<PAGE>
                                                                    EXHIBIT 99.1



                   Consolidated Financial Statements of

                   STERLING CANADA, INC.
                   (DEBTOR-IN-POSSESSION)
                   (in United States dollars)

                   Years ended September 30, 2001, 2000 and 1999


<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
                                                                    September 30,
                                                               ------------------------
                                                                   2001         2000
                                                                   ----         ----
<S>                                                             <C>          <C>
ASSETS

CURRENT
  Cash and cash equivalents                                     $   1,100    $      86
  Accounts receivable, net                                         34,668       49,930
  Inventories (Note 3)                                              9,190        7,459
  Prepaid expenses                                                    887          568
---------------------------------------------------------------------------------------
                                                                   45,845       58,043

Property, plant and equipment, net (Note 3)                       107,093      117,785
Due from affiliates (Note 10)                                     203,793      168,008
Other assets (Note 3)                                               9,869       21,450
---------------------------------------------------------------------------------------
                                                                $ 366,600    $ 365,286
=======================================================================================

LIABILITIES

CURRENT
  Accounts payable                                              $  12,664    $  15,478
  Accrued liabilities (Note 3)                                      4,506       16,511
  Current portion of long-term debt (Note 4)                        1,206         --
---------------------------------------------------------------------------------------
                                                                   18,376       31,989

Pre-petition liabilities - subject to compromise (Note 4)         181,965         --
Pre-petition liabilities - not subject to compromise (Note 4)      73,084         --
Long-term debt (Note 5)                                            18,798      244,001
Deferred income taxes (Note 7)                                      9,171        8,338
Deferred credits and other liabilities                              9,909        8,832
---------------------------------------------------------------------------------------
                                                                  311,303      293,160
---------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES (Note 9)

STOCKHOLDER'S EQUITY

  Common stock                                                       --           --
  Additional paid-in capital                                       83,396       83,396
  Retained earnings                                                 3,921       17,763
  Accumulated other comprehensive income                          (32,020)     (29,033)
---------------------------------------------------------------------------------------
                                                                   55,297       72,126
---------------------------------------------------------------------------------------
                                                                $ 366,600    $ 365,286
=======================================================================================
</TABLE>

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


<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
                                                  Year ended September 30,
                                             ------------------------------------
                                                2001         2000        1999
                                                ----         ----        ----
<S>                                          <C>          <C>          <C>
REVENUES                                     $ 187,625    $ 185,763    $ 169,489

COST OF GOODS SOLD                             148,781      147,608      139,628
---------------------------------------------------------------------------------
GROSS PROFIT                                    38,844       38,155       29,861

SELLING, GENERAL AND ADMINISTRATIVE
  EXPENSES                                       8,368       12,746        9,839
OTHER EXPENSE                                      732         --           --
REORGANIZATION ITEMS                             1,340         --           --
INTEREST AND DEBT RELATED EXPENSES (1)          26,077       29,768       29,463
---------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES                2,327       (4,359)      (9,441)

PROVISION FOR INCOME TAXES (Note 5)             16,169        2,946          487
---------------------------------------------------------------------------------
NET LOSS                                     $ (13,842)   $  (7,305)   $  (9,928)
=================================================================================
</TABLE>


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

(1) Contractual interest on allocated debt for the year ended September 30, 2001
    totaled $30,351






<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>

                                                                                   Accumulated
                                                   Additional                         Other
                                    Common          Paid-In         Retained      Comprehensive
                                     Stock          Capital         Earnings          Income            Total
                                     -----          -------         --------          ------            -----

<S>                                 <C>             <C>             <C>              <C>              <C>
Balance, September 30, 1998            --           $ 83,396        $ 34,996         $(30,813)        $ 87,579
Comprehensive income:
  Net loss                             --               --            (9,928)            --
  Translation adjustment               --               --              --              3,313
    Comprehensive loss                                                                                  (6,615)
---------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999            --             83,396          25,068          (27,500)          80,964
Comprehensive income:
  Net loss                             --               --            (7,305)            --
  Translation adjustment               --               --              --             (1,533)
    Comprehensive loss                                                                                  (8,838)
---------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000            --             83,396          17,763          (29,033)          72,126
Comprehensive income:
  Net loss                             --               --           (13,842)            --
  Pension Adjustment                   --               --              --                (52)
  Translation adjustment               --               --              --             (2,935)
    Comprehensive loss                                                                                 (16,829)
---------------------------------------------------------------------------------------------------------------
Balance, September 30, 2001            --           $ 83,396        $  3,921         $(32,020)        $ 55,297
===============================================================================================================
</TABLE>

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

<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>

                                                                 Year ended September 30,
                                                           -------------------------------------
                                                               2001         2000         1999
                                                               ----         ----         ----
<S>                                                          <C>         <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                   $(13,842)    $ (7,305)    $ (9,928)
  Adjustments to reconcile net loss to net
    cash provided by operating activities:
      Depreciation and amortization                            18,986       19,476       18,328
      Deferred tax expense                                     13,131        1,066          763
      Other                                                     2,680           60         (234)
  Changes in assets/liabilities:
    Accounts receivable                                        14,125      (16,588)      (6,943)
    Inventories                                                (2,097)      (1,171)       1,578
    Prepaid expenses                                             (363)       1,301        4,721
    Due from affiliates                                       (46,401)     (18,595)       2,017
    Other assets                                               (1,293)       8,802        2,298
    Accounts payable                                              449          798        1,142
    Accrued liabilities                                         1,099        5,273       (1,629)
    Other liabilities                                           1,273        3,907       (4,792)
------------------------------------------------------------------------------------------------
  Net cash (used in) provided by operating activities         (12,253)      (2,976)       7,321
------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                         (5,754)      (5,466)      (4,357)
  Proceeds on disposal of fixed assets                           --           --          3,583
------------------------------------------------------------------------------------------------
  Net cash used in investing activities                        (5,754)      (5,466)        (774)
------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issance of long-term debt                     20,025         --         (1,765)
   Debt issuance costs                                         (1,007)        --           --
------------------------------------------------------------------------------------------------
  Net cash provided by (used in) financing activities          19,018         --         (1,765)
------------------------------------------------------------------------------------------------
Effect of United States/Canadian exchange rate on cash              3          (60)         234
------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND
  CASH EQUIVALENTS                                              1,014       (8,502)       5,016

CASH AND CASH EQUIVALENTS,
  BEGINNING OF YEAR                                                86        8,588        3,572
------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
  END OF YEAR                                                $  1,100     $     86     $  8,588
================================================================================================

Supplemental disclosures of cash flow information:
  Income taxes paid                                          $ (1,961)    $   (696)    $   (749)
Interest paid, net of interest income received                 (1,130)        --           --
</TABLE>

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


<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

1.      BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

        Sterling Canada, Inc., through its subsidiaries (Sterling Canada, Inc.
        and its subsidiaries collectively, the "Company"), manufactures
        chemicals for use primarily in the pulp and paper industry at four
        plants in Canada and one plant in Valdosta, Georgia. These plants
        primarily produce sodium chlorate, a chemical used primarily to make
        chlorine dioxide, which in turn is used by pulp mills in the pulp
        bleaching process. The Company also produces sodium chlorite at one of
        its Canadian locations and oversees construction of large-scale chlorine
        dioxide generators for the pulp and paper industry. Sterling Canada,
        Inc. is a wholly-owned subsidiary of Sterling Chemicals, Inc.
        ("Chemicals"), which is a wholly-owned subsidiary of Sterling Chemicals
        Holdings, Inc. ("Holdings" and, together with its subsidiaries, unless
        otherwise indicated are collectively referred to as "we","our","ours",
        and "us").

        The accompanying consolidated financial statements have been prepared on
        the going concern basis of accounting, which contemplates the continuity
        of operations, the realization of assets and the satisfaction of
        liabilities in the ordinary course of business. On July 16, 2001 (the
        "Petition Date"), Holdings, Chemicals and most of their U.S.
        subsidiaries (collectively, the "Debtors") filed voluntary petitions for
        reorganization under Chapter 11 of the U.S. Bankruptcy Code ("Bankruptcy
        Code") in the U.S. Bankruptcy Court for the Southern District of Texas
        (the "Bankruptcy Court") and began operating their business as
        debtors-in-possession pursuant to the Bankruptcy Code. None of the
        Company's foreign subsidiaries were included in the Chapter 11 filings.
        The accompanying consolidated financial statements have been presented
        in conformity with the AICPA's Statement of Position 90-7, "Financial
        Reporting By Entities in Reorganization Under the Bankruptcy Code,"
        ("SOP 90-7"). The statement requires a segregation of liabilities
        subject to compromise by the Bankruptcy Court as of the bankruptcy
        filing date, and identification of all transactions and events that are
        directly associated with the reorganization of the Debtors.

        The Chapter 11 petitions were driven by the Debtors' inability to meet
        their funded debt obligations over the long-term, largely brought about
        by weak demand for petrochemical products caused by declines in general
        worldwide economic conditions, the relative strength of the U.S. dollar
        which has caused their export sales to be at a competitive disadvantage
        and higher raw material and energy costs. As a result of these
        conditions, the Debtors have incurred significant operating losses. The
        reorganization contemplated by the Chapter 11 filings is designed to
        permit the Debtors to preserve cash and to give the Debtors the
        opportunity to restructure their debt. During the pendency of the
        Chapter 11 cases, with approval of the Bankruptcy Court, the Debtors may
        assume favorable pre-petition contracts and leases, reject unfavorable
        pre-petition contracts and leases and sell or otherwise dispose of
        assets. The confirmation of a plan of reorganization is the primary
        objective of the Debtors. Unless otherwise ordered by the Bankruptcy
        Court, the Debtors have the exclusive right to propose a plan of
        reorganization until March 13, 2002, and the exclusive right to seek
        acceptances of any plan proposed by them until May 12, 2002. A plan of
        reorganization, when filed, will set forth the means for treating
        claims, including liabilities subject to compromise and interests in the
        Debtors. Such means may take a number of different forms. A plan of
        reorganization may result in, among other things, significant dilution
        or elimination of certain classes of existing equity interests as a
        result of the issuance of securities to creditors or new investors. The
        Debtors are in the early stages of formulating a plan of reorganization.
        The confirmation of any plan of reorganization will require creditor
        acceptance as required under the Bankruptcy Code and approval of the
        Bankruptcy Court.



<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

1.      BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS (CONTINUED)

        At this time, it is not possible to predict the outcome of the
        bankruptcy cases, in general, or the effect on the business of the
        Debtors, the claims of creditors of the Debtors or the interests of the
        stockholders of Holdings. As a result of the bankruptcy filings, most of
        the Debtors' liabilities incurred prior to the Petition Date, including
        certain secured debt, could be subject to compromise. However, the
        ultimate resolutions of these liabilities is not presently determinable.

        As a result of the bankruptcy filings and related events, there is no
        assurance that the carrying amounts of assets will be realized or that
        liabilities will be liquidated or settled for the amounts recorded. In
        addition, confirmation of a plan of reorganization, or disapproval
        thereof, could change the amounts reported in the financial statements.
        The ability of the Debtors to continue as a going concern is dependent
        upon, among other things, (i) the Debtors' ability to comply with the
        terms of the DIP Financing described below and any related orders
        entered by the Bankruptcy Court in connection with the Chapter 11 cases,
        (ii) the ability of the Debtors to access the incremental $40 million in
        Debtor-in-Possession financing that is dependent on an effective primary
        order, (iii) the ability of the Debtors to maintain adequate cash on
        hand, (iv) the ability of the Debtors to generate sufficient cash from
        operations, (v) the ability of the Debtors' subsidiaries that are not
        included in the Chapter 11 cases to obtain necessary financing, (vi)
        confirmation of a plan or plans of reorganization under the Bankruptcy
        Code and (vii) the Debtors' ability to achieve profitability following
        such confirmation. As the Debtors can give no assurances that they will
        accomplish any of the foregoing, there is substantial doubt about the
        Debtors', and therefore the Company's ability to continue as a going
        concern.

        The Debtors have limited liquidity, which may prove inadequate during
        their reorganization process. The Debtors are currently funding their
        liquidity needs out of operating cash flow and from borrowings under the
        DIP Financing. The DIP Financing is limited in amount and is also
        subject to numerous funding conditions which are largely beyond the
        control of the Debtors, including borrowing base requirements and
        compliance with the EBITDA covenant contained in the DIP Financing. The
        ability of the Debtors to obtain additional financing during the
        reorganization process is severely limited by a variety of factors,
        including the debt incurrence restrictions imposed by the DIP Financing,
        numerous procedural requirements and uncertainties relating to the
        bankruptcy proceedings, including any continuing challenge to the
        priming order, and the Debtors' current financial condition and
        prospects. Accordingly, no assurances can be given that the Debtors'
        existing sources of liquidity will be adequate to fund their liquidity
        needs throughout the reorganization process or, if additional sources of
        liquidity become necessary during the reorganization process, that they
        would be available to the Debtors or adequate. Any liquidity shortages
        during the reorganization process would likely have a material adverse
        effect on the Debtors' business and financial condition as well as their
        ability to successfully restructure and emerge from bankruptcy. See Note
        5 for additional information regarding the status of the challenge to
        the priming order and the impact on the Debtors' business.

        The accompanying financial statements do not include any adjustments
        that may result from the resolution of these uncertainties.

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        The significant accounting policies of the Company are described below.

        The financial statements of the Company are presented in accordance with
        accounting principles generally accepted in the United States of America
        ("U.S.") and certain subsidiaries have been translated from Canadian
        dollars, their functional currency, to U.S. dollars, the reporting
        currency of the Company following the guidelines of Statement of
        Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
        Translation".

        Principles of consolidation

        The consolidated financial statements include the accounts of Sterling
        Canada, Inc. and all of its direct and indirect wholly-owned
        subsidiaries, which include Sterling Pulp Chemicals Ltd. ("Sterling
        Pulp"), Sterling Pulp Chemicals, Inc., Sterling Pulp Chemicals US, Inc.,
        and Sterling NRO, Ltd. All significant intercompany accounts and
        transactions have been eliminated.


<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        Cash equivalents

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

        Inventories

        Inventories are stated at the lower of cost and market. Cost is
        determined on the first-in, first-out basis, except for stores and
        supplies that 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 equipment are capitalized,
        while repair and maintenance expenses are charged to operations as
        incurred. Disposals are removed at carrying costs less accumulated
        depreciation with any resulting gain or loss reflected in operations.
        Depreciation is provided using the straight-line method over estimated
        useful lives ranging from five to 25 years, with the predominant life of
        plant and equipment being 15 years.

        Impairment of long-lived assets

        Impairment tests of long-lived assets are made when conditions indicate
        their carrying costs may not be recoverable. Such impairment tests are
        based on a comparison of undiscounted future cash flows 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 costs of patents are amortized on a straight-line basis over their
        estimated useful lives, which approximate ten years. The Company
        capitalized the value of its chlorine dioxide generator technology
        acquired in fiscal 1992 based on the net present value of all estimated
        remaining royalty payments associated with this technology. The
        resulting intangible amount is included in other assets and is amortized
        over the average life for these royalty payments of ten years.

        Income taxes

        The Company is included in the consolidated United States federal income
        tax returns filed by Holdings. The Company's provision (benefit) for
        United States income taxes has been allocated by Holdings as if the
        Company filed its annual tax returns on a separate return basis. The
        Company's Canadian subsidiaries file separate federal Canadian tax
        returns, as well as returns in the provinces in which they operate. For
        these Canadian subsidiaries, deferred income taxes are recorded to
        reflect the tax effect of the temporary differences between the
        financial reporting basis and the tax basis of the subsidiary's assets
        and liabilities.



<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        Revenue recognition

        The Company generates revenues through sales in the open market pursuant
        to short-term and long-term contracts with its customers. The Company
        recognizes revenue from sales as the products are shipped and collection
        is reasonably assured. Revenues associated with the constructing of
        chlorine dioxide generators are recognized using the percentage of
        completion method based on cost incurred compared to total estimated
        cost. The Company also receives prepaid royalties for use of its
        chlorine dioxide generator technology, which are typically recognized as
        revenues over a period of ten years. The Company classifies amounts
        billed to customers for shipping and handling as revenues, with the
        related shipping and handling costs included in cost of goods sold.

        Foreign currency translation

        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 included in accumulated other comprehensive
        income, while transaction gains and losses are included in operations
        when incurred.

        Earnings per share

        All issued and outstanding shares of the Company are held directly or
        indirectly by Chemicals and, accordingly, earnings per share information
        is not presented.

        Environmental costs

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

        Disclosures about fair value of financial instruments

        In preparing disclosures about the fair value of financial instruments,
        the Company has assumed that the carrying amount approximates fair
        value for cash and cash equivalents, receivables, accounts payable and
        certain accrued expenses due to the short maturities of those
        instruments. The fair values of long-term debt instruments allocated to
        the Company by Chemicals are estimated based upon quoted market
        values (if applicable) or on the current interest rates available for
        debt with similar terms and remaining maturities. The fair value of
        pre-petition liabilities subject to compromise and pre-petition
        liabilities not subject to compromise is not possible to determine given
        the uncertainty of the impact of the bankruptcy proceedings.
        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.


<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        Accounting estimates

        The preparation of the financial statements in conformity with
        accounting principles generally accepted in the United States of America
        requires management to make estimates and assumptions that affect the
        reported amounts of assets and liabilities and the disclosure of
        contingent assets and liabilities at the date of the financial
        statements and the reported amounts of revenues and expenses during the
        reporting periods. Actual results could differ from these estimates.

        Allocations

        Sterling Canada, Inc. and each of its subsidiaries is directly or
        indirectly wholly owned by Chemicals, which incurs certain direct and
        indirect expenses for the benefit and support of the Company. These
        services include, among others, tax planning, treasury, legal, risk
        management, and the maintenance of insurance coverage for the Company.
        Chemicals allocated $2.3 million, $3.5 million, and $2.5 million of such
        expenses to the Company in fiscal years 2001, 2000, and 1999,
        respectively, which are included in selling, general, and administrative
        expenses. Additionally, Chemicals allocated $0.7 million of other
        expense and $1.3 million of reorganization items during fiscal 2001.
        Allocations are based on the Companys' proportionate share of the
        respective amounts and are determined using various criteria including
        headcount, payroll, number of vehicles, amount of pre-petition
        liabilities and revenue.

        New accounting standards

        Statement of Financial Accounting Standards ("SFAS") No. 133,
        "Accounting for Derivative Instruments and Hedging Activities," as
        amended by SFAS No. 138 "Accounting for Certain Derivative Instruments
        and Certain Hedging Activities," establishes accounting and reporting
        standards for derivative instruments, including certain derivative
        instruments embedded in other contracts and for hedging activities. As
        of October 1, 2000 the transition adjustment relating to the adoption of
        these statements was not material.

        Our Canadian facilities periodically enter into fixed price agreements
        for a portion of their electrical energy requirements. Sterling Pulp has
        an agreement relating to the supply of a portion of the electrical
        energy at one of its Canadian sodium chlorate production facilities.
        This agreement, which was previously designated as a normal purchase
        under SFAS No. 133, does not meet the criteria of a normal purchase
        based on guidance issued by the Derivative Implementation Group (the
        "DIG") in June 2001, All purchases under this agreement, which expires
        on December 31, 2001, are used in the ordinary course of business;
        however, effective July 1, 2001, this agreement is required to be
        marked-to-market. At September 30, 2001, the value of this agreement was
        a loss of approximately $1.2 million based upon current market prices
        and quantities to be delivered.

        In July 2001, the Financial Accounting Standards Board issued SFAS No.
        141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
        Intangible Assets." SFAS No. 141 requires that all business combinations
        be accounted for under the purchase method and further requires separate
        identification and recognition of intangible assets, other than
        goodwill. The statement applies to all business combinations initiated
        after June 30, 2001.


<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        New accounting standards (continued)

        SFAS No. 142 requires that an intangible asset that is acquired shall be
        initially recognized and measured based on its fair value. The statement
        also provides that goodwill should not be amortized, but shall be tested
        for impairment annually, or more frequently if circumstances indicate
        potential impairment, through a comparison of fair value to its carrying
        amount. SFAS No. 142 is effective for fiscal periods beginning after
        December 15, 2001. The Company does not believe that the adoption of
        SFAS No. 141 or 142 will have a significant impact on its financial
        statements.

        In August 2001, the Financial Accounting Standards Board issued SFAS No.
        143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which
        must be applied to fiscal years beginning after June 15, 2002, addresses
        financial accounting and reporting for obligations associated with the
        retirement of tangible long-lived assets and the associated asset
        retirement costs. The Company is in the process of evaluating the impact
        of SFAS No. 143 on its financial statements.

        In August 2001, the Financial Accounting Standards Board issued SFAS No.
        144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
        which addresses financial accounting and reporting for the impairment of
        long-lived assets and for long-lived assets to be disposed of. SFAS No.
        144 is effective for fiscal years beginning after December 15, 2001. The
        Company is currently evaluating the impact of SFAS No. 144 on its
        financial statements.


        Reclassification

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


<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================



3.       DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
         <TABLE>
         <CAPTION>
                                                                       September 30,
                                                                  ------------------------
                                                                      2001         2000
                                                                      ----         ----
                                                                  (Dollars in Thousands)
         <S>                                                       <C>           <C>
         Inventories:
           Finished products                                       $   5,821     $   3,823
           Raw materials                                                 259           250
         ----------------------------------------------------------------------------------
         Inventories, at cost                                          6,080         4,073
         Inventories under exchange agreements                            80           278
         Stores and supplies                                           3,030         3,108
         ----------------------------------------------------------------------------------
                                                                   $   9,190     $   7,459
         ==================================================================================

         Property, plant and equipment:
           Land                                                    $   1,362     $   1,430
           Buildings                                                  26,671        27,109
           Plant and equipment                                       163,602       163,619
         ----------------------------------------------------------------------------------
         Property, plant and equipment, at cost                      191,635       192,158
         Less accumulated depreciation                               (84,542)      (74,373)
         ----------------------------------------------------------------------------------
                                                                   $ 107,093     $ 117,785
         ==================================================================================

         Other assets:
           Debt placement fees, net                                $   1,007     $   8,362
           Capitalized project costs                                   1,358           115
           Intangible assets, net                                      5,924        11,762
           Other                                                       1,580         1,211
         ----------------------------------------------------------------------------------
                                                                   $   9,869     $  21,450
         ==================================================================================

         Accrued liabilities:
           Accrued compensation                                    $     565     $   3,008
           Accrued interest                                              136         6,559
           Other                                                       3,805         6,944
         ----------------------------------------------------------------------------------
                                                                   $   4,506     $  16,511
         ==================================================================================
         </TABLE>

4.       PRE-PETITION LIABILITIES

         Liabilities Subject to Compromise

         The principal categories of claims classified as liabilities subject to
         compromise under reorganization proceedings are identified below. All
         amounts below may be subject to future adjustment depending on
         Bankruptcy Court action, further developments with respect to disputed
         claims or other events, including the reconciliation of claims filed
         with the Bankruptcy Court to amounts recorded in the accompanying
         consolidated financial statements. Additional pre-petition claims may
         arise from rejection of additional executory contracts or unexpired
         leases by the Debtors. Under a confirmed plan of reorganization, all
         pre-petition claims subject to compromise may be paid and discharged at
         amounts substantially less than their allowed amounts.


<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

4.      PRE-PETITION LIABILITIES (CONTINUED)

        In August of 1996, in connection with a recapitalization transaction,
        Chemicals allocated $276.8 million of debt to the Company. Principal
        payments were allocated to the Company by Chemicals as scheduled
        principal payments were made on a basis consistent with the original
        allocation. In addition, the Company has made payments to Chemicals,
        from time to time, out of available cash which were applied by Chemicals
        as a reduction of the principal of the previously allocated debt.
        Interest expense is allocated to the Company based on the terms of
        Chemicals' debt agreements.

        The Company recorded liabilities subject to compromise under Chapter 11
        proceedings as of September 30, 2001, consisted of the following:


<TABLE>
<CAPTION>
                                                        (Dollars in Thousands)
<S>                                                         <C>
          Accrued liabilities                               $     130
          Trade accounts payable                                2,767
          Accrued interest                                      5,846
          Allocated debt(1)
          -----------------
          11 1/4% Notes                                        52,224
          11 3/4% Notes                                       120,998
                                                           -----------
          Total liabilities subject to compromise           $ 181,965
                                                           ===========
</TABLE>

         (1) Debt liabilities are presented net of allocated unamortized debt
             issue costs of $3.6 million.

        As a result of the bankruptcy filing, principal and interest payments
        may not be made on pre-petition debt without Bankruptcy Court approval
        or until a plan of reorganization defining the repayment terms has been
        confirmed. The total allocated interest on pre-petition debt that was
        not paid or charged to earnings for the period from July 16, 2001 to
        September 30, 2001, was $4.2 million. Such interest is not being accrued
        since management believes it is not probable that it will be treated as
        an allowed claim. The Bankruptcy Code generally disallows the payment of
        post-petition interest that accrues with respect to unsecured or
        undersecured claims.

        Liabilities Not Subject to Compromise

        The principal categories of claims classified as liabilities not subject
        to compromise under reorganization proceedings are identified below.
        Management believes all amounts below are fully secured liabilities that
        are not expected to be compromised.

        The Company recorded liabilities not subject to compromise under Chapter
        11 proceedings as of September 30, 2001, consisted of the following:

<TABLE>
<CAPTION>
                                                             (Dollars in Thousands)
          Debt allocated from Parent
          --------------------------
<S>                                                                <C>
          12 3/8% Senior secured notes                              $ 67,152
          Accrued interest on 12 3/8% Senior secrued notes             5,932
                                                                   ----------
          Total liabilities not subject to compromise               $ 73,084
                                                                   ==========
</TABLE>
<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

5.      LONG-TERM DEBT

        This note contains information regarding debt as of September 30,
        2001. As a result of the filing of the Chapter 11 cases previously
        described, no payments will be made by the Debtors on pre-petition debt
        except as approved by the Bankruptcy Court.

        Upon the filing of the Chapter 11 cases by the Debtors, an Event of
        Default occurred under the Prior Credit Agreement (as defined below) and
        each of the indentures governing outstanding notes of Chemicals and
        Holdings and all of this indebtedness was accelerated and became
        immediately due and payable. The Prior Revolvers (as defined below) were
        completely paid off with the proceeds of the initial draw under the DIP
        Financing. However, the Debtors may pay the indebtedness under the
        indentures only pursuant to a confirmed plan of reorganization or order
        of the Bankruptcy Court. During the pendency of the Chapter 11 cases,
        the Debtors will not, for the most part, be subject to the restrictions
        contained in the Prior Credit Agreement (as defined below) or any of the
        indentures. However, the Debtors and the Company will be subject to the
        restrictions contained in the DIP Financing, and Sterling Pulp
        Chemicals, Ltd. ("Sterling Pulp") will be subject to restrictions
        contained in both the DIP Financing and the Canadian Financing Agreement
        (as defined below).

        Effective July 19, 2001, the Debtors (excluding Holdings) entered into a
        Revolving Credit Agreement with a group of lenders led by Tyco Capital
        (formerly The CIT Group/Business Credit, Inc.) to provide up to $195
        million in Debtor-In-Possession financing (the "DIP Financing"). By
        interim order dated July 18, 2001 and final order dated September 14,
        2001, the Bankruptcy Court approved up to $155 million in lending
        commitments under the DIP Financing (the "Base Facility"), consisting of
        an $85 million "current assets revolver" and a $70 million "fixed assets
        revolver." The initial draw under the DIP Financing was used to repay
        all amounts outstanding under the Debtors' previous revolving credit
        facilities. Additional borrowings under the DIP Financing may be used to
        fund the Debtors' post-petition operating expenses and supplier and
        employee obligations throughout the reorganization process. The final
        order dated September 14, 2001 is on appeal to the U.S. District Court,
        but no stay of the final order has been sought or imposed, and the order
        remains fully effective. While no assurances can be given, we do not
        believe the final order will be overturned on appeal.

        Borrowings under the DIP Financing are subject to customary funding
        conditions, including borrowing base restrictions under the current
        assets revolver. The Base Facility is secured by substantially all of
        the assets of the Debtors, but some of the liens have been granted
        super-priority administrative expense claims for the amount of the DIP
        Financing which, subject to certain carve outs, will entitle the DIP
        lenders to be paid before any other claims against the Debtors are paid.
        The DIP Financing is designed to give the Debtors the opportunity,
        during the reorganization process, to develop a new capital structure
        that will support them over the long-term, including during recurring
        cyclical downturns in the markets for the Debtors' petrochemicals
        products.


<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

5.      LONG-TERM DEBT (CONTINUED)

        At September 30, 2001, the total credit available under the DIP
        Financing was $112.8 million due to borrowing base restrictions under
        the current assets revolver.

        At September 30, 2001, $42.3 million was drawn under the fixed assets
        revolver and there were no borrowings outstanding under the current
        assets revolver. In addition, approximately $4.4 million of letters of
        credit were outstanding under the current assets revolver, leaving at
        September 30, 2001, unused borrowing capacity under the secured
        revolving credit facilities of approximately $66.1 million.

        As a result of a priming order entered by the Bankruptcy Court on
        November 2, 2001 and reinstated on December 19, 2001, the lending
        commitments under the current assets revolver were increased from $85
        million to $125 million. The priming order grants the lenders under the
        currents assets revolver a priming lien on Chemicals' fixed assets
        located in the United States and the capital stock of most of Chemicals'
        domestic subsidiaries, prior in right to the existing liens in favor of
        the 12 3/8% Notes. Although the priming order was entered by the
        Bankruptcy Court on November 2, 2001, it was appealed to the U.S.
        District Court by the indenture trustee for the 12 3/8% Notes. By order
        dated December 17, 2001, the U.S. District Court reversed the priming
        order and remanded the matter to the Bankruptcy Court for a
        determination of a compensatory adjustment in favor of the 12 3/8%
        Notes, which the U.S. District Court suggested would be satisfied by a
        4% increase of the interest rate payable on up to $40 million. On
        remand, the Bankruptcy Court entered an order dated December 19, 2001,
        reinstating the priming order subject to an appropriate compensatory
        adjustment in favor of the 12 3/8% Notes of four percentage points of
        additional interest on up to $40 million. In addition, the Bankruptcy
        Court scheduled a hearing for January 2, 2002 to consider the
        characteristics and implementation of this 4% increase. The Debtors
        anticipate that the priming order will be further appealed by the
        indenture trustee. The priming order will remain effective pending the
        outcome of any appeal unless stayed by an appellate court. The Debtors
        will take all reasonable actions necessary, either before the Bankruptcy
        Court or on appeal, to maintain the effectiveness of the priming order.
        If the priming order is stayed or is not ultimately upheld on appeal, we
        will need to seek additional sources of financing or revise our business
        plan and operations consistent with the level of available financing.
        However, we can give no assurances that the priming order will not be
        stayed or will be upheld on appeal or, if stayed or not upheld on
        appeal, that additional sources of financing will be available or
        adequate or that our available financing will be adequate after
        implementing revisions to our business plan and operations.

        As of July 11, 2001, Sterling Pulp entered into a financing agreement
        with Tyco Capital Business Credit (Canada) Inc. ("Tyco Canada") to
        provide up to the Canadian dollar equivalent of U.S. $30 million (the
        "Canadian Financing Agreement"). The initial advance under this
        facility, approximately U.S. $20 million, was used by Sterling Pulp to
        discharge a portion of an intercompany debt and was ultimately
        transferred to the Debtors through an intercompany loan. The
        intercompany loan was approved by the Bankruptcy Court's interim order
        entered on July 18, 2001 and final order entered on September 14, 2001,
        which is a subject of the appeal of the final order discussed above. The
        initial term of the Canadian Financing Agreement extends to July 2004.
        The Canadian Financing Agreement maybe terminated by either Sterling
<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

5.      LONG-TERM DEBT (CONTINUED)

        Pulp or Tyco Canada thereafter only by giving 60 days written
        termination notice prior to each subsequent anniversary date. At
        September 30, 2001, $20 million was drawn under the Canadian Financing
        Agreement.

        Under the DIP Financing, the Debtors (excluding Holdings) are
        co-borrowers and are jointly and severally liable for any indebtedness
        thereunder. The Base Facility consists of:

        o   a $70 million fixed assets revolving credit facility secured by:

            -    first priority liens on all of the capital stock of Chemicals
                 and the other co-borrowers, all of Chemicals' United States
                 production facilities and related assets and 35% of the capital
                 stock of certain of Chemicals' subsidiaries incorporated
                 outside the United States; and

            -    second priority liens on all accounts receivable, inventory and
                 other specified assets of Chemicals and the other co-borrowers
                 and 65% of the capital stock of certain of Chemicals'
                 subsidiaries incorporated outside the United States; and

        o   an $85 million current assets revolving credit facility secured by:

            -    a first priority lien on all accounts receivable, inventory and
                 other specified assets of Chemicals and the other co-borrowers;
            -    a second priority lien on 35% of the capital stock of certain
                 of Chemicals' subsidiaries incorporated outside the United
                 States; and
            -    third priority liens on the remaining 65% of that stock, all of
                 the capital stock of Chemicals and the other co-borrowers and
                 all of Chemicals' United States production facilities and
                 related
                 assets.


        Available credit under the fixed assets revolving credit facility is not
        subject to a borrowing base. At September 30, 2001, available credit
        under the current assets revolving credit facility was subject to a
        monthly borrowing base consisting of 85% of eligible accounts receivable
        and 65% of eligible inventory, with an inventory cap of $42.5 million.
        In addition, the borrowing base for the current assets revolver was
        required to exceed outstanding borrowings thereunder by $12 million at
        all times with a maximum of $85 million available under the current
        asset revolving credit facility.

        Assuming the priming order is not overturned on appeal, (i) maximum
        availability under the current assets revolving credit facility is $125
        million, (ii) the monthly borrowing base consists of 85% of eligible
        accounts receivable, the lesser of $10 million or 33% of specified
        estimated future royalty payments related to the Debtors' chlorine
        dioxide generator technology and 65% of eligible inventory, with an
        inventory cap of $62.5 million and (iii) the borrowing base for the
        current assets revolver is required to exceed outstanding borrowings by
        only $6 million at all times.



<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

5.      LONG-TERM DEBT (CONTINUED)

        If the priming order remains effective and the total commitments under
        the current assets revolver are increased to $125 million, the
        incremental $40 million is secured by first priority liens on all of our
        United States production facilities and related assets and all of the
        capital stock of the co-borrowers (excluding Chemicals) to secure up to
        $40 million under the current assets revolver, as well as all of the
        same collateral securing the initial $85 million current assets
        revolver.

        Consequently, after giving effect to the priming order, the DIP
        Financing consists of:

        o    a $70 million fixed assets revolving credit facility secured by:

             -    a first priority lien on all of the capital stock of
                  Chemicals;
             -    second priority liens on all of Chemicals' United States
                  production facilities and related assets, all of the capital
                  stock of the co-borrowers (excluding Chemicals), all accounts
                  receivable, inventory and other specified assets of Chemicals
                  and the other co-borrowers and 35% of the capital stock of
                  certain of Chemicals' subsidiaries incorporated outside the
                  United States; and
             -    a third priority lien on the remaining 65% of that stock; and

        o    a $125 million current assets revolving credit facility:

             -    $40 million of which is secured by first priority liens on all
                  of Chemicals' United States production facilities and related
                  assets, all of the capital stock of the co-borrowers
                  (excluding Chemicals) and 35% of the capital stock of certain
                  of Chemicals' subsidiaries incorporated outside the United
                  States and a second priority lien on the remaining 65% of that
                  stock; and
             -    all of which is secured by a first priority lien on all
                  accounts receivable, inventory and other specified assets of
                  Chemicals and the other co-borrowers, third priority liens on
                  all of the capital stock of Chemicals and 35% of the capital
                  stock of certain of Chemicals' subsidiaries incorporated
                  outside the United States and fourth priority liens on the
                  remaining 65% of that stock, all of the capital stock of the
                  co-borrowers (excluding Chemicals) and all of Chemicals'
                  United States production facilities and related assets.

        Borrowings under the fixed assets revolving credit facility bear
        interest, at Chemicals' option, at an annual rate of either the "LIBOR
        Rate" (as defined in the DIP Financing) plus 3.75% or the "Alternate
        Base Rate" (as defined in the DIP Financing) plus 2.25%. Borrowings
        under the current assets revolving credit facility bear interest, at
        Chemicals' option, at an annual rate of either the LIBOR Rate plus 3.50%
        or the Alternate Base Rate plus 2.00%. At September 30, 2001, the
        weighted average interest rate in effect was 7.2%. The DIP Financing
        also requires Chemicals and the co-borrowers to pay an aggregate
        commitment fee ranging from 0.75% to 1.25% on the unused portion of the
        commitment for the fixed assets revolving credit facility, depending on
        the amount drawn, and an aggregate commitment fee of 0.5% on the unused
        portion of the commitment for the current assets revolving credit
        facility.



<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

5.     LONG-TERM DEBT (CONTINUED)

        At September 30, 2001, the total credit available under the DIP
        Financing was $112.8 million due to the current assets revolver
        borrowing base limitations discussed above. At September 30, 2001, $42.3
        million was drawn under the fixed assets revolver and there were no
        borrowings outstanding under the current assets revolver. In addition,
        approximately $4.4 million of letters of credit were outstanding under
        the current assets revolver, leaving at September 30, 2001, unused
        borrowing capacity under the secured revolving credit facilities of
        approximately $66.1 million. None of these borrowings were allocated to
        the Company.

        At September 30, 2001, $20 million was drawn under the Canadian
        Financing Agreement. Borrowings under the Canadian Financing Agreement
        bear interest at the CIBC Bank Rate (as defined in the Canadian
        Financing Agreement) plus between 2.0% and 2.5%, or at the LIBOR Rate
        plus 3.5%.

        The DIP Financing and the Canadian Financing Agreement contain numerous
        covenants, including, but not limited to, restrictions on the ability to
        incur indebtedness, create liens and sell assets, as well as maintenance
        of certain financial covenants.

        In August of 1996, in connection with a recapitalization transaction,
        Chemicals allocated $276.8 million of debt to the Company. Principal
        payments were allocated to the Company by Chemicals as scheduled
        principal payments were made on a basis consistent with the original
        allocation. In addition, the Company has made payments to Chemicals,
        from time to time, out of available cash which were applied by Chemicals
        as a reduction of the principal of the previously allocated debt.
        Interest expense is allocated to the Company based on the terms of
        Chemicals' debt agreements. At September 30, 2001, interest rates on
        allocated debt ranged from 11.25% to 12.375%. Debt issue costs relating
        to allocated long-term debt have been allocated to the Company by
        Chemicals on a basis consistent with long-term debt and are included
        as a valuation against pre-petition liabilities subject to compromise.

        On July 23, 1999, Chemicals completed a private offering of $295,000,000
        of its 12 3/8% Senior Secured Notes due 2006, which were subsequently
        exchanged for publicly registered 12 3/8% Notes with substantially
        similar terms (the "12 3/8% Notes"). The 12 3/8% Notes are senior
        secured obligations of Chemicals and rank equally in right of payment
        with all other existing and future senior indebtedness of Chemicals and
        senior in right of payment to all existing and future subordinated
        indebtedness of Chemicals. The 12 3/8% Notes are guaranteed by all of
        Chemicals' existing direct and indirect United States subsidiaries
        (other than Sterling Chemicals Acquisitions, Inc.) on a joint and
        several basis. Each subsidiary's guarantee ranks equally in right of
        payment with all of that subsidiary's existing and future senior
        indebtedness and senior in right of payment to all existing and future
        subordinated indebtedness of that subsidiary. The 12 3/8% Notes and the
        subsidiary guarantees are secured by:

        o    a second priority lien on all of Chemicals' United States
             production facilities and related assets;
        o    a second priority pledge of all of the capital stock of each
             subsidiary guarantor; and
        o    a first priority pledge of 65% of the stock of certain of
             Chemicals' subsidiaries incorporated outside of the United States.

        As a result of the priming order, the second priority liens held by the
        12 3/8% Notes on all of Chemicals' United States production facilities
        and related assets and the capital stock of each subsidiary guarantor
        became third priority liens. The priming order does not affect the
        priority of the pledge held by the 12 3/8% Notes of 65% of the stock of
        certain of Chemicals' subsidiaries incorporated outside of the United
        States.
<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

5.      LONG-TERM DEBT (CONTINUED)

        On July 23, 1999, Chemicals also established two secured revolving
        credit facilities providing up to $155,000,000 in revolving credit loans
        (the "Prior Revolvers") under a single Revolving Credit Agreement (the
        "Prior Credit Agreement"). Under the Prior Credit Agreement, Chemicals
        and each of its direct and indirect United States subsidiaries (other
        than Sterling Chemicals Acquisitions, Inc.) were co-borrowers and were
        jointly and severally liable for any indebtedness thereunder. The Prior
        Revolvers consisted of (i) an $85,000,000 revolving credit facility
        secured by a first priority lien on all accounts receivable, inventory
        and other specified assets of Chemicals and the other co-borrowers and
        (ii) a $70,000,000 revolving credit facility secured by a first priority
        lien on all of our United States production facilities and related
        assets, all of the capital stock of Chemicals and all of the capital
        stock of each co-borrower and a second priority lien on all accounts
        receivable, inventory and other specified assets of Chemicals and the
        other co-borrowers. As mentioned above, the initial draw under the DIP
        Financing was used to repay all amounts under the Prior Revolvers. At
        September 30,2000, approximately $37.2 million was drawn by Chemicals
        under the prior revolvers, none of which was allocated to the Company.

        DEBT MATURITIES

        The estimated remaining principal payments on the outstanding debt of
        Sterling Pulp are as follows:

<Table>
<Caption>
        YEAR  ENDING                                             PRINCIPAL
        SEPTEMBER 30,                                            PAYMENTS
        -------------                                            --------
                                                         (Dollars in Thousands)
<S>                                                             <C>
          2002................................................. $   1,206
          2003.................................................     1,810
          2004.................................................    16,988
          2005.................................................        --
          2006.................................................        --
          Thereafter ..........................................        --
                                                                ---------
                  Total debt of Sterling Pulp.................. $  20,004
                                                                =========
</Table>
<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

6.       CONDENSED COMBINED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY

        The following condensed financial statements are presented in accordance
with SOP 90-7:

STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
                                                                    Year ended September 30, 2001
                                               --------------------------------------------------------------------
                                                  Entities in       Entities Not in
                                                 Reorganization      Reorganization                      Combined
                                                   Proceedings        Proceedings     Eliminations        Totals
                                                ----------------   ----------------- --------------     ----------

<S>                                                 <C>               <C>              <C>               <C>
Revenues                                            $  56,230         $ 134,989        $  (3,594)        $ 187,625
Cost of goods sold                                     39,773           112,602           (3,594)          148,781
-------------------------------------------------------------------------------------------------------------------
Gross profit                                           16,457            22,387             --              38,844
Selling, general and administrative expenses            2,406             5,962             --               8,368
Other expense                                             732              --               --                 732
Reorganization expense                                  1,340              --               --               1,340
Interest and debt related expenses, net                25,716               361             --              26,077
-------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                     (13,737)           16,064             --               2,327
Provision for income taxes                             11,194             4,975             --              16,169
-------------------------------------------------------------------------------------------------------------------
Net income (loss)                                   $ (24,931)        $  11,089        $    --           $ (13,842)
===================================================================================================================
</TABLE>
<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

6.      CONDENSED COMBINED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY
        (CONTINUED)

STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
                                                                  September 30, 2001
                                               --------------------------------------------------------------------
                                                  Entities in       Entities Not in
                                                 Reorganization      Reorganization                      Combined
                                                   Proceedings         Proceedings    Eliminations        Totals
                                               -----------------   ----------------- --------------    ------------

<S>                                                 <C>               <C>              <C>               <C>

ASSETS
Cash and cash equivalents                           $   1,086         $      14         $    --           $   1,100
Accounts receivable, net                               15,388            22,359            (3,079)           34,668
Inventories                                             1,756             7,434              --               9,190
Prepaid expenses                                           16               871              --                 887
Property, plant and equipment, net                     44,332            62,761              --             107,093
Due from affiliates                                   203,793              --                --             203,793
Other assets                                            7,334            21,944           (19,409)            9,869
--------------------------------------------------------------------------------------------------------------------
     Total Assets                                   $ 273,705         $ 115,383         $ (22,488)        $ 366,600
====================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)

Accounts payable                                    $   3,219         $  12,524         $  (3,079)        $  12,664
Accrued liabilities                                       594             3,912              --               4,506
Current portion of long-term debt                          --             1,206              --               1,206
Liabilities subject to compromise                     181,965              --                --             181,965
Liabilities not subject to compromise                  73,084              --                --              73,084
Long-term debt                                         19,409            18,798           (19,409)           18,798
Deferred income taxes                                    --               9,171              --               9,171
Deferred credits and other liabilities                  5,727             4,182              --               9,909
Stockholder's equity (deficiency in assets)           (10,293)           65,590              --              55,297
--------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity
(Deficiency in Assets)                              $ 273,705         $ 115,383         $ (22,488)        $ 366,600
====================================================================================================================
</TABLE>

<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

6.     CONDENSED COMBINED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY
       (CONTINUED)

STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
                                                           Year ended September 30, 2001
                                               ---------------------------------------------------
                                                  Entities in       Entities Not in
                                                 Reorganization      Reorganization      Combined
                                                   Proceedings        Proceedings         Totals
                                               ---------------------------------------------------

<S>                                                 <C>               <C>              <C>
Net cash provided by (used in) operating
     activities                                     $ (24,565)        $  12,312        $ (12,253)

Cash flows from investing activities:
     Capital expenditures                                (627)           (5,127)          (5,754)
     Investments                                        6,764            (6,764)            --
                                               ---------------------------------------------------
Net cash provided by (used in) investing
     activities                                         6,137           (11,891)          (5,754)

Cash flows from financing activities:
     Proceeds from long-term debt                        --              20,004           20,004
     Repayments of long-term debt                      19,409           (19,409)            --
     Debt issuance costs                                  105            (1,112)          (1,007)
     Other                                               --                  21               21
                                               ---------------------------------------------------
Net cash provided by (used in) financing
     activities                                        19,514              (496)          19,018

Effect of exchange rate changes on cash                  --                   3                3
                                               ---------------------------------------------------
Net increase (decrease) in cash and cash
     equivalents                                        1,086               (72)           1,014

Cash and cash equivalents at:
     Beginning of year                                   --                  86               86
                                               ---------------------------------------------------
     End of year                                  $     1,086         $      14        $   1,100
                                               ===================================================
</TABLE>

<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

7.       INCOME TAXES

        The Company is included in the consolidated federal United States tax
        returns filed by Holdings. The Company's provision (benefit) for United
        States income taxes has been allocated as if the Company filed its
        annual federal United States tax returns on a separate return basis. As
        of September 30, 2001, and 2000, zero and $13.1 million, respectively,
        of deferred income tax assets were included in Due from Affiliates.

        For the years ended September 30, 2001, 2000, and 1999, the Company
        recorded $13.1 million, zero and $0.2 million, respectively, of United
        States income tax provision (benefit) in its provision (benefit) for
        income taxes.

        Canadian deferred income taxes are recorded to reflect the tax
        consequences in future years of differences between the tax basis of
        assets and liabilities and the financial reporting amounts at each
        year-end. A reconciliation of the Canadian income taxes to the Canadian
        effective tax provision follows:
<TABLE>
<CAPTION>
                                                                                      Year ended September 30,
                                                                              ---------------------------------------
                                                                                2001            2000            1999
                                                                              --------        --------        --------
                                                                                     (Dollars in Thousands)

<S>                                                                           <C>             <C>             <C>
        Provision for federal income tax at the statutory rate                $ 3,713         $ 2,308         $   259
        Provincial income taxes at the statutory rates                          2,072           1,114              88
        Federal and provincial manufacturing and
        processing tax credits                                                   (810)           (477)            (50)
        Other                                                                    --              --                16
        --------------------------------------------------------------------------------------------------------------
                                                                              $ 4,975         $ 2,945         $   313
        ==============================================================================================================
</TABLE>

<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

7.      INCOME TAXES (CONTINUED)

        The provision for Canadian income taxes is composed of the following:

        <TABLE>
        <CAPTION>
                                                                          Year ended September 30,
                                                              ----------------------------------------------
                                                                   2001             2000             1999
                                                                        (Dollars in Thousands)

        <S>                                                     <C>              <C>              <C>
        Current federal                                         $   2,898        $   3,328        $   2,098
        Deferred federal                                                5           (1,380)          (1,859)
        Current provincial                                          2,067            1,702              619
        Deferred provincial                                             5             (705)            (545)
        ----------------------------------------------------------------------------------------------------
                                                                $   4,975        $   2,945        $     313
        ====================================================================================================
        </TABLE>

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


        <TABLE>
        <CAPTION>
                                                                           September 30,
                                                                  -----------------------------
                                                                       2001             2000
                                                                      (Dollars in Thousands)

        <S>                                                         <C>              <C>
        Deferred tax assets:
          Accrued liabilities                                       $     452        $     249
          Accrued postretirement cost                                   1,522            1,339
          Investment tax credits                                          115            1,408
        ---------------------------------------------------------------------------------------
                                                                        2,089            2,996
        ---------------------------------------------------------------------------------------

        Deferred tax liabilities:
          Property, plant and equipment                               (11,260)         (11,334)
        ---------------------------------------------------------------------------------------
                                                                      (11,260)         (11,334)
        Net deferred tax liabilities                                $  (9,171)       $  (8,338)
        =======================================================================================
        </TABLE>

<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

8.      EMPLOYEE BENEFITS

        The Company's United States employees participate in various employee
        benefit plans of Chemicals. Costs, assets, and liabilities associated
        with United States employees participating in these various plans are
        allocated to the Company by Chemicals based on the number of employees.
        In addition, the Company sponsors various employee benefit plans in
        Canada.

        The Debtors have received approval from the Bankruptcy Court to pay or
        otherwise honor certain of their pre-petition obligations, including
        payments for employee wages and salaries, benefits and other employee
        obligations. The Debtors' obligations, under its employee benefit plans
        are liabilities that are subject to compromise under the Chapter 11
        reorganization proceedings. See Note 4 for further information on
        liabilities subject to compromise.

        Employee Savings Plan

        The Company introduced an employee savings plan for all eligible
        full-time Canadian employees with an effective date of October 1, 2000.
        Each participant has the option to contribute a percentage of his or her
        earnings to the Canadian savings plan, with no limit on the maximum
        percentage contributed. The Company will match 100% of a participant's
        contributions, to the extent such contributions do not exceed 3.5% of
        such participant's cash compensation (excluding bonuses, profit sharing,
        and similar types of compensation). The Company has recorded an expense
        of $0.2 million related to the Savings Plan for the fiscal year ended
        September 30, 2001.

         Profit Sharing and Bonus Plans

        In January of 1997, the Board of Directors of Holdings, upon
        recommendation of its Compensation Committee, approved the establishment
        of a Profit Sharing Plan that is designed to benefit all qualified
        employees, and a Bonus Plan that is designed to provide certain exempt
        salaried employees of the Company with the opportunity to earn bonuses,
        depending, among other things, on the annual financial performance of
        Holdings.

        The Company has recorded (income) and expense of ($0.1) million, $1.3
        million and $0.2 million related to the Profit Sharing Plan and nil,
        $1.1 million and nil related to the Bonus Plan for each of the fiscal
        years ended September 30, 2001, 2000 and 1999, respectively.

        Phantom Stock Plan

        The Company has a phantom stock plan for all eligible full-time Canadian
        employees. The effective date of this Plan was August 21, 1996 and the
        expiration date was December 31, 2000. At the end of each plan year, the
        plan administrator establishes a "determined percentage" for the
        preceding plan year. This percentage is then multiplied by each
        participant's compensation for the plan year to determine the award
        amount. The award amount is then divided by the fair market value of one
        share of the common stock of Holdings, as of December 31 of that plan
        year, to determine the number of rights to be credited to the
        participant. Upon termination of employment, the benefit amount becomes
        payable to the participant. The benefit amount is the number of vested
        rights in the participant's account, multiplied by the fair market value
        of one share of common stock of Holdings as of the most recent valuation
        date.

        The Company has recorded (income) and expense of $(0.4) million, $0.2
        million and nil related to the phantom stock plan for each of the fiscal
        years ended September 30, 2001, 2000 and 1999, respectively.
<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

8.      EMPLOYEE BENEFITS (CONTINUED)

        Savings and Investment Plan

        Chemicals' Sixth Amended and Restated Savings and Investment Plan covers
        substantially all United States employees of the Company, including
        executive officers. This Plan is qualified under Section 401(k) of the
        Internal Revenue Code. Each participant has the option to defer taxation
        of a portion of his or her earnings by directing the Company to
        contribute a percentage of such earnings to this Plan. A participant may
        direct up to a maximum of 20% of eligible earnings to this Plan, subject
        to certain limitations set forth in the Internal Revenue Code for
        "highly compensated" participants. A participant's contributions become
        distributable upon the termination of his or her employment. The Company
        did not make any contribution to this Plan in fiscal 2000. Beginning
        October 1, 2000, the Company began matching 50% of a participant's
        contributions, to the extent such contributions do not exceed 7% of such
        participant's cash compensation (excluding bonuses, profit sharing, and
        similar types of compensation). The Company has recorded an expense of
        $0.1 million related to the Savings and Investment Plan for the fiscal
        year ended September 30, 2001.

        Retirement Benefit Plans

        Chemicals has non-contributory pension plans in the United States which
        cover all salaried and wage employees. The benefits under these plans
        are based primarily on years of service and employees' pay near
        retirement. Chemicals' funding policy is consistent with the funding
        requirements of federal law and regulations. Plan assets consist
        principally of government and corporate securities. The liability
        relating to United States employees allocated to the Company by
        Chemicals for the retirement benefit plans and included in Due from
        Affiliates was $0.8 million and $0.6 million at September 30, 2001 and
        2000, respectively. The total pension expense relating to United States
        employees allocated to the Company was $0.2 million, $0.2 million, and
        $0.1 million for the years ended September 30, 2001, 2000, and 1999,
        respectively.



<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

8.     EMPLOYEE BENEFITS (CONTINUED)

        The Company has employer and employee contributory plans in Canada which
        cover all salaried and wage employees. Information for Canadian benefit
        plans concerning the pension obligation, plan assets, amounts recognized
        in the Company's financial statements, and underlying actuarial
        assumptions is stated below.

        <TABLE>
        <CAPTION>
                                                                                       September 30,
                                                                                ------------------------
                                                                                   2001          2000
                                                                                   ----          ----
                                                                                  (Dollars in Thousands)
        <S>                                                                      <C>           <C>
        Change in benefit obligation:
          Benefit obligation at beginning of year                                $ 17,608      $ 16,283
          Currency rate conversion                                                   (855)         (293)
          Service cost                                                                713           716
          Interest cost                                                             1,293         1,240
          Plan amendments                                                             196
          Actuarial gain                                                              985           (31)
          Benefits paid                                                              (470)         (307)
        ------------------------------------------------------------------------------------------------
          Benefit obligation at end of year                                      $ 19,470      $ 17,608
        ================================================================================================

        Change in plan assets:
          Fair value at beginning of year                                        $ 17,817      $ 15,330
          Currency rate conversion                                                   (865)         (276)
          Actual return on plan assets                                             (2,348)        2,412
          Employer contributions                                                      722           658
          Benefits paid                                                              (470)         (307)
        ------------------------------------------------------------------------------------------------
          Fair value at end of year                                              $ 14,856      $ 17,817
        ================================================================================================

        Development of net amount recognized:
          Funded status                                                          $ (4,613)     $    209
          Unrecognized cost:
            Actuarial gain (loss)                                                   3,449        (1,318)
            Prior service cost                                                        452           298
        ------------------------------------------------------------------------------------------------
        Net amount recognized                                                    $   (712)     $   (811)
        ================================================================================================

        Amounts recognized in the statement of financial position:
          Prepaid pension cost                                                   $    353      $    418
          Accrued pension cost                                                     (1,246)       (1,229)
          Intangible asset                                                            129          --
          Accumulated other comprehensive income                                       52          --
        ------------------------------------------------------------------------------------------------
        Net amount recognized                                                    $   (712)     $   (811)
        ================================================================================================
        </TABLE>



<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

8.      EMPLOYEE BENEFITS (CONTINUED)

        Net periodic pension costs for the Canadian pension plan consist of the
        following components:

        <TABLE>
        <CAPTION>
                                                                                            September 30,
                                                                                ------------------------------------
                                                                                    2001        2000         1999
                                                                                    ----        ----         ----
                                                                                       (Dollars in Thousands)
        <S>                                                                       <C>          <C>          <C>
        Components of net pension costs:
          Service cost-benefits earned during the year                            $    713     $   716      $   919
          Interest on prior year's projected benefit obligation                      1,293       1,240        1,112
          Expected return on plan assets                                            (1,281)     (1,144)        (963)
          Net amortization:
            Actuarial loss (gain)                                                      (89)         28           68
            Prior service cost                                                          27          (2)          29
        ------------------------------------------------------------------------------------------------------------
        Net pension costs                                                         $    663     $   838      $ 1,165
        ============================================================================================================

        Weighted average assumptions:
          Discount rate                                                               7.3%        7.5%         7.5%
          Rates of increase in salary compensation level                              4.5%        4.5%         4.5%
          Expected long-term rate of return on plan assets                            7.5%        7.5%         7.5%

</TABLE>

        Postretirement Benefits Other than Pensions

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

        Health care benefits are provided to employees who retire with ten or
        more years of service, excluding Canadian employees covered by
        collective bargaining agreements. All employees are eligible for
        postretirement life insurance. Postretirement health care benefits for
        United States plans are non-contributory. Benefit provisions for most
        hourly and some salaried employees are subject to collective bargaining
        agreements. In general, the plans stipulate that retiree health care
        benefits are paid as covered expenses are incurred. The liability
        relating to United States employees allocated to the Company by
        Chemicals for the postretirement benefits other than pensions and
        included in Due from Affiliates was $0.5 million and $0.4 million at
        September 30, 2001 and 2000, respectively. The total postretirement
        benefits other than pensions expense for United States employees
        allocated to the Company was $ 0.1 million, $0.1 million, and $0.1
        million for the years ended September 30, 2001, 2000, and 1999,
        respectively.



<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

8.     EMPLOYEE BENEFITS (CONTINUED)

        Information for Canadian benefit plans with respect to the plan
        obligation, the funded status, amounts recognized in the Company's
        financial statements, and underlying actuarial assumptions is stated
        below.
        <TABLE>
        <CAPTION>
                                                                                   September 30,
                                                                            ----------------------------
                                                                                  2001          2000
                                                                             (Dollars in Thousands)
        <S>                                                                    <C>            <C>
        Change in benefit obligation:
          Benefit obligation at beginning of year                              $  4,751       $  4,886
          Service cost                                                              238            314
          Interest cost                                                             355            329
          Actuarial loss (gain)                                                     407           (754)
          Benefits paid                                                            (200)           (24)
        -----------------------------------------------------------------------------------------------
        Benefit obligation at end of year                                      $  5,551       $  4,751
        ===============================================================================================
        Development of net amount recognized:
          Funded status                                                        $ (5,551)      $ (4,751)
          Unrecognized cost:
            Actuarial (gain) loss                                                   267            (91)
        -----------------------------------------------------------------------------------------------
        Net amount recognized                                                  $ (5,284)      $ (4,842)
        ===============================================================================================
        </TABLE>

        Net periodic plan costs for the Canadian postretirement benefit consist
of the following components:

        <TABLE>
        <CAPTION>
                                                                               September 30,
                                                                    -----------------------------------
                                                                       2001         2000         1999
                                                                           (Dollars in Thousands)

        <S>                                                            <C>          <C>          <C>
        Components of net plan costs:
          Service cost                                                 $ 238        $ 314        $ 307
          Interest cost                                                  355          329          299
          Net amortizaton of actuarial loss                                7           16           32
        -----------------------------------------------------------------------------------------------
        Net plan costs                                                 $ 600        $ 659        $ 638
        ===============================================================================================

        Weighted-average assumptions:
          Discount rate                                                7.25%        7.50%        6.75%
        </TABLE>






<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

8.     EMPLOYEE BENEFITS (CONTINUED)

        The weighted average annual assumed health care trend rate is 7.5% for
        2001. The rate is assumed to decrease gradually to 5.8% in 2027 and
        remain level thereafter. Assumed health care cost trend rates have a
        significant effect on the amounts reported for health care plans. A one
        percentage point change in assumed health care trend rates would have
        the following effects:

<TABLE>
<CAPTION>
                                                                    1% Increase     1% Decrease
                                                                    -----------     -----------
                                                                       (Dollars in Thousands)

<S>                                                                     <C>             <C>
        Effect on total of service and interest cost components         $ 33            $ (31)
        Effect on postretirement benefit obligation                      268             (233)
</TABLE>

9.       COMMITMENTS AND CONTINGENCIES

        Lease Commitments

        The Company has entered into various long-term noncancellable operating
        leases, some of which have been allocated to commonly controlled
        companies. Future minimum lease commitments at September 30, 2001 are as
        follows: fiscal 2002 - $5.6 million; fiscal 2003 - $4.9 million; fiscal
        2004 - $4.6 million; fiscal 2005 - $3.8 million; fiscal 2006 - $2.6
        million; and thereafter - $4.5 million.


        Environmental and Safety Matters

        The Company's operations involve the handling, production,
        transportation, treatment, and disposal of materials that are classified
        as hazardous or toxic waste and that are extensively regulated by
        environmental and health and safety laws, regulations, and permit
        requirements. Environmental permits required for the Company's
        operations are subject to periodic renewal and can be revoked or
        modified for cause or when new or revised environmental requirements are
        implemented. Changing and increasingly strict environmental requirements
        can affect the manufacture, handling, processing, distribution, and use
        of the Company's chemical products and, if so affected, the Company's
        business and operations may be materially and adversely affected. In
        addition, changes in environmental requirements can cause the Company to
        incur substantial costs in upgrading or redesigning its facilities and
        processes, including our waste treatment, storage, disposal, and other
        waste handling practices and equipment.

        The Company conducts environmental management programs designed to
        maintain compliance with applicable environmental requirements at all of
        its facilities. The Company routinely conducts inspection and
        surveillance programs designed to detect and respond to leaks or spills
        of regulated hazardous substances and to correct identified regulatory
        deficiencies. The Company believes that its procedures for waste
        handling are consistent with industry standards and applicable
        requirements. In addition, the Company believes that its operations are
        consistent with good industry practice. However, a business risk
        inherent with chemical operations is the potential for personal injury
        and property damage claims from employees, contractors and their
        employees, and nearby landowners and occupants. While the Company
        believes its business operations and facilities generally are operated
        in compliance in all material respects with all applicable environmental
        and health and safety requirements, the Company cannot be sure that past
        practices or future operations will not result in

<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

9.     COMMITMENTS AND CONTINGENCIES (CONTINUED)

        material claims or regulatory action, require material environmental
        expenditures, or result in exposure or injury claims by employees,
        contractors and their employees, and the public. Some risk of
        environmental costs and liabilities is inherent in the Company's
        operations and products, as it is with other companies engaged in
        similar businesses. In addition, a catastrophic event at any of the
        Company's facilities could result in the incurrence of liabilities
        substantially in excess of its insurance coverages.

        The Company's operating expenditures for environmental matters, mostly
        waste management and compliance, were approximately $3.4 million for
        fiscal 2001 and $2.5 million for fiscal 2000. The Company also spent
        approximately $0.6 million for environmentally related capital projects
        in fiscal 2001 and $0.7 million for these types of capital projects in
        fiscal 2000. In fiscal 2002, the Company anticipates spending
        approximately $2.6 million for capital projects related to waste
        management and environmental compliance. There are no capital
        expenditures related to remediation of environmental conditions
        projected for fiscal 2002.

        Conversely, a significant ban on all chlorine containing compounds could
        have a materially adverse effect on us. British Columbia has a
        regulation in place - Pulp Mill and Pulp and Paper Mill Liquid Effluent
        Control Regulation - requiring elimination of the use of all chlorine
        products, including chlorine dioxide, in the bleaching process by the
        year 2002. The pulp and paper industry believes that a ban of chlorine
        dioxide in the bleaching process will yield no measurable environmental
        or public health benefit and is working to change this regulation.

        In the event such a regulation is implemented, Sterling Pulp would seek
        to sell the products it manufactures at its British Columbia facility to
        customers in other markets. Sterling Pulp is not aware of any other laws
        or regulations in place in North America which would restrict the use of
        such products for other purposes.


        Legal Proceedings

        As previously discussed, the Debtors filed petitions for reorganization
        under Chapter 11 of the Bankruptcy Code on July 16, 2001. As a result of
        the Debtors' commencement of the Chapter 11 cases, an automatic stay has
        been imposed against the commencement or continuation of legal
        proceedings against the Debtors outside of the Bankruptcy Court. The
        automatic stay will not apply, however, to governmental authorities
        exercising their police or regulatory powers, including the application
        of environmental laws. Claimants against the Debtors may assert their
        claims in the Chapter 11 cases by filing a timely proof of claim, to
        which the Debtors may object and seek a determination from the
        Bankruptcy Court as to the allowability of the claim. Claimants who
        desire to liquidate their claims in legal proceedings outside of the
        Bankruptcy Court will be required to obtain relief from the automatic
        stay by order of the Bankruptcy Court. If such relief is granted, the
        automatic stay will remain in effect with respect to the collection of
        liquidated claim amounts. As a general rule, all claims against the
        Debtors that seek a recovery from assets of the Debtors' estates will be
        addressed in the Chapter 11 cases and paid only pursuant to the terms of
        a confirmed plan of reorganization.


<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

9.      COMMITMENTS AND CONTINGENCIES (CONTINUED)

        The Company is subject to claims and legal actions that arise in the
        ordinary course of its business. The Company believes that the ultimate
        liability, if any, with respect to these claims and legal actions will
        not have a material adverse effect on its financial position, results of
        operations, or cash flows, although the Company cannot give any
        assurances to that effect.

        Pledge of Common Stock

        The subsidiaries of Chemicals which guaranteed the 12 3/8% Notes consist
        of Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
        Pulp Chemicals, Inc., Sterling Chemicals Energy, Inc., Sterling
        Chemicals International, Inc. and Sterling Fibers, Inc. and, together
        with two Canadian subsidiaries of Sterling Canada, Inc., are
        collectively referred to as the "Guarantors."

        In order to secure the repayment of the DIP Financing, the following
        pledges of stock were made by the holders of that stock:

        In order to secure $40 million of the current assets revolving credit
        facility, a first priority pledge of 100% of the common stock of the
        Guarantors incorporated in the United States and 35% of the common stock
        of the Guarantors incorporated outside the United States, and a second
        priority pledge of the remaining 65% of that stock;

        In order to secure the fixed assets revolving credit facility, a second
        priority pledge of 100% of the common stock of the Guarantors
        incorporated in the United States and 35% of the common stock of the
        Guarantors incorporated outside the United states, and a third priority
        pledge of the remaining 65% of that stock, and

        In order to secure all of the current assets revolving credit facility,
        a fourth priority pledge of 100% of the common stock of the Guarantors
        incorporated in the United States and 65% of the common stock of the
        Guarantors incorporated outside the United States and a third priority
        pledge of the remaining 35% of that stock;

        As a result of the priming order, in order to secure the additional $40
        million of the current assets revolving credit facility, there is a
        first priority pledge of 100% of the common stock of the Guarantors
        incorporated in the United States and 35% of the common stock of the
        Guarantors incorporated outside the United States, and a second priority
        pledge of the remaining 65% of that stock, which will result in the
        lowering by one level of priority of each of the pledges described
        above.

        In order to secure the repayment of the 12 3/8% Notes, the holders of
        the Guarantors' common stock initially made a second priority pledge
        of 100% of the common stock of each of the Guarantors incorporated in
        the United States and a first priority pledge of 65% of the common stock
        of each of the Guarantors incorporated outside of the United States.
        However, after the issuance of the priming order by the Bankruptcy
        Court, the priority of the pledge of the common stock of the Guarantors
        incorporated in the United States was lowered to a third priority
        pledge.

<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

10.     RELATED PARTY TRANSACTIONS

        In the normal course of operations of the Company, the following
        represents significant transactions with related parties for the fiscal
        years ended September 30, 2001, 2000 and 1999:

        <TABLE>
        <CAPTION>
                                                                     Year ended September 30,
                                                                -------------------------------------
                                                                    2001         2000         1999
                                                                    ----         ----         ----
                                                                      (Dollars in Thousands)

        <S>                                                        <C>          <C>          <C>
        Commonly-controlled companies:
          Sale of goods                                            $ 2,866      $ 3,500      $ 6,661
          Purchase of goods                                          8,364        6,087        6,401
          Administration fee revenue                                   326          340          335
        </TABLE>


        11.     FINANCIAL INSTRUMENTS

        Foreign Exchange

        The Company has previously entered into forward foreign exchange
        contracts to reduce risk due to Canadian dollar exchange rate movements.
        The forward foreign exchange contracts had varying maturities with none
        exceeding 18 months. The Company made net settlements of United States
        dollars for Canadian dollars at rates agreed to at inception of the
        contracts. The Company does not engage in currency speculation. The last
        of the Company's existing forward exchange contracts expired in March of
        2000, and it does not currently intend to enter into any additional
        forward exchange contracts.

        Electricity Contracts

        Sterling Pulp periodically enters into fixed price agreements for a
        portion of its electrical energy requirements. As of September 30, 2001,
        the Company had entered into a fixed price agreement relating to the
        supply of a portion of the electrical energy at one of its Canadian
        sodium chlorate production facilities. The difference between the
        forecasted price of energy and the fixed price resulted in the
        recognition of an operating expense of $1.2 million during fiscal 2001
        based upon on current market prices and quantities to be delivered. The
        agreement expires December 31, 2001.


        Concentrations of Risk

        The Company sells its products primarily to companies involved in the
        pulp and paper manufacturing industries. The Company performs ongoing
        credit evaluations of its customers and generally does not require
        collateral for accounts receivable.

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

        Approximately 31% of the Company's employees are covered by union
        agreements. None of the agreements expire during fiscal 2002.
<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

11.     FINANCIAL INSTRUMENTS (CONTINUED)

        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 may be
        invested by the Company with any single bank, financial institution, or
        United States corporation.

        Fair Value of Financial Instruments

        The carrying amounts reflected in the consolidated balance sheet for
        cash and cash equivalents, receivables, payables and certain accrued
        expenses approximate fair value due to the short maturities of these
        instruments. The following table presents the carrying value and fair
        value of long-term debt (including current maturities) at September 30,
        2001:

<Table>
<Caption>
                                                    CARRYING VALUE    FAIR VALUE
                                                    --------------    ----------
                                                        (Dollars in Thousands)

<S>                                                     <C>             <C>
        Canadian Financing Agreement                    $20,004          $20,004
</TABLE>

        Due to the uncertainty resulting from the Bankruptcy filings discussed
        in Note 1, it is difficult to estimate the fair value of the Debtors'
        borrowings. The Canadian Financing Agreement having variable interest
        rates, the fair value approximates its carrying value, as the interest
        rate fluctuates with changes in market rates.

        At September 20, 2001, the Company's forward power contract had a fair
        market value of ($1.2) million, based on its estimate of what it would
        have to pay to terminate the contract at September 30, 2001.



<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Stockholder of
Sterling Canada, Inc.

We have audited the consolidated balance sheets of Sterling Canada, Inc. (the
"Company") as at September 30, 2001 and 2000 and the consolidated statements of
operations, changes in stockholder's equity, and cash flows for each of the
three years in the period ended September 30, 2001. 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 Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at September 30,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 2001 in accordance with
accounting principles generally accepted in the United States of America.


DELOITTE & TOUCHE LLP

Chartered Accountants
Mississauga, Canada
December 20, 2001

                     Comments by Auditors for U.S. Readers
                      On Canada-U.S. Reporting Difference

In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the company's ability to continue as a going concern, such as those described in
Note 1 to the financial statements. Our report to the stockholder dated December
20, 2001 is expressed in accordance with Canadian reporting standards which do
not permit a reference to such events and conditions in the auditors' report
when these are adequately disclosed in the financial statements.


DELOITTE & TOUCHE LLP

Chartered Accountants
Mississauga, Canada
December 20, 2001