 was effective at the beginning of each such historical period,
would not be materially different from what has been presented using APB No.
15.  The Company will adopt SFAS No. 128 for fiscal 1998.

    SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and displaying of comprehensive income and its components. SFAS No.
131  "Disclosures About Segments of an Enterprise and Related Information"
establishes standards for the way that public business enterprises report
information about segments in interim and annual financial statements. The
Company is currently evaluating what, if any, additional disclosures may be
required when these two statements are adopted in the first quarter of fiscal
1999.


CERTAIN KNOWN EVENTS, TRENDS, UNCERTAINTIES AND RISK FACTORS

    Raw Material Prices and Availability.  For each of the Company's products,
the cost of raw materials and utilities is far greater than all other costs of
production combined.  Therefore, an adequate supply of raw materials at
reasonable prices is critical to the success of the Company's business.  The
only major raw materials for the Company's petrochemical and pulp chemical
products which is produced by the Company is methanol, which is used in the
production of acetic acid.    The major raw materials used by the Company in
the production of its petrochemical products are all commodity chemicals and
the price for each can fluctuate widely for a variety of reasons, including
changes in the availability of these products because of major capacity
additions or significant plant operating problems.  Although no assurances can
be given, the Company believes that it will continue to secure adequate
supplies of all its raw materials at acceptable prices.  The primary raw
material for acrylic fibers is acrylonitrile, which is currently produced by
the Company.  However, as part of the AFB Acquisition, the Company assumed an
existing acrylonitrile supply agreement, which expires February 28, 2002,
pursuant to which Sterling Fibers will purchase all of the Santa Rosa Plant's
requirements for acrylonitrile from Cytec.  Upon the expiration of such supply
contract, the Company may supply all of Sterling Fibers' acrylonitrile
requirements from the Texas City Plant.

    Cyclical Markets for Products; Capacity Increases on Key Petrochemical
Products.  The prices of the Company's petrochemical and pulp chemical products
have been cyclical and sensitive to overall supply relative to demand and the
level of general business activity.  Large global capacity additions of styrene
and acrylonitrile are projected to be completed in 1997 and 1998.  For styrene,
approximately 7.2 billion pounds of new capacity is expected, and for
acrylonitrile, approximately 940 million pounds of new capacity is expected.
The Company believes that these announced global capacity additions in styrene
and acrylonitrile will result in overcapacity for these markets in fiscal year
1998. The resulting impact on prices and margins negatively impacted the
Company's results in fiscal 1997.

    Environmental and Safety Matters.  The Company's operations involve the
handling, production, transportation, and disposal of materials classified as
hazardous or toxic and are subject to extensive federal, state, and local
regulatory requirements relating to environmental affairs, waste management,
health and safety, and chemical products.  Operating permits are or may be
required for the operation of some of the Company's operating units and
chemical waste disposal operations, and these permits are subject to
revocation, modification, and renewal.  Governmental authorities have the power
to enforce compliance with these regulations and permits, and violators are
subject to fines, injunctions, or both.  Third parties may also have the right
to sue to enforce compliance.  The Company believes that its operations are in
compliance in all material respects with applicable environmental laws.
However, the operations of a chemical manufacturing facility entail some risk
of environmental damage, and there can be no assurance that material costs or
liabilities will not be incurred.  Moreover, it is possible that other
developments, such as increasingly strict requirements or environmental laws
and enforcement policies, could bring into question the handling, manufacture,
use, emission or on-site or off-site disposal of substances or chemicals by the
Company.  There can be no assurance that past or future operations will not
result in exposure to injury or claims of injury by employees, vendors,
contractors, or the public due





                                       25
<PAGE>   28
to toxic or hazardous materials.  In addition, a catastrophic event at the
Company's facilities could result in liabilities to the Company substantially
in excess of its insurance coverages.

    The Company's pulp chemical business is sensitive to potential
environmental regulation.  On November 14, 1997, the EPA enacted regulations
that support substitution of chlorine dioxide, which is produced from sodium
chlorate, for elemental chlorine in the pulp bleaching process (Pulp and Paper
Cluster Rule).  Certain environmental groups are encouraging passage of
regulations which restrict the amount of AOX or chlorine derivatives in bleach
plant effluent.  This regulation will result in increased substitution of
chlorine dioxide for elemental chlorine in the pulp bleaching process which
significantly reduces the amount of AOX and chlorine derivatives in bleach
plant effluent.  As long as there is not an outright ban on chlorine containing
compounds, regulations restricting AOX or chlorine derivatives in bleach plant
effluent should favor the use of chlorine dioxide, thus sodium chlorate.  Any
significant ban on all chlorine containing compounds could have a material
adverse effect on the Company's financial condition and results of operations.

    British Columbia has a regulation in place that would effectively eliminate
the use of chlorine dioxide in the bleaching process by the year 2002.  The
pulp and paper industry is working to change this regulation and believes that
a ban of chlorine dioxide in the bleaching process will yield no measurable
environmental or public health benefit.  In the event such a regulation was
implemented, the Company would seek to sell its products to customers in other
markets.  The Company is not aware of any other laws or regulations currently
in place in North America which would restrict the use of the product.

    Legal Proceedings.  The information under "Legal Proceedings" in Note 7 to
Consolidated Financial Statements herein is incorporated by reference.

    High Financial Leverage, Substantial Restrictions and Covenants. As a
result of the 1996 Recapitalization, the AFB Acquisition, and the Saskatoon
Acquisition, the Company had consolidated indebtedness of $882 million and
deficiency in assets of $289 million at September 30, 1997. The Company's high
degree of leverage could have important consequences, including the following:
(i) the ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes, and
other purposes, if needed, may be restricted; (ii) a substantial portion of
cash flow from operations will be dedicated to cover cash interest
requirements, thereby limiting the funds available for operations and any
future business opportunities; and (iii) the degree of leverage may make the
Company more vulnerable to a downturn in its businesses or the economy
generally.

    The Company's debt instruments contain numerous financial and operating
covenants, including, but not limited to, restrictions on the Company's ability
to incur indebtedness, pay dividends, create liens, sell assets, engage in
certain mergers and acquisitions, and refinance existing indebtedness.  These
covenants may limit the Company's ability to pursue its acquisition strategy.
In the event of a change of control and under certain other circumstances,
Holdings will be required to offer to purchase all of its outstanding 13 1/2%
Notes and Chemicals will be required to offer to purchase all of its
outstanding 11 1/4% Notes and 11 3/4% Notes, in each case subject to certain
conditions, at a price equal to 101% of the Accreted Value with respect to the
13 1/2% Notes, and 101% of the principal amount thereof, with respect to the
11 1/4% Notes and 11 3/4% Notes, plus accrued and unpaid interest, if any.  The
ability of the Company to comply with such covenants and other terms of its
debt instruments and to satisfy its other debt obligations will depend on the
future performance of the Company, which is subject to the risks and
uncertainties discussed herein.

    The markets for many of the Company's products are cyclical and sensitive
to the level of general business activity.  See "Overview" and "Cyclical
Markets for Products; Capacity Increases on Key Petrochemical Products."
Weakness in the level of worldwide economic activity or in the market for one
or more of the Company's major products could have a material adverse effect on
the Company's ability to meet its debt service obligations and comply with the
restrictions imposed by its debt instruments.





                                       26

<PAGE>   29
    Highly Competitive Industry.  The industry in which the Company operates is
highly competitive.  Many of the Company's competitors, particularly in the
petrochemical industry, are larger and have substantially greater financial
resources than the Company.  Among the Company's competitors are some of the
world's largest chemical companies that have their own raw material resources.
In addition, a significant portion of the Company's business is based upon
widely available technology.  The entrance of new competitors into the industry
and the addition by existing competitors of new capacity may reduce the
Company's ability to maintain profit margins or its ability to preserve its
market share, or both.  Such developments could have a negative impact on the
Company's ability to obtain higher profit margins, even during periods of
increased demand for the Company's products. The competitiveness of Sterling
Fibers with respect to its specialty textiles and technical fibers products
(which are its higher margin products) is maintained, to a significant extent,
through the exclusive ownership or use of certain product and manufacturing
technology.  If competitors of Sterling Fibers gain access to the use of
similar technology, or render such technology obsolete through the introduction
of superior technology, the financial condition of Sterling Fibers would be
materially affected in an adverse manner.

    Dependence on Texas City Plant.  All of the Company's petrochemicals,
including all of its styrene and acrylonitrile, are produced at the Texas City
Plant.  Significant unscheduled downtime at the Texas City Plant due to
equipment breakdowns, interruptions in the supply of raw materials, power
failures, natural forces or any other cause, including the normal hazards
associated with the production of petrochemicals, could have a material adverse
effect on the Company.  Although the Company maintains insurance, including
business interruption insurance, that it considers to be adequate under the
circumstances, there can be no assurance that a significant interruption in the
operation of the Texas City Plant would not have a material adverse effect on
the Company's financial condition and results of operations.

    Ability to Complete Acquisitions.  A significant element of the Company's
business strategy is to pursue strategic acquisitions that either expand or
complement the Company's products.  The financing for such acquisitions will
likely affect the Company's capitalization.  There can be no assurance that the
Company will be able to identify and make acquisitions on terms favorable to it
or that the Company will be able to obtain financing for such acquisitions on
terms the Company finds acceptable.  As of September 30, 1997, the restrictions
contained in the Indentures currently operate to prevent the company from
incurring any additional debt other than debt incurred under the Revolver or
pursuant to certain limited "baskets", and other exceptions.  Under limited
circumstances the Company may, however, consummate additional acquisitions
under the Credit Agreement and the Indentures (i) through the incurrence of
debt in Unrestricted Subsidiaries  or (ii) if the pro forma effect of such
acquisition has a sufficient positive impact on certain financial ratios.

    Long-Term Contracts and Significant Customers.  The Company sells
substantial portions of its styrene and acrylonitrile production under
long-term contracts, and sells all of its acetic acid and plasticizers
production under long-term contracts with single customers.  These contracts
are intended to provide some stability if demand for or prices of these
products decline significantly, but also limit the Company's ability to take
full advantage of attractive market conditions during periods of higher prices
for these products.  During fiscal 1997, a significant portion of the Company's
production from the Texas City Plant was dedicated to multi-year contracts with
Solutia, Bayer, BP, and BASF.  Under certain market conditions, the loss of one
or more of these customers or a material reduction in the amount of product
purchased by one or more of them could have a material adverse effect on the
Company.

    Foreign Operations, Country Risks, and Exchange Rate Fluctuations.
Approximately 18% of the Company's fiscal 1997 revenues were derived from its
Canadian-based pulp chemical business and approximately 30% were derived from
export sales.  International operations and exports to foreign markets are
subject to a number of special risks, including currency exchange rate
fluctuations, trade barriers, exchange controls, national and regional labor
strikes, political risks, and risks of increases in duties, taxes, and
governmental royalties, as well as changes in laws and policies governing
operations of foreign-based companies.  In addition, earnings of foreign
subsidiaries and intercompany payments are subject to foreign income tax rules
that may reduce cash flow available to meet required debt service and other
obligations of the Company.

    Since the Company derives most of its pulp chemical revenues from
production and sales by subsidiaries within Canada, the Company has organized
its subsidiary structure and its operations in part based on certain
assumptions about various Canadian tax laws, currency exchange, and capital
repatriation laws and other relevant laws.  While the Company believes that
such assumptions are correct, there can be no assurance that Canadian taxing or
other authorities will reach the same conclusion.  If such assumptions are
incorrect, or if Canada were to change or modify such laws or the current
interpretation thereof, the Company may suffer adverse tax and financial
consequences.

   A portion of the Company's expenses and sales are denominated in Canadian
dollars, and accordingly, the Company's revenues, cash flows, and earnings may
be affected by fluctuations in the exchange rate between the United States
dollar and the Canadian dollar, which may also have adverse tax consequences.
In addition, because a portion of the Company's sales, cost of goods sold, and
other expenses are denominated in Canadian dollars, the Company has a
translation exposure





                                       27
<PAGE>   30
to fluctuations in the Canadian dollar against the United States dollar. These
currency fluctuations could have a material impact on the Company as increases
in the value of the Canadian dollar have the effect of increasing the United
States dollar equivalent of cost of goods sold and other expenses with respect
to the Company's Canadian production facilities.  The Company enters into
forward foreign exchange contracts to hedge such exposure for periods consistent
with its committed exposure, but does not engage in currency speculation.





                                       28
<PAGE>   31
RESULTS OF OPERATIONS

     The following table sets forth revenues, gross profit, and operating
income for the Company's primary segments for the years ended September 30,
1997, 1996, and 1995.


<TABLE>
<CAPTION>
                                                                          Year Ended September 30,          
                                                                         --------------------------
                                                                           1997      1996      1995
                                                                         ------    ------    ------
                                                                           (Dollars in millions)
<S>                                                                      <C>       <C>       <C>   
            REVENUES:
            Petrochemicals and Fibers . . . . . . . . . . . . . . . .    $  728    $  633    $  886
            Pulp Chemicals  . . . . . . . . . . . . . . . . . . . . .       181       157       144
                                                                         ------    ------    ------

                                                                         $  909    $  790    $1,030
                                                                         ======    ======    ======


            GROSS PROFIT:
            Petrochemicals and Fibers . . . . . . . . . . . . . . . .    $   33    $   53    $  225
            Pulp Chemicals  . . . . . . . . . . . . . . . . . . . . .        63        58        47
                                                                         ------    ------    ------

                                                                         $   96    $  111    $  272
                                                                         ======    ======    ======

            OPERATING INCOME:
            Petrochemicals and Fibers . . . . . . . . . . . . . . . .    $   11    $   31    $  212
            Pulp Chemicals  . . . . . . . . . . . . . . . . . . . . .        46        36        31
                                                                         ------    ------    ------

                                                                         $   57    $   67    $  243
                                                                         ======    ======    ======
</TABLE>


COMPARISON OF FISCAL 1997 TO FISCAL 1996

     Revenues.  Revenues for fiscal 1997 were $909 million compared to revenues
of  $790 million for fiscal 1996, an increase of 15%.  The increase in revenues
resulted primarily from eight months of operations from the newly acquired
Sterling Fibers, three months of operations from the recent Saskatoon
Acquisition, the startup of the new Valdosta Plant, and the new methanol unit.

Petrochemicals and Fibers

     For fiscal 1997, the Company's revenues from its petrochemical and fibers
businesses increased to $728 million when compared to fiscal 1996 revenues of
$633 million.  The AFB Acquisition and the new methanol unit had a positive
impact on revenues in fiscal 1997, partially offset by reduced styrene and
acrylonitrile average sales prices and sales volumes.

   Styrene.  Styrene revenues for fiscal 1997 decreased 4% due to average sales
prices decreasing by approximately 2% primarily as a result of weaker market
conditions, particularly in the export market.  In addition, fiscal 1997 sales
volumes decreased by approximately 5% as compared to fiscal 1996.  The prices
of styrene's major raw materials, benzene and ethylene, were substantially
higher during fiscal 1997 compared to fiscal 1996.  Benzene prices were
approximately 10% higher while ethylene prices were approximately 18% higher.
These price escalations contributed significantly to the decline in styrene
margins as market conditions did not allow for sufficient styrene price
increases to compensate for these rising costs.

     Acrylonitrile.  Acrylonitrile revenues for fiscal 1997 decreased 9% as a
result of a decline of approximately 6% in sales volumes and approximately 3%
in average sales prices.  The 6% reduction in volumes in fiscal 1997 were
primarily due to a partial shutdown during the third quarter as a result of
operating difficulties following the completion of a capital project.  The
prices of propylene and ammonia, which are the major raw materials used to make
acrylonitrile, were approximately 14% and 13% higher, respectively, in fiscal
1997 than in fiscal 1996. The combination of lower average sales prices and
higher raw materials costs resulted in lower acrylonitrile margins in fiscal
1997 as compared to fiscal 1996.

     Methanol.  Methanol revenues for fiscal 1997 were $68 million.   The
methanol unit construction was completed in August 1996 and, therefore,
recorded minimal revenues in fiscal 1996.  The methanol unit was negatively
impacted during the fourth quarter of fiscal 1997 due to a shutdown resulting
from operating problems.





                                       29
<PAGE>   32
     Fibers.  Sterling Fibers recorded eight months of revenues of
approximately $92 million since its acquisition in early fiscal 1997.

   Other Petrochemical Products.  Revenues during fiscal 1997 from the
Company's other petrochemical products (including acetic acid, plasticizers,
TBA, and sodium cyanide) decreased approximately 23% when compared to fiscal
1996 revenues primarily due to a decline in acetic acid revenues resulting from
a procedural change in the billings under the Company's production contract
with BP and the recording of related revenues.  Prior to the startup of the
Company's methanol unit, the Company purchased the methanol used in the
production of acetic acid.  Under the BP contract, such purchases were
ultimately re-billed to BP and included in acetic acid revenues.  Methanol for
acetic acid production is now supplied by the Company's methanol facility and
is included in methanol revenues.

Pulp Chemicals

     Revenues from the Company's pulp chemical business for fiscal 1997
increased by approximately 15% to $181 million compared to fiscal 1996. The
increase in revenues was primarily due to an increase in sales revenues from
sodium chlorate of 17% compared to fiscal 1996, as a result of the startup of
the Valdosta Plant in fiscal 1997, and the additional revenues of the recent
Saskatoon Acquisition.  Average sales prices for sodium chlorate declined 5% in
fiscal 1997 compared to fiscal 1996.  Revenues from the sale of generators and
royalty income decreased 5% in fiscal 1997 compared to fiscal 1996.  This 5%
decrease was primarily due to reduced project work related to generators.
Operating earnings for the pulp chemicals business were $46 million for fiscal
1997 compared to $36 million in fiscal 1996.  The increase was primarily due to
increased sales volumes of sodium chlorate.

Selling, General and Administrative Expenses.  Selling, general and
administrative ("SG&A") expenses for fiscal 1997 totaled $38 million, compared
to $40 million in fiscal 1996.  This decrease was related to $3.9 million in
SAR expenses which were paid as a part of the Merger in fiscal 1996.

Income from Operations.  Income from operations for fiscal 1997 was $57
million, consisting of $11 million from petrochemical and fibers operations and
$46 million from pulp chemical operations.  This amount represented a decrease
of approximately 15% from fiscal 1996, primarily as a result of weakness in the
markets for styrene and acrylonitrile discussed above, which resulted in
significantly lower margins during fiscal 1997 as compared to fiscal 1996.
This weakness was partially offset by higher operating income from the pulp
chemical business, the fibers operations acquired in fiscal 1997, and the new
methanol facility.  In addition, the Company incurred approximately $4 million
in merger related expenses in fiscal 1996.

Interest and Debt Related Expenses.  Interest and debt related expense for
fiscal 1997 increased $76 million compared to fiscal 1996 primarily due to the
additional debt incurred in the 1996 Recapitalization, the AFB Acquisition, and
the Saskatoon Acquisition.

Provision (Benefit) for Income Taxes.  Provision (benefit) for income taxes for
fiscal 1997 was $(7) million, with an effective tax rate of 23%, compared to
$17 million, with an effective tax rate of 34% for fiscal 1996.  The decrease
in the provision was primarily the result of the Company's pre-tax loss of
approximately $31 million for fiscal 1997 compared to pre-tax income of $50
million in fiscal 1996.

Extraordinary Item.  The $3.9 million after-tax ($6.0 million pre-tax)
extraordinary item in fiscal 1997 related to unamortized debt issue costs which
were expensed in April 1997 as a result of the partial prepayment of the Term
Loans.  The extraordinary item in fiscal 1996 of $1.9 million after-tax ($3.0
million pre-tax) related to the loss on early extinguishment of debt resulting
from the 1996 Recapitalization.

Net Income (Loss).  Due to the factors described above, net loss for fiscal
1997 was $28 million compared to net income of $32 million for fiscal 1996.


COMPARISON OF FISCAL 1996 TO FISCAL 1995

Revenues.  Revenues for fiscal 1996 were $790 million compared to revenues of
$1.03 billion for fiscal 1995, a decrease of 23%.  The decrease in revenues
resulted primarily from lower average sales prices for styrene and
acrylonitrile, and lower acrylonitrile and acetic acid sales volumes, which
were partially offset by increased revenues in the pulp chemical business as a
result of higher average sodium chlorate sales prices.





                                       30
<PAGE>   33


Petrochemicals

     For fiscal 1996, the Company's revenues from its petrochemical business
decreased 29% to $633 million when compared to fiscal 1995, primarily as a
result of decreases in styrene and acrylonitrile average sales prices and lower
acrylonitrile and acetic acid sales volumes.

     Styrene.  Styrene revenues for fiscal 1996 decreased due to average sales
prices decreasing by approximately 41% primarily as a result of weaker market
conditions in the Far East.  Fiscal 1996 sales volumes increased by
approximately 18% over fiscal 1995 when two planned shutdowns for scheduled
maintenance restricted production.  The second planned shutdown also included
modernization of the styrene unit's control instrumentation with
state-of-the-art distributive control systems.  The modernization project
completed in fiscal 1995 increased the Company's annual styrene production
capacity to 1.7 billion pounds.  The prices of styrene's major raw materials,
benzene and ethylene, were substantially lower during fiscal 1996 compared to
fiscal 1995.  Benzene prices were approximately 17% lower while ethylene prices
were approximately 25% lower. These decreases offset some of the decrease in
selling prices discussed above, but styrene margins still declined
substantially.

     Acrylonitrile.  Acrylonitrile revenues for fiscal 1996 decreased as a
result of a decline of approximately 29% in average sales prices and
approximately 11% in sales volumes.  Reduced imports of acrylonitrile
derivatives by the Far East market (primarily acrylic fiber and ABS resins)
resulted in lower acrylonitrile average sales prices and sales volumes.

     The Company's acrylonitrile unit operated at a reduced rate in 1996 due to
an extended shutdown for most of March 1996 for scheduled maintenance and
installation of the first phase of state-of-the-art distributive control
systems.  A second phase of distributive controls was installed in October
1996.  The new distributive control systems are expected to result in increased
efficiencies and stronger operating fundamentals in the future.  The prices of
propylene and ammonia, which are the major raw materials used to make
acrylonitrile, were approximately 23% and 22% lower, respectively, in fiscal
1996 than in fiscal 1995.  These decreases helped to offset some of the lower
average selling prices discussed above, but margins still declined
substantially.

     Acetic Acid.  Acetic acid revenues in fiscal 1996 decreased primarily as a
result of a 19% decrease in sales volumes related to a shutdown of the acetic
acid unit to expand the unit by nearly 200 million pounds annually and for
installation of new distributive control systems.  The expansion of the acetic
acid unit and the related construction of the partial oxidation unit by Praxair
at the Texas City Plant were completed in June 1996.  The partial oxidation
unit supplies raw materials to the Company's acetic acid unit.

     Other Petrochemical Products.  Revenues during fiscal 1996 from the
Company's other petrochemical products (excluding lactic acid revenues)
increased approximately 30% primarily as a result of increases in revenues from
plasticizers.  The Company ceased production of lactic acid in May 1996.  In
the second and third quarters of fiscal 1996, the Company wrote off the
remaining net book value of the lactic acid unit assets and expensed other
related costs resulting in a $3.7 million charge against earnings before taxes.

Pulp Chemicals

     Revenues from the Company's pulp chemical business for fiscal 1996
increased by approximately 9% to $157 million compared to fiscal 1995 primarily
as a result of an increase in sodium chlorate average sales prices of
approximately 8%, partially offset by an approximately 2% decrease in sales
volumes.  Sodium chlorate experienced higher sales prices as a result of
improved demand due to increased chlorine dioxide utilization in pulp
bleaching.  Royalty revenues in fiscal 1996 from installed generator technology
were $19 million, the same as fiscal 1995.  In addition, the Company received
ten generator contracts including all eight contracts that were awarded in
North America during fiscal 1996.

Selling, General and Administrative Expenses.  Selling, general and
administrative ("SG&A") expenses for fiscal 1996 totaled $40 million, compared
to $29 million in fiscal 1995.  This increase was related to an increase in SAR
expense which was paid as a part of the Merger.

Income from Operations.  Income from operations for fiscal 1996 was $67 million
(including merger-related expenses of $3.6 million), consisting of $31 million
from petrochemical operations and $36 million from pulp chemical operations.
This amount represented an approximately 72% decrease from fiscal 1995,
primarily as a result of weakness in the markets for styrene and acrylonitrile
discussed above, which resulted in significantly lower margins during fiscal
1996 compared to the 1995 fiscal year.  This weakness was partially offset by
higher operating income





                                       31
<PAGE>   34
from the pulp chemical business and other petrochemical products.  In addition,
the Company incurred approximately $2 million in start-up expenses during
fiscal 1996 in connection with construction of the methanol unit.

Other Expenses.  Other expenses in fiscal 1996 consist of the $3.7 million
pre-tax charge against earnings related to the write-off of the Company's
lactic acid unit assets.

Interest and Debt Related Expenses.  Interest expense for fiscal 1996 decreased
$1 million compared to fiscal 1995 primarily due to lower outstanding debt for
most of fiscal 1996.  The Company's average interest rate per annum increased
to 10% on September 30, 1996 from 7% on September 30, 1995, primarily due to
the financing in August 1996 related to the 1996 Recapitalization.

Provision for Income Taxes.  Provision for income taxes for fiscal 1996 was $17
million, with an effective tax rate of 34%, compared to $75 million, with an
effective tax rate of 33% for fiscal 1995.  The decrease in the provision was
primarily the result of the significant decrease in the Company's pre-tax
income to $50 million for fiscal 1996 from $228 million in fiscal 1995.

Extraordinary Item.  The extraordinary item in fiscal 1996 of $1.9 million
relates to the loss on early extinguishment of debt of $3.0 million (net of
taxes of $1.1 million) resulting from the 1996 Recapitalization.

Net Income.  Due to the factors described above, net income for fiscal 1996 was
$32 million compared to $150 million for fiscal 1995.





                                       32
<PAGE>   35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA


                       STERLING CHEMICALS HOLDINGS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                      YEAR ENDED SEPTEMBER 30,       
                                                                           -------------------------------------------
                                                                                1997            1996            1995 
                                                                           -----------     -----------     -----------
<S>                                                                        <C>                 <C>         <C>        
Revenues  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $   908,787         790,465     $ 1,030,198

Cost of goods sold  . . . . . . . . . . . . . . . . . . . . . . . . . .        813,148         679,039         758,580
                                                                           -----------     -----------     -----------
Gross profit  . . . . . . . . . . . . . . . . . . . . . . . . . . . .           95,639         111,426         271,618

Selling, general and administrative expenses  . . . . . . . . . . . . .         38,170          40,305          28,856
Merger related expenses . . . . . . . . . . . . . . . . . . . . . . . .             --           3,633              --
Write-off of assets . . . . . . . . . . . . . . . . . . . . . . . . . .             --           3,706              --
Interest and debt related expenses, net of interest income  . . . . . .         88,901          13,380          14,604
                                                                           -----------     -----------     -----------
Income (loss) before taxes and extraordinary item . . . . . . . . . . .        (31,432)         50,402         228,158
Provision (benefit)  for income taxes . . . . . . . . . . . . . . . . .         (7,296)         16,898          75,005
                                                                           -----------     -----------     -----------
Income (loss) before extraordinary item . . . . . . . . . . . . . . . .        (24,136)         33,504         153,153
Extraordinary item, loss on early extinguishment of debt,
  net of tax (Note 4)  . . . . . . . . . . . . . . . . . . . . . . .             3,924           1,900           3,104
                                                                           -----------     -----------     -----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .        (28,060)         31,604         150,049
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . .            905              --              --
                                                                           -----------     -----------     -----------
Net income (loss) attributable to common stockholders . . . . . . . . .    $   (28,965)    $    31,604     $   150,049
                                                                           ===========     ===========     ===========

Per share data:
Income (loss) before extraordinary item . . . . . . . . . . . . . . . .    $     (2.23)    $       .66     $      2.76
Extraordinary item  . . . . . . . . . . . . . . . . . . . . . . . . . .          (0.35)           (.04)           (.06)
                                                                           -----------     -----------     -----------
Net income (loss) per common share  . . . . . . . . . . . . . . . . . .    $     (2.58)    $       .62     $      2.70
                                                                           ===========     ===========     ===========
</TABLE>


               The accompanying notes are an integral part of the
                       consolidated financial statements.





                                       33
<PAGE>   36
                       STERLING CHEMICALS HOLDINGS, INC.
                          CONSOLIDATED BALANCE SHEETS
                    (AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                 SEPTEMBER 30,    
                                                                                            -----------------------
                                                                                              1997           1996   
                                                                                            ---------     ---------
<S>                                                                                         <C>           <C>      
ASSETS
Current assets:
    Cash and cash equivalents ..........................................................    $   7,958     $   5,609
    Accounts receivable ................................................................      167,248       133,399
    Inventories ........................................................................       87,870        53,720
    Prepaid expenses ...................................................................       10,956         9,076
    Deferred income tax benefit ........................................................       10,005         7,214
                                                                                            ---------     ---------
    Total current assets ...............................................................      284,037       209,018

Property, plant and equipment, net .....................................................      492,036       365,765
Other assets ...........................................................................      102,898       114,901 
                                                                                            ---------     ---------
    Total assets .......................................................................    $ 878,971     $ 689,684
                                                                                            =========     =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
    Accounts payable ...................................................................    $  80,658     $  66,562
    Accrued liabilities ................................................................       77,565        53,898
    Current portion of long-term debt ..................................................        5,710        11,625
                                                                                            ---------     ---------
    Total current liabilities ..........................................................      163,933       132,085

Long-term debt .........................................................................      876,281       714,632  
Deferred income tax liability ..........................................................       36,038        46,933
Deferred credits and other liabilities .................................................       73,336        68,473
Common stock held by ESOP ..............................................................        7,688         6,500
Less:  unearned compensation ...........................................................       (5,570)       (6,500)
Redeemable preferred stock .............................................................       15,793            -- 
Commitments and contingencies (Note 7)
Stockholders' equity (deficiency in assets):
    Common stock, $.01 par value, 20,000,000 shares authorized, 11,942,000 shares issued
     and 11,714,000 outstanding at September 30, 1997; and 10,599,000 shares issued and
     outstanding at September 30, 1996 .................................................          120           106
    Additional paid-in capital .........................................................     (542,485)     (560,077)
    Retained earnings ..................................................................      277,691       306,656
    Pension adjustment .................................................................          (31)           -- 
    Accumulated translation adjustment .................................................      (21,093)      (19,124)
                                                                                            ---------     ---------

                                                                                             (285,798)     (272,439)
    Treasury stock, at cost, 228,000 shares at September 30, 1997 ......................       (2,730)           -- 
                                                                                            ---------     ---------
    Total stockholders' equity (deficiency in assets)  .................................     (288,528)     (272,439)
                                                                                            ---------     ---------
    Total liabilities and stockholders' equity (deficiency in assets) ..................    $ 878,971     $ 689,684
                                                                                            =========     =========
</TABLE>
                                               

               The accompanying notes are an integral part of the
                       consolidated financial statements.





                                       34
<PAGE>   37
                       STERLING CHEMICALS HOLDINGS, INC.
                           CONSOLIDATED STATEMENTS OF
             CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                          
                                         COMMON STOCK      ADDITIONAL                          ACCUMULATED
                                       ----------------     PAID-IN      RETAINED    PENSION   TRANSLATION    DEFERRED  TREASURY
                                       SHARES    AMOUNT     CAPITAL      EARNINGS  ADJUSTMENT   ADJUSTMENT COMPENSATION  STOCK
                                       ------    ------    ---------     --------  ----------   ---------- ------------ -------- 
<S>                                    <C>       <C>       <C>            <C>        <C>          <C>        <C>       <C>       
Balance, September 30, 1994 .....      60,327    $  603    $  33,232      125,003    $  (950)     (17,322)   $  (68)   $ (50,764)

Net income ......................          --        --           --      150,049         --           --        --           --
Translation adjustment ..........          --        --           --           --         --           15        --           --
Treasury stock transactions .....          --        --           37           --         --           --        --          150
Amortization of deferred
  compensation ..................          --        --           --           --         --           --       (61)          --
Pension adjustment ..............          --        --           --           --       (606)          --        --           --
                                       ------    ------    ---------      -------    -------      -------    ------    --------- 
Balance, September 30, 1995 .....      60,327       603       33,269      275,052     (1,556)     (17,307)     (129)     (50,614)

Net income ......................          --        --           --       31,604         --           --        --           --
Redemption of common stock ......     (50,690)     (507)    (616,892)          --         --           --        --           --
Common stock issued in
    the 1996 Recapitalization ...       5,349        54       64,084           --         --           --        --           --
Employee stock purchase .........         250         2        3,000           --         --           --        --           --
Stock warrants ..................          --        --        6,900           --         --           --        --           --
Translation adjustment ..........          --        --           --           --         --       (1,817)       --           --
Treasury stock transactions .....      (4,637)      (46)     (50,438)          --         --           --        --       50,614
Amortization of deferred
   compensation .................          --        --           --           --         --           --       129           --
Pension adjustment ..............          --        --           --           --      1,556           --        --           --
                                       ------    ------    ---------      -------    -------      -------    ------    --------- 
Balance, September 30, 1996 .....      10,599       106     (560,077)     306,656         --      (19,124)       --           --

Net loss ........................          --        --           --      (28,060)        --           --        --           --
Common stock issued in
   connection with  AFB
   Acquisition, net .............         778         8        9,331           --         --           --        --           --
Preferred stock dividends .......          --        --           --         (905)        --           --        --           --
Translation adjustment ..........          --        --           --           --         --       (1,969)       --           --
Employee stock purchase .........         (44)       --         (531)          --         --           --        --           --
Treasury stock transactions .....        (228)       --           --           --         --           --        --       (2,730)
Common stock issued  in
   connection with  the
   Saskatoon Acquisition, net ...         609         6        6,379           --         --           --        --           --
Stock  warrants .................          --        --        2,413           --         --           --        --           --
Pension adjustment ..............          --        --           --           --        (31)          --        --           --
                                       ------    ------    ---------      -------    -------      -------    ------    --------- 
Balance, September 30, 1997 .....      11,714    $  120    $(542,485)   $ 277,691    $   (31)   $ (21,093)   $   --    $  (2,730)
                                       ======    ======    =========    =========    =======    =========    ======    ========= 
</TABLE>




               The accompanying notes are an integral part of the
                       consolidated financial statements.





                                       35
<PAGE>   38
                       STERLING CHEMICALS HOLDINGS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                        Year Ended September 30,       
                                                                              -----------------------------------------
                                                                                 1997            1996           1995    
                                                                              -----------    -----------    -----------
<S>                                                                           <C>            <C>            <C>        
Cash flows from operating activities:
    Cash received from customers ..........................................   $   935,886    $   874,253    $ 1,159,192
    Miscellaneous cash receipts ...........................................        21,833         17,758         14,007
    Cash paid to suppliers and employees ..................................      (853,134)      (804,414)      (893,324)
    Interest paid .........................................................       (60,747)        (9,492)       (14,811)
    Interest received .....................................................           360          1,114          2,540
    Income taxes received (paid) ..........................................         3,116        (15,618)       (75,766)
                                                                              -----------    -----------    -----------
Net cash provided by operating activities .................................        47,314         63,601        191,838
Cash flows from investing activities:
    Capital expenditures ..................................................       (43,428)       (95,957)       (53,962)
    Business acquisitions .................................................      (152,923)            --             --
                                                                              -----------    -----------    -----------
Net cash used in investing activities .....................................      (196,351)       (95,957)       (53,962)
Cash flows from financing activities:
    Proceeds from long-term debt ..........................................       375,260        800,350        217,000
    Repayment of long-term debt ...........................................      (236,104)      (196,285)      (322,282)
    Redemption of common stock ............................................            --       (616,160)            --
    Purchase of other equity interests ....................................            --        (14,587)            --
    Issuance of common stock, net .........................................        18,721         64,040             --
    Sale of warrants ......................................................         2,413          6,900             --
    Debt issuance costs ...................................................        (9,684)       (33,070)            --
    Other merger fees .....................................................            --         (3,709)            --
Issuance of preferred stock ...............................................         4,887             --             --
    Purchase of treasury stock ............................................        (3,256)            --             --
    Other .................................................................          (627)          (289)        (3,735)
                                                                              -----------    -----------    -----------
Net cash provided by (used in) financing activities .......................       151,610          7,190       (109,017)
Effect of  United States /Canadian exchange rate on cash ..................          (224)          (107)            10
                                                                              -----------    -----------    -----------
Net increase (decrease) in cash and cash equivalents ......................         2,349        (25,273)        28,869

Cash and cash equivalents - beginning of year .............................         5,609         30,882          2,013
                                                                              -----------    -----------    -----------
Cash and cash equivalents - end of year ...................................   $     7,958    $     5,609    $    30,882
                                                                              ===========    ===========    ===========

Reconciliation of net income to cash provided by operating activities:
Net income (loss) .........................................................   $   (28,060)        31,604    $   150,049
Adjustments to reconcile net income (loss) to net cash provided by
  operating activities:
    Depreciation and amortization .........................................        54,012         42,702         43,033
    Loss on disposal/write off of assets ..................................           241          3,706             --
    Extraordinary item ....................................................         3,924          1,900          3,104
    Deferred tax expense ..................................................         2,866          4,172          4,280
    Accrued compensation including SARs ...................................            --          8,984         (2,638)
    Merger related expenses ...............................................            --          3,633             --
    Discount notes amortization ...........................................        15,499          1,656             --
    Other .................................................................         2,087         (3,766)         1,058
Change in assets/liabilities:
    Accounts receivable ...................................................        (8,985)       (18,297)        22,540
    Inventories ...........................................................        (6,674)        14,147          1,921
    Prepaid expenses ......................................................        (7,767)        (5,173)        (1,183)
    Other assets ..........................................................        (1,754)        (8,900)        (4,075)
    Accounts payable ......................................................        (1,424)        (5,454)        (4,117)
    Accrued liabilities ...................................................        27,305         (7,018)       (21,447)
    Other liabilities .....................................................        (3,956)          (295)          (687)
                                                                              -----------    -----------    -----------
Net cash provided by operating activities .................................   $    47,314    $    63,601    $   191,838
                                                                              ===========    ===========    ===========
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.





                                       36
<PAGE>   39
                            STERLING CHEMICALS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                             (DOLLARS IN THOUSANDS)



<TABLE>
<CAPTION>
                                                                             MAY 14, 1996
                                                     YEAR ENDED           (DATE OF INCEPTION)
                                                 SEPTEMBER 30, 1997     TO SEPTEMBER 30, 1996 (1)
                                                 ------------------     -------------------------
<S>                                                 <C>                        <C>            
Revenues ........................................   $ 908,787                  $  83,410      
Cost of goods sold ..............................     813,148                     83,047      
                                                    ---------                  ---------      
Gross profit ....................................      95,639                        363      
                                                                                              
Selling, general and administrative expenses ....      37,475                      3,426      
Interest and debt related expenses ..............      72,931                      1,615      
Interest income from parent .....................      (1,692)                    (5,236)     
                                                    ---------                  ---------      
                                                                                              
Income (loss) before taxes and                                                       
 extraordinary item ..............................    (13,075)                       558  
Provision (benefit) for income taxes ............      (2,148)                       384      
                                                    ---------                  ---------      
                                                                                              
Income (loss) before extraordinary item .........     (10,927)                       174      
                                                                                              
Extraordinary item, loss on early extinguishment                                              
  of debt, net of tax (Note 4) ..................       3,924                         --      
                                                    ---------                  ---------      
Net income (loss) ...............................   $ (14,851)                 $     174      
                                                    =========                  =========      
</TABLE>   
                                                                               

    (1) See Note 1 of Notes to Consolidated Financial Statements for a
discussion of merger activities and related financing.  Prior to August 21,
1996, Chemicals had no operating activities, other than those related to merger
activities.

               The accompanying notes are an integral part of the
                       consolidated financial statements.





                                       37
<PAGE>   40

                            STERLING CHEMICALS, INC.
                          CONSOLIDATED BALANCE SHEETS
                   (DOLLARS IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                              SEPTEMBER 30,
                                                                                        ----------------------
                                                                                           1997         1996
                                                                                        ---------    ---------
<S>                                                                                     <C>          <C>      
ASSETS
Current assets:
    Cash and cash equivalents .......................................................   $   7,958    $   5,581    
    Accounts receivable .............................................................     167,898      135,635
    Inventories .....................................................................      87,870       53,720
    Prepaid expenses ................................................................      10,031        9,076
    Deferred income tax benefit .....................................................      10,005        7,214
                                                                                        ---------    ---------
       Total current assets .........................................................     283,762      211,226

Property, plant and equipment, net ..................................................     492,036      365,765
Other assets ........................................................................      99,519      108,460
                                                                                        ---------    ---------
      Total assets ..................................................................   $ 875,317    $ 685,451
                                                                                        =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
    Accounts payable ................................................................   $  80,658    $  66,562
    Accrued liabilities .............................................................      77,565       55,740
    Current portion of long-term debt ...............................................       5,710       11,625
                                                                                        ---------    ---------
    Total current liabilities .......................................................     163,933      133,927

Long-term debt ......................................................................     768,870      619,875
Deferred income tax liability .......................................................      42,646       47,478
Deferred credits and other liabilities ..............................................      73,337       68,473
Common stock held by ESOP ...........................................................       7,688        6,500
Less: unearned compensation .........................................................      (5,570)      (6,500)
Commitments and contingencies
Stockholders' equity (deficiency in assets):
    Common stock, $.01 par value ....................................................          --           --
    Additional paid-in capital ......................................................    (139,786)    (165,352)
    Retained earnings ...............................................................     (14,677)         174
    Pension adjustment ..............................................................         (31)          --
    Accumulated translation adjustment ..............................................     (21,093)     (19,124)
                                                                                        ---------    ---------
    Total stockholders' equity (deficiency in assets)  ..............................    (175,587)    (184,302)
                                                                                        ---------    ---------

       Total liabilities and stockholders' equity (deficiency in assets)  ...........   $ 875,317    $ 685,451
                                                                                        =========    =========
</TABLE>


               The accompanying notes are an integral part of the
                       consolidated financial statements.





                                       38
<PAGE>   41
                            STERLING CHEMICALS, INC.
                           CONSOLIDATED STATEMENTS OF
             CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                    COMMON STOCK        ADDITIONAL                                 ACCUMULATED
                               ----------------------     PAID-IN       RETAINED      PENSION     TRANSLATION 
                                 SHARES       AMOUNT      CAPITAL       EARNINGS    ADJUSTMENT     ADJUSTMENT 
                               ---------    ---------    ---------     ---------     ---------     ---------
<S>                                   <C>   <C>          <C>           <C>           <C>           <C>       
Balance, May 14, 1996  .....          --    $      --    $      --     $      --     $      --     $      -- 
Common stock issued .......            1           --            1            --            --            -- 
Capital transfer, net .....           --           --     (165,353)           --        (1,556)      (20,194)
Net income ................           --           --           --           174            --            -- 
Pension adjustment ........           --           --           --            --         1,556            -- 
Translation adjustment ....           --           --           --            --            --         1,070
                               ---------    ---------    ---------     ---------     ---------     ---------
Balance, September 30, 1996            1    $      --     (165,352)    $     174     $      --       (19,124)



Contribution from parent ..           --           --       27,684            --            --            -- 
Net loss ..................           --           --           --       (14,851)           --            -- 
Pension adjustment ........           --           --           --            --           (31)           -- 
Earned ESOP Shares ........           --           --       (2,118)           --            --            -- 
Translation adjustment ....           --           --           --            --            --        (1,969)
                               ---------    ---------    ---------     ---------     ---------     ---------
Balance, September 30, 1997            1    $      --    $(139,786)    $ (14,677)    $     (31)    $ (21,093)
                               =========    =========    =========     =========     =========     =========
</TABLE>
                                                             



               The accompanying notes are an integral part of the
                       consolidated financial statements.





                                       39
<PAGE>   42
                            STERLING CHEMICALS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                               MAY 14, 1996
                                                                         YEAR ENDED         (DATE OF INCEPTION)
                                                                     SEPTEMBER 30, 1997   TO SEPTEMBER 30, 1996(1)
                                                                     ------------------   ------------------------
<S>                                                                        <C>                  <C>         
Cash flows from operating activities:                                                                       
    Cash received from customers ......................................    $ 935,886            $ 102,900   
    Miscellaneous cash receipts .......................................       21,970                1,749   
    Cash paid to suppliers and employees ..............................     (853,996)             (92,800)  
    Interest paid .....................................................      (60,747)              (3,129)  
    Interest received .................................................          345                  474   
    Income taxes received (paid) ......................................        3,116               (4,950)  
                                                                           ---------            ---------   
Net cash provided by operating activities .............................       46,574                4,244   
Cash flows from investing activities:                                                                       
    Capital expenditures ..............................................      (43,428)              (6,398)  
    Business acquisitions .............................................     (152,923)                  --   
                                                                           ---------            ---------   
Net cash used in investing activities .................................     (196,351)              (6,398)  
Cash flows from financing activities:                                                                       
    Proceeds from long-term debt ......................................      375,260              637,900   
    Repayment of long-term debt .......................................     (236,104)              (6,400)  
    Debt issuance costs ...............................................       (9,684)             (27,939)  
    Intercompany financing ............................................        3,000                   --   
    Distribution to parent ............................................           --             (609,961)  
    Contribution from parent ..........................................       22,286               14,165   
    Other .............................................................       (2,380)                  --   
                                                                           ---------            ---------   
Net cash provided by financing activities .............................      152,378                7,765   
Effect of United States /Canadian exchange rate on cash ...............         (224)                 (30)  
                                                                           ---------            ---------   
Net increase in cash and cash equivalents .............................        2,377                5,581   
Cash and cash equivalents - beginning of period .......................        5,581                   --   
                                                                           ---------            ---------   
Cash and cash equivalents - end of year ...............................    $   7,958            $   5,581   
                                                                           =========            =========   
                                                                                                            
Reconciliation of Net Income to                                                                             
Cash Provided by Operating Activities                                                                       
Net income (loss) .....................................................    $ (14,851)           $     174   
Adjustments to reconcile net income (loss) to net cash provided by                                          
  operating activities:                                                                                     
    Depreciation and amortization .....................................       53,680                4,801   
    Deferred tax expense ..............................................        7,847                1,457   
    Extraordinary item ................................................        3,924                   --   
    Other .............................................................        2,173                 (511)  
Change in assets/liabilities:                                                                               
    Accounts receivable ...............................................      (13,510)                 164   
    Inventories .......................................................       (6,674)                (468)  
    Prepaid expenses ..................................................       (5,733)              (2,428)  
    Other assets ......................................................       (2,271)                 784   
    Accounts payable ..................................................       (1,288)               7,025   
    Accrued liabilities ...............................................       27,218               (4,460)  
    Other liabilities .................................................       (3,941)              (2,294)  
                                                                           ---------            ---------   
Net cash provided by operating activities .............................    $  46,574            $   4,244   
                                                                           =========            =========   
</TABLE>     

    (1) See Note 1 of Notes to Consolidated Financial Statements for a
discussion of merger activities and related financing.  Prior to August 21,
1996, Chemicals had no operating activities, other than those related to merger
activities.

               The accompanying notes are an integral part of the
                       consolidated financial statements.








                                       40
<PAGE>   43
               STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  MERGER ACTIVITIES

    Sterling Chemicals, Inc. (prior to the Merger, "Sterling") and STX
Acquisition Corp. ("STX Acquisition"), a Delaware corporation formed in April
1996 by an investor group led by The Sterling Group, Inc. ("TSG") and The
Unicorn Group L.L.C. ("Unicorn"), entered into an Amended and Restated
Agreement and Plan of Merger dated April 24, 1996 (the "Merger Agreement").  On
August 20, 1996, the Merger Agreement was approved by a majority of the shares
outstanding, and on August 21, 1996, STX Acquisition merged with and into
Sterling, changing its name to Sterling Chemicals Holdings, Inc.  ("Holdings"),
and continuing as the surviving corporation (the "Merger").  In connection with
the Merger, Holdings transferred all of its operating assets and liabilities
excluding its 13 1/2% Senior Discount Notes due 2008 (the "13 1/2% Notes") to a
wholly owned subsidiary, STX Chemicals Corp., which at the time of the Merger,
changed its name to Sterling Chemicals, Inc. (after the Merger, "Chemicals").
Holdings has no direct subsidiaries other than Chemicals.  As used in these
notes, the term "Company" refers to Sterling and its subsidiaries prior to the
consummation of the Merger and, following the Merger, to Holdings and its
subsidiaries, including Chemicals.

    Each share of the Company's common stock outstanding immediately prior to
the Merger was converted (at the election of the holder thereof) into either
$12.00 cash or the right to retain such shares ("Rollover Shares"), with the
aggregate number of Rollover Shares limited to 5.0 million.  As a result of the
Merger, on August 21, 1996, the former STX Acquisition stockholders held
approximately 5.3 million shares (49%), stockholders with Rollover Shares held
approximately 5.0 million shares (46%), and the Company's newly formed Employee
Stock Option Plan (the "ESOP") held approximately 542,000 shares (5%) of the
outstanding common shares of Holdings' common stock, par value $0.01 per share
("Holdings Common Stock").

    The Merger was financed by the proceeds of bank term loans of $356.5
million, including an ESOP term loan of $6.5 million, amounts drawn against a
revolving credit facility of $6.4 million each pursuant to a new credit
agreement (the "Original Credit Agreement"), an offering by Chemicals of $275.0
million of Chemicals' 11 3/4% Senior Subordinated Notes Due 2006 (the "11 3/4%
Notes"), an offering of $191.8 million (initial proceeds of $100 million)
representing 191,751 Units, with each unit consisting of one 13 1/2% Note and
one warrant to purchase three shares of Holdings Common Stock for $0.01 per
share beginning in August 1997, equity raised by STX Acquisition of
approximately $70.7 million, and cash on hand of $10.3 million.  These proceeds
were used to redeem Sterling's common stock other than Rollover Shares ($608.3
million), purchase other equity interests (primarily stock appreciation rights
("SARs")) ($14.6 million), repay debt outstanding prior to the Merger ($142.7
million), loan monies to the new ESOP ($6.5 million), and pay fees and expenses
($46.8 million).

    The Company has accounted for the Merger and related financing
(collectively the "1996 Recapitalization") as a series of debt and equity
transactions representing a recapitalization.  Accordingly, the historical
basis of the Company's assets and liabilities have not been impacted by the
1996 Recapitalization.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       The Company manufactures seven commodity petrochemicals at its Texas
City, Texas plant (the "Texas City Plant").  Additionally, the Company
manufactures chemicals for use primarily in the pulp and paper industry at five
plants in Canada and one in Valdosta, Georgia, and manufactures acrylic fibers
in a plant near Pensacola, Florida (the "Santa Rosa Plant").  At its Texas City
Plant, the Company produces styrene, acrylonitrile, acetic acid, plasticizers,
methanol, tertiary butylamine ("TBA"), and sodium cyanide.  The Company
generally sells its petrochemical products to customers for use in the
manufacture of other chemicals and products, which in turn are used in the
production of a wide array of consumer goods and industrial products.  The
Company produces regular textiles, specialty textiles, and technical fibers at
the Santa Rosa Plant, as well as licensing the acrylic fibers manufacturing
technology to producers worldwide.  Sodium chlorate is produced at the five
plants in Canada and in Valdosta, Georgia.  Sodium chlorite is produced at one
of the Canadian locations.  In addition, chlor-alkali and calcium hypochlorite
are produced at one of the Canadian locations.  The company licenses,
engineers, and overseas construction of large-scale chlorine dioxide generators
for the pulp and paper industry as part of the pulp chemical business.  These
generators convert sodium chlorate into chlorine dioxide at pulp mills.





                                       41
<PAGE>   44

    The significant accounting policies of the Company are described below.

PRINCIPLES OF CONSOLIDATION

    The consolidated financial statements include the accounts of all wholly
owned and majority-owned subsidiaries.  All significant intercompany accounts
and transactions have been eliminated. The Company's investment in a
cogeneration joint venture of a 50% equity interest is accounted for under the
equity method with the Company's share of earnings from the joint venture
recorded as a reduction of cost of goods sold.

CASH EQUIVALENTS

    The Company considers all investments purchased with a remaining maturity
of three months or less to be cash equivalents.

INVENTORIES

    Inventories are stated at the lower of cost or market; cost is determined
on the first-in, first-out basis except for stores and supplies, which are
valued at average cost.

    The Company enters into agreements with other companies to exchange
chemical inventories in order to minimize working capital requirements and to
facilitate distribution logistics.  Balances related to quantities due to or
payable by the Company are included in inventory.

PROPERTY, PLANT, AND EQUIPMENT

    Property, plant, and equipment are recorded at cost.  Major renewals and
improvements which extend the useful lives of the equipment are capitalized.
Major planned maintenance expenses are accrued for during the periods prior to
the maintenance, while routine repair and maintenance expenses are charged to
operations as incurred.  Disposals are removed at carrying cost less
accumulated depreciation with any resulting gain or loss reflected in
operations.  Depreciation is provided using the straight-line method over
estimated useful lives ranging from 5 to 25 years with the predominant life of
the plant and equipment being 15 years.  The Company capitalizes interest costs
which are incurred as part of the cost of constructing major facilities and
equipment.  The amount of interest capitalized for the fiscal years 1997, 1996,
and 1995 was $3.8 million, $4.1 million and $1.0 million, respectively.

IMPAIRMENT OF LONG-LIVED ASSETS

    Impairment tests of long lived assets are made when conditions indicate
their carrying cost may not be recoverable.  Such impairment tests are based on
a comparison of future cash flows (undiscounted) to the carrying cost of the
asset.  If an impairment is indicated, the asset value is written down to its
estimated fair value.

PATENTS AND ROYALTIES

    The cost of patents is amortized on a straight-line basis over their
estimated useful lives which approximates ten years.  The Company capitalized
the value of the chlorine dioxide generator technology acquired in fiscal 1992
based on the net present value of all estimated remaining royalty payments
associated with the technology.  The resulting intangible amount is included in
other assets and is amortized over an average life for these royalty payments
of ten years.

DEBT ISSUE COSTS

    Debt issue costs relating to long-term debt are amortized using the
effective interest method and are included in other assets.

INCOME TAXES

    Deferred income taxes are recorded to reflect the tax effect of the
temporary differences between the financial reporting basis and the tax basis
of the Company's assets and liabilities at enacted rates.





                                       42
<PAGE>   45

REVENUE RECOGNITION

    The Company generates revenues through sales in the open market, raw
material conversion agreements, and long-term supply contracts.  In addition,
the Company has entered into shared profit arrangements with respect to certain
petrochemical products.  The Company recognizes revenue from sales in the open
market, raw material conversion agreements, and long-term supply contracts as
the products are shipped.  Revenues from shared profit arrangements are
estimated and accrued monthly.  Deferred credits are amortized over the life of
the contract which gave rise to them.  The Company also generates revenues from
the construction and sale of chlorine dioxide generators which are recognized
using the percentage of completion method.  The Company also receives prepaid
royalties which are recognized over a period which is typically ten years.  In
addition, the Company generates revenues from the sale of acrylic fibers
manufacturing technology to producers worldwide, which are recognized as
earned.

FOREIGN EXCHANGE

    Assets and liabilities denominated in Canadian dollars are translated into
United States dollars at year-end exchange rates and revenues and expenses are
translated at the average monthly exchange rates.  Translation adjustments are
reported as a separate component of stockholders' equity, while transaction
gains and losses are included in operations when incurred.

    The Company's Canadian subsidiaries enter into forward foreign exchange
contracts to minimize the short-term impact of Canadian dollar fluctuations on
certain of its Canadian dollar denominated commitments.  Gains or losses on
these contracts are deferred and are included in operations in the same period
in which the related transactions are settled.

EARNINGS PER SHARE

    Income (loss) per share for fiscal years 1997, 1996, and 1995 has been
computed using a weighted average shares outstanding of 11,237,000, 50,700,000,
and 55,674,000, respectively.  The weighted average shares outstanding used in
the computation of earnings (loss) per share are net of 490,000, 542,000, and
zero shares held by the ESOP that are not allocated to the employees as of
September 30, 1997, 1996, and 1995, respectively.  Primary earnings (loss) per
share were computed using the average number of shares of common stock and
dilutive warrants in fiscal 1996 and using average number of shares of common
stock outstanding for fiscal 1997 and 1995.  Additionally, the effect of
options and warrants were anti-dilutive for fiscal 1997.

ENVIRONMENTAL COSTS

    Environmental costs are expensed unless the expenditures extend the
economic useful life of the assets.  Costs that extend the economic life of the
assets are capitalized and depreciated over the remaining life of such assets.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable, and the cost can be reasonably estimated.

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

     In preparing disclosures about the fair value of financial instruments,
the Company has assumed that the carrying amount approximates fair value for
cash and cash equivalents, receivables, short-term borrowings, accounts payable
and certain accrued expenses because of the short maturities of those
instruments.  The fair values of long-term debt instruments are estimated based
upon quoted market values (if applicable), or on the current interest rates
available to the Company for debt with similar terms and remaining maturities.
Considerable judgment is required in developing these estimates and,
accordingly, no assurance can be given that the estimated values presented
herein are indicative of the amounts that would be realized in a free market
exchange.

ACCOUNTING ESTIMATES

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported periods.  Significant estimates include environmental reserves,
litigation contingencies, maintenance costs related to shut downs, taxes, and
revenues.  Actual results could differ from these estimates.





                                       43
<PAGE>   46
RECLASSIFICATION

    Certain amounts reported in the financial statements for the prior periods
have been reclassified to conform with the current financial statement
presentation with no effect on net income (loss) or stockholders' equity.

3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
<TABLE>
<CAPTION>
                                                                                            SEPTEMBER 30,      
                                                                                      -----------------------
                                                                                         1997         1996    
                                                                                      ---------     ---------
                                                                                       (Dollars in Thousands)
<S>                                                                                   <C>           <C>      
Inventories:
    Finished products ............................................................    $  47,572     $  31,868
    Raw materials ................................................................       17,800         9,499
                                                                                      ---------     ---------
Inventories at FIFO cost .........................................................       65,372        41,367
                                                                                      ---------     ---------
    Inventories under exchange agreements ........................................        2,179           722
    Stores and supplies ..........................................................       20,319        11,631
                                                                                      ---------     ---------
                                                                                      $  87,870     $  53,720
                                                                                      =========     =========
Property, plant and equipment:
    Land .........................................................................    $  12,766     $  11,720
    Buildings ....................................................................       51,032        27,448
    Plant and equipment ..........................................................      634,772       468,647
    Construction in progress .....................................................       43,856        85,490
    Less:  accumulated depreciation ..............................................     (250,390)     (227,540)
                                                                                      ---------     ---------
                                                                                      $ 492,036     $ 365,765
                                                                                      =========     =========
Other assets:
    Patents and technology, net ..................................................    $  32,918     $  34,902
    Debt issue costs .............................................................       32,472        34,025
    Other ........................................................................       37,508        45,974
                                                                                      ---------     ---------
                                                                                      $ 102,898     $ 114,901
                                                                                      =========     =========
Accrued liabilities:,
    Repairs ......................................................................    $  19,205     $  11,417
    Interest .....................................................................       14,661         3,869
    Property taxes ...............................................................        8,255         6,772
    Other ........................................................................       35,444        31,840
                                                                                      ---------     ---------
                                                                                      $  77,565     $  53,898
                                                                                      =========     =========
Deferred credits and other liabilities:
    Deferred revenue .............................................................    $  19,963     $  17,720
    Accrued postretirement benefits ..............................................       36,448        27,143
    Other ........................................................................       16,925        23,610
                                                                                      ---------     ---------
                                                                                      $  73,336     $  68,473
                                                                                      =========     =========
</TABLE>





                                       44
<PAGE>   47
4. LONG-TERM DEBT:

    Long-term debt consisted of the following:
<TABLE>
<CAPTION>
                                                                                            SEPTEMBER 30,      
                                                                                       -----------------------
                                                                                          1997          1996    
                                                                                       ---------     ---------
                                                                                        (Dollars in Thousands)
<S>                                                                                    <C>           <C>      
Revolving credit facilities .......................................................    $   9,400     $      --
Term loans ........................................................................      275,334       350,000
Saskatoon term loans ..............................................................       53,822            --
ESOP term loan ....................................................................        4,875         6,500
11 1/4% notes .....................................................................      153,148            --
11 3/4% notes .....................................................................      275,000       275,000 
13 1/2% notes .....................................................................      110,412        94,757
                                                                                       ---------     ---------
    Total debt outstanding ........................................................      881,991       726,257
                                                                                       =========     =========
Less:
    Current maturities ............................................................       (5,710)      (11,625)
                                                                                       ---------     ---------
Total long-term debt ..............................................................    $ 876,281     $ 714,632
                                                                                       =========     =========
</TABLE>


TERM LOANS, REVOLVER AND ESOP LOANS

    As part of the 1996 Recapitalization, Chemicals entered into the Original
Credit Agreement with Texas Commerce Bank National Association, as agent bank
for a syndicate of lenders.  Funding under the Original Credit Agreement
occurred August 21, 1996, upon the consummation of the Merger.  The Original
Credit Agreement provided for facilities consisting of a six and one-half year
revolving credit facility providing for up to $100 million (subject to a
monthly borrowing base calculation) in revolving loans (the "Revolver"), a term
loan facility consisting of a six and one-half year $200 million Tranche A term
loan and an eight-year $150 million Tranche B term loan (the "Original Term
Loans"), and a four-year $6.5 million ESOP Term Loan (the "ESOP Loan").

    On January 31, 1997, the Company acquired (the "AFB Acquisition") the
acrylic fibers business (the "AFB") of Cytec Industries Inc. ("Cytec") (see
Note 8).  In connection with the AFB Acquisition, Chemicals entered into a
credit agreement (the "Fibers Credit Agreement") with Texas Commerce Bank
National Association, as agent bank for a syndicate of lenders. Funding under
the Fibers Credit Agreement occurred January 31, 1997, upon consummation of the
AFB Acquisition.  The Fibers Credit Agreement provided for a term loan facility
consisting of a $31 million Tranche A term loan due June 30, 2003, and a $50
million Tranche B term loan due September 30, 2004 (the "Fibers Term Loans").

    On April 7, 1997, Chemicals completed a private offering (the "11 1/4%
Notes Offering") of $150,000,000 of 11 1/4% Senior Subordinated Notes Due 2007
(the "11 1/4% Notes").  The 11 1/4% Notes are unsecured senior subordinated
obligations of Chemicals, ranking subordinate in right of payment to all
existing and future senior debt of Chemicals, but pari passu with the 11 3/4%
Notes and all future senior subordinated indebtedness.  On July 7, 1997,
Chemicals completed a registered exchange offer, pursuant to which all of the
11 1/4% Notes were exchanged for publicly registered 11 1/4% Notes with
substantially similar terms.

    The proceeds of the 11 1/4% Notes Offering were used to prepay outstanding
indebtedness under the Term Loans.  In connection with such prepayments,
Chemicals and the requisite lenders under the Original Credit Agreement and the
Fibers Credit Agreement effected amendments to such agreements ("the
Amendments").  Among other things, the Amendments:  (i) permitted and provided
for the issuance of the 11 1/4% Notes, (ii) adjusted the method of the
application of voluntary prepayments to allow the proceeds of the 11 1/4% Notes
Offering to be applied in a manner that significantly reduced required
principal payments, particularly over the next three years, (iii) amended
certain financial covenants to make them somewhat less restrictive,  (iv)
increased the commitment under the Revolver by $25 million to $125 million, and
(v) included a new financial covenant with respect to the maintenance of a
specified Senior Debt Leverage Ratio (as defined in the Amendments).
Unamortized debt issue costs related to the Term Loans of approximately $6.0
million pre-tax, $3.9 million after-tax, were expensed in April 1997, and
recorded as an extraordinary loss from early extinguishment of debt.

    In connection with the acquisition of substantially all of the assets of
Saskatoon Chemicals Ltd., a subsidiary of Weyerhauser Canada Ltd., the Company
consolidated and combined the Original Credit Agreement and the Fibers Credit
Agreement (as consolidated, the "Credit Agreement"), as well as the Original
Term Loans and the Fibers Term Loans (as consolidated, the "Term Loans").





                                       45
<PAGE>   48
    The Term Loans, the ESOP Loan, and the Revolver borrowings bear interest,
at Chemicals' option, at an annual rate of either the Eurodollar Rate or the
Base Rate plus an Applicable Margin ranging from 0% to 3% depending upon the
Company's Leverage Ratio (as defined in the Credit Agreement).  The "Base Rate"
is equal to the greater of the Prime Rate as announced from time to time by the
agent bank, the "Federal Funds Effective Rate" plus 1/2% or the "Base CD Rate"
plus 1% (as such terms are defined in the Credit Agreement). The Credit
Agreement also requires Chemicals to pay a commitment fee in the amounts of 3/8%
or 2% of the unused commitment under the Revolver depending on the Company's
Leverage Ratio.

    The Credit Agreement requires the principal amount of the Term Loans to be
amortized in quarterly installments of $333,333 beginning with the fiscal
quarter ending September 30, 1997, increasing in March 2000.  The ESOP Loan
will be amortized in 12 equal quarterly installments of $406,250, with the last
payment in September 2000.

    Chemicals' obligations under the Credit Agreement are secured by a first
priority lien on the capital stock of Chemicals' domestic subsidiaries, 65% of
the capital stock of its foreign subsidiaries and substantially all of the
domestic assets of Chemicals and its subsidiaries, including without
limitation, accounts receivable, inventory, intangibles and fixed assets, and
assignments of certain material leases, licenses, and contracts.  In addition,
the Credit Agreement is secured by a pledge by Holdings of all of the capital
stock of Chemicals.

    The Credit Agreement contains numerous financial and operating covenants,
including, but not limited to, restrictions on Chemicals' ability to incur
indebtedness, pay dividends, create liens, sell assets, engage in mergers and
acquisitions, and refinance existing indebtedness.  The Credit Agreement also
requires Chemicals to satisfy certain financial covenants and tests.  In
addition, the Credit Agreement includes various circumstances that will
constitute, upon occurrence and subject in certain cases to notice and grace
periods, an event of default thereunder.

    On July 10, 1997, Sterling Pulp Chemicals (Sask) Ltd. ("Sterling Sask"), an
indirect wholly owned subsidiary of Holdings and Chemicals, acquired
substantially all of the assets of Saskatoon Chemicals Ltd. ("Saskatoon
Chemicals"), a subsidiary of Weyerhauser Canada Ltd. (the "Saskatoon
Acquisition").  In connection with the Saskatoon Acquisition, Sterling Sask
entered into a credit agreement (the "Saskatoon Credit Agreement") with The
Chase Manhattan Bank of Canada individually and as administrative agent.
Funding under the Saskatoon Credit Agreement occurred July 10, 1997, upon
consummation of the Saskatoon Acquisition.  The Saskatoon Credit Agreement
provides for a revolving credit facility of Cdn. $8.0 million (the "Saskatoon
Revolving Loan"), and a term loan facility consisting of Cdn. $25.0 million
Tranche A term loan due June 30, 2003, and $36.4 million Tranche B term loan
due June 30, 2005 (the "Saskatoon Term Loans").  Advances under the Saskatoon
Revolving Loan are subject to a borrowing base consisting of 85% of eligible
accounts receivable and 65% of eligible inventory with an inventory cap of 50%
of the borrowing base.  At September 30, 1997, the borrowing base did not limit
such available credit and there were no borrowings outstanding under the
Saskatoon Revolving Loan.  Sterling Sasks' obligations under the Saskatoon
Credit Agreement are secured by substantially all assets of Sterling Sask.  The
Saskatoon Credit Agreement requires Sterling Sask to satisfy certain financial
covenants and tests.

    At September 30, 1997, Chemicals had indebtedness of $275.3 million under
the Term Loans, $53.8 million under the Saskatoon Term Loans, and $4.9 million
under the ESOP Loan.  Additionally, as of September 30, 1997, the Company had
drawn approximately $9.4 million and issued $2.6 million in letters of credit
under the Revolver, thereby reducing the available commitment to $113.0
million. Advances under the Revolver are subject to a borrowing base consisting
of 85% of eligible accounts receivable and 65% of eligible inventory with an
inventory cap of 50% of the borrowing base.   At September 30, 1997, the
borrowing base did not limit such available credit.


DISCOUNT NOTES AND SUBORDINATED NOTES

    As part of the Merger financing, Chemicals also issued the 11 3/4% Notes
and Holdings issued $191.8 million ($100 million initial proceeds) representing
191,751 Units, with each Unit consisting of one 13 1/2% senior subordinated
discount note due 2008 (the "13 1/2% Notes") and one warrant to purchase three
shares of Holdings Common Stock for $.01 per share.

    The 11 3/4% Notes bear interest at the annual rate of 11 3/4%, payable
semi-annually on February 15 and August 15 of each year commencing February 15,
1997.  The 13 1/2% Notes will accrete interest until August 15, 2001, with no
interest payable in cash until February 15, 2002, at an annual rate of 13 1/2%.
Commencing in 2002, interest will be payable semi-annually on February 15 and
August 15 of each year until maturity.





                                       46
<PAGE>   49
    The 11 3/4% Notes may not be redeemed by Chemicals prior to August 15,
2001, and from thereon through August 15, 2004, the 11 3/4% Notes may be
redeemed at a premium varying between 105.875% and 101.958%.  Subsequent to
August 15, 2004, Chemicals may redeem the 11 3/4% Notes at their face value
plus accrued interest.  Prior to August 15, 1999, Chemicals may redeem in the
aggregate up to 35% of the original principal amount of the 11 3/4% Notes with
the proceeds of one or more public equity offerings, as defined.  Such
redemptions may be made at a redemption price of 111.75% of the face value plus
accrued interest to the redemption date.  After such redemption, at least
$178.8 million aggregate principal amount of the 11 3/4% Notes must remain
outstanding.

    The 13 1/2% Notes may not be redeemed by Holdings prior to August 15, 2001,
and from thereon through August 15, 2006, the 13 1/2% Notes may be redeemed at
a premium varying between 106.75% and 101.35%.  Subsequent to August 15, 2006,
the Company may redeem the 13 1/2% Notes at their Accreted Value (as defined in
the indenture) plus accrued interest.  Prior to August 15, 1999, Holdings may
redeem in the aggregate up to 35% of the Accreted Value of the 13 1/2% Notes
with the proceeds of one or more public equity offerings, as defined.  Such
redemptions may be made at a redemption price of 113.5% of the face value plus
accrued interest to the redemption date.  After such redemption, at least
$124.6 million aggregate principal amount of the 13 1/2% Notes must remain
outstanding.

    On April 7, 1997, Chemicals completed the 11 1/4% Notes Offering of
$150,000,000 of 11 1/4% Senior Subordinated Notes Due 2007 (the "11 1/4%
Notes").  The 11 1/4% Notes are unsecured senior subordinated obligations of
Chemicals, ranking subordinate in right of payment to all existing and future
senior debt of Chemicals, but pari passu with the 11 3/4% Notes and all future
senior subordinated indebtedness.  On July 7, 1997, Chemicals completed a
registered exchange offer, pursuant to which all of the 11 1/4% Notes were
exchanged for publicly registered 11 1/4% Notes with substantially similar
terms.

    The 11 1/4% Notes bear interest at the annual rate of 11 1/4%, payable
semi-annually on April 1 and October 1 of each year commencing October 1, 1997.
The 11 1/4% Notes may not be redeemed by Chemicals prior to April 1, 2002, and
from thereon through April 1, 2004, the 11 1/4% Notes may be redeemed at a
premium varying between 105.625% and 101.875%.  Subsequent to April 1, 2005,
Chemicals may redeem the 11 1/4% Notes at their face value plus accrued
interest.  Prior to April 1, 2000, Chemicals may redeem in the aggregate up to
35% of the original principal amount of the 11 1/4% Notes with the proceeds of
one or more public equity offerings, as defined. Such redemptions may be made
at a redemption price of 111.25% of the face value plus accrued interest to the
redemption date.  After such redemption, at least $97.5 million aggregate
principal amount of the 11 1/4% Notes must remain outstanding.

    The indentures governing the 11 1/4% Notes, 11 3/4% Notes, and 13 1/2%
Notes (the "Indentures") contain numerous financial and operating covenants,
including, but not limited to, restrictions on Chemicals' or Holdings' ability
to incur indebtedness, pay dividends, create liens, sell assets, engage in
mergers and acquisitions, and refinance existing indebtedness.  In addition,
the Indentures include various circumstances that will constitute, upon
occurrence and subject in certain cases to notice and grace periods, an event
of default thereunder.

    The Credit Agreement and the indenture for the 11 1/4% Notes and the 
11 3/4% Notes contain provisions which restrict the payment of advances, loans,
and dividends from Chemicals to Holdings.  The most restrictive of the covenants
limits such payments during fiscal 1998 to approximately $2.0 million, plus any
amounts due to Holdings from Chemicals under the intercompany tax sharing
agreement.


DEBT MATURITIES

    The estimated remaining principal payments on the outstanding Term Loans,
Saskatoon Term Loans, Revolver, and ESOP Loan are as follows:

<TABLE>
<CAPTION>
           Year ending                                                                Principal
           September 30,                                                              Payments
           -------------                                                             ----------
                                                                                (Dollars in Thousands)
               <S>                                                                    <C>  
               1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $  5,710
               1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      5,710
               2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     15,371
               2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     26,831
               2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     34,845
               Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    254,964
                                                                                      --------
               Total Term Loans, Saskatoon Term Loans, Revolver and ESOP Loan . . .   $343,431
                                                                                      ========
</TABLE>





                                       47
<PAGE>   50
5. INCOME TAXES

    A reconciliation of federal statutory income taxes to the Company's
effective tax provision (benefit) before extraordinary item follows:

<TABLE>
<CAPTION>
                                                                               YEAR ENDED SEPTEMBER 30,        
                                                                         ----------------------------------
                                                                           1997         1996         1995   
                                                                         --------     --------     --------
                                                                               (Dollars in Thousands)
<S>                                                                      <C>          <C>          <C>     
Provision for federal income tax at the statutory rate ..............    $(11,001)    $ 17,641     $ 79,855
Foreign sales corporation ...........................................          --         (700)      (7,991)
State and foreign income taxes ......................................       3,782        1,529        2,862
Other ...............................................................         (77)      (1,572)         279
                                                                         --------     --------     --------
Effective tax provision (benefit) ...................................    $ (7,296)    $ 16,898     $ 75,005
                                                                         ========     ========     ========
</TABLE>

The provision (benefit) for income taxes is composed of the following:
<TABLE>
<CAPTION>
                                                                               YEAR ENDED SEPTEMBER 30,        
                                                                         ----------------------------------
                                                                           1997         1996         1995   
                                                                         --------     --------     --------
                                                                               (Dollars in Thousands)
<S>                                                                     <C>            <C>            <C>
From operations:
    Current federal .................................................    $ (6,131)    $ 12,084     $ 67,393
    Deferred federal ................................................      (9,211)      (3,249)       1,075
    Deferred foreign ................................................       6,104        7,421        3,489
    Current state ...................................................       1,942          642        2,947
    Deferred state ..................................................          --           --          101
                                                                         --------     --------     --------
Total tax provision (benefit) .......................................    $ (7,296)    $ 16,898     $ 75,005
                                                                         ========     ========     ========
</TABLE>


    The components of the Company's deferred income tax assets and liabilities
are summarized below:

<TABLE>
<CAPTION>
                                                                                              SEPTEMBER 30,    
                                                                                           ------------------
                                                                                              1997      1996   
                                                                                           -------    -------
                                                                                         (Dollars in Thousands)
<S>                                                                                         <C>       <C>    
Deferred tax assets:
Accrued liabilities ...................................................................    $18,225    $10,348

Accrued postretirement cost ...........................................................     12,350      9,544
Tax loss and credit carryforward and other ............................................     13,889      5,817
                                                                                           -------    -------
Total deferred tax assets .............................................................     44,464     25,709
                                                                                           -------    -------

Less:  current deferred income tax assets .............................................     10,005      7,214
                                                                                           -------    -------
Noncurrent deferred tax assets ........................................................    $34,459    $18,495
                                                                                           =======    =======

Deferred tax liabilities:
Property, plant and equipment .........................................................    $67,996    $61,304
Accrued pension cost ..................................................................      1,665      2,525
Other .................................................................................        836      1,599
                                                                                           -------    -------
Total deferred tax liabilities ........................................................     70,497     65,428
                                                                                           -------    -------
Net deferred tax liability ............................................................    $36,038    $46,933
                                                                                           =======    =======
</TABLE>

    In fiscal 1997, the Company generated approximately $17.0 million in United
States net operating losses which will be carried back and utilized in a prior
fiscal year.  The Company also has approximately Cdn. $14.0 million in Canadian
tax credit carryforwards which will expire from 1999 through 2004.

6.  EMPLOYEE BENEFITS

    The Company has established the following benefit plans:

Retirement Benefit Plans

    The Company has non-contributory pension plans in the United States and
employer and employee contributory plans in Canada which cover all salaried and
wage employees.  The benefits under these plans are based primarily on years of
service and employees' pay near retirement.  For those Company employees who
were employed by the Company as of September 30, 1986 and were previously
employed by Monsanto, the Company recognizes their Monsanto pension years of
service for purposes of determining benefits under the Company's plans.  For
those





                                       48
<PAGE>   51
Company employees who were employed by the Company on August 21, 1992, and were
previously employed by Tenneco Inc., the Company recognizes their Tenneco Inc.
pension years of service for purposes of determining benefits under the
Company's plans.  The Company's funding policy is consistent with the funding
requirements of federal law and regulations.  Plan assets consist principally
of common stocks and government and corporate securities.

    For those Company employees as of January 31, 1997 who:  (i) were
previously employed by Cytec and (ii) elect to retire from the Company on or
before January 31, 1999, the Company supplements the standard pension payable
such that the employee's total combined pension from the Company and from the
Cytec Nonbargaining Employees' Retirement Plan equals the amount the employee
would have received had he or she remained an employee of Cytec until
retirement.

    In accordance with generally accepted accounting principles the Company has
recorded its additional minimum liability.  In recognizing the additional
pension liability at September 30, 1997, the Company recorded a net reduction
to stockholders' equity of $31,000.  There were no additional pension
liabilities to recognize at September 30, 1996.

    The components of pension expense for the years ended September 30, 1997,
1996, and 1995 were as follows:

<TABLE>
<CAPTION>
                                                                               1997         1996         1995
                                                                             --------     --------     --------
                                                                                     (Dollars in Thousands)
<S>                                                                          <C>          <C>          <C>     
Service cost (for benefits earned during the period) ....................    $  4,857     $  3,664     $  3,288
Interest cost on projected benefit obligation ...........................       5,941        5,044        4,471
Actual return on plan assets and contributions ..........................     (16,116)      (6,001)      (5,825)
Deferral of asset gain ..................................................      10,107        1,050        1,909
Net amortization of unrecognized amounts ................................         831          926          871
                                                                             --------     --------     --------
Pension expense .........................................................    $  5,620     $  4,683     $  4,714
                                                                             ========     ========     ========
</TABLE>

    Assumptions used in determining the projected benefit obligation and
pension cost for the periods were as follows:

<TABLE>
<CAPTION>
                                                                                         FISCAL YEAR           
                                                                               -------------------------------
                                                                                1997         1996        1995  
                                                                               ------       ------      ------
<S>                                                                             <C>          <C>          <C> 
Discount rates  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     7.75%        7.75%        7.5%
Rates of increase in salary compensation level  . . . . . . . . . . . . . .     5.25%        5.5%         5.5%
Expected long-term rate of return on assets . . . . . . . . . . . . . . . .     8.5%         9.0%         9.0%
</TABLE>

    The funded status of the Company's pension plans as of the actuarial
valuation dates of August 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
                                                                 1997                          1996            
                                                     ----------------------------  ----------------------------
                                                        ASSETS       ACCUMULATED      ASSETS       ACCUMULATED
                                                        EXCEED        BENEFITS        EXCEED        BENEFITS
                                                      ACCUMULATED      EXCEED       ACCUMULATED      EXCEED
                                                        BENEFITS       ASSETS        BENEFITS        ASSETS    
                                                     -------------  -------------  -------------  -------------
                                                                        (Dollars in Thousands)
<S>                                                     <C>          <C>               <C>          <C>        
Actuarial present value of benefits based on service                                                           
  to date and present pay levels:                                                                              
Vested benefit obligation ..........................    $ 62,396     $    771          $ 52,053     $    525   
Non-vested benefit obligation ......................       1,685            5             2,064            2   
Accumulated benefit obligation .....................      64,081          776            54,117          527   
Plan assets at fair value ..........................      84,598           --            65,443           --   
Plan assets in excess of (less than) accumulated                                                               
  benefit obligation ...............................      20,517         (776)           11,326         (527)  
Additional amounts related to projected salary                                                                 
  increases ........................................      18,017           98            16,568          177   
Plan assets more (less) than total projected benefit                                                           
  obligation .......................................       2,500         (874)           (5,242)        (704)  
Unrecognized net (gain) loss resulting from plan                                                               
  experience and changes in actuarial assumptions ..      (6,913)          40             3,688         (107)  
Unrecognized prior service cost ....................       6,370            3             3,376           --   
Unrecognized transition obligation .................       2,110            5             2,486            7   
Total prepaid (accrued) pension obligation .........    $  4,067     $   (826)         $  4,308     $   (804)  
                                                        ========     ========          ========     ========   
</TABLE>
              




                                       49
<PAGE>   52
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

    The Company provides certain health care benefits and life insurance
benefits for retired employees.  Substantially all of the Company's employees
become eligible for these benefits at normal retirement age. The Company
accrues the cost of these benefits during the period in which the employee
renders the necessary service.

    Health care benefits are provided to employees who retire from the Company
with ten or more years of service except for Canadian employees covered by
collective bargaining agreements.  All of the Company's employees are eligible
for postretirement life insurance.  Postretirement health care benefits for
United States plans are non-contributory.  Benefit provisions for most hourly
and some salaried employees are subject to collective bargaining.  In general,
the plans stipulate that retiree health care benefits are paid as covered
expenses are incurred.  For United States employees, postretirement medical
plan deductibles are assumed to increase at the rate of the long-term consumer
price index.  The components of postretirement benefits cost other than
pensions for the years ended September 30, 1997, 1996, and 1995 were as
follows:

<TABLE>
<CAPTION>
                                                              1997      1995      1996  
                                                             ------    ------    ------
                                                                (Dollars in Thousands)
<S>                                                          <C>       <C>       <C>   
Service cost (for benefits earned during the period) ....    $1,343    $1,155    $1,084
Interest cost on projected benefit obligation ...........     2,494     1,985     1,835
Amortization of plan amendments .........................        29       243        29
                                                             ------    ------    ------
                                                             $3,866    $3,383    $2,948
                                                             ======    ======    ======
</TABLE>

    Actuarial assumptions used to determine costs and benefit obligations for
postretirement benefit plans other than pensions include an average discount
rate of 7.5% and an average rate of future increases in benefit compensation of
5.5%.  The assumed composite rate of future increases in per capita cost of
health care benefits (health care cost trend rate) was 7.5% for fiscal 1997,
exclusive of demographic changes, decreasing gradually to 5.5% by the year
2027. These trend rates reflect current cost performance and the Company's
expectation that future rates will decline. Increasing the health care cost
trend rate by one percentage point would increase the accumulated
postretirement benefit obligation by $1.7 million and would increase annual
aggregate service and interest costs by $199,000.

    The following sets forth the plans funded status reconciled with amounts
reported in the Company's consolidated balance sheet at September 30, 1997 and
1996.

Accumulated postretirement benefit obligation (APBO):

<TABLE>
<CAPTION>
                                                                                              1997      1996   
                                                                                           ---------  --------
                                                                                          (Dollars in Thousands)
<S>                                                                                        <C>        <C>     
Retirees  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $  10,723  $  7,896
Fully eligible active plan participants . . . . . . . . . . . . . . . . . . . . . . . .       11,421     8,301
Other active plan participants  . . . . . . . . . . . . . . . . . . . . . . . . . . . .       16,473    12,906
                                                                                           ---------  --------
    Total APBO  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       38,617    29,103
Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           --        --
Unrecognized loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       (1,975)   (1,737)
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .         (194)     (223)
                                                                                           ---------  --------
Accrued postretirement benefit liability  . . . . . . . . . . . . . . . . . . . . . . .    $  36,448  $ 27,143
                                                                                           =========  ========
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

    In fiscal 1996, the Company established the 1996 Employee Stock Purchase
Plan.  This plan authorized up to 250,000 shares of common stock to be issued
to key employees and management at an issue price of $12 per share.  This plan
became effective as of September 19, 1996 and terminated on September 30, 1996.
All authorized shares were issued by the end of fiscal 1996.

EMPLOYEE STOCK OWNERSHIP TRUST

    The original Employee Stock Ownership Trust ("old ESOT") was formed to
invest primarily in the Company's common stock and included only participants
contributing to the Company's Savings and Investment Plan (the "Savings Plan").
The Company's contribution to the old ESOT was 60% of the participant's Savings
Plan contributions to the extent that such participant's contributions did not
exceed 7.5% of the employee's eligible earnings.  The Company's contributions
were subject to a 20% per year vesting schedule commencing after one year of
service.  The Company's contributions to the old ESOT for the years ended
September 30, 1996 and 1995 were $1.7 million per year.





                                       50
<PAGE>   53
    An application for determination was filed with the Internal Revenue
Service terminating the old ESOT and assets were distributed to participants
during fiscal 1997.

    In connection with the Merger, a new Employee Stock Ownership Trust ("new
ESOT") was established which covers substantially all United States employees.
Allocations of shares of common stock will be made annually to participants.
The new ESOT primarily invests in shares of Holdings Common Stock and borrowed
$6.5 million from Chemicals pursuant to the Chemicals ESOP Loan to purchase
approximately 542,000 shares of Holdings Common Stock.  As more fully described
in Note 4, the ESOP Loan is payable in 16 quarterly installments during the
period beginning December 31, 1996, and ending September 30, 2000.  The shares
of Holdings Common Stock purchased by the new ESOT have been pledged as
security for the ESOP Loan and such shares will be released and allocated to
the new ESOT participants' account as the ESOP Loan is discharged.  Until the
ESOP Loan is paid in full, contributions to the new ESOT will be used to pay
the outstanding principal and interest on the ESOP Loan.  In addition, during
fiscal 1997 the New ESOT purchased 99,000 shares of Holdings Common Stock.  As
of September 30, 1997, 151,000 ESOT shares had been allocated to employees.
The Company recorded $1.6 million of expense related to the New ESOT in fiscal
1997.

SAVINGS AND INVESTMENT PLAN

    The Savings Plan covers substantially all United States employees,
including executive officers.  The Savings Plan is qualified under Section
401(k) of the Internal Revenue Code (the "Code").  Each participant has the
option to defer taxation of a portion of his or her earnings by directing the
Company to contribute a percentage of such earnings to the Savings Plan.  A
participant may direct up to a maximum of 15% of eligible earnings to the
Savings Plan, subject to certain limitations set forth in the Code for "highly
compensated" participants, as defined in Section 414(q) of the Code.  A
participant's contributions become distributable upon the termination of his or
her employment.  The Company does not make any contribution to the Savings
Plan.

PROFIT SHARING AND BONUS PLANS

    In January 1997, the Board of Directors, upon recommendation of the
Compensation Committee, approved the establishment of a Profit Sharing Plan
that is designed to benefit all qualified employees, and a Bonus Plan that will
provide for bonuses to exempt salaried employees based on the Company's annual
financial performance.

    Under the Company's previous profit sharing plans, expense for the years
ended September 30, 1996 and 1995 was $2.8 million and $13.0 million,
respectively.  No expenses for profit sharing or bonuses were incurred in
fiscal 1997.

OMNIBUS STOCK AND INCENTIVE PLAN

    The Company had an Omnibus Stock and Incentive Plan ("Original Omnibus
Plan"), under which the Company could grant to key employees incentive and
nonincentive stock options, stock appreciation rights, restricted stock,
performance units and performance shares. The terms and amounts of all awards
were determined by the Compensation Committee of the Board of Directors.  Upon
a change of control of the Company, all awards granted under the plan were to
become fully vested and all performance based awards were to be paid at the
higher of performance goals or actual performance to date.

    In fiscal 1993, the Company granted SARs to certain key employees and
directors.  Total expense (benefit) determined based on 3.6 million SARs
granted, the vesting period (five years beginning September 1992) and the
appreciation of the Company's stock price above the fair market value of the
Company's common stock on the date of grant of the SARs.  In October 1994, the
Company amended the SAR program by modifying the vesting periods and limiting
the amount of appreciation for each SAR during each vesting period, thereby
limiting the Company's aggregate future expenses.  The Company recorded expense
(benefit) for the years ended September 30, 1996 and 1995 of $8.5 million and
$(2.8) million, respectively, and paid $5.8 million in September 1995, and
$13.8 million in August 1996, pursuant to the SARs, as amended.  The expense
(benefit) for the SARs is included in selling, general and administrative
expenses in the Company's income statement.

    In fiscal 1995, the Company granted 82,500 stock options to certain
officers of the Company with an exercise price of $13.50 per share. All
existing stock options were terminated in connection with the Merger.

    Upon consummation of the Merger, the Original Omnibus Plan was terminated.





                                       51
<PAGE>   54
OMNIBUS STOCK AWARDS AND INCENTIVE PLAN

    In April 1997, the Board of Directors, upon recommendation of the
Compensation Committee, but subject to shareholder approval at the next
stockholders meeting, approved the establishment of the Omnibus Stock Awards
and Incentive Plan (the "Omnibus Plan").  Under the Omnibus Plan, the Company
may grant to key employees, incentive and nonqualified stock options, stock
appreciation rights, restricted stock awards, performance awards, and phantom
stock awards.  The terms and amounts of the awards will be determined by the
Compensation Committee of the Board of Directors.  One million shares of the
Company's stock are reserved for issuance under the Omnibus Plan.  In the event
of a change of control of the Company or a qualified public offering of
Holdings Common Stock, all awards will immediately vest and become exercisable.

    In July 1997, the Company granted approximately 260,000 nonqualified stock
options to key employees of the Company with an exercise price of $12.00 per
share.  During 1997, 33,000 stock options were cancelled, and as of September
30, 1997, 227,000 stock options were outstanding.  The options vest 20% per
year beginning on January 1, 1998, and are exercisable through January 1, 2007.

NONQUALIFIED STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS

    Also in April 1997, the Board of Directors, upon recommendation of the
Compensation Committee, approved the establishment of the Nonqualified Stock
Option Plan for Non-Employee Directors (the "Nonqualified Plan").  Each non-
employee director of the Company is eligible to participate in the Nonqualified
Plan.  Each eligible director on the date of adoption of the Nonqualified Plan
was granted an option to acquire 2,000 shares of Holdings Common Stock (4,000
shares for the Vice-Chairman), and each eligible director who is serving on the
Broad of Directors on each subsequent October 1st will automatically be granted
an option to acquire 1,000 shares of Holdings Common Stock (2,000 shares for
the Vice-Chairman).  All options will expire ten years from date of grant.  All
options will be granted at the fair market value on the date of grant and vest
immediately.  A total of 160,000 shares of Holdings Common Stock are reserved
for issuance under the Nonqualified Plan.

    Effective April 1997, the Company granted 14,000 stock options to
non-employee directors of the Company with an exercise price of $12.00 per
share.  The options are exercisable immediately and expire on the tenth
anniversary of the date of grant.

    In the first quarter of fiscal 1997, the Company elected to continue to
apply the intrinsic value method of accounting for stock-based compensation and
increase its footnote disclosure, as permitted by Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation".

    All stock options are granted at fair market value of the Holdings Common
Stock at the grant date.  The weighted average fair value of the stock options
granted during 1997 was $0.5 million.  The fair value of each stock option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for the grants in
1997: risk free interest rate of 6.1%; expected dividend yield of 0.0%;
expected life of ten years; and expected volatility of 44%.  Stock options
generally expire ten years from the date of grant and fully vest after five
years.  The outstanding stock options at September 30, 1997 have a weighted
average contractual life of approximately 9 years.  There were 14,000 stock
options exercisable at September 30, 1997.

    In accordance with the intrinsic value method of stock-based compensation
no compensation costs have been recognized for stock option awards described
above.  Had compensation cost for all option issuances been determined
consistent with SFAS No. 123, it would not have had a material impact on  the
Company's pro forma net loss and loss per share for 1997.


7. COMMITMENTS AND CONTINGENCIES

PRODUCT CONTRACTS

    The Company has certain long-term agreements which provide for the
dedication of 100% of the Company's production of acetic acid, plasticizers,
TBA, sodium cyanide, and calcium hypochlorite each to one customer.  The
Company also has various sales and conversion agreements which dedicate
significant portions of the Company's production of styrene, acrylonitrile, and
methanol to various customers.  These agreements generally provide for cost
recovery plus an agreed margin or element of profit based upon market price.





                                       52
<PAGE>   55
LEASE COMMITMENTS

    The Company has entered into various long-term noncancellable operating
leases.  Future minimum lease commitments at September 30, 1997, are as
follows: fiscal 1998 -- $4.3 million; fiscal 1999 -- $3.7 million; fiscal 2000
-- $3.5 million; fiscal 2001 -- $3.1 million; fiscal 2002 -- $3.1 million; and
$8.7 million thereafter.  Rent expense for fiscal years 1997, 1996, and 1995
was not material.

ENVIRONMENTAL AND SAFETY MATTERS

    The Company's operations involve the handling, production, transportation,
and disposal of materials classified as hazardous or toxic and are extensively
regulated under environmental and health and safety laws.  Operating permits
which are required for the Company's operations are subject to periodic renewal
and may be revoked or modified for cause.

    New laws or permit requirements and conditions may affect the Company's
operations, products, or waste disposal.  Past or future operations may result
in claims or liabilities.  Expenditures could be required to upgrade wastewater
collection, pretreatment or disposal systems, or other matters. Additionally,
the Company will initiate appropriate actions or preventive projects necessary
to insure that the facility continues to operate in a safe and environmentally
responsible manner.  No assurances can be given that the Company will not incur
material environmental expenditures associated with its facilities, operations
or products.

    The Company routinely incurs expenses associated with hazardous substance
management and pollution prevention in ongoing operations.  These operating
expenses include items such as depreciation on its waste treatment facilities,
outside waste management, fuel, electricity, and salaries.  The amounts of
these operating expenses were approximately $50 million, $47 million, and $45
million for fiscal years 1997, 1996, and 1995, respectively.  The Company does
not anticipate a material increase in these types of expenses during fiscal
1998.  The Company considers these types of environmental expenditures normal
operating expenses and includes them in cost of goods sold.

    At its Texas City Plant, the Company has reduced emissions of targeted
chemicals 71% from 1987 levels well ahead of the EPA's voluntary 33/50 program.
These reductions included a 95% reduction in hydrogen cyanide emissions and an
83% reduction in benzene emissions.

    The Company's sodium chlorate market is sensitive to potential
environmental regulations. On November 14, 1997, the Environmental Protection
Agency enacted regulations that support substitution of chlorine dioxide, which
is produced from sodium chlorate, for elemental chlorine in the pulp bleaching
process (Pulp and Paper Cluster Rule).  Certain environmental groups are
encouraging passage of regulations which restrict the amount of Absorbable
Organic Halides (AOX) or chlorine derivatives in bleach plant effluent.  This
regulation will result in increased substitution of chlorine dioxide for
elemental chlorine in the pulp bleaching process, which significantly reduces
the amount of AOX and chlorine derivatives in bleach plant effluent.  As long
as there is not an outright ban on chlorine-containing compounds, regulations
restricting AOX or chlorine derivatives in bleach plant effluent should favor
the use of chlorine dioxide, thus sodium chlorate.  Any significant ban on all
chlorine-containing compounds could have a material adverse effect on the
Company's financial condition and results of operations.

    British Columbia has a regulation in place that would effectively eliminate
the use of chlorine dioxide in the bleaching process by the year 2002.  The
pulp and paper industry is working to change this regulation and believes that
the ban of chlorine dioxide in the bleaching process will yield no measurable
environmental or public health benefit.  The Company is not aware of any other
laws or regulations currently in place which would restrict the use of the
product.

LEGAL PROCEEDINGS

   AMMONIA RELEASE LAWSUITS:

    On May 8, 1994, an ammonia release occurred at the Company's Texas City
Plant while a reactor in the acrylonitrile unit was being restarted after a
shutdown for routine maintenance.  Approximately 52 lawsuits and interventions
involving more than 5,500 plaintiffs were filed against the Company seeking an
unspecified amount of money for alleged damages from the ammonia release.

    Approximately 2,600 of the plaintiffs agreed to submit their damage claims
to binding arbitration.  Pursuant to this agreement to arbitrate, a two week
evidentiary hearing was conducted in July 1996 before a three judge panel to





                                       53
<PAGE>   56
determine the amount of damages.  On May 1, 1997, the three judge panel awarded
the plaintiffs an amount of damages which was well within the limits of the
Company's insurance coverage.

    Thirty-nine of the plaintiffs tried their cases to a jury in Harris County
District Court.  After approximately five months of trial, the jury returned a
verdict on September 2, 1997.  The total amount awarded for all 39 plaintiffs
was well within the limits of the Company's insurance coverage.

    Neither the May 1, 1997 arbitration award, nor the September 2, 1997 jury
award will have a material adverse impact on the financial position, results of
operations, or cash flows of the Company.

    Approximately 1,000 of the plaintiffs have settled their claims against the
Company in fiscal 1997 and the Company continues to vigorously defend against
the claims of the approximately 1,800 remaining plaintiffs.

    NICKEL CARBONYL LAWSUIT:

    On July 30, 1997, as the Company's methanol unit at the Texas City Plant
was being shut down for repair, nickel carbonyl was formed when carbon monoxide
reacted with nickel catalyst in the unit's reformer.  After isolating the
nickel carbonyl within the methanol unit, the Company worked with the
permission and guidance of the Texas Natural Resources Conservation Commission
to destroy the nickel carbonyl by incineration on-site.

     Prior to its incineration, several Company employees and contractor
employees may have been exposed to nickel carbonyl in the methanol unit.  Nine
contractor employees allegedly exposed to nickel carbonyl have filed a lawsuit
against the Company seeking unspecified damages for personal injuries.  The
Company anticipates that additional claims and litigation against the Company
asserting similar claims will ensue.  The Company believes that its general
liability insurance coverage is sufficient to cover all costs and expenses.  No
employees or other individuals outside the methanol unit were exposed to the
nickel carbonyl.

    OTHER LAWSUITS.  The Company is subject to various other claims and legal
actions that arise in the ordinary course of its business.

LITIGATION CONTINGENCY

    The Company has made estimates of the reasonably possible range of
liability with regard to its outstanding litigation for which it may incur
liability.  These estimates are based on the Company's judgments using
currently available information as well as consultation with the Company's
insurance carriers and outside legal counsel.  A number of the claims in these
litigation matters are covered by the Company's insurance policies or by
third-party indemnification of the Company.  The Company, therefore, has also
made estimates of its probable recoveries under insurance policies or from
third-party indemnitors based on its understanding of its insurance policies
and indemnifications, discussions with its insurers and indemnitors, and
consultation with outside legal counsel, in addition to the Company's
judgments.  Based on the foregoing as of September 30, 1997, the Company has
accrued approximately $6.5 million as its estimate of aggregate contingent
liability for these matters, and has also recorded aggregate receivables from
its insurers and third-party indemnitors of approximately $6.0 million.  At
September 30, 1997, management estimates that the aggregate reasonably possible
range of loss for all litigation combined, in addition to the amount accrued,
is from $0 to $12 million.  The Company believes that this additional
reasonably possible loss is substantially covered by insurance.

    While the Company has based its estimates on its evaluation of available
information to date and the other matters described above, much of the
litigation remains in the discovery stage and it is impossible to predict with
certainty the ultimate outcome.  The Company will adjust its estimates as
necessary as additional information is developed and evaluated.  However, the
Company believes that the final resolution of these contingencies will not have
a material adverse impact on the financial position, results of operations, or
cash flows of the Company.

    The timing of probable insurance and indemnity recoveries, and payment of
liabilities, if any, is not expected to have a material adverse effect on the
financial position, results of operations, or cash flows of the Company.





                                       54
<PAGE>   57

8.  BUSINESS ACQUISITIONS

    On January 31, 1997, the Company acquired the AFB from Cytec.  The AFB, now
owned by two wholly owned subsidiaries of the Company (collectively "Sterling
Fibers"), recorded sales of approximately $92 million during the eight months
of operations in fiscal 1997 and consists of an acrylic fibers plant located
near Pensacola, Florida, and several associated marketing and research offices.
Sterling Fibers is one of two acrylic fibers manufacturers in the United
States.  Cytec will supply acrylonitrile to Sterling Fibers through a five-year
supply agreement ending in 2002.  The acquisition was financed through the
incurence of $81 million of term debt under the Fibers Credit Agreement with
substantially the same lenders as those under the Original Credit Agreement,
the issuance of $10 million (liquidation value) of Series A "pay in kind"
mandatory redeemable preferred stock ("Series A Preferred') to Cytec, and the
sale of $10 million of Holdings Common Stock in a private placement.  The
Company used the purchase method to account for the acquisition, and operating
results of Sterling Fibers beginning February 1, 1997 are included with those
of the Company.

    On July 10, 1997, Sterling Sask, an indirect wholly owned subsidiary of
Holdings and Chemicals, acquired substantially all of the assets of Saskatoon
Chemicals, a subsidiary of Weyerhaeuser Canada Ltd.  The acquired assets
include a manufacturing plant near Saskatoon, Saskatchewan, which manufactures
sodium chlorate, caustic soda, calcium hypochlorite, chlorine, and hydrochloric
acid.  Total consideration of $69.2 million was financed with: (i)
approximately $54.6 million under a new credit facility established by Sterling
Sask with a group of lenders, (ii) approximately $7.3 million pursuant to a
private placement of Holdings Common Stock, and (iii) approximately $7.3
million pursuant to a private placement of Units, each Unit consisting of
shares of Holdings' mandatory Cumulative Redeemable Preferred Stock, Series B
"pay in kind" ("Series B Preferred") and warrants to purchase shares of
Holdings Common Stock.  The Saskatoon Acquisition was accounted for under the
purchase method and operating results of Sterling Sask beginning July 10, 1997
are included with those of the Company.

    The following table presents the unaudited pro forma results of operations
of the Company as if the AFB Acquistion and the Saskatoon Acquisition had
occurred on October 1, 1995.  The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what would
have occurred had the AFB Acquistion and the Saskatoon Acquisition  been made
at the beginning of the fiscal year 1996 or of results which may occur in the
future (in thousands, except per share amounts).
<TABLE>
<CAPTION>
                                                                             Pro Forma       Pro Forma
                                                                            Twelve Months   Twelve Months
                                                                               Ended           Ended
                                                                           September 30,   September 30,
                                                                               1997            1996 
                                                                             --------         ------
<S>                                                                          <C>              <C>
Revenues                                                                     $ 988,000        $975,600
Income (loss) before extraordinary items                                     $ (27,300)       $ 39,400
Net income (loss) attributable to common stockholders                        $ (34,200)       $ 34,400
Net income (loss) per common share                                           $  ( 2.85)       $   0.66
</TABLE>





                                       55
<PAGE>   58
9. SEGMENT AND GEOGRAPHIC INFORMATION:

    Sales to individual customers constituting 10% or more of total revenues
and sales by segment were as follows (there were no sales to individual
customers constituting 10% or more of total revenues in fiscal 1997 and 1996):

<TABLE>
<CAPTION>
                                                                              YEAR ENDED SEPTEMBER 30,         
                                                                      -----------------------------------------
                                                                         1997           1996           1995    
                                                                      -----------    -----------    -----------
                                                                               (Dollars in Thousands)
<S>                                                                  <C>            <C>                <C>     
Major Customers:
British Petroleum plc and subsidiaries  . . . . . . . . . . . . .        *              *           $  169,944
Mitsubishi International Corporation  . . . . . . . . . . . . . .        *              *           $  129,812
Export Sales:
Export revenues . . . . . . . . . . . . . . . . . . . . . . . . .    $274,139       $267,153        $  534,067
Percentage of total revenues  . . . . . . . . . . . . . . . . . .          30%            34%               52%
Export revenues (as a percent of total exports)
 by geographical area:
  Asia  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          56%            66%               64%
  Europe  . . . . . . . . . . . . . . . . . . . . . . . . . . . .          41%            34%               36%
  Other   . . . . . . . . . . . . . . . . . . . . . . . . . . . .           3%             -                 -
</TABLE>

*DOES NOT COMPRISE 10% OF TOTAL REVENUE FOR 1997 AND 1996, THEREFORE NOT
 REPORTED.

<TABLE>
<CAPTION>
                                                                               YEAR ENDED SEPTEMBER 30,        
                                                                      -----------------------------------------
                                                                         1997           1996           1995    
                                                                      -----------    -----------    -----------
                                                                               (Dollars in Thousands)
<S>                                                                   <C>            <C>            <C>
Segment Information (1)
Revenues:
    Petrochemical and Fibers  . . . . . . . . . . . . . . . . . .     $   728,215    $   633,754    $  886,247
    Pulp  . . . . . . . . . . . . . . . . . . . . . . . . . . . .         180,572        156,711       143,951
                                                                      -----------    -----------    ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $   908,787    $   790,465    $1,030,198
Operating income:
    Petrochemical and Fibers    . . . . . . . . . . . . . . . . .     $    11,524    $    31,891    $  211,752
    Pulp  . . . . . . . . . . . . . . . . . . . . . . . . . . . .          45,945         35,597        31,010
                                                                      -----------    -----------    ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $    57,469    $    67,488    $  242,762
Depreciation and amortization expenses:
    Petrochemical and Fibers  . . . . . . . . . . . . . . . . . .     $    32,762    $    28,125    $   28,386
    Pulp  . . . . . . . . . . . . . . . . . . . . . . . . . . . .          21,250         14,577        14,647
                                                                      -----------    -----------    ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $    54,012    $    42,702    $   43,033
Capital expenditures:
    Petrochemical and Fibers  . . . . . . . . . . . . . . . . . .     $    22,664    $    50,033    $   45,759
    Pulp  . . . . . . . . . . . . . . . . . . . . . . . . . . . .          20,764         45,924         8,203
                                                                      -----------    -----------    ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $    43,428    $    95,957    $   53,962
Identifiable assets:
    Petrochemicals and Fibers   . . . . . . . . . . . . . . . . .     $   554,474    $   457,273    $  405,324
    Pulp  . . . . . . . . . . . . . . . . . . . . . . . . . . . .         324,497        232,411       204,615
                                                                      -----------    -----------    ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $   878,971    $   689,684    $  609,939
</TABLE>

(1) The petrochemical and fibers segment is based in the United States.  The
    pulp segment is primarily based in Canada.


10. FINANCIAL INSTRUMENTS

FOREIGN EXCHANGE

    The Company enters into forward foreign exchange contracts to hedge
Canadian dollar currency transactions on a continuing basis for periods
consistent with its committed exposures. The forward foreign exchange contracts
have varying maturities with none exceeding 18 months. The Company makes net
settlements of United States dollars for Canadian dollars at rates agreed to at
inception of the contracts.

    The Company enters into forward foreign exchange contracts to reduce risk
due to Canadian dollar exchange rate movements.  The Company does not engage in
currency speculation.  The Company had a notional amount of approximately $20
million and $30 million of forward foreign exchange contracts outstanding to
buy Canadian dollars





                                       56
<PAGE>   59
at September 30, 1997 and 1996, respectively.  The deferred gain (loss) on
these forward foreign exchange contracts at September 30, 1997 and 1996 was
immaterial.

GAS HEDGE

    The Company hedged a portion of its natural gas to be used in the
production of styrene and methanol during the first half of fiscal 1998.   At
September 30, 1997, the Company had natural gas collar contracts on 700,000
MMbtu's of natural gas per month for November 1997 through March 1998 with an
average "floor" price of $2.13 per MMbtu and an average "cap" price of $2.54
per MMbtu.  The Company's current hedging agreements are settled on a monthly
basis.  All of the Company's current contracts specify the third-party index to
be the inside FERC Houston Ship Channel First of the Month Index Price. The
Company had a net loss of $0.1 million due to natural gas hedging contracts in
fiscal 1997 and an unrealized gain of $1.2 million at September 30, 1997.

CONCENTRATION OF RISK

    The Company sells its products primarily to companies involved in the
petrochemical, fiber, and pulp and paper manufacturing industries.  The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral for accounts receivable.  However, letters of credit are
required by the Company on many of its export sales.  The Company's credit
losses have been minimal.

    The Company maintains cash deposits with major banks which from time to
time may exceed federally insured limits.  The Company periodically assesses
the financial condition of the institutions and believes that any possible loss
is minimal.

    Approximately 40% of the Company's employees are covered by union
agreements.  Approximately 4% of the Company's employees are covered by union
agreements which could expire within one year.

INVESTMENTS

    It is the policy of the Company to invest its excess cash in investment
instruments or securities whose value is not subject to market fluctuations
such as certificates of deposit, repurchase agreements, or Eurodollar deposits
with domestic or foreign banks or other financial institutions.  Other
permitted investments include commercial paper of major United States
corporations with ratings of A1 by Standard & Poor's Ratings Group or P1 by
Moody's Investor Services, Inc., loan participations of major United States
corporations with a short term credit rating of A1/P1 and direct obligations of
the United States Government or its agencies.  In addition, not more than $5
million will be invested with any single bank, financial institution, or United
States corporation.

FAIR VALUE OF FINANCIAL INSTRUMENTS

    At September 30, 1997, the fair market value of all of the Company's
financial instruments approximated the book value, except as stated below.

<TABLE>
<CAPTION>
                                                                Book Value        Fair Value
                                                                ----------        ----------
                                                                   (Dollars in Thousands)
                         <S>      <C>                         <C>                    <C>
                         13 1/2%  Notes                       $  110,412           $135,184
                         11 3/4%  Notes                          275,000            303,875
                         11 1/4%  Notes                          153,148            163,875
</TABLE>


    The fair values of the 13 1/2% Notes, 11 1/4% Notes, and 11 3/4% Notes are
based on quoted market prices.

11. RELATED PARTY TRANSACTIONS

    In connection with the 1996 Recapitalization, the Company paid TSG and
Unicorn one-time transaction fees of approximately $8.4 million and $4.4
million, respectively. In addition, the Company paid TSG a one-time transaction
fee of approximately $1.1 million in connection with the AFB Acquisition, and a
fee of approximately $0.7 million in connection with the Saskatoon Acquisition.
Investment banking fees of approximately $3.3 million were paid as part of the
1996 Recapitalization to Lazard Freres & Company ("Lazard").  A member of the
former Board of Directors is a Limited Managing Director of Lazard.  However,
the Board member agreed not to receive any compensation from Lazard related to
the Merger.





                                       57
<PAGE>   60
    Also in connection with the 1996 Recapitalization, Credit Suisse First
Boston Corporation ("CFSB") served as managing underwriter for the public
offering of the 13 1/2% Notes and 11 3/4% Notes and provided certain financial
advisory services to STX Acquisition and Chemicals, for which such firm
received underwriting discounts and commissions and financial advisory fees
totaling approximately $17 million.  In addition, CSFB received net
compensation of approximately $1.0 million related to the 11 1/4% Notes
Offering.  John L. Garcia, a director and stockholder of the Company, is a
Managing Director of CSFB.

    Since October 1, 1991, the Company and certain affiliates of Koch
Industries have had ongoing commercial relationships in the ordinary course of
business, including, from time to time, supply of raw materials or sales of
petrochemicals and transportation of natural gas.  For the fiscal year ended
September 30, 1997, (i) product sales to and raw material purchases from Koch
Chemical, an indirect wholly-owned subsidiary of Koch Industries, (ii) payments
to John Zink Company, an indirect wholly-owned subsidiary of Koch Industries,
in consideration for certain contracting and construction services performed at
the Texas City Plant, and (iii) services for the transportation of natural gas
by Koch Gateway Pipeline Company to the Santa Rosa Plant, each represented less
than 1% of the Company's revenues.

    In connection with the Saskatoon Acquisition, the Company paid a fee to
Clipper Capital Associates, Inc. ("Clipper") and Olympus Partners ("Olympus")
of $0.1 million to act as placement agents for the Series B Preferred Stock.
Robert Calhoun, a director of the Company, is President of Clipper.  Affiliates
of Clipper and Olympus are significant stockholders of the Company.

12. CAPITAL STOCK

    The authorized shares of Holdings Common Stock at September 30, 1997 and
1996 was 20,000,000.

    On January 31, 1997, the Company issued 778,232 additional shares of
Holdings Common Stock in connection with the AFB Acquisition.  In addition, the
Company issued 608,334 shares of Holdings Common Stock in connection with the
Saskatoon Acquisition.

    In connection with the issuance of the 13 1/2% Notes (see Note 4), Holdings
issued 191,751 warrants to purchase three shares of Holdings Common Stock for
$0.01, exercisable beginning in August 1997 until August 2008. In connection
with the Saskatoon Acquisition, Holdings also issued to holders of the Series B
Preferred Stock 201,048 warrants to purchase one share of Holdings Common Stock
for $0.01, exercisable beginning in July 1997 until December 2007.  At
September 30, 1997, all 392,799 warrants to purchase Holdings Common Stock were
outstanding.

13. MANDATORY REDEEMABLE PREFERRED STOCK

    In connection with the AFB Acquisition, the Company authorized 350,000
shares and issued 104,110 shares of non-voting Series A Preferred Stock with a
fair value and carrying value of $10.0 million.   The Series A Preferred Stock
has a cumulative dividend rate of 10%, payable in kind semi-annually on January
1 and July 1 of each year commencing July 1, 1997.  The Company may redeem all
or any number of shares of Series A Preferred Stock at any time with proper
written notice at a price of $100 per share plus accrued dividends.   The
holders of Series A Preferred Stock may have the Company redeem shares on any
dividend payment date after June 30, 2009 with proper written notice at a price
of $100 per share plus accrued dividends. The carrying value of the Series A
Preferred Stock at September 30, 1997 was $10.7 million (liquidation value of
$100 per share).

    In connection with the Saskatoon Acquisition, the Company authorized 58,000
shares and issued approximately 7,532 shares of non-voting Series B Preferred
Stock with a fair value of $4.9 million.  The Series B Preferred Stock has a
14% dividend rate through July 10, 2002, and thereafter a variable rate between
14% and 18% depending on payment terms (as defined) until redeemed.  The
dividend is payable in kind on January 1, April 1, July 1, and October 1 of
each year commencing October 1, 1997.  The Company may redeem all or any number
of shares of Series B Preferred Stock at any time with proper written notice at
a price of $1,000 per share plus a premium ranging from 5% to 1% depending on
the date of redemption plus accrued dividends.  The holders of Series B
Preferred Stock may have the Company redeem shares on any dividend payment date
after June 30, 2009 with proper written notice at a price of $1,000 per share
plus accrued dividends.  The carrying value of the Series B Preferred Stock at
September 30, 1997 was $5.1 million (liquidation value of $1,000 per share).
The difference in the carrying value and the redemption amount will be accreted
as a charge to retained earnings over the holding period using the effective
interest rate method.





                                       58
<PAGE>   61
14. NEW ACCOUNTING STANDARDS

    SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" establishes new accounting standards for
measuring the impairment of long-lived assets.  The Company adopted this
Statement in the first quarter of fiscal 1997.  The adoption of this Statement
did not have a material adverse effect on the Company's financial position,
results of operations, or cash flows.

    SFAS No 123, "Accounting for Stock-Based Compensation" permits companies to
either adopt this new standard and record expenses for stock options and other
stock-based employee compensation plans based on their fair value at date of
grant, or continue to apply its current accounting policy and increase its
footnote disclosure.  In the first quarter of fiscal 1997, the Company elected
to continue to apply APB Opinion No. 25, and will increase its footnote
disclosure to include the pro forma impact on net income and earnings per share
of the application of the fair value based method of accounting.

    SFAS No. 128, "Earnings Per Share" establishes standards for computing and
presenting earnings per share ("EPS").  SFAS No. 128 replaces the presentation
of primary EPS previously prescribed with a presentation of basic EPS, which is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period.  The statement also
requires presentation of diluted EPS.  Diluted EPS is computed similarly to
fully diluted EPS pursuant to APB No. 15.  Pro forma basic and diluted EPS for
all historical periods presented, assuming that SFAS No. 128 was effective at
the beginning of each such historical period, would not be materially different
from what has been presented.  The Company will adopt SFAS No. 128 for fiscal
1998.

    SFAS No. 130 "Reporting Comprehensive Income" establishes standards for
reporting and displaying of comprehensive income and its components.  SFAS No.
131 "Disclosures About Segments of an Enterprise and Related Information
establishes standards for the way that public business enterprises report
information about operating segments in interim and annual financial
statements. Management is currently evaluating the disclosures required when
these two statements are adopted in the first quarter of fiscal 1999.





                                       59
<PAGE>   62

                   STERLING CHEMICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


    Except as modified below, the Notes to the Company's Consolidated Financial
Statements are incorporated herein by reference insofar as they relate to
Chemicals.


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH FLOWS

    On August 21, 1996, Holdings transferred all of its operating assets and
liabilities (net $422.8 million) to Chemicals.  At the same time, Chemicals
transferred $610 million in cash to Holdings.

INCOME TAXES

    Chemicals is included in the consolidated Federal tax return filed by its
parent, Holdings.  A tax sharing agreement between Holdings and Chemicals
defines the computation of Chemicals' obligations to Holdings.  Chemicals'
provision for income taxes is computed as if Chemicals and its subsidiaries
file their annual tax return on a separate company basis.  Deferred income
taxes are recorded to reflect the tax effect of the temporary differences
between the financial reporting basis and the tax basis of Chemicals' assets
and liabilities at enacted rates.

EARNINGS PER SHARE

    All issued and outstanding shares of Chemicals are held by Holdings, and
accordingly, earnings per share are not presented.


2. INCOME TAXES

    A reconciliation of federal statutory income taxes to Chemicals' effective
tax provision (benefit) before extraordinary item follows:

<TABLE>
<CAPTION>
                                                                          YEAR ENDED       PERIOD FROM MAY 14, 1996
                                                                      SEPTEMBER 30, 1997    TO SEPTEMBER 30, 1996 
                                                                      ------------------   ------------------------
                                                                             (Dollars in Thousands)
<S>                                                                      <C>                     <C>     
Provision for federal income tax at the statutory rate ..............    $(4,576)                 $   195 
Foreign sales corporation ...........................................         --                     (116)
State and foreign income taxes ......................................      3,782                      115 
Tax settlements and other ...........................................     (1,354)                     190 
                                                                         -------                  ------- 
Effective tax provision (benefit) ...................................    $(2,148)                 $   384 
                                                                         =======                  ======= 
</TABLE>    

The provision (benefit) for income taxes is composed of the following:

<TABLE>
<CAPTION>
                                                                          YEAR ENDED       PERIOD FROM MAY 14, 1996
                                                                      SEPTEMBER 30, 1997    TO SEPTEMBER 30, 1996 
                                                                      ------------------   ------------------------
                                                                             (Dollars in Thousands)
<S>                                                                      <C>                      <C>     
From operations:
    Current federal   . . . . . . . . . . . . . . . . . . . . . . . .    $  (5,959)               $ (1,001)
    Deferred federal  . . . . . . . . . . . . . . . . . . . . . . . .       (4,235)                  1,457
    Deferred foreign  . . . . . . . . . . . . . . . . . . . . . . . .        6,104                      90
    Current state   . . . . . . . . . . . . . . . . . . . . . . . . .        1,942                    (162)
                                                                         ---------                --------
    Total tax provision (benefit)   . . . . . . . . . . . . . . . . .    $  (2,148)               $    384
                                                                         =========                ========
</TABLE>





                                       60
<PAGE>   63

    The components of Chemicals' deferred income tax assets and liabilities are
summarized below:

<TABLE>
<CAPTION>
                                                                                              SEPTEMBER 30,
                                                                                           ------------------
                                                                                          (DOLLARS IN THOUSANDS)
                                                                                             1997       1996
                                                                                           -------    -------
<S>                                                                                        <C>        <C>    
Deferred tax assets:
Accrued liabilities ...................................................................    $17,131    $ 9,803
Accrued postretirement cost ...........................................................     12,350      9,544
Tax loss and credit carryforward and other ............................................      8,375      5,817
                                                                                           -------    -------
Total deferred tax assets .............................................................     37,856     25,164
                                                                                           -------    -------

Less:  current deferred income tax asset ..............................................     10,005      7,214
                                                                                           -------    -------
Noncurrent deferred tax assets ........................................................    $27,851    $17,950
                                                                                           =======    =======

Deferred tax liabilities:
Property, plant and equipment .........................................................    $67,996    $61,304
Accrued pension cost ..................................................................      1,665      2,525
Other .................................................................................        836      1,599
                                                                                           -------    -------
Total deferred tax liabilities ........................................................     70,497     65,428
                                                                                           -------    -------
Net deferred tax liability ............................................................    $42,646    $47,478
                                                                                           =======    =======
</TABLE>

    In fiscal 1997, Chemicals generated approximately $14.4 million in United
States net operating losses which will be carried back and utilized in a prior
fiscal year.  Chemicals also has approximately Cdn. $14.0 million in Canadian
tax credit carryforwards which will expire from 1999 through 2004.





                                       61
<PAGE>   64
                       REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Stockholders of Sterling Chemicals Holdings, Inc.

We have audited the consolidated balance sheets of Sterling Chemicals Holdings,
Inc. and subsidiaries as of September 30, 1997 and 1996, and the related
consolidated statements of operations, changes in stockholders' equity
(deficiency in assets) and cash flows for the years then ended.  These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sterling
Chemicals Holdings, Inc. and subsidiaries as of September 30, 1997 and 1996 and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.





DELOITTE & TOUCHE LLP
December  3, 1997
Houston, Texas





                                       62
<PAGE>   65
                       REPORT OF INDEPENDENT ACCOUNTANTS



To the Stockholder of Sterling Chemicals, Inc.

We have audited the consolidated balance sheets of Sterling Chemicals, Inc. and
subsidiaries as of September 30, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity (deficiency in
assets) and cash flows and for the year ended September 30, 1997 and for the
period from May 14, 1996 (date of incorporation) to September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sterling
Chemicals, Inc. and subsidiaries as of September 30, 1997 and 1996 and the
consolidated results of their operations and their cash flows  for the year
ended September 30, 1997 and for the period from May 14, 1996 (date of
incorporation) to September 30, 1996 in conformity with generally accepted
accounting principles.





DELOITTE & TOUCHE LLP
December 3, 1997
Houston, Texas





                                       63
<PAGE>   66
                       REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Stockholders of Sterling Chemicals Holdings, Inc.

We have audited the consolidated statements of operations, changes in
stockholders' equity and cash flows for the year ended September 30, 1995 of
Sterling Chemicals Holdings, Inc. (formerly Sterling Chemicals, Inc.) and
subsidiaries.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Sterling Chemicals Holdings, Inc. and subsidiaries (formerly Sterling
Chemicals, Inc.) for the year ended September 30, 1995, in conformity with
generally accepted accounting principles.



COOPERS & LYBRAND L.L.P.
October 25, 1995
Houston, Texas





                                       64
<PAGE>   67
                              REPORT OF MANAGEMENT



    Management is responsible for the preparation and content of the financial
statements and other information included in this annual report.  The financial
statements have been prepared in conformity with generally accepted accounting
principles appropriate under the circumstances to reflect, in all material
respects, the substance of events and transactions that should be included.
The financial statements reflect management's judgments and estimates as to the
effects of events and transactions that are accounted for or disclosed.

    Management maintains accounting systems which are supported by internal
accounting controls that provide reasonable assurance that assets are
safeguarded and that transactions are executed in accordance with management's
authorization and recorded properly to permit the preparation of financial
statements in accordance with generally accepted accounting principles.  The
concept of reasonable assurance is based on the recognition that the cost of a
system of internal accounting controls should not exceed the benefits. Internal
audits have been conducted to test compliance with internal controls.  Results
of audit efforts and actions are communicated to appropriate members of
management and to the Audit Committee of the Board of Directors.

    Deloitte & Touche LLP performed an independent audit of the Company's
financial statements for fiscal years 1997 and 1996, for the purpose of
determining that the statements are presented fairly and in accordance with
generally accepted accounting principles.  The independent auditors are
appointed by the Board of Directors and meet regularly with the Audit Committee
of the Board.  The Audit Committee of the Board of Directors is composed solely
of outside directors.  The Audit Committee meets periodically with the
Company's senior officers and independent accountants to review the adequacy
and reliability of the Company's accounting, financial reporting and internal
controls.




Robert W. Roten
President and Chief Executive Officer



Paul G. Vanderhoven
Controller - Principal Accounting Officer


December 3, 1997





                                       65
<PAGE>   68
                        STERLING CHEMICALS HOLDINGS, INC.
                       SUPPLEMENTAL FINANCIAL INFORMATION
                  (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)

                      QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                               FISCAL       FIRST        SECOND         THIRD        FOURTH
                                                YEAR       QUARTER       QUARTER       QUARTER       QUARTER
                                             ---------    ---------     ---------     ---------     ---------
<S>                                               <C>     <C>           <C>           <C>           <C>      
Revenues                                          1997    $ 186,926     $ 239,763     $ 239,244     $ 242,854
                                                  1996      191,542       190,879       218,371       189,673

Gross Profit                                      1997       15,083        16,827        28,995        34,734
                                                  1996       29,395        29,398        33,250        19,383

Income (loss) before extraordinary items          1997       (7,198)       (7,811)       (5,453)       (3,674)
                                                  1996       12,787         6,427        16,420        (2,130)

Net income (loss) (1)                             1997       (7,198)       (7,811)       (9,377)       (3,674)
                                                  1996       12,787         6,427        16,420        (4,030)

Per Share Data:

Income (loss) before extraordinary item           1997    $   (0.68)    $   (0.72)    $   (0.48)    $   (0.35)
                                                  1996         0.23          0.12          0.29         (0.06)

Net income (loss) attributable  to common         1997        (0.68)        (0.72)        (0.84)        (0.35)
stockholders                                      1996          .23           .12           .29          (.11)
</TABLE>





------------

(1) During the third quarter of fiscal 1997, the Company recorded a $3.9
million after-tax ($6.0 million pre-tax) extraordinary item related to
unamortized debt issue costs as a result of the partial prepayment of the Term
Loans.  In addition, during the fourth quarter of fiscal 1996, the Company
recorded a $1.9 million after-tax ($3.0 million pre-tax) extraordinary item
related to the early extinguishment of debt from the 1996 Recapitalization.





                                       66
<PAGE>   69

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         Not applicable.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The Proxy Statement for the Company's 1998 Annual Meeting of Stockholders
is incorporated herein by reference in response to this item.


ITEM 11. EXECUTIVE COMPENSATION

     The Proxy Statement for the Company's 1998 Annual Meeting of Stockholders
is incorporated herein by reference in response to this item.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The Proxy Statement for the Company's 1998 Annual Meeting of Stockholders
is incorporated herein by reference in response to this item.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Proxy Statement for the Company's 1998 Annual Meeting of Stockholders
is incorporated herein by reference in response to this item.





                                       67
<PAGE>   70
                                    PART IV


Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on
Form 8-K.

     (a) Financial Statements, Financial Statement Schedules and Exhibits

         1. Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                                         PAGE OF
                                                                                                        THIS 10-K
                                                                                                        --------- 
             <S>                                                                                           <C>
             Sterling Chemicals Holdings, Inc. Consolidated Statements of Operations for the fiscal
                years ended September 30, 1997, 1996 and 1995 .........................................    33
             Sterling Chemicals Holdings, Inc. Consolidated Balance Sheets as of September 30, 1997
                and 1996  .............................................................................    34
             Sterling Chemicals Holdings, Inc. Consolidated Statements of Changes in Stockholders'
                  Equity (Deficiency in Assets) for  the fiscal years ended September 30, 1997, 1996
                  and 1995  ...........................................................................    35
             Sterling Chemicals Holdings, Inc. Consolidated Statements of Cash Flows for the fiscal
                years ended September 30, 1997, 1996 and 1995 .........................................    36
             Sterling Chemicals, Inc. Consolidated Statements of Operations for the period from May
                14, 1996 to September 30, 1996 and the fiscal year ended September 30, 1997 ...........    37
             Sterling Chemicals, Inc. Consolidated Balance Sheets as of September 30, 1997 and 1996 ...    38
             Sterling Chemicals, Inc. Consolidated Statements of Changes in Stockholders' Equity
                (Deficiency in Assets) for the period from May 14, 1996 to September 30, 1996 and the
                           fiscal year ended September 30, 1997 .......................................    39
             Sterling Chemicals, Inc. Consolidated Statements of Cash Flows for the period from May 14,
                1996 to September 30, 1996 and the fiscal year ended September 30, 1997 ...............    40
             Notes to Consolidated Financial Statements ...............................................    41
             Reports of Independent Accountants .......................................................    62
             Report of Management .....................................................................    65
</TABLE>


         2. All schedules for which provision is made in Regulation S-X of the
     Securities and Exchange Commission are not required under the related
     instruction or are inapplicable and, therefore, have been omitted.





                                       68
<PAGE>   71
         3. Exhibits

     The following exhibits are filed as part of this Form 10-K:

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                             DESCRIPTION OF EXHIBIT
    ------                                             ----------------------
   <S>        <C>
    2.1        --Amended and Restated Agreement and Plan of Merger between STX Acquisition Corp. and 
                 Sterling Chemicals, Inc. dated as of April 24, 1996, incorporated by reference from the 
                 Company's Current Report on Form 8-K dated April 24, 1996 as amended by Form 8-K/A.
    3.1        --Restated Certificate of Incorporation of Sterling Chemicals Holdings, Inc., incorporated by 
                 reference from Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly
                 period ended June 30, 1997.
    3.2        --Certificate of Incorporation of Sterling Chemicals, Inc., as amended, incorporated by reference
                 from Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended
                 September 30, 1996.
    3.3        --Restated Bylaws of Sterling Chemicals Holdings, Inc, incorporated by reference from Exhibit 3.3
                 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996.
    3.4        --Bylaws of Sterling Chemicals, Inc., incorporated by reference from Exhibit 3.4 to the
                 Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp.
                 (Registration No. 333-04343).
    4.1        --Warrant Agreement (including form of Warrant), dated as of August 15, 1996, between
                 Sterling Chemicals Holdings, Inc. and KeyCorp Shareholder Services, Inc. as Warrant Agent,
                 incorporated by reference from Exhibit 4.4 to the Registration Statement on Form S-1 of STX     
                 Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343).
    4.2        --Warrant Agreement, dated as of July 10, 1997, between Sterling Chemicals Holdings, Inc.
                 and Harris Trust and Savings Bank as Warrant Agent, incorporated by reference from Exhibit 4.1   
                 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. 
    4.3        --Indenture governing the 13 1/2 % Senior Secured Discount Notes Due 2008 of the Company,
                 incorporated by reference from Exhibit 4.5 to the Registration Statement on Form S-1
                 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343).
    4.4        --Indenture governing the 11 3/4% Senior Subordinated Notes Due 2006 of Sterling Chemicals,          
                 Inc. (formerly known as STX Chemicals Corp.), incorporated by reference from Exhibit 4.7 to the 
                 Registration Statement on Form S-1 of STX  Acquisition Corp. and STX Chemicals Corp. 
                 (Registration No. 333-04343).
    4.5        --Indenture governing the 11 1/4% Senior Subordinated Notes due 2007 of Sterling Chemicals, Inc.,  
                 incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for 
                 the quarterly period ended March 31, 1997.
 ** 4.6        --Amended and Restated Credit Agreement, dated July 10, 1997, among Sterling Chemicals, Inc. and
                 Texas Commerce  Bank, individually and as Administrative Agent, Credit Suisse First Boston,
                 individually and as Documentation Agent, and the other lenders named therein.
    4.7        --Stockholders Agreement, incorporated by reference from Exhibit 4.10 to the Registration 
                 Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No.
                 333-04343).
    4.8        --Registration Rights Agreement, incorporated by reference from Exhibit 4.11 to the Registration
                 Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No.
                 333-04343).
    4.9        --Amended and Restated Voting Agreement, dated as of January 22, 1997, incorporated by 
                 reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly
                 period ended June 30, 1997.
    4.10       --Tag-Along Agreement, incorporated by reference from Exhibit 4.13 to the Registration Statement
                 on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343).
    4.11       --Intercreditor Agreement, incorporated by reference from Exhibit 4.14 to the Registration 
                 Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals  Corp. (Registration
                 No.333-04343).
    4.12       --Security Agreement (Pledge) between STX Acquisition Corp. and Texas Commerce Bank,
                 incorporated by reference from Exhibit 4.15 to the Registration Statement on Form S-1 of STX
                 Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343).
    4.12 (a)   --Second Amendment and Supplement to Security Agreement (Pledge) between Sterling Chemicals
                 Holdings, Inc. and Texas Commerce Bank N.A.


</TABLE>



                                       69
<PAGE>   72
<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                             DESCRIPTION OF EXHIBIT
    ------                                             ----------------------
<S>            <C>
   +10.1       --Assets Purchase Agreement dated August 1, 1986, between Monsanto Company and the
                 Company, incorporated by reference from Exhibit 10.1 to the Company's Annual Report on Form
                 10-K for the fiscal year ended September 30, 1992.
    10.2       --Sterling Chemicals, Inc. Salaried Employees' Pension Plan (Restated as of October 1, 1993),
                 incorporated by reference from Exhibit 10.6 to the Company's Annual Report on Form 10-K for
                 the fiscal year ended September 30, 1993.
    10.2(a)    --Supplement to the Sterling Chemicals, Inc. Salaried Employee's Pension Plan (Restated as of
                 January 1, 1994), incorporated by reference from Exhibit 10.6(a) to the Company's Annual
                 Report on Form 10-K for the fiscal year ended September 30, 1994.
    10.2(b)    --First and Second Amendments to the Sterling Chemicals, Inc. Salaried Employees' Pension Plan
                 dated April 27, 1994 and September 23, 1994, respectively, incorporated by reference from  
                 Exhibit 10.6(b) to the Company's Annual Report on Form 10-K for the fiscal year ended
                 September 30, 1994.
    10.3       --Sterling Chemicals, Inc. Hourly Paid Employees' Pension Plan (Restated as of October 1, 1993),
                 incorporated by reference from Exhibit 10.8 to the Company's Annual Report on Form 10-K for
                 the fiscal year ended September 30, 1993.
    10.3(a)    --Supplement to the Sterling Chemicals, Inc. Hourly Paid Employee's Pension Plan (Restated as
                 of January 1, 1994), incorporated by reference from Exhibit 10.8(a) to the Company's Annual
                 Report on Form 10-K for the fiscal year ended September 30, 1994.
    10.3(b)    --First Amendment to the Sterling Chemicals, Inc. Hourly Paid Employees' Pension Plan dated
                 April 27, 1994, incorporated by reference from Exhibit 10.8(b) to the Company's Annual Report
                 on Form 10-K for the fiscal year ended September 30, 1994.
    10.3(c)    --Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan 
                 (Effective as of May 1, 1996), incorporated by reference from Exhibit 10.3(c) to the Company's
                 Annual Report on Form 10-K for the fiscal year ended September 30, 1996.
    10.4       --Sterling Chemicals, Inc. Amended and Restated Savings and Investment Plan, incorporated by
                 reference from Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year
                 ended September 30, 1993.
    10.4(a)    --Supplements to the Sterling Chemicals, Inc. Savings and Investment Plan for Hourly Paid
                 Employees and Salaried Employees, incorporated by reference from Exhibit 10.10(a) to the
                 Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994.
    10.4(b)    --First and Second Amendments to the Sterling Chemicals, Inc. Amended and Restated Savings
                 and Investment Plan dated April 27, 1994 and October 26, 1994, respectively, incorporated by
                 reference from Exhibit 10.10(b) to the Company's Annual Report on Form 10-K for the fiscal
                 year ended September 30, 1994.
    10.5       --Sterling Chemicals, Inc. Pension Benefit Equalization Plan, incorporated by reference from
                 Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020).
    10.6       --Sterling Chemicals Employee Stock Ownership Plan (ESOP), incorporated by reference from
                 Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended September
                 30, 1996. 
   +10.7       --Styrene Monomer Conversion Contract dated November 3, 1995, between Monsanto Company
                 (subsequently assigned to Bayer Corporation, a subsidiary of Bayer AG) and the Company,
                 incorporated by reference from Exhibit 10.13 to the Company's Annual Report on Form 10-K
                 for the fiscal year ended September 30, 1995.
   +10.8       --Acrylonitrile Exchange Contract dated January 1, 1994, between the Company and Monsanto
                 Company, incorporated by reference from Exhibit 10.19 to the Company's Annual Report on
                 Form 10-K for the fiscal year ended September 30, 1994.
   +10.9       --Production Agreement dated April 15, 1988 between BP Chemicals Americas Inc. and the
                 Company and First and Second Amendment thereto, incorporated by reference from Exhibit
                 10.21 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020).
   +10.10      --Agreement dated May 2, 1988, between E.I. du Pont de Nemours and Company and the
                 Company, incorporated by reference from Exhibit 10.22 to the Company's Registration
                 Statement on Form S-1 (Registration No. 33-24020). 
  ++10.11      --Amended and Restated Product Sales Agreement dated January 1, 1998, between
                 BASF  Corporation and the Company.
    10.12      --License Agreement dated August 1, 1986, between Monsanto Company and the Company,
                 incorporated by reference from Exhibit 10.25 to the Company's Registration Statement on
                 Form S-1 (Registration No. 33-24020).
</TABLE>





                                       70
<PAGE>   73
<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                             DESCRIPTION OF EXHIBIT
    ------                                             ----------------------
   <S>         <C>
    +10.13   --Amended Lease and Production Agreement dated August 8, 1994, between BP Chemicals
               Americas Inc. and the Company, incorporated by reference from Exhibit 10.21 to the Company's
               Annual Report on Form 10-K for the fiscal year ended September 30, 1994.
     10.14   --Form of Indemnity Agreement executed between the Company and each of its officers and
               directors prior to the Merger, incorporated by reference from Exhibit 10.30 to the Company's Annual
               Report on Form 10-K for the fiscal year ended September 30, 1994.
     10.15   --Form of Indemnity Agreement executed between the Company and each of its officers and
               directors, incorporated by reference from Exhibit 10.17 to the Company's Annual Report on Form
               10-K for the fiscal year ended September 30, 1996.
     10.16   --Sterling Chemicals, Inc. Amended and Restated Supplemental Employee Retirement Plan,
               incorporated by reference from Exhibit 10.34 to the Company's Annual Report on Form 10-K
               for the fiscal year ended September 30, 1989 (Commission File Number 1-10059).
     10.17   --Sterling Chemicals, Inc. Deferred Compensation Plan, incorporated by reference from Exhibit
               10.35 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
               1989 (Commission File Number 1-10059).
     10.18   --Articles of Agreement between the Company, its successors and assigns, and Texas City, Texas
               Metal Trades Council, AFL-CIO Texas City, Texas, May 1, 1996 to May 1, 1999, incorporated
               by reference from Exhibit 10.22 to the Company's Annual Report on Form 10-K for the 
               fiscal year ended September 30, 1996.
     10.19   --Conditional Performance Guaranty dated as of August 20, 1992, by Albright & Wilson, Ltd. in
               favor of Sterling Pulp Chemicals, Ltd., Sterling Canada, Inc. and the Indemnities identified in
               Section 10.2 of the Purchase Agreement, incorporated by reference from Exhibit 10.38 to the
               Company's Current Report on Form 8-K dated September 3, 1992.
     10.20   --Performance Guaranty dated as of August 20, 1992, by the Company in favor of Tenneco Canada
               Inc., Rio Linda Chemical Co., Albright & Wilson Americas, Inc. and the Indemnities identified
               in Section 10.3 of the Purchase Agreement, incorporated by reference from Exhibit 10.39 to the
               Company's Current Report on Form 8-K dated September 3, 1992.
    +10.21   --Sales and Purchase Agreement dated April 1, 1994, between BP Chemicals Ltd. and the
               Company, incorporated by reference from Exhibit 10.48 to the Company's Annual Report on
               Form 10-K for the fiscal year ended September 30, 1994.
     10.22   --Agreement between Sterling Pulp Chemicals Ltd. North Vancouver British Columbia and Pulp,
               Paper and Woodworkers of Canada Local 5 British Columbia effective December 1, 1994 to
               November 30, 1997, incorporated by reference from Exhibit 10.50 to the Company's Annual
               Report on Form 10-K for the fiscal year ended September 30, 1994.
    +10.23   --Methanol Production Agreement between BP Chemicals Inc. and the Company dated
               September 26, 1996, incorporated by reference from Exhibit 10.33 to the Company's 
               Annual Report on Form 10-K for the fiscal year ended September 30, 1996.
     10.24   --Consulting Agreement dated April 23, 1996, among The Sterling Group, Inc.,  STX
               Acquisition Corp., and STX Chemicals Corp, incorporated by reference from Exhibit __ to the 
               Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996.
     10.25   --Asset Purchase Agreement, dated December 23, 1996, among Sterling Fibers, Inc., Sterling
               Chemicals, Inc., Sterling Chemicals Holdings, Inc., Cytec Acrylic Fibers Inc., Cytec Technology
               Corp. and Cytec Industries Inc., incorporated by reference from Exhibit 10.1 to the Company's
               Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1996.
   **21.1    --Subsidiaries of Sterling Chemicals Holdings, Inc.
   **23.1    --Consent of Deloitte & Touche LLP
   **23.2    --Consent of Coopers & Lybrand L.L.P.
   **27.1    --Financial Data Schedule - Sterling Chemicals Holdings, Inc.
   **27.2    --Financial Data Schedule - Sterling Chemicals, Inc.
</TABLE>

**   Filed herewith.
+    Confidential treatment has been requested with respect to portions of this
     Exhibit, and such request has been granted.
++   Filed herewith and confidential treatment has been requested with respect
     to portions of this exhibit.

     (b) Reports on Form 8-K.

           On July 25, 1997, the Company filed a Current Report on Form 8-K
           reporting under Items 2 and 7 of such Form; such Form was amended by
           Form 8-K/A filed September 22, 1997.





                                       71
<PAGE>   74

                                   SIGNATURES

     PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANTS HAVE DULY CAUSED THIS REPORT TO BE SIGNED
ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

                                   STERLING CHEMICALS HOLDINGS, INC.
                                   STERLING CHEMICALS, INC.
                                    (Registrants)


                                   By   /s/      ROBERT W. ROTEN         
                                     ------------------------------------------
                                                (Robert W. Roten)
                                        President and Chief Executive Officer

DATE: DECEMBER 15, 1997

     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF EACH OF THE
REGISTRANTS AND IN THE CAPACITIES AND ON THE DATES INDICATED.

<TABLE>
<CAPTION>
           SIGNATURE                           TITLE                            DATE
           ---------                           -----                            ----
       <S>                            <C>                                  <C>
       /s/ FRANK P. DIASSI            Chairman of the Board of             December 15, 1997
-------------------------------        Directors                                             
       (Frank P. Diassi)              


       /s/ ROBERT W. ROTEN            President, Chief Executive           December 15, 1997
-------------------------------        Officer and Director                                 
       (Robert W. Roten)               (principal executive officer)


       /s/ PAUL G. VANDERHOVEN        Controller                           December 15, 1997
-------------------------------        (principal accounting officer)                       
       (Paul G. Vanderhoven)           


       /s/ J. VIRGIL WAGGONER         Vice Chairman of the Board of        December 15, 1997
-------------------------------         Directors                                           
       (J. Virgil Waggoner)               


       /s/ FRANK J. HEVRDEJS          Director                             December 15, 1997
-------------------------------                                                             
       (Frank J. Hevrdejs)


       /s/ T. HUNTER NELSON           Director                             December 15, 1997
-------------------------------
       (T. Hunter Nelson)


       /s/ JOHN L. GARCIA             Director                             December 15, 1997
-------------------------------
       (John L. Garcia)

       /s/ ALLAN R. DRAGONE           Director                             December 15, 1997
-------------------------------
       (Allan R. Dragone)

       /s/ GEORGE J. DAMIRIS          Director                             December 15, 1997
-------------------------------
       (George J. Damiris)

       /s/ ROBERT B. CALHOUN          Director                             December 15, 1997
-------------------------------
       (Robert B. Calhoun)
</TABLE>





                                       72
<PAGE>   75
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                             DESCRIPTION OF EXHIBIT
    ------                                             ----------------------
   <S>        <C>
    2.1        --Amended and Restated Agreement and Plan of Merger between STX Acquisition Corp. and 
                 Sterling Chemicals, Inc. dated as of April 24, 1996, incorporated by reference from the 
                 Company's Current Report on Form 8-K dated April 24, 1996 as amended by Form 8-K/A.
    3.1        --Restated Certificate of Incorporation of Sterling Chemicals Holdings, Inc., incorporated by 
                 reference from Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly
                 period ended June 30, 1997.
    3.2        --Certificate of Incorporation of Sterling Chemicals, Inc., as amended, incorporated by reference
                 from Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended
                 September 30, 1996.
    3.3        --Restated Bylaws of Sterling Chemicals Holdings, Inc, incorporated by reference from Exhibit 3.3
                 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996.
    3.4        --Bylaws of Sterling Chemicals, Inc., incorporated by reference from Exhibit 3.4 to the
                 Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp.
                 (Registration No. 333-04343).
    4.1        --Warrant Agreement  (including form of Warrant), dated as of August 15, 1996, between
                 Sterling Chemicals Holdings, Inc. and KeyCorp Shareholder Services, Inc. as Warrant Agent,
                 incorporated by reference from Exhibit 4.4 to the Registration Statement on Form S-1 of STX     
                 Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343).
    4.2        --Warrant Agreement, dated as of July 10, 1997, between Sterling Chemicals Holdings, Inc.
                 and Harris Trust and Savings Bank as Warrant Agent, incorporated by reference from Exhibit 4.1   
                 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. 
    4.3        --Indenture governing the 13 1/2 % Senior Secured Discount Notes Due 2008 of the Company,
                 incorporated by reference from Exhibit 4.5 to the Registration Statement on Form S-1
                 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343).
    4.4        --Indenture governing the 11 3/4% Senior Subordinated Notes Due 2006 of Sterling Chemicals,          
                 Inc.(formerly known as STX Chemicals Corp.), incorporated by reference from Exhibit 4.7 to the  
                 Registration Statement on Form S-1 of STX  Acquisition Corp. and STX Chemicals Corp. 
                 (Registration No. 333-04343).
    4.5        --Indenture governing the 11 1/4% Senior Subordinated Notes due 2007 of Sterling Chemicals, Inc.,  
                 incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for 
                 the quarterly period ended March 31, 1997.
 ** 4.6        --Amended and Restated Credit Agreement, dated July 10, 1997, among Sterling Chemicals, Inc. and
                 Texas Commerce  Bank, individually and as Administrative Agent, Credit Suisse First Boston,
                 individually and as Documentation Agent, and the other lenders named therein.
    4.7        --Stockholders Agreement, incorporated by reference from Exhibit 4.10 to the Registration 
                 Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No.
                 333-04343).
    4.8        --Registration Rights Agreement, incorporated by reference from Exhibit 4.11 to the Registration
                 Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No.
                 333-04343).
    4.9        --Amended and Restated Voting Agreement, dated as of January 22, 1997, incorporated by 
                 reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly
                 period ended June 30, 1997.
    4.10       --Tag-Along Agreement, incorporated by reference from Exhibit 4.13 to the Registration Statement
                 on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343).
    4.11       --Intercreditor Agreement, incorporated by reference from Exhibit 4.14 to the Registration 
                 Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals  Corp. (Registration
                 No.333-04343).
    4.12       --Security Agreement (Pledge) between STX Acquisition Corp. and Texas Commerce Bank,
                 incorporated by reference from Exhibit 4.15 to the Registration Statement on Form S-1 of STX
                 Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343).
    4.12 (a)   --Second Amendment and Supplement to Security Agreement (Pledge) between Sterling Chemicals
                 Holdings, Inc. and Texas Commerce Bank N.A.


</TABLE>




<PAGE>   76
<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                             DESCRIPTION OF EXHIBIT
    ------                                             ----------------------
<S>            <C>
   +10.1       --Assets Purchase Agreement dated August 1, 1986, between Monsanto Company and the
                 Company, incorporated by reference from Exhibit 10.1 to the Company's Annual Report on Form
                 10-K for the fiscal year ended September 30, 1992.
    10.2       --Sterling Chemicals, Inc. Salaried Employees' Pension Plan (Restated as of October 1, 1993),
                 incorporated by reference from Exhibit 10.6 to the Company's Annual Report on Form 10-K for
                 the fiscal year ended September 30, 1993.
    10.2(a)    --Supplement to the Sterling Chemicals, Inc. Salaried Employee's Pension Plan (Restated as of
                 January 1, 1994), incorporated by reference from Exhibit 10.6(a) to the Company's Annual
                 Report on Form 10-K for the fiscal year ended September 30, 1994.
    10.2(b)    --First and Second Amendments to the Sterling Chemicals, Inc. Salaried Employees' Pension Plan
                 dated April 27, 1994 and September 23, 1994, respectively, incorporated by reference from  
                 Exhibit 10.6(b) to the Company's Annual Report on Form 10-K for the fiscal year ended
                 September 30, 1994.
    10.3       --Sterling Chemicals, Inc. Hourly Paid Employees' Pension Plan (Restated as of October 1, 1993),
                 incorporated by reference from Exhibit 10.8 to the Company's Annual Report on Form 10-K for
                 the fiscal year ended September 30, 1993.
    10.3(a)    --Supplement to the Sterling Chemicals, Inc. Hourly Paid Employee's Pension Plan (Restated as
                 of January 1, 1994), incorporated by reference from Exhibit 10.8(a) to the Company's Annual
                 Report on Form 10-K for the fiscal year ended September 30, 1994.
    10.3(b)    --First Amendment to the Sterling Chemicals, Inc. Hourly Paid Employees' Pension Plan dated
                 April 27, 1994, incorporated by reference from Exhibit 10.8(b) to the Company's Annual Report
                 on Form 10-K for the fiscal year ended September 30, 1994.
    10.3(c)    --Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan 
                 (Effective as of May 1, 1996), incorporated by reference from Exhibit 10.3(c) to the Company's
                 Annual Report on Form 10-K for the fiscal year ended September 30, 1996.
    10.4       --Sterling Chemicals, Inc. Amended and Restated Savings and Investment Plan, incorporated by
                 reference from Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year
                 ended September 30, 1993.
    10.4(a)    --Supplements to the Sterling Chemicals, Inc. Savings and Investment Plan for Hourly Paid
                 Employees and Salaried Employees, incorporated by reference from Exhibit 10.10(a) to the
                 Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994.
    10.4(b)    --First and Second Amendments to the Sterling Chemicals, Inc. Amended and Restated Savings
                 and Investment Plan dated April 27, 1994 and October 26, 1994, respectively, incorporated by
                 reference from Exhibit 10.10(b) to the Company's Annual Report on Form 10-K for the fiscal
                 year ended September 30, 1994.
    10.5       --Sterling Chemicals, Inc. Pension Benefit Equalization Plan, incorporated by reference from
                 Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020).
    10.6       --Sterling Chemicals Employee Stock Ownership Plan (ESOP), incorporated by reference from
                 Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended September
                 30, 1996. 
   +10.7       --Styrene Monomer Conversion Contract dated November 3, 1995, between Monsanto Company
                 (subsequently assigned to Bayer Corporation, a subsidiary of Bayer AG) and the Company,
                 incorporated by reference from Exhibit 10.13 to the Company's Annual Report on Form 10-K
                 for the fiscal year ended September 30, 1995.
   +10.8       --Acrylonitrile Exchange Contract dated January 1, 1994, between the Company and Monsanto
                 Company, incorporated by reference from Exhibit 10.19 to the Company's Annual Report on
                 Form 10-K for the fiscal year ended September 30, 1994.
   +10.9       --Production Agreement dated April 15, 1988 between BP Chemicals Americas Inc. and the
                 Company and First and Second Amendment thereto, incorporated by reference from Exhibit
                 10.21 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020).
   +10.10      --Agreement dated May 2, 1988, between E.I. du Pont de Nemours and Company and the
                 Company, incorporated by reference from Exhibit 10.22 to the Company's Registration
                 Statement on Form S-1 (Registration No. 33-24020). 
  ++10.11      --Amended and Restated Product Sales Agreement dated January 1, 1998, between
                 BASF  Corporation and the Company.
    10.12      --License Agreement dated August 1, 1986, between Monsanto Company and the Company,
                 incorporated by reference from Exhibit 10.25 to the Company's Registration Statement on
                 Form S-1 (Registration No. 33-24020).
</TABLE>




<PAGE>   77
<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                             DESCRIPTION OF EXHIBIT
    ------                                             ----------------------
   <S>         <C>
    +10.13   --Amended Lease and Production Agreement dated August 8, 1994, between BP Chemicals
               Americas Inc. and the Company, incorporated by reference from Exhibit 10.21 to the Company's
               Annual Report on Form 10-K for the fiscal year ended September 30, 1994.
     10.14   --Form of Indemnity Agreement executed between the Company and each of its officers and
               directors prior to the Merger, incorporated by reference from Exhibit 10.30 to the Company's Annual
               Report on Form 10-K for the fiscal year ended September 30, 1994.
     10.15   --Form of Indemnity Agreement executed between the Company and each of its officers and
               directors, incorporated by reference from Exhibit 10.17 to the Company's Annual Report on Form
               10-K for the fiscal year ended September 30, 1996.
     10.16   --Sterling Chemicals, Inc. Amended and Restated Supplemental Employee Retirement Plan,
               incorporated by reference from Exhibit 10.34 to the Company's Annual Report on Form 10-K
               for the fiscal year ended September 30, 1989 (Commission File Number 1-10059).
     10.17   --Sterling Chemicals, Inc. Deferred Compensation Plan, incorporated by reference from Exhibit
               10.35 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
               1989 (Commission File Number 1-10059).
     10.18   --Articles of Agreement between the Company, its successors and assigns, and Texas City, Texas
               Metal Trades Council, AFL-CIO Texas City, Texas, May 1, 1996 to May 1, 1999, incorporated
               by reference from Exhibit 10.22 to the Company's Annual Report on Form 10-K for the 
               fiscal year ended September 30, 1996.
     10.19   --Conditional Performance Guaranty dated as of August 20, 1992, by Albright & Wilson, Ltd. in
               favor of Sterling Pulp Chemicals, Ltd., Sterling Canada, Inc. and the Indemnities identified in
               Section 10.2 of the Purchase Agreement, incorporated by reference from Exhibit 10.38 to the
               Company's Current Report on Form 8-K dated September 3, 1992.
     10.20   --Performance Guaranty dated as of August 20, 1992, by the Company in favor of Tenneco Canada
               Inc., Rio Linda Chemical Co., Albright & Wilson Americas, Inc. and the Indemnities identified
               in Section 10.3 of the Purchase Agreement, incorporated by reference from Exhibit 10.39 to the
               Company's Current Report on Form 8-K dated September 3, 1992.
    +10.21   --Sales and Purchase Agreement dated April 1, 1994, between BP Chemicals Ltd. and the
               Company, incorporated by reference from Exhibit 10.48 to the Company's Annual Report on
               Form 10-K for the fiscal year ended September 30, 1994.
     10.22   --Agreement between Sterling Pulp Chemicals Ltd. North Vancouver British Columbia and Pulp,
               Paper and Woodworkers of Canada Local 5 British Columbia effective December 1, 1994 to
               November 30, 1997, incorporated by reference from Exhibit 10.50 to the Company's Annual
               Report on Form 10-K for the fiscal year ended September 30, 1994.
    +10.23   --Methanol Production Agreement between BP Chemicals Inc. and the Company dated
               September 26, 1996, incorporated by reference from Exhibit 10.33 to the Company's 
               Annual Report on Form 10-K for the fiscal year ended September 30, 1996.
     10.24   --Consulting Agreement dated April 23, 1996, among The Sterling Group, Inc.,  STX
               Acquisition Corp., and STX Chemicals Corp, incorporated by reference from Exhibit_ to the 
               Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996.
     10.25   --Asset Purchase Agreement, dated December 23, 1996, among Sterling Fibers, Inc., Sterling
               Chemicals, Inc., Sterling Chemicals Holdings, Inc., Cytec Acrylic Fibers Inc., Cytec Technology
               Corp. and Cytec Industries Inc., incorporated by reference from Exhibit 10.1 to the Company's
               Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1996.
   **21.1    --Subsidiaries of Sterling Chemicals Holdings, Inc.
   **23.1    --Consent of Deloitte & Touche LLP
   **23.2    --Consent of Coopers & Lybrand L.L.P.
   **27.1    --Financial Data Schedule - Sterling Chemicals Holdings, Inc.
   **27.2    --Financial Data Schedule - Sterling Chemicals, Inc.
</TABLE>

**   Filed herewith.
+    Confidential treatment has been requested with respect to portions of this
     Exhibit, and such request has been granted.
++   Filed herewith and confidential treatment has been requested with respect
     to portions of this exhibit.