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

                            -----------------------
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
    ACT OF 1934 [FEE REQUIRED] For the fiscal year ended September 30, 1996
                                       OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from 
                                       to

COMMISSION FILE NUMBER 1-10059
                       STERLING CHEMICALS HOLDINGS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

             DELAWARE                               76-0185186
(STATE OR OTHER JURISDICTION OF       (I.R.S. EMPLOYER IDENTIFICATION NO.) 
  INCORPORATION OR ORGANIZATION)
  1200 SMITH STREET, SUITE 1900
    HOUSTON, TEXAS 77002-4312                    (713) 650-3700
(ADDRESS OF PRINCIPAL EXECUTIVE        (REGISTRANT'S TELEPHONE NUMBER, 
             OFFICES)                         INCLUDING AREA CODE)

       SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:   NONE
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                    COMMON STOCK, PAR VALUE $.01 PER SHARE

COMMISSION FILE NUMBER 333-04343-01

                           STERLING CHEMICALS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

             DELAWARE                               76-0502785
(STATE OR OTHER JURISDICTION OF       (I.R.S. EMPLOYER IDENTIFICATION NO.) 
  INCORPORATION OR ORGANIZATION)
  1200 SMITH STREET, SUITE 1900
    HOUSTON, TEXAS 77002-4312                    (713) 650-3700
(ADDRESS OF PRINCIPAL EXECUTIVE        (REGISTRANT'S TELEPHONE NUMBER, 
             OFFICES)                         INCLUDING AREA CODE)
            
       SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:   NONE
       SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:   NONE

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

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

  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of each of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K.   __

  As of December 13, 1996, Sterling Chemicals Holdings, Inc. had 11,140,837
shares of common stock outstanding.  As of such date, the aggregate market value
of such common stock held by nonaffiliates, based upon the last sales price of
these shares as reported on the OTC Electronic Bulletin Board maintained by the
National Association of Securities Dealers, Inc., was approximately $128
million.  As of December 13, 1996, all outstanding equity securities of Sterling
Chemicals, Inc. were owned by Sterling Chemicals Holdings, Inc.

   Portions of the definitive Proxy Statement relating to the 1997 Annual
Meeting of Stockholders of Sterling Chemicals Holdings, Inc. are incorporated by
reference in Part III of this Form 10-K.
 
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<PAGE>
 
                               TABLE OF CONTENTS
 
                                                                      PAGE
                                                                      ----
                                    PART I
   Item 1.   Business..............................................     1
   Item 2.   Properties............................................    15
   Item 3.   Legal Proceedings.....................................    16
   Item 4.   Submission of Matters to Vote of Security Holders.....    18
 
                                    PART II
 
   Item 5.   Market for Registrant's Common Equity and Related  
             Stockholder Matters...................................    19
   Item 6.   Selected Financial Data of the Company................    20
   Item 7.   Management's Discussion and Analysis of Financial
             Condition and Results of Operations...................    22
   Item 8.   Financial Statements and Supplementary Data...........    33
   Item 9.   Changes in and Disagreements with Accountants on 
             Accounting and Financial Disclosure...................    66
 
                                   PART III
 
   Item 10.  Directors and Executive Officers of the Registrant....    67
   Item 11.  Executive Compensation................................    67
   Item 12.  Security Ownership of Certain Beneficial Owners and 
             Management............................................    67
   Item 13.  Certain Relationships and Related Transactions........    67
 
                                    PART IV
 
   Item 14.  Exhibits, Consolidated Financial Statement Schedules 
             and Reports on Form 8-K...............................    68
 
 

   NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

                                       i
<PAGE>
 
                                    PART I

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


   ITEM 1. BUSINESS

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

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


   RECENT DEVELOPMENTS
 
     In fiscal 1995, the Company initiated a three-year, $200 million capital
   spending program which is approximately 75% complete.  The program includes
   modernization of the Company's Texas City Plant, construction of a methanol
   unit at the Texas City Plant, a substantial expansion of the Company's acetic
   acid capacity, construction of a sodium chlorate plant at Valdosta, Georgia,
   debottlenecking projects to add incremental capacity at the Company's
   existing sodium chlorate facilities and various other projects.  The plant
   modernization effort at the Texas City Plant includes a significant capital
   commitment for replacing the older control technology in the styrene,
   acrylonitrile and acetic acid units with state-of-the-art distributive
   control systems, which should result in increased efficiencies and stronger
   operating fundamentals.

     In August 1996, the Company completed construction of a world-scale, 150
   million gallon per year methanol unit at the Texas City Plant as part of its
   capital program.  During the demonstration period, problems in the unit's

                                       1
<PAGE>
 
   reformer burners developed.  The burners were replaced in October 1996 and
   the methanol unit achieved full production in late October 1996.  Capital
   investment in the unit and production capacity are shared by the Company and
   BP Chemicals Inc. ("BP").  Approximately 50% of the methanol production is
   used as a raw material in the Company's acetic acid unit, replacing methanol
   that was previously purchased from third parties. The remaining methanol
   production is available for the merchant market and for BP's worldwide acetic
   acid business.  The unit was constructed at significantly less than normal
   replacement cost because available equipment already at the Company's Texas
   City Plant was refurbished and used in the project.

     During fiscal 1996, the Company and BP expanded the acetic acid unit's
   capacity to nearly 800 million pounds annually, an increase of approximately
   30% or 200 million pounds.  BP continues to market all of the Company's
   acetic acid production.

     In a project related to the expanded acetic acid capacity, Praxair Hydrogen
   Supply, Inc. ("Praxair") completed in June 1996 a new partial oxidation unit
   at the Company's Texas City Plant.  The unit supplies carbon monoxide and
   hydrogen under a long-term contract to the Company for use in the production
   of acetic acid and plasticizers.  The unit is owned by Praxair, but
   constructed on land owned by the Company and leased to Praxair.

     The Company is currently constructing a 110,000 ton per year sodium
   chlorate plant in Valdosta, Georgia. The new facility, which will cost
   approximately $55 million, will increase the Company's total annual sodium
   chlorate capacity by more than 30% to nearly 460,000 tons.  Valdosta, Georgia
   was selected because of its proximity to existing customers which are
   currently being supplied from the Company's Canadian plants, and its
   proximity to reliable, competitively priced electricity, the most important
   variable in sodium chlorate production costs.  The new facility is intended
   to meet the growing market demand from the pulp and paper industry in the
   Southeastern U.S. and is expected to be on stream by January 1, 1997.

 
   SALES AND MARKETING

     The Company primarily sells its petrochemical products pursuant to multi-
   year contracts and spot transactions in both the domestic and export markets
   through its commercial organization and sales force.  This long-term, high
   volume focus allows the Company to maintain relatively low selling, general
   and administrative expenses related to the marketing of its petrochemical
   products.  The Company competes on the basis of product price, quality and
   deliverability.  Prices for the Company's commodity chemicals are determined
   by market factors that are largely beyond the Company's control, and, except
   with respect to a number of its multi-year contracts, the Company generally
   sells its products at prevailing market prices.

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

     The Company sells sodium chlorate primarily in Canada and the U.S.
   generally under one to five-year supply contracts, most of which provide for
   minimum and maximum volumes or a percentage of requirements at market prices.
   In addition, most sales contracts contain certain "meet or release" pricing
   clauses and some contain restrictions on the amount of future price
   increases.  Certain contracts are evergreen and require advance notice before
   termination.

                                       2
<PAGE>
 
   CONTRACTS

     The Company's key multi-year contracts and conversion agreements, which
   collectively accounted for 30% of the Company's fiscal 1996 revenues are
   described below:

   Styrene-Bayer

     The Company and Bayer Corporation ("Bayer"), a subsidiary of Bayer AG, are
   currently operating under a conversion agreement effective through December
   21, 2000.  Under this agreement, the Company provides Bayer, subject to
   specified minimum and maximum quantities, a major portion of Bayer's styrene
   requirements for its manufacture of styrene-containing polymers.  The
   agreement permits Bayer to terminate its obligations upon twelve months'
   notice to the Company should Bayer sell its business that uses styrene or
   assign the agreement (subject to the Company's consent) to a third-party
   purchaser of the business.  During fiscal 1996, the Company delivered
   approximately 10% of its styrene production pursuant to this agreement.
 
   Styrene-BP Chemicals

     Effective April 1, 1994, the Company and BP entered into a styrene sales
   and purchase agreement.  The term of the agreement initially expires in
   December 1996.  The Company and BP are currently negotiating an extension of
   this agreement.  Although the likelihood and terms of any extension are
   impossible to predict, at this time management has no reason to believe that
   the agreement will not be extended.  During fiscal 1996, the Company
   delivered approximately 10% of its styrene production to BP pursuant to this
   agreement.

   Acrylonitrile-Monsanto

     The Company and Monsanto Company ("Monsanto") entered into a multi-year
   conversion agreement effective January 1, 1994, which superseded a prior
   agreement that had been in place since 1986.  The initial term of this
   agreement will expire at the end of 1998, at which time the agreement will
   convert to an "evergreen" contract with successive two-year terms if not
   terminated.  During fiscal 1996, the Company delivered approximately 25% of
   its acrylonitrile production to Monsanto pursuant to this agreement.

   Acrylonitrile-BP Chemicals

     In 1988, the Company entered into a long-term conversion agreement with BP,
   under which BP contributed the majority of the capital expenditures required
   for starting the third acrylonitrile reactor train at the Texas City Plant
   and has the option to take up to approximately one-sixth of the Company's
   total acrylonitrile capacity.  BP furnishes the necessary raw materials and
   pays the Company a conversion fee for the amount of acrylonitrile it takes.
   During fiscal 1996, the Company delivered approximately 15% of its
   acrylonitrile production to BP pursuant to this agreement.  The acrylonitrile
   reactor in which BP invested capital incorporates certain BP technological
   improvements under a separate license agreement.  The Company has the right
   to incorporate these and any future improvements into its other existing
   acrylonitrile reactors.  BP has a first security interest in the third
   reactor and related equipment and in the first acrylonitrile produced in the
   three reactor units to the extent of the acrylonitrile which BP is entitled
   to purchase under the production agreement.  These rights are only to be
   exercised upon an event of default by the Company.

   Acetic Acid-BP Chemicals

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


                                       3
<PAGE>
 
   Methanol-BP Chemicals

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

   Plasticizers-BASF

     A product sales agreement has been in effect with BASF Corporation ("BASF")
   since August 1, 1986, pursuant to which the Company sells all of its
   plasticizers production to BASF.  The agreement expires at the end of 1999.
   BASF provides certain raw materials to the Company and markets the
   plasticizers produced by the Company.  BASF pays fees to the Company on a
   formula basis designed to reimburse the Company's direct and allocated costs.
   In addition, the Company is entitled to a share of profits earned by BASF
   attributable to the plasticizers supplied by the Company.  BASF retains title
   to and has a security interest in the raw materials furnished by it and in
   the finished inventory of plasticizers produced by the Company for delivery
   to BASF.

     No individual customer of the Company's petrochemical or pulp chemical
   business accounted for more than 10% of the Company's revenues in fiscal
   1996.

     For information regarding the Company's export sales and domestic and
   foreign operations, see Note 8 of Item 8, ''Notes to Consolidated Financial
   Statements'' which is hereby incorporated by reference.


   PRODUCTS

     At its Texas City Plant, the Company manufactures seven commodity
   petrochemicals which are used in the manufacture of other goods or in other
   chemical processes.  At its four Canadian plants, and by the end of 1996 at
   its Valdosta, Georgia plant, the Company manufactures chemicals used
   primarily in the bleaching of kraft pulp for paper manufacturing.  The
   Company also is a supplier of patented and proprietary technology for
   chlorine dioxide generators used by certain mills in the kraft pulp bleaching
   process.

                                       4
<PAGE>
 
   PRODUCT SUMMARY

     The Company's principal products and their primary end uses and raw
   materials are set forth below.
<TABLE>
<CAPTION>
 
                              INTERMEDIATE    PRIMARY END      
COMPANY PRODUCT                  PRODUCTS      PRODUCTS         RAW MATERIALS
---------------              --------------  -------------     ----------------
<S>                          <C>             <C>                <C>
Petrochemicals
Styrene                      Polystyrene     Building           Ethylene and
                             ABS/SAN resins  products, boat     Benzene
                             Styrene         and automotive
                             butadiene       components,
                             latex           disposable cups
                             Polyester       and trays,
                             resins          packaging and
                                             containers,
                                             housewares,
                                             tires, audio and
                                             video cassettes,
                                             luggage,
                                             children's toys,
                                             paper coating,
                                             appliance
                                             parts and carpet
                                             backing
 
Acrylonitrile                Acrylic fibers  Apparel,           Ammonia, Air
                             ABS/SAN resins  furnishings,       and Propylene
                                             upholstery,
                                             household
                                             appliances,
                                             carpets;
                                             plastics for
                                             automotive parts
                                             using ABS and
                                             SAN polymers
  
Acetic Acid                  Vinyl acetate   Adhesives,         Methanol and
                             monomer         cigarette          Carbon Monoxide
                                             filters and
                                             surface coatings
 
Methanol                     Acetic acid     Adhesives,         Natural Gas
                             MTBE            cigarette
                             Formaldehyde    filters and
                                             surface
                                             coatings;
                                             gasoline
                                             oxygenate and
                                             octane enhancer;
                                             plywood adhesives
  
Plasticizers                 Polyvinyl       Flexible           Alpha-Olefins,
                             chloride (PVC)  plastics such as   Carbon
                                             shower curtains    Monoxide,
                                             and liners,        Hydrogen,
                                             floor coverings,   Orthoxylene and
                                             cable              Air
                                             insulation,
                                             upholstery and
                                             plastic molding
 
TBA                          NA              Pesticides,        Isobutylene and
                                             solvents,          the
                                             pharmaceuticals    acrylonitrile
                                             and synthetic      by-product
                                             rubber             Hydrogen
                                                                Cyanide ("HCN")
 
Sodium Cyanide               NA              Electroplating     Sodium
                                             and precious       Hydroxide and
                                             metals recovery    by-product HCN
 
Pulp Chemicals
Sodium Chlorate              Chlorine        Bleaching agent    Salt, Water and
                             dioxide         for pulp           Electricity
                                             production;
                                             Downstream
                                             products include
                                             high quality
                                             office and
                                             coated papers
 
Sodium Chlorite              Chlorine        Antimicrobial      Sodium Chlorate
                             dioxide         agent for          and
                                             municipal water    Hydrochloric
                                             treatment,         Acid
                                             disinfectant for
                                             fresh produce
 
Chlorine Dioxide             NA              Chlorine dioxide   NA
     Generators                              for use in the
                                             bleaching of pulp
 
</TABLE>

   PETROCHEMICALS

     Styrene.  The Company manufactures styrene from ethylene and benzene.
   Styrene is principally used in the manufacture of intermediate products such
   as polystyrene, acrylonitrile butadiene styrene ("ABS") resins, synthetic
   rubbers, SBLatex, unsaturated polyester resins and styrene acrylonitrile
   resins ("SAN").  These intermediate products are used to produce various
   consumer products, including building products, boat and automotive
   components, disposable cups and trays, packaging and containers, housewares,
   tires, audio and video cassettes, luggage, children's toys, paper coating,
   appliance parts and carpet backing.

                                       5
<PAGE>
 
     The Company is the third largest North American producer of styrene.  The
   Company's styrene unit is one of the largest in the world and has an annual
   rated production capacity of 1.7 billion pounds, following a recent
   debottlenecking, which represents approximately 12% of total North American
   capacity.  The Company sold approximately 20% of its styrene sales volumes
   pursuant to long-term conversion contracts during fiscal 1996.  Approximately
   40% of the Company's styrene sales volumes were exported in fiscal 1996,
   principally to the Far East, either directly or pursuant to arrangements with
   large international trading companies.

     Acrylonitrile. The Company manufactures acrylonitrile by propylene
   ammoxidation. Acrylonitrile is used primarily in the manufacture of
   intermediate products such as acrylic fiber and ABS resins.  The principal
   end uses for acrylonitrile include apparel, furnishings, upholstery,
   household appliances, carpets, and plastics for automotive parts.

     The Company is the second largest global producer of acrylonitrile.  The
   Company's acrylonitrile unit has an annual rated production capacity of 740
   million pounds, which represents approximately 21% of total North American
   capacity.  The Company sold approximately 40% of its acrylonitrile sales
   volumes pursuant to long-term conversion agreements during fiscal 1996.
   Approximately 60% of the Company's acrylonitrile production in fiscal 1996
   was exported, principally to the Far East, either directly or pursuant to
   arrangements with large international trading companies.

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

     Acetic Acid.  The Company produces acetic acid from carbon monoxide and
   methanol.  Acetic acid is primarily used in the manufacture of intermediate
   products such as vinyl acetate monomer.  These intermediate products are used
   to produce various consumer products, including pharmaceuticals, adhesives,
   glue, cigarette filters, and surface coatings.

     The Company is the third largest North American producer of acetic acid.
   Following a 200 million pound capacity expansion completed in June 1996, the
   Company's acetic acid unit has an annual rated production capacity of nearly
   800 million pounds, which represents approximately 17% of total North
   American capacity.  All of the Company's production is sold to BP pursuant to
   a long-term contract through 2016.
 
     Methanol.  In August 1996, the Company completed construction of a world-
   scale, 150 million gallon per year methanol unit at the Texas City Plant as
   part of its capital program.  During the demonstration period, problems in
   the unit's reformer burners developed.  The burners were replaced in October
   1996 and the methanol unit attained full production in late October 1996.
   Capital investment in the unit and production capacity are shared by the
   Company and BP.  Approximately 50% of the methanol production is used as a
   raw material in the Company's acetic acid unit, replacing methanol that was
   previously purchased from third parties. The remaining methanol is available
   for the merchant market and for BP's worldwide acetic acid business.  The
   methanol unit was constructed at significantly less than normal replacement
   cost because available equipment already at the Company's Texas City Plant
   was refurbished and used in the project.

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

     Plasticizers.  The Company manufactures plasticizers employing a series of
   processes using alpha-olefins and orthoxylene as the primary raw materials.
   Major end-uses for plasticizers include flexible plastics used in shower
   curtains and liners, floor coverings, cable insulation, upholstery and
   plastic molding.  The Company has an agreement with BASF pursuant to which
   the Company sells all of its plasticizers production to BASF through 1999.
   The Company's plasticizers capacity is 280 million pounds per year.

                                       6
<PAGE>
 
     TBA.  TBA is produced by the addition of hydrogen cyanide to isobutylene in
   an acid catalyst reaction.  The Company uses a portion of its by-product
   hydrogen cyanide from acrylonitrile production in this process.  Major end
   uses for TBA include pesticides, solvents and synthetic rubber.  The Company
   sells all of its TBA production to Flexsys America L.P. ("Flexsys") pursuant
   to a long-term conversion agreement.  The Company's capacity for TBA is
   currently 21 million pounds per year.

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

 
   PULP CHEMICALS

     Sodium Chlorate.  Sodium chlorate is used primarily in the production of
   chlorine dioxide which is used chiefly by pulp and paper manufacturers as a
   bleaching chemical in the pulp manufacturing process.  Bleached pulp is used
   to make uncoated paper for commercial printing and for office copiers and
   printers, and coated paper for magazines, catalogues, promotional printed
   products, packing, tissue and other products.  Sodium chlorate is also used
   as a raw material to produce sodium chlorite.

     Sodium chlorate is manufactured by passing an electric current through an
   undivided cell containing a solution of sodium chloride (salt). Electric
   power costs typically represent approximately 65% of the variable cost of
   production of sodium chlorate.  Electric power is purchased by each of the
   Company's facilities pursuant to contracts with local electric utilities.
   Consequently, the rates charged by local electric utilities are an important
   competitive factor among sodium chlorate producers.  The Company's electrical
   power costs are believed to be competitive with other producers in the areas
   in which it operates.

     Upon completion of the Valdosta, Georgia plant, the Company will become the
   second largest producer of sodium chlorate in North America.  The Company's
   four Canadian sodium chlorate plants have an aggregate annual rated
   production capacity of 350,000 tons.  The Valdosta plant will increase the
   Company's total annual capacity by 30% to nearly 460,000 tons, representing
   approximately 22% of North American sodium chlorate capacity. Valdosta,
   Georgia was selected because of its proximity to existing customers currently
   being supplied from the Company's Canadian plants and its proximity to
   reliable, competitively priced electricity.  The new facility is intended to
   meet the growing market demand from the pulp and paper industry in the
   Southeastern U.S.

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

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

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

                                       7
<PAGE>
 
     Sodium Chlorite.  The Company manufactures sodium chlorite at its
   Buckingham, Quebec facility.  Sodium chlorite is a specialty product used
   primarily to produce chlorine dioxide for water treatment and as a
   disinfectant for fresh produce.  The Company has a rated annual capacity of
   approximately 3,500 tons, which represents approximately 40% of total North
   American capacity.


   RAW MATERIALS FOR PRODUCTS AND ENERGY RESOURCES

     For each of the Company's products, the combined cost of raw materials and
   utilities is far greater than all other production costs combined.  Thus, an
   adequate supply of these materials at reasonable prices is critical to the
   success of the Company's business.  With the exception of methanol, the
   Company does not currently produce any of its major raw materials, benzene,
   ethylene, propylene, ammonia or natural gas at the Texas City Plant, or
   electricity at its pulp chemical facilities.  Moreover some of the Company's
   competitors are integrated and produce their own raw materials.  Although the
   Company believes that it will continue to be able to secure adequate supplies
   of its raw materials at acceptable prices to meet its requirements, there can
   be no assurance that it will be able to do so.

 
   PETROCHEMICALS

     Styrene.  Styrene is a clear liquid that the Company manufactures from
   ethylene and benzene. The Company's conversion agreements require that other
   parties furnish the Company with the ethylene and/or benzene necessary to
   fulfill its conversion obligations.  Approximately 20% of the Company's
   fiscal 1996 benzene and ethylene requirements were furnished by customers
   pursuant to conversion arrangements.  The Company purchases benzene and
   ethylene for use in the remainder of its production of styrene for sale to
   others.  Benzene and ethylene are both commodity petrochemicals and the price
   for each can fluctuate widely due to significant changes in the availability
   of these products, such as major capacity additions or significant plant
   operating problems, and due to variations in the economy and commodity
   chemical markets in general.  The Company has multi-year arrangements with
   several ethylene suppliers that provide for its estimated requirements for
   purchased ethylene at generally prevailing and competitive market prices.

     Acrylonitrile.  The Company produces acrylonitrile by reacting propylene
   and ammonia over a solid-fluidized catalyst at low pressure.  The Company's
   conversion agreements require that other parties furnish to the Company the
   propylene and/or ammonia necessary to fulfill its conversion obligations.
   Approximately 40% of the Company's fiscal 1996 propylene and ammonia
   requirements were furnished by customers pursuant to conversion arrangements.
   The Company purchases propylene and ammonia for use in the remainder of its
   production of acrylonitrile for sale to others.  Propylene and ammonia are
   both commodity petrochemicals and the price for each can fluctuate widely due
   to significant changes in the availability of these products such as major
   capacity additions or significant plant operating problems, and due to
   variations in the economy and commodity chemical markets in general.  If
   various customers for whom the Company now manufactures acrylonitrile under
   conversion arrangements were to cease furnishing their own raw materials and
   seek only to purchase acrylonitrile from the Company, the Company's
   requirements for purchased propylene and ammonia could significantly
   increase.  The Company believes that both ammonia and propylene will, for the
   foreseeable future, remain in adequate supply to meet demand.

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

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

     Methanol.  The Company produces methanol by steam reforming of natural gas
   to form synthesis gas.  The synthesis gas is then converted to methanol under
   elevated pressures in the presence of a catalyst.  The Company 

                                       8
<PAGE>
 
   obtains its natural gas under various supply contracts and believes that
   adequate supplies will be available for the Company's needs in the
   foreseeable future.

     Plasticizers.  The Company manufactures plasticizers using a series of
   processes.  Primary raw materials are alpha-olefins and orthoxylene, which
   are supplied by BASF under its long-term contract with the Company which
   expires at the end of 1999.  The Company believes that adequate supplies of
   raw materials will be available for the Company's needs in the foreseeable
   future.

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

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

 
   PULP CHEMICALS

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

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


   TECHNOLOGY AND LICENSING
 
   Petrochemicals

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

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

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

   Pulp Chemicals

     The Company produces sodium chlorate using state-of-the-art metal cell
   technology.  The principal technology business of the Company is the design,
   sale and technical service of custom-built patented chlorine dioxide

                                       9
<PAGE>
 
   generators.  The ERCO engineering group is involved in the technical support
   of the Company's sales and marketing group through joint calling efforts
   which define the scope of a project as well as  producing technical schedules
   and cost estimates.  The Company performs detailed design of chlorine dioxide
   generators which are then fabricated by contractors.  Plant installation,
   instrumentation testing and generator start-up are supervised by a joint
   engineering/technical service team of the Company.  Prior to 1996, the
   Company was involved in a number of patent disputes with Akzo Nobel regarding
   chlorine dioxide technology.  In 1996, the parties reached a settlement of
   such disputes that allows licensees of both the Company and Akzo Nobel to
   operate their chlorine dioxide generators within the broadest range of
   operating conditions, subject to cross licensing and payment of royalties.

     The Company's pulp chemical research and development activities are carried
   out at its Toronto, Ontario laboratories.  Activities include the development
   of new or improved chlorine dioxide generation processes and research in new
   technologies focusing on electrochemical and membrane technology related to
   chlorine dioxide, including improvement of quality and reduction of quantity
   of pulp mill effluents and treatment of municipal water supplies.


   COMPETITION AND INDUSTRY CONDITIONS

    GENERAL

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

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

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

     Acrylonitrile     BP Chemicals Inc., Cytec Industries Inc., E.I. DuPont de
                       Nemours and Company, and Monsanto Company

     Acetic Acid       Hoechst Celanese Corporation, Eastman Chemical Company,
                       and Millennium Chemicals

     Plasticizers      Exxon Corporation, Aristech Chemicals, and Eastman
                       Chemical Company

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

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

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

     Historically, petrochemical industry profitability has been affected by
   vigorous price competition, which may intensify due to, among other things,
   new domestic and foreign industry capacity.  The Company's businesses are
   subject to changes in the world economy, including changes in currency
   exchange rates.  In general, weak economic conditions either in the United
   States or in the world tend to reduce demand and put pressure on margins.
   Operations outside the United States are subject to the economic and
   political risks inherent in the countries in which they operate.
   Additionally, the export and domestic markets can be affected significantly
   by import laws and 

                                      10
<PAGE>
 
   regulations. During fiscal 1996, the Company's export sales were
   approximately 34% of total revenues. It is not possible to predict accurately
   how changes in raw material costs, market conditions, or other factors will
   affect petrochemical industry margins in the future.


   PETROCHEMICALS

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

     From 1991 to 1993, styrene's profitability was depressed because of both
   industry overcapacity and global recessionary pressures.  By the spring of
   1994, however, demand growth resulting from economic expansion had absorbed
   much of the excess capacity.  As a result, styrene prices and margins
   increased substantially in fiscal 1994 and through most of fiscal 1995, and
   average industry utilization rates exceeded rated capacity by the third
   quarter of fiscal 1995.  Shortly thereafter, styrene prices started
   decreasing as demand weakened as a result of a general slowdown in the
   worldwide economic growth rate, prompting customers to begin utilizing their
   available inventories and decreasing purchases of additional product.  The
   weakening market conditions were accelerated in the fourth quarter of fiscal
   1995 by significantly decreased purchases of styrene and styrene derivatives
   by China, primarily as a result of changes in China's enforcement of economic
   and tax policies and monetary constraints that negatively affected its
   imports.  China accounts for a significant portion of global purchases of
   styrene and styrene derivatives.  Average styrene prices declined by over 41%
   from fiscal 1995 to fiscal 1996, primarily as a result of weaker market
   conditions in the Far East.

     According to CMAI, the North American styrene industry operated at
   approximately a 98% utilization rate in fiscal 1995, and approximately 93% in
   fiscal 1996.  Certain styrene producers have announced plans to add
   significant production capacity over the next several years, particularly in
   the Far East.  Current global production capacity for styrene is estimated to
   be approximately 40 billion pounds and the Company believes that
   approximately 7.2 billion pounds of capacity will be added by competitors in
   the next two fiscal years, including an estimated 3.5 billion pounds in
   fiscal 1997 and 3.7 billion pounds in fiscal 1998.  The Company expects that
   prices for styrene will continue at current depressed levels until global
   demand for styrene increases sufficiently to absorb such additional
   production capacity.

     Acrylonitrile.  The acrylonitrile market exhibits characteristics in
   capacity utilization, selling prices and profit margins similar to those of
   styrene.  Moreover, as a result of the Company's high percentage of export
   acrylonitrile sales, demand for the Company's acrylonitrile is most
   significantly influenced by export customers, particularly those that supply
   acrylic fiber to China.  In recent years, the acrylic fiber market has been
   subject to volatility because of fluctuations in demand from the Chinese
   market.  During most of fiscal 1995, strong demand for acrylic fiber and ABS
   resins, particularly in China, increased demand for acrylonitrile.  However,
   the Company believes that acrylonitrile demand began to weaken in the third
   quarter of fiscal 1995 for the same reasons that caused the deterioration in
   the styrene market.  Demand for acrylonitrile from export customers decreased
   significantly in the fourth quarter of fiscal 1995 as a result of these
   developments, although export prices and margins did not decrease
   significantly until the first quarter of fiscal 1996.  Average acrylonitrile
   sales prices declined 29% from fiscal 1995 to fiscal 1996 as a result of
   weaker market conditions in the Far East.

     According to CMAI, the North American acrylonitrile industry operated at
   approximately a 97% utilization rate in fiscal 1995 and approximately 93% in
   fiscal 1996.  The Company believes that during fiscal years 1997 and 1998,
   global industry capacity will increase by approximately 940 million pounds or
   9%.  As a result of the increased global industry capacity in fiscal years
   1997 and 1998, industry utilization rates may decline and price competition
   may increase during this period.

     Acetic Acid.  According to  CMAI, the total domestic capacity for acetic
   acid production is approximately 4.9 billion pounds per year, with the
   Company's current rated capacity of approximately 800 million pounds per year
   representing approximately 16% of the total domestic capacity.

                                      11
<PAGE>
 
     Methanol.  The Company completed construction of a world-scale, 150 million
   gallon per year methanol unit at the Texas City Plant in August 1996.
   Capital investment in the unit and production capacity is shared by the
   Company and BP.  Approximately 50% of the methanol production is used as a
   raw material in the Company's acetic acid unit.  The remaining methanol
   production is available for the merchant market and for BP's worldwide acetic
   acid business.

     Plasticizers.  The Company's capacity for plasticizers is 280 million
   pounds per year.  The Company has an agreement with BASF pursuant to which
   the Company will sell all of its plasticizers production to BASF through
   1999.

     TBA.  The Company operates a TBA production unit with a capacity of 21
   million pounds per year.  The Company believes that currently there are only
   three TBA production units in the world: those operated by the Company (21
   million pounds capacity), Nitto Chemical Industries Co., Ltd. (3.3 million
   pounds capacity), and BASF (13 million pounds capacity).

     Sodium Cyanide.  The Company operates a sodium cyanide unit at its Texas
   City Plant which is owned by DuPont.  The capacity of this unit is 100
   million pounds per year.


    PULP CHEMICALS

     Sodium Chlorate.  Historically, sodium chlorate has experienced cycles in
   capacity utilization, selling prices and profit margins.  From 1990 to 1994,
   the industry had been operating well below rated capacity, resulting in
   declining product prices, due to significant capacity expansion during the
   period from 1990 to 1992.  Since the mid-1980s, however, North American
   demand for sodium chlorate has grown at an average annual rate of 10% as pulp
   mills have accelerated substitution of chlorine dioxide, sodium chlorate's
   primary derivative, for elemental chlorine in bleaching applications.
   Chlorine dioxide is a powerful and highly selective oxidizing agent suitable
   for pulp bleaching. It has the ability to substantially reduce hazardous
   substances, including dioxins and furans, in bleach plant effluent, as well
   as produce high-brightness pulp with little or no damage to the cellulose
   fiber.

     Substitution of chlorine dioxide for elemental chlorine is driven primarily
   by environmental concerns. Through the end of 1995, approximately 80% to 85%
   of Canadian bleach plant capacity and approximately 60% to 65% of U.S. bleach
   plant capacity has been converted to chlorine dioxide.  The Environmental
   Protection Agency ("EPA") has published draft regulations known as "Cluster
   Rules" which, if enacted, are likely to mandate the elimination of elemental
   chlorine usage in bleaching applications, resulting in increased substitution
   of chlorine dioxide for elemental chlorine by the North American pulp and
   paper industry.

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


   ENVIRONMENTAL AND SAFETY MATTERS

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

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

                                      12
<PAGE>
 
     The Company conducts environmental management programs to maintain
   compliance with applicable environmental laws.  As part of these programs,
   the Company conducts or commissions reviews of its environmental performance
   and addresses issues identified.  The Company routinely conducts inspection
   and surveillance programs to detect and respond to any leaks or spills of
   regulated hazardous substances and to correct any identified regulatory
   deficiency.  To reduce the risk of offsite consequences from any
   unanticipated event, the Company acquired a greenbelt buffer zone adjacent to
   the Texas City Plant in 1991.  The Company also participates in a regional
   air monitoring network to monitor ambient air quality in the Texas City
   community.  These programs are part of the Company's commitment to
   Responsible Care initiatives of the Chemical Manufacturers Association and
   Canadian Chemical Producers Association.

     During fiscal 1996, the Company was recognized as a 33/50 Environmental
   Champion by the EPA for surpassing the emission reduction goals of the 33/50
   program at the Texas City Plant faster than the EPA's timetable.  The
   voluntary 33/50 program targeted 17 high priority chemicals included in the
   EPA's Toxic Release Inventory. Six of the 17 chemicals are present at the
   Company's Texas City Plant.  The goal of the program was a 33% reduction in
   air emissions of these compounds by 1992, compared to 1987 levels, and a 50%
   reduction by 1995.  For the 1995 reporting year,  the final year of the 33/50
   program, the Company achieved a 71% reduction in the targeted chemicals,
   including a 95% reduction in hydrogen cyanide emissions by converting this
   by-product into sodium cyanide, an 83% reduction in benzene emissions
   primarily by constructing a major wastewater treatment facility, a 66%
   reduction in toluene and orthoxylene, and a 13% reduction in chromium and
   nickel compounds.  In addition to these improvements, the Company has
   recently completed an extensive review of the overall environmental condition
   at its Texas City Plant and has initiated a groundwater monitoring program.
   No assurances can be given that the Company will not incur material
   environmental expenditures associated with its facilities, operations, or
   products.

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

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

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

     In connection with the Company's purchase of the pulp chemical business in
   1992, the seller, Tenneco Canada, Inc. ("Tenneco"), contractually retained
   liability for costs, damages, fines, penalties and other losses under claims
   by third parties (including employees and authorities) arising from the
   ownership or operation of the facilities and businesses prior to the
   acquisition.  The Company is also indemnified against the breach of
   environmental remediation covenants.  These covenants oblige the indemnifying
   party to do specific remedial work (including decommissioning the old section
   of the Vancouver facility, which is underway) at the facilities within set
   time periods, and to do any investigation, monitoring or remedial work
   required by present or future legislation governing environmental conditions
   predating the acquisition.  The indemnity also protects the Company against
   losses arising from the remediation of pre-acquisition environmental
   conditions or from pre-acquisition violations of environmental laws.  With
   the exception of any third-party claims, the losses against which the Company
   is 

                                      13
<PAGE>
 
   indemnified do not include consequential damages or lost profits. The Tenneco
   obligations have been assigned to Albright & Wilson UK Ltd. ("Albright &
   Wilson") as a result of the sale by Tenneco of certain assets to Albright &
   Wilson.

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

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

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

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

     Emissions into the air from the Texas City Plant are subject to certain
   permit requirements and self-implementing emission limitations and standards
   under state and federal law.  The Texas City Plant is located in an area that
   is classified by the EPA as not having attained the ambient air quality
   standards for ozone, which is controlled by direct regulation of volatile
   organic compounds ("VOCs") and nitrogen oxide ("NOx").  Additional
   requirements were issued in fiscal 1994 and modified in fiscal 1996 by the
   Texas Natural Resource Conservation Commission in order to achieve ambient
   air quality standards for ozone.  These measures may substantially increase
   the Company's NOx control costs in the future, although the cost and full
   impact, if any, cannot be determined at this time.

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

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

                                      14
<PAGE>
 
   EMPLOYEES

     As of September 30, 1996, the Company had approximately 1,200 employees,
   including approximately 300 at its facilities in Canada.  Approximately 60%
   of the employees at the Company's manufacturing facilities are covered by
   union agreements.  The primary union agreement is with the Texas City, Texas
   Metal Trades Council, AFL-CIO, of Galveston County, Texas, and covers all
   hourly employees at the Texas City Plant.  The Company signed a new labor
   agreement in May 1996 which is subject to renegotiation in April 1999.  The
   new agreement increases the flexibility of work rules which the Company
   believes will increase the overall efficiency of the Texas City Plant.
   Employees at the Vancouver plant are represented by the Pulp, Paper and
   Woodworkers Union.  The Vancouver agreement was renegotiated in November 1994
   and is subject to further renegotiation in November 1997.  Employees at the
   Buckingham plant are represented by either the Energy and Chemicals Workers
   Union or an office and professional workers union.  Both Buckingham
   agreements were negotiated in November 1994 and are subject to renegotiation
   in November 1997.  The Company believes its relationship with its employees
   is good.


   INSURANCE

     The Company currently maintains $500 million of coverage for property
   damage to its Texas City Plant and resulting business interruption.  Although
   the Company carries such insurance, it has only one styrene manufacturing
   facility and one acrylonitrile manufacturing facility; thus, a significant
   interruption in the operation of either facility could have a material
   adverse effect on the Company's financial condition, results of operations or
   cash flows.  The Company maintains $338 million of combined coverage for
   property damage and resulting business interruption for its pulp chemical
   operations.  The Company also maintains other insurance coverages for various
   risks associated with its business.  There is no assurance that the Company
   will not incur losses beyond the limits of, or outside the coverage of, its
   insurance.  From time to time various types of insurance for companies in the
   chemical industry have been very expensive or, in some cases, unavailable.
   There is no assurance that in the future the Company will be able to maintain
   its existing coverage or that the premiums will not increase substantially.


   ITEM 2.  PROPERTIES

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

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

     The Company's Texas City Plant comprises seven basic operating units which
   can be divided into three groups based on the chemistry involved. One group
   of operating units involves synthesis gas chemistry (carbon monoxide and
   hydrogen), and its facilities include the acetic acid unit, three plasticizer
   units (oxo-alcohol, phthalic anhydride and linear phthalate esters), and the
   methanol unit.  Carbon monoxide and hydrogen are utilized as feedstocks in
   the oxo-alcohol manufacturing process and carbon monoxide and methanol are
   utilized as feedstocks to produce acetic acid.  As described in Item 1 under
   the caption "Recent Developments," a new partial oxidation unit was
   constructed by Praxair at the Texas City Plant to supply carbon monoxide and
   hydrogen to the Company. The synthesis gas reformer is now used in the
   methanol unit.  A second group of operating units involves acrylonitrile and
   hydrogen cyanide chemistry, and its facilities include the acrylonitrile
   unit, the TBA unit, and the sodium cyanide unit.  Ammonia and propylene are
   used as feedstocks in the acrylonitrile process and hydrogen cyanide, a by-
   product of that process, is used as a feedstock for the other units in this
   second group and is also burned as fuel.  The third operating group is based
   on ethylene and benzene chemistry and its facilities comprise the
   ethylbenzene and styrene units.  Although the styrene unit is independent of
   the rest of the Texas City Plant from a feedstock and by-product standpoint,
   it is the cornerstone of the Texas City Plant's energy balance as it uses
   large quantities of by-product steam generated by the acrylonitrile and
   phthalic anhydride units, thus reducing the demands on the 

                                      15
<PAGE>
 
   Company's steam generating facility. In this way, the Texas City Plant's
   utilities system links the three operating groups together in an effort to
   minimize utility costs. This integration results in cost efficiencies without
   significantly compromising the operating flexibility of the individual
   product units.

     The Company owns or leases all of the real property which comprise its
   Texas City Plant and all of the facilities and equipment located there, other
   than the sodium cyanide unit which is owned by DuPont, a cogeneration
   facility owned by a joint venture between the Company and Praxair Energy
   Resources, Inc., and the new partial oxidation unit constructed at the site
   by Praxair.  Following the expiration of its ten-year lease with BP on July
   31, 1996, legal title to the acetic acid unit reverted to the Company.  The
   Company also owns storage facilities, approximately 200 rail cars and an
   acetic acid barge.  In addition, the Company subleases approximately 20,000
   square feet of office space in Houston, Texas for its corporate headquarters
   and leases several storage facilities in the U.S. and Korea.

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

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

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


   ITEM 3. LEGAL PROCEEDINGS

     The information set forth under the caption "Legal Proceedings" in Note 7
   of the "Notes to Consolidated Financial Statements" is incorporated herein
   by this reference.  The cause numbers, the styles of the cases, the courts in
   which the cases are pending and certain other information with respect to the
   matters described in Note 7 are set forth below.

     HUNTSMAN LAWSUIT: Sterling Chemicals, Inc. v. Huntsman Chemical
   Corporation, Huntsman Styrene Corporation and Huntsman Corporation; Cause No.
   95-005256; In the 61st Judicial District Court of Harris County, Texas.

     ALLEMAND LAWSUIT: George Allemand and Willa Allemand v. Sterling Chemicals,
   Inc., Olin Corporation, Goodyear Tire & Rubber Co., Inc. Marine Fueling
   Service, Inc.; le Manufacturier de Granford, Triplex Inc. and Shrieve
   Chemical Company, Cause No. A-152,286; In the 58th Judicial District Court of
   Jefferson County, Texas.

     AMMONIA RELEASE LAWSUITS:

     1.  Otis Pointer Jr., individually and on behalf of all others similarly
   situated, v. Sterling Chemicals, Inc., Paul Saunders and an unknown chemical
   operator; Cause No. 94CV0514; In the 56th Judicial District Court of
   Galveston County, Texas ("Pointer").
     2.  Holly Benefiel, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV0246;
   In the 56th Judicial District Court of Galveston County, Texas.
     3.  Lilly Gordon, et al. v. Sterling Chemicals, Inc.; Cause No. 95-36592;
   In the 281st Judicial District Court of Harris County, Texas ("Gordon").
     4.  Versell Allums, et al. v. Sterling Chemicals, Inc., Paul Saunders and
   an unknown chemical operator; Cause No. 95CV1017; In the 10th Judicial
   District Court of Galveston County, Texas.
     5.  Maurice Benson, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1265;
   In the 56th Judicial District Court of Galveston County, Texas.

                                      16
<PAGE>
 
     6.  Rodney Curry, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1263;
   In the 122nd Judicial District Court of Galveston County, Texas.
     7.  Jayson Rhodes, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1266;
   In the 10th Judicial District Court of Galveston County, Texas.
     8.  Darrell Vick, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1262;
   In the 122nd Judicial District Court of Galveston County, Texas.
     9.  Nathaniel Barron, et al. v. Sterling Chemicals, Inc. and Paul Saunders;
   Cause No. 96CV0103; In the 10th Judicial District Court of Galveston County,
   Texas.
     10.  Melton Avie, et al. v. Sterling Chemicals, Inc., BP America, Inc., BP
   Chemicals America, Inc., n/k/a BP Chemicals, Inc., Allen Bolen, and Paul
   Saunders; Cause No. 96CV0377; In the 56th Judicial District Court of
   Galveston County, Texas.
     11.  Feliciana Cantu, et al. v. Sterling Chemicals, Inc.; Cause No. 664459;
   In the County Civil Court at Law No. 4 of Harris County, Texas.
     12.  Lee Arvie, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0431; In
   the 56th Judicial District Court of Galveston County, Texas.
     13.  Edwin Laday v. Sterling Chemicals, Inc.; Cause No. 96CV0430; In the
   212th Judicial District Court of Galveston County, Texas.
     14.  Earl Rivas and Rosie Rivas v. Sterling Chemicals, Inc., Sterling
   Chemical Company, Sterling Chemical Company, Inc., B.P. Chemicals, Inc., B.P.
   Chemicals America, Inc., Paul Saunders, and Allan Bolen; Cause No. 96CV0438;
   In the 10th Judicial District Court of Galveston County, Texas.
     15.  Bertha L. Anderson, et al. v. Sterling Chemicals, Inc.; Cause No.
   96CV0440; In the 122nd Judicial District Court of Galveston County, Texas.
     16.  Carl Terry, et al. v. Sterling Chemicals, Inc. and Paul Saunders;
   Cause No. 96CV0436; In the 212th Judicial District Court of Galveston County,
   Texas.
     17.  Phyllis Cormier, et al. v. Sterling Chemicals, Inc.; Cause No. 96-
   023195; In the 269th Judicial District Court of Harris County, Texas.
     18.  Nita Moore, et al. v. Sterling Chemicals, Inc.; Cause No. 96-22420; In
   the 270th Judicial District Court of Harris County, Texas.
     19.  Mattie Moses, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0458;
   In the 56th Judicial District Court of Galveston County, Texas.
     20.  Prince Ella Green and James Green v. Sterling Chemicals, Inc.; Cause
   No. 96CV0454; In the 212th Judicial District Court of Galveston County,
   Texas.
     21.  Jacqueline Lynch, et al. v. Sterling Chemicals, Inc.; Cause No. 43353;
   In the County Court at Law No. 2 of Galveston County, Texas.
     22.  Gloria Cotton, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0446;
   In the 122nd Judicial District Court of Galveston County, Texas.
     23.  Phyllis Joiner, et al. v. Sterling Chemicals, Inc.; Cause No. 56189;
   In the Justice of the Precinct No. 1, Galveston County, Texas.
     24.  Timothy McClurkin, Sr. v. Sterling Chemicals, Inc.; Cause No.
   96CV0451; In the 56th Judicial District Court of Galveston County, Texas.
     25.  Allen E. Kitchens v. Sterling Chemicals, Inc., et al.; Cause No.
   43,352; In the Galveston County Court, Galveston County, Texas.
     26.  Patricia A. Glover v. Sterling Chemicals, Inc., Paul Saunders, Allen
   Bolen, et al.; Cause No. 96CV0459; In the 212th Judicial District Court of
   Galveston County, Texas.
     27.  Wayne R. Lee v. Sterling Chemicals, Inc.; Cause No. 96CV0467; In the
   10th Judicial District Court of Galveston County, Texas.
 
     The following ammonia lawsuits against the Company have been dismissed by
   voluntary non-suit, however, the plaintiffs in these lawsuits have maintained
   their claims against the Company by filing Pleas-in-Intervention in either
   Pointer or Gordon referenced above:

     1. Bobbie J. Adams, et al. v. Sterling Chemicals, Inc.; Cause No. 94CV0764;
   In the 56th Judicial District Court of Galveston County, Texas.
     2. Courtney Adomond, et al. v. Sterling Chemicals, Inc.; Cause No.
   94CV0947; In the 56th Judicial District Court of Galveston County, Texas.

                                      17
<PAGE>
 
     3. Caroll Allen, et al. v.  Sterling Chemicals, Inc.; Cause No. 94CV1147;
   In the 212th Judicial District Court of Galveston County, Texas
     4. Richard Gayton, individually and as next friend of Ruben Gayton, et al.
   v. Sterling Chemicals, Inc., Paul Saunders and an unknown chemical operator;
   Cause No. 95-43771; In the 55th Judicial District Court of Harris County,
   Texas.
     5. Connie Alaniz and Emilio Alaniz, et al. v. Sterling Chemicals, Inc.,
   Paul Saunders and Terry Bellard; Cause No. 95CV1011; In the 10th Judicial
   District Court of Galveston County, Texas.
     6. Anita R. Afriyie, et al. v. Sterling Chemicals, Inc., Paul Saunders and
   Terry Bellard; Cause No. 95CV0997; In the 122nd Judicial District Court of
   Galveston County, Texas.
     7. Beverly D. Mitchell, et al. v. Sterling Chemicals, Inc., et al.; Cause
   No. 94CV1312 in the 56th Judicial District Court of Galveston County, Texas.

     The following ammonia lawsuit was settled in August 1996:

     Guadalupe Trevino v. Sterling Chemicals, Inc.; Cause No. 42634; In the
   Probate and County Court of Galveston County, Texas.


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

     On August 20, 1996, a Special Meeting of the Company's stockholders was
   held for the purpose of approving an Amended and Restated Agreement and Plan
   of Merger, dated April 24, 1996, pursuant to which, among other things, STX
   Acquisition Corp. would be merged with and into the Company, the Company
   would become a holding company through the transfer of its assets to an
   operating subsidiary, and the existing stockholders of the Company could
   elect to either retain their shares of stock (subject to certain limitations)
   or receive $12.00 cash per share.  The results of the stockholders vote on
   the Merger were as follows:  40,618,219 votes for, 1,812,182 votes against or
   withheld, 226,727 abstentions, and 13,032,863 shares not voting.
   Accordingly, the Merger was approved and was consummated on August 21, 1996.

                                      18
<PAGE>
 
                                    PART II

   ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
            MATTERS
 
     There is no established public trading market for Holdings' common stock,
   par value $.01 per share ("Common Stock"), although the Common Stock is
   traded on the OTC Electronic Bulletin Board maintained by the National
   Association of Securities Dealers, Inc. under the symbol "STXX".  Prior to
   the Merger, the Common Stock was listed on the New York Stock Exchange
   ("NYSE") under the symbol "STX".  The following table sets forth the price
   range of the Common Stock during the fiscal years ended September 30, 1996
   and September 30, 1995.  Information for the fourth quarter of fiscal 1996
   reflects high and low sales prices on the NYSE for the period of July 1
   through August 21, and high and low sales price information as reported on
   the OTC Electronic Bulletin Board for the period of August 22 through
   September 30.
<TABLE>
<CAPTION>
 
                    First       Second    Third     Fourth
                   Quarter      Quarter  Quarter    Quarter
                   -------      -------  --------  ---------
<S>                <C>          <C>      <C>       <C>
   1996 High       $ 9 1/4      $13      $13 1/8    $12 1/2
        Low        $ 7 1/2      $ 8      $11 1/8    $10 7/8
 

   1995 High        $13 7/8     $14      $13        $12 7/8
        Low         $ 9 3/4     $10 7/8  $10 1/4    $ 8 1/4

</TABLE> 
 

     As of September 30, 1996, there were approximately 280 record holders of
   Common Stock.

     Holdings has not paid dividends on the Common Stock in any of the last
   three fiscal years and does not anticipate paying dividends in the
   foreseeable future.  Any future determination as to the payment of dividends
   will be made at the discretion of the Board of Directors of Holdings and will
   depend upon the Company's operating results, financial condition, capital
   requirements, general business conditions and such other factors that the
   Board of Directors deems relevant.  In addition, the payment of dividends on
   the Common Stock is restricted by the terms of the indenture governing the
   13 1/2% Senior Secured Discount Notes Due 2008 ("Discount Notes"), and
   indirectly restricted by the terms of the Chemicals Credit Facility and the
   indenture governing the 11 3/4% Senior Subordinated Notes Due 2006
   ("Subordinated Notes") which restrict the ability of Chemicals to transfer
   funds to Holdings.
 
                                      19
<PAGE>
 
   ITEM 6. SELECTED FINANCIAL DATA OF THE COMPANY

   The following table sets forth selected financial data with respect to the
   Company's consolidated financial condition and consolidated results of
   operations and should be read in conjunction with the Company's Consolidated
   Financial Statements and related notes in Item 8 of this Form 10-K.
<TABLE>
<CAPTION>
 
 
                                                             Year Ended September 30,
                                          ------------------------------------------------------------
                                          1996/(2)/       1995          1994         1993         1992
                                          ----            ----          ----         ----         ----
OPERATING DATA:                                          (In Thousands Except Per Share Data)
 
<S>                                       <C>           <C>            <C>          <C>          <C>
   Revenues                               $   790,465     $1,030,198    $700,840     $518,821    $430,529
 
   Gross profit                               111,426        271,618      93,924       40,919      27,882
 
   Net income (loss)                           31,604        150,049      19,132       (5,420)     (5,890)
 
   Net cash provided by (used in)              63,601        191,838      75,249       48,114      (3,752)
     operating activities
 
  Net cash used in investing activities       (95,957)       (53,962)     (9,737)     (12,175)    (20,424)
 
   Net cash provided by (used in)               7,190       (109,017)    (64,874)     (37,057)     23,752
     financing activities
 
   EBITDA/(1)/                                121,200        281,480     108,600       52,477      40,967
 
PER SHARE DATA:
 
   Net income (loss) per share                   0.62           2.70        0.34        (0.10)      (0.11)
   Cash dividends                                   -              -           -         0.06       0.245
 
BALANCE SHEET DATA:
 
   Working capital                        $    76,933     $   74,620    $ 20,809     $ 30,952    $ 56,787
 
   Total assets                               689,684        609,939     580,925      546,754     608,470
 
   Long-term debt (excluding current          714,632        103,581     192,621      263,894     300,220
   maturities)
 
   Shareholders' equity (deficiency in       (272,439)       239,318      89,734       70,336      87,343
   assets)
</TABLE>

   __________

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

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

                                      20
<PAGE>
 
   SELECTED FINANCIAL DATA FOR CHEMICALS

     The following table sets forth selected financial data with respect to
   Chemical's consolidated financial condition and consolidated results of
   operations and should be read in conjunction with Chemical's Consolidated
   Financial Statements and related notes in Item 8 of this Form 10-K.
<TABLE>
<CAPTION>
 
                                                      Period from
                                           May 14, 1996 (Date of Inception) 
                                                to September 30, 1996/1/
                                           --------------------------------
                                                 (Dollars in Thousands)
 
            OPERATING DATA:
 
<S>         <C>                                  <C> 
             Revenues                            $  83,410  
 
             Gross profit                              363
 
             Net income                                174
 
            BALANCE SHEET DATA:
 
             Working capital                     $  77,299
 
             Total assets                          685,451
 
             Long-term debt (excluding             619,875
             current maturities)
 
             Stockholders' equity                 (184,302)
             (deficiency in assets)
 
</TABLE>

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

                                      21
<PAGE>
 
   ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS

   OVERVIEW

     Holdings is a holding company whose only material asset is Chemicals.
   Holdings' only material liability is its obligation to repay the Discount
   Notes issued in connection with the Merger.  Chemicals and its subsidiaries
   own substantially all of the consolidated operating assets and are obligated
   for substantially all liabilities of the Company other than the Discount
   Notes.  The Merger that occurred on August 21, 1996 and related financings
   were accounted for as a recapitalization, with no change in the basis of the
   assets and liabilities of Chemicals.  Other than the additional interest
   expense associated with the Discount Notes, the results of operations for the
   Company are the same as those for Chemicals.  Accordingly, the discussion
   that follows is applicable to both entities, except as specifically noted.  A
   separate discussion of the results of operations for Chemicals for the period
   ended September 30, 1996, would not, in the opinion of the Company, provide
   any additional meaningful information.

     The primary markets in which the Company competes, especially styrene and
   acrylonitrile, are cyclical and are sensitive to changes in the balance
   between supply and demand, the price of raw materials, and the level of
   general worldwide economic activity.  Historically, these markets have
   experienced alternating periods of tight supply and rising prices and profit
   margins, followed by periods of large capacity additions resulting in
   overcapacity and declining prices and margins.  Large global capacity
   additions of styrene and acrylonitrile are projected to be completed during
   fiscal years 1997 and 1998.  For styrene, approximately 7.2 billion pounds of
   new capacity is expected, and for acrylonitrile, approximately 940 million
   pounds of new capacity is expected.  The Company believes that these
   announced global capacity additions in styrene and acrylonitrile will result
   in overcapacity for these markets in fiscal years 1997 and 1998.  The
   resulting impact on prices and margins began to negatively affect the
   Company's results in the last half of fiscal 1996.  Demand growth is
   generally driven by new applications and the substitution of petrochemical-
   based plastics and fibers for materials, such as metals, paper, glass, wood,
   and cotton.  Demand from the Far East, particularly China, tends to have a
   disproportionate impact on the global markets for styrene and acrylonitrile
   due to both volume and volatility of the region's demand.  Although direct
   sales to China were approximately only 1% of total revenues in fiscal 1996,
   much of the Company's Far Eastern petrochemical product demand is ultimately
   driven by Chinese demand for downstream products.  In fiscal 1996, the
   Company's export sales to the Far East and total export sales were
   approximately 22% and 34%, respectively, of its total sales.

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

     During the past five years, the Company's results of operations have varied
   significantly from year to year primarily as a result of cyclical changes in
   the markets for its primary products.  The Company has attempted to stabilize
   these fluctuations by manufacturing two product groups, petrochemicals and
   pulp chemicals, which have historically been subject to different market
   dynamics, including timing differences in their respective cyclical upturns
   and downturns.

     Despite this diversification, however, prolonged or severe softness in the
   market for any of its principal products, particularly styrene and
   acrylonitrile, will adversely affect the Company.  Although earnings from
   styrene and acrylonitrile are expected to be significantly impacted by the
   global petrochemical capacity increases in fiscal years 1997 and 1998, this
   impact should be partially offset by the pulp chemical business which is
   expected to benefit from growing demand for generators and sodium chlorate
   and the 30% increase in the Company's sodium chlorate capacity as a result of
   completion of the Valdosta, Georgia plant.  There can be no assurance,
   however, that such favorable results in the pulp chemical business will be
   realized.

     In addition, the Company markets substantial volumes of petrochemicals
   (approximately 50%, 54% and 51% of total sales volumes in fiscal years 1996,
   1995, and 1994, respectively) and generates substantial revenues

                                      22
<PAGE>
 
   (approximately 36%, 30%, and 32% of total revenues in fiscal years 1996,
   1995, and 1994, respectively) under conversion agreements.  Under these
   agreements, the customer furnishes raw materials which the Company processes
   in exchange for a fee designed to cover its fixed and variable costs of
   production.  The conversion agreements allow the Company to maintain lower
   levels of working capital and, in some cases, to gain access to certain
   improvements in manufacturing process technology.  The Company believes that
   its conversion agreements help insulate the Company to some extent from the
   effects of declining markets and increases in raw material prices while
   allowing it to share in the benefits of favorable market conditions for most
   of the products sold under these arrangements.

     In fiscal 1995, the Company began a three-year, $200 million capacity
   expansion and modernization program.  Approximately 75% of the capital
   expenditures were completed by the end of fiscal 1996, and the balance will
   be completed in future periods.  Through this program, the Company has
   expanded its total annual petrochemical production capacity including
   capacity additions of 200 million pounds of styrene, 200 million pounds of
   acetic acid, and 150 million gallons of methanol.  In addition, the Company
   will increase its sodium chlorate production capacity by 30% or 110,000 tons
   upon completion of the Valdosta, Georgia plant.  Future capital expenditures
   are expected to be funded from operating cash flow and borrowings under its
   revolving credit facility.

     Notwithstanding the anticipated weakness in the styrene and acrylonitrile
   markets, the Company believes that cash flow from operations, together with
   funds available under its revolving credit facility will be adequate to make
   the required payments of principal and interest due in fiscal 1997.

   LIQUIDITY AND CAPITAL RESOURCES

     On August 21, 1996, in connection with the Merger, the Company completed
   debt and equity transactions resulting in a recapitalization of the Company
   (collectively, the "Transaction").  The following table sets forth the
   sources and uses of funds to effect the Transaction, which was accounted for
   as a recapitalization with no impact on the historical basis of the assets
   and liabilities of the Company.  See Notes 1 and 4 of Notes to Consolidated
   Financial Statements for further information on the Transaction and the terms
   of the debt instruments, including definitions of certain terms.
<TABLE>
<CAPTION>
 
            Sources of Funds              Dollars in Millions
            ----------------              -------------------
 
<S>                                       <C>
           Revolving credit facility                   $  6.4
           Term loans                                   350.0
           ESOP term loan                                 6.5
           Subordinated notes                           275.0
           Discount notes and warrants                  100.0
           Equity private placement                      70.7
           Cash from operations                          10.3
                                                       ------
 
             Total                                     $818.9
                                                       ======
 
            Uses of Funds
            -------------               
 
           Purchase of common stock                    $608.3
           Purchase of other equity                      
            interests                                    14.6
           Repayment of outstanding debt                142.7
           Chemicals ESOP loan                            6.5
           Transaction expenses and fees                 46.8
                                                       ------
 
                                                       $818.9
                                                       ======
</TABLE>

     As a result of the Transaction, the Company is highly leveraged with
   significantly increased cash requirements for debt service.  At September 30,
   1996, long-term debt (including current maturities) was $726 million and
   deficiency in assets was $(272) million as a result of recapitalization
   accounting.

                                      23
<PAGE>
 
     The Company's ability to obtain additional financing in the future for
   working capital, capital expenditures, acquisitions and general corporate
   purposes, should it need to do so, will be affected by cash requirements for
   debt service.  The Credit Agreement and the indentures governing the
   Subordinated Notes and the Discount Notes (collectively, the "Indentures")
   contain numerous financial and operating covenants, including, but not
   limited to, restrictions on the Company's ability to incur indebtedness, pay
   dividends, create liens, sell assets, engage in mergers and acquisitions and
   refinance existing indebtedness.  The Company's ability to comply with the
   terms of these various debt agreements (including its ability to comply with
   such covenants) and to meet its debt service obligations will depend on the
   future performance of the Company.  As a result of weaker than expected
   market conditions for styrene and acrylonitrile during the first quarter of
   fiscal 1997 and costs that were expensed related to the Merger in the fourth
   quarter of fiscal 1996, the Company may not be in compliance with its
   leverage ratio covenant under the Credit Agreement as of the end of the first
   quarter of fiscal 1997. If needed, the Company intends to obtain a waiver to
   correct any such noncompliance. The Company expects to be in compliance with
   all the other coverage ratios under the Credit Agreement as of December 31,
   1996, but there can be no assurance in this regard nor can there be any
   assurance that the requisite waiver will be obtained with respect to the
   leverage ratio covenant. The Credit Agreement also requires that certain
   amounts of Excess Cash Flow (as defined) be used to prepay amounts
   outstanding under the Term Loans. The first such mandatory prepayment is not
   required to be made until January 1998.

     The Company intends to meet its liquidity needs for operating activities
   and capital expenditures (other than acquisitions) through internally
   generated funds and, to the extent necessary, borrowings under the revolving
   credit facility.  The Company believes that such sources of funds will be
   sufficient to permit the Company to meet its liquidity needs during fiscal
   1997.

     The Credit Agreement and the indenture for the Subordinated Notes contain
   provisions which restrict the payment of advances, loans and dividends from
   Chemicals to Holdings.  The most restrictive of those covenants limits such
   payments during fiscal 1997 to approximately $1.6 million plus any amounts
   due to Holdings from Chemicals under the intercompany tax sharing agreement.
   Such restriction is not expected to limit Holdings' ability to meet its
   obligations in fiscal 1997.

     Working Capital.  Working capital at September 30, 1996 was $77 million, an
   increase of $2 million from September 30, 1995.  This increase was the result
   of the following changes:
<TABLE>
<CAPTION>
 
             Current Assets                    Current Liabilities
             --------------                    -------------------        
             (In Millions)                         (In Millions)
 
   <S>                          <C>        <C>                             <C>
   Cash and cash equivalents    $(25)       Accounts payable               $ 5
   Inventories                   (14)       Accrued liabilities              2
   Accounts receivable            21        Current portion long-term debt   6
   Other                           7                                       
                                ----                                       ---
                                $(11)                                      $13
</TABLE>

     ( ) - Decrease in assets, increase in liabilities.

     Cash Flow.  Net cash provided from operations was $64 million for fiscal
   1996, a decrease of $128 million compared to fiscal 1995.  This decrease
   primarily resulted from decreased earnings during fiscal 1996.  Net cash flow
   used in investing activities was $96 million in fiscal 1996 compared to $54
   million in fiscal 1995.  The increase was primarily due to additional
   expenditures made as a part of the Company's three-year capital spending
   program.  Net cash flow provided by financing activities was $7 million in
   fiscal 1996 compared to net cash flow used of $109 million in fiscal 1995.
   In fiscal 1995, net cash flow used in financing activities primarily resulted
   from utilizing cash flow from operations to reduce long-term debt.

     Capital Expenditures.  In fiscal 1995, the Company initiated its three-
   year, $200 million capital spending program.  As of September 30, 1996, the
   Company has spent approximately 75% of the capital program.  Capital

                                      24
<PAGE>
 
   expenditures for fiscal 1996 were $96 million compared to $54 million in
   fiscal 1995.  The fiscal 1996 capital expenditures were primarily for the
   expansion of the acetic acid unit, construction of the methanol unit, and
   construction of the Valdosta, Georgia sodium chlorate plant.  The fiscal 1995
   capital expenditures were primarily for plant instrumentation modernization
   and process improvements, the acetic acid expansion, and construction of the
   methanol unit and the new sodium chlorate plant. The acetic acid expansion
   was completed in June 1996, the methanol unit was completed in August 1996,
   and the Valdosta plant is expected to be on stream by January 1, 1997.

     Capital expenditures are expected to be approximately $33 million in fiscal
   1997, with about $18 million dedicated to the petrochemical business and $15
   million dedicated to the pulp chemical business.  Capital expenditures for
   the petrochemical business will be primarily for process modernization in
   styrene and acrylonitrile and routine safety, environmental and replacement
   capital.  Capital expenditures for the pulp chemical business will be
   primarily for completion of the Georgia sodium chlorate plant.

     The Company's capital expenditures for environmentally-related prevention,
   containment and process improvements were $2 million and $3 million for
   fiscal years 1996 and 1995, respectively.  The Company does not anticipate a
   material increase in these types of expenses during fiscal 1997.  During both
   fiscal years, the Company did not incur any other infrequent or non-recurring
   material environmental expenditures which were required under existing
   environmental regulations.  See "Certain Known Events, Trends and
   Uncertainties - Environmental and Safety Matters."

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

     Acquisitions.  A part of the Company's business strategy is to implement a
   focused acquisition strategy, targeting chemical businesses and assets which
   would strengthen the Company's existing market positions, provide upstream or
   downstream integration or produce complementary chemical products.  As
   previously discussed, the Company's ability to consummate acquisitions may be
   limited by restrictions in its debt agreements, results of operations and
   industry conditions.  Though there can be no assurance, the Company currently
   believes that, if such acquisition opportunities arise, it will be able to
   obtain the necessary approval from its existing lenders and obtain additional
   financing, as necessary, to consummate such acquisitions.

     Foreign Exchange.  The Company enters into forward foreign exchange
   contracts to reduce risk due to Canadian dollar exchange rate movements.  The
   Company does not engage in currency speculation.  The forward foreign
   exchange contracts have varying maturities with none exceeding 18 months.
   The Company makes net settlements of U.S. dollars for Canadian dollars at
   rates agreed to at inception of the contracts.  The Company had a notional
   amount of approximately $30 million and $26 million of forward foreign
   exchange contracts outstanding to buy Canadian dollars at September 30, 1996
   and 1995, respectively.  The deferred gain on these forward foreign exchange
   contracts at September 30, 1996 and 1995 was immaterial.


   ACCOUNTING CHANGES

     The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
   for Stock-Based Compensation" in October 1995.  Under SFAS No. 123, companies
   are permitted to either adopt this new standard and record expenses for stock
   options and other stock-based employee compensation plans based on their fair
   value at date of grant, or continue to apply its current accounting policy
   under Accounting Principles Board ("APB") Opinion No. 25 and increase its
   footnote disclosure.  The Company will continue to apply APB Opinion No. 25,
   and in fiscal 1997 will increase its footnote disclosure to include the pro-
   forma impact on net income and earnings per share of the application of the
   fair value based method of accounting.

                                      25
<PAGE>
 
     The Company will adopt SFAS No. 121 "Accounting for the Impairment of Long-
   Lived Assets and for Long-Lived Assets to Be Disposed Of" in fiscal 1997.
   Issued in March 1995, SFAS No. 121 sets forth guidance on how to measure an
   impairment of long-lived assets and when to recognize such an impairment.
   The adoption of the new standard is not expected to have a material impact on
   the Company's financial position or results from operations.


   CERTAIN KNOWN EVENTS, TRENDS, UNCERTAINTIES AND RISK FACTORS

     Petrochemical Raw Material Prices and Availability.  For each of the
   Company's petrochemical products, the cost of raw materials and utilities is
   far greater than all other costs of production combined.  Therefore, an
   adequate supply of raw materials at reasonable prices is critical to the
   success of the Company's business.  The Company does not produce any of its
   major raw materials (benzene, ethylene, propylene, ammonia, and natural gas),
   although a methanol unit was completed in August 1996 as described above.
   This unit supplies the methanol required in acetic acid production.

     These materials are all commodity petrochemicals and the price for each can
   fluctuate widely for a variety of reasons, including changes in the
   availability of these products because of major capacity additions or
   significant plant operating problems.  Although no assurances can be given,
   the Company believes that it will continue to secure adequate supplies of all
   its raw materials at acceptable prices.

     Cyclical Markets for Products; Capacity Increases on Key Petrochemical
   Products.  The prices of the Company's petrochemical and pulp chemical
   products have been cyclical and sensitive to overall supply relative to
   demand and the level of general business activity.  Large global capacity
   additions of styrene and acrylonitrile are projected to be completed in
   fiscal years 1997 and 1998.  For styrene, approximately 7.2 billion pounds of
   new capacity is expected, and for acrylonitrile, approximately 940 million
   pounds of new capacity is expected. The Company believes that these announced
   global capacity additions in styrene and acrylonitrile will result in
   overcapacity for these markets in fiscal years 1997 and 1998. The resulting
   impact on prices and margins began to negatively affect the Company's results
   of operations negatively in the last half of fiscal 1996.

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

     At its Texas City Plant, the Company has reduced emissions of targeted
   chemicals 71% from 1987 levels under the EPA's voluntary 33/50 program.
   These reductions included a 95% reduction in hydrogen cyanide emissions and
   an 83% reduction in benzene emissions.  Additionally, the Company will
   initiate appropriate actions or preventive projects necessary to insure that
   the facility continues to operate in a safe and environmentally responsible
   manner.  No assurances can be given that the Company will not incur material
   environmental  expenditures associated with its facilities, operations or
   products.

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

     British Columbia has a regulation in place that would effectively eliminate
   the use of chlorine dioxide in the bleaching process by the year 2002.  The
   pulp and paper industry is working to change this regulation and believes

                                      26
<PAGE>
 
   that the ban of chlorine dioxide in the bleaching process will yield no
   measurable environmental or public health benefit.  The Company is not aware
   of any other laws or regulations existing in North America which would
   restrict the use of the product.

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

     High Financial Leverage. As a result of the Merger, the Company had
   consolidated indebtedness of $726 million and deficiency in assets of $(272)
   million at September 30, 1996. The Company's high degree of leverage could
   have important consequences, including the following: (i) the ability to
   obtain additional financing in the future for working capital, capital
   expenditures, acquisitions, general corporate purposes or other purposes, if
   needed, may be restricted; (ii) a substantial portion of cash flow from
   operations will be dedicated to cover cash interest requirements, thereby
   limiting the funds available for operations and any future business
   opportunities; and (iii) the degree of leverage may make the Company more
   vulnerable to a downturn in its businesses or the economy generally.

     Substantial Restrictions and Covenants. The Company's debt instruments
   contain numerous financial and operating covenants, including, but not
   limited to, restrictions on the Company's ability to incur indebtedness, pay
   dividends, create liens, sell assets, engage in certain mergers and
   acquisitions and refinance existing indebtedness. These covenants may limit
   the Company's ability to pursue its planned acquisition strategy. In the
   event of a change of control, the Company will be required, subject to
   certain conditions, to offer to purchase all outstanding Discount Notes and
   Subordinated Notes, respectively, at a price equal to 101% of the Accreted
   Value with respect to the Discount Notes, and 101% of the principal amount,
   with respect to the Subordinated Notes, plus accrued interest. The ability of
   the Company to comply with such covenants and other terms of its debt
   instruments and to satisfy its other debt obligations will depend on the
   future performance of the Company.

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


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

     Ability to Complete Acquisitions.  A significant element of the Company's
   business strategy is to pursue strategic acquisitions that either expand or
   complement the Company's products.  The financing for such acquisitions will
   likely affect the Company's capitalization.  There can be no assurance that
   the Company will be able to identify and make acquisitions on terms favorable
   to it or that the Company will be able to obtain financing for such
   acquisitions on terms the Company finds acceptable.  In addition, the
   Indentures and the Credit Agreement substantially limit the Company's ability
   to incur additional debt to finance such acquisitions.

     Long-Term Contracts and Significant Customers.  The Company sells
   substantial portions of its styrene and acrylonitrile production under long-
   term contracts, and sells all of its acetic acid and plasticizers production
   under long-term contracts with single customers.  These contracts are
   intended to provide some stability if demand for or prices of these products
   decline significantly, but also limit the Company's ability to take full
   advantage of attractive market 


                                      27
<PAGE>
 
   conditions during periods of higher prices for these products. During fiscal
   1996, a significant portion of the Company's production from the Texas City
   Plant was dedicated to multi-year contracts with Monsanto, Bayer, BP, and
   BASF. Under certain market conditions, the loss of one or more of these
   customers or a material reduction in the amount of product purchased by one
   or more of them could have a material adverse effect on the Company.

     Foreign Operations, Country Risks and Exchange Rate Fluctuations.
   Approximately 20% of the Company's fiscal 1996 revenues were derived from its
   Canadian-based pulp chemical business and approximately 34% were derived from
   export sales. International operations and exports to foreign markets are
   subject to a number of special risks, including currency exchange rate
   fluctuations, trade barriers, exchange controls, national and regional labor
   strikes, political risks and risks of increases in duties, taxes and
   governmental royalties, as well as changes in laws and policies governing
   operations of foreign-based companies. In addition, earnings of foreign
   subsidiaries and intercompany payments are subject to foreign income tax
   rules that may reduce cash flow available to meet required debt service and
   other obligations of the Company.

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

     A portion of the Company's expenses and sales are denominated in Canadian
   dollars, and accordingly, the Company's revenues, cash flows and earnings may
   be affected by fluctuations in the exchange rate between the United States
   dollar and the Canadian dollar, which may also have adverse tax consequences.
   In addition, because a portion of the Company's sales, cost of goods sold and
   other expenses are denominated in Canadian dollars, the Company has a
   translation exposure to fluctuations in the Canadian dollar against the U.S.
   dollar.  These currency fluctuations could have a material impact on the
   Company as increases in the value of the Canadian dollar have the effect of
   increasing the U.S. dollar equivalent of cost of goods sold and other
   expenses with respect to the Company's Canadian production facilities.  The
   Company enters into forward foreign exchange contracts to hedge such exposure
   for periods consistent with its committed exposure, but does not engage in
   currency speculation.


                                      28
<PAGE>
 
   RESULTS OF OPERATIONS

     The following table sets forth revenues, gross profit and operating income
   for the Company's primary product groups for the years ended September 30,
   1996, 1995, and  1994.
<TABLE>
<CAPTION>
 
 
                                  Year Ended
                                September 30,
                         1996       1995      1994
                        ------     ------    ------
   <S>                  <C>        <C>       <C>
                           (Dollars in millions)
   REVENUES:
   Petrochemicals.....   $ 633     $  886     $ 578
   Pulp Chemicals.....     157        144       123
                         -----     ------     -----
                         $ 790     $1,030     $ 701
                         =====     ======     =====
 
   GROSS PROFIT:
   Petrochemicals.....   $  53     $  225     $  58
   Pulp Chemicals.....      58         47        36
                         -----     ------     -----
                         $ 111     $  272     $  94
                         =====     ======     =====
 
   OPERATING INCOME:
   Petrochemicals.....   $  31     $  212     $  37
   Pulp Chemicals.....      36         31        11
                         -----     ------     -----
                         $  67     $  243     $  48
                         =====     ======     =====
 
</TABLE>
   COMPARISON OF FISCAL 1996 TO FISCAL 1995

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

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

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

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

     The Company's acrylonitrile unit operated at a reduced rate in 1996 due to
   an extended shutdown for most of March 1996 for scheduled maintenance and
   installation of the first phase of state-of-the-art distributive control
   systems.  A second phase of distributive controls was installed in October
   1996.  The new distributive control 

                                      29
<PAGE>
 
   systems are expected to result in increased efficiencies and stronger
   operating fundamentals in the future. The prices of propylene and ammonia,
   which are the major raw materials used to make acrylonitrile, were
   approximately 23% and 22% lower, respectively, in fiscal 1996 than in fiscal
   1995. These decreases helped to offset some of the lower average selling
   prices discussed above, but margins still declined substantially.

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

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

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

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

     Income from Operations.  Income from operations for fiscal 1996 was $67
   million (including merger-related expenses of $3.6 million), consisting of
   $31 million from petrochemical operations and $36 million from pulp chemical
   operations.  This amount represented an approximately 72% decrease from
   fiscal 1995, primarily as a result of weakness in the markets for styrene and
   acrylonitrile discussed above, which resulted in significantly lower margins
   during fiscal 1996 compared to the 1995 fiscal year.  This weakness was
   partially offset by higher operating income from the pulp chemical business
   and other petrochemical products.  In addition, the Company incurred
   approximately $2 million in start-up expenses during fiscal 1996 in
   connection with construction of the methanol unit.

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

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

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

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

                                      30
<PAGE>
 
     Net Income.  Due to the factors described above, net income for fiscal 1996
   was $32 million compared to $150 million for fiscal 1995.


   COMPARISON OF FISCAL 1995 TO FISCAL 1994

     Revenues.  The Company's revenues for fiscal 1995 were $1.03 billion, an
   increase of $329 million from fiscal 1994.  Fiscal 1995 revenues were the
   highest in Company history, achieved primarily through higher sales prices
   and volumes for styrene and acrylonitrile due to improving conditions in the
   commodity chemical markets in 1994 and 1995.  The Company's pulp chemical
   business also experienced record revenues in fiscal 1995 primarily due to
   increased sales prices and volumes of sodium chlorate.

     Petrochemicals.  The financial performance of the Company's petrochemical
   business was significantly better during fiscal 1995 than in fiscal 1994.
   Petrochemical revenues increased 53% to $886 million from fiscal 1994,
   primarily as a result of increased average styrene and acrylonitrile sales
   prices and higher acrylonitrile sales volumes.

     Styrene.  Styrene revenues increased in fiscal 1995 compared to fiscal 1994
   primarily because of a 64% increase in average sales prices.  The styrene
   unit operated at a slightly higher rate than in fiscal 1994, in spite of two
   planned shutdowns for maintenance and catalyst replacement during fiscal 1995
   compared to no shutdowns in the prior year.  The second planned shutdown,
   which occurred in the fourth quarter of fiscal 1995, also included
   modernization of the styrene unit's control instrumentation with state-of-
   the-art distributive control systems.  The average prices for styrene's
   primary raw materials, benzene and ethylene, increased approximately 5% and
   40%, respectively, in fiscal 1995 compared to fiscal 1994.  However, the
   Company was able to increase styrene selling prices and thereby margins
   through most of the fiscal year until the dramatic fall in prices and margins
   in the fourth quarter of fiscal 1995.

     Acrylonitrile.  Acrylonitrile revenues for fiscal 1995 increased primarily
   due to an increase of approximately 70% in average sales prices, peaking at
   unprecedented levels in the third quarter of fiscal 1995, and an increase of
   approximately 11% in sales volumes.  Acrylonitrile revenues from export sales
   constituted approximately 93% of the Company's total acrylonitrile revenues
   and approximately 81% of its acrylonitrile production for fiscal 1995.
   Almost all of the Company's domestic acrylonitrile revenues are from
   conversion agreements.  Average export acrylonitrile prices and margins were
   significantly higher in fiscal 1995 than in fiscal 1994 as a result of the
   strong demand during most of the year.

     The average prices of acrylonitrile's primary raw materials, propylene and
   ammonia, increased substantially in fiscal 1995 compared to fiscal 1994.
   Average propylene prices were approximately 70% higher and average ammonia
   prices increased by approximately 35%.  However, the Company was able to
   substantially improve margins for acrylonitrile during most of the year due
   to increases in acrylonitrile sales prices, until the downturn in the fourth
   quarter that negatively affected sales prices and margins.

     Acetic Acid.  Acetic acid revenues for fiscal 1995 increased approximately
   24% from fiscal 1994.  The increase in revenues was related to an increase in
   passed through raw material costs, specifically methanol, during the period.

     Other Petrochemical Products.  Revenues in fiscal 1995 from plasticizers,
   lactic acid, TBA and sodium cyanide decreased approximately 3% compared to
   fiscal 1994.  The decline was primarily attributable to lower lactic acid
   revenues.

     Pulp Chemicals.  Revenues from the Company's pulp chemical business
   increased by approximately 17% to $144 million in fiscal 1995.  The increase
   in revenues resulted primarily from (i) an approximately 14% increase in
   sodium chlorate sales volumes, due to the substitution of chlorine dioxide
   for elemental chlorine in the bleaching process, and (ii) an approximately
   11% increase in average selling prices.  Royalty revenues from installed
   generator technology increased by approximately 15% to $19 million in fiscal
   1995 as a result of higher customer operating rates and additional installed
   capacity.  Sales of generator technology were approximately the same in
   fiscal 1995 as the previous year.

                                      31
<PAGE>
 
     The increased sodium chlorate sales volumes in fiscal 1995 resulted in
   increased capacity utilization, which contributed to lower per unit cost and
   increased margins.

     Selling, General and Administrative Expenses.  The Company's SG&A expenses
   in fiscal 1995 were $29 million compared to $46 million in fiscal 1994.  A
   $25 million decrease in the expense related to the SAR program, resulting
   from an approximately 50% decrease in the number of SARs outstanding and a
   decrease in the Company's stock price at the end of fiscal 1995 compared to
   the end of fiscal 1994, was partially offset by a $4 million increase in
   employee profit sharing, which was directly related to the Company's improved
   earnings in fiscal 1995.

     Income from Operations.  Income from operations for fiscal 1995 was $243
   million, consisting of $212 million from petrochemical operations and $31
   million from pulp chemical operations.  This amount represented an
   approximately 406% increase from fiscal 1994.  The increase was primarily the
   result of strength in the markets for styrene and acrylonitrile discussed
   above, which resulted in significantly higher margins and volumes during
   fiscal 1995 compared to fiscal 1994.

     Interest and Debt Related Expenses.  Interest expense decreased $7.5
   million in fiscal 1995 primarily due to the Company's repayment of $105
   million of debt during the year.  The Company's average interest rates
   decreased to 7% per annum on September 30, 1995 from 8% per annum on
   September 30, 1994 primarily due to the refinancing in April 1995.

     Provision for Income Taxes.  Provision for income taxes for fiscal 1995 was
   $75 million, with an effective tax rate of 33%, compared to $9 million, with
   an effective tax rate of 32% for fiscal 1994.  The increase was primarily due
   to the significant increase in the Company's pre-tax income of $228 million
   for fiscal 1995 from $28 million in fiscal 1994, which was largely the result
   of higher earnings from the petrochemical business.

     Net Income.  Due to the factors described above, net income for fiscal 1995
   was $150 million compared to $19 million for fiscal 1994.

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


                       STERLING CHEMICALS HOLDINGS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
 
                                                                     YEAR ENDED SEPTEMBER 30,
                                                                 --------------------------------
                                                                   1996       1995        1994
                                                                 --------  -----------  ---------
<S>                                                              <C>       <C>          <C>
   Revenues....................................................  $790,465   $1,030,198  $700,840
   Cost of goods sold..........................................   679,039      758,580   606,916
                                                                 --------   ----------  --------
   Gross profit................................................   111,426      271,618    93,924
 
   Selling, general and administrative expenses................    40,305       28,856    46,150
   Merger related expenses.....................................     3,633           --        --
   Write-off of assets.........................................     3,706           --        --
   Interest and debt related expenses, net of interest income..    13,380       14,604    22,126
   Gain on sale of assets......................................        --           --    (2,606)
                                                                 --------   ----------  --------
   Income before taxes and extraordinary item..................    50,402      228,158    28,254
   Provision for income taxes..................................    16,898       75,005     9,122
                                                                 --------   ----------  --------
   Income before extraordinary item............................    33,504      153,153    19,132
   Extraordinary item, loss on early extinguishment of debt,
    net of tax (Note 3)........................................     1,900        3,104        --
                                                                 --------   ----------  --------
   Net income..................................................  $ 31,604   $  150,049  $ 19,132
                                                                 ========   ==========  ========
 
   Per share data:
   Income before extraordinary item............................  $    .66   $     2.76  $    .34
   Extraordinary item..........................................       .04          .06        --
                                                                 --------   ----------  --------
   Net income per share........................................  $    .62   $     2.70  $    .34
                                                                 ========   ==========  ========
 
</TABLE>
   The accompanying notes are an integral part of the consolidated financial
   statements.

                                      33
<PAGE>
 
                       STERLING CHEMICALS HOLDINGS, INC.
                          CONSOLIDATED BALANCE SHEETS
                  (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
 
                                                                                                SEPTEMBER 30,
                                                                                            ---------------------
                                                                                               1996       1995
                                                                                            ----------  ---------
<S>                                                                                         <C>         <C>
   ASSETS
   Current assets:
     Cash and cash equivalents............................................................  $   5,609   $ 30,882
     Accounts receivable..................................................................    133,399    112,102
     Inventories..........................................................................     53,720     67,867
     Prepaid expenses.....................................................................      9,076      3,878
     Deferred income tax benefit..........................................................      7,214      5,622
                                                                                            ---------   --------
     Total current assets.................................................................    209,018    220,351
 
   Property, plant and equipment, net.....................................................    365,765    309,084
   Other assets...........................................................................    114,901     80,504
                                                                                            ---------   --------
     Total assets.........................................................................  $ 689,684   $609,939
                                                                                            =========   ========
 
   LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
   Current liabilities:
     Accounts payable.....................................................................  $  66,562   $ 72,016
     Accrued liabilities..................................................................     53,898     55,858
     Current portion of long-term debt....................................................     11,625     17,857
                                                                                            ---------   --------
     Total current liabilities............................................................    132,085    145,731
 
   Long-term debt.........................................................................    714,632    103,581
   Deferred income tax liability..........................................................     46,933     40,297
   Deferred credits and other liabilities.................................................     68,473     81,012
   Common stock held by ESOP..............................................................      6,500         --
   Less:  unearned compensation...........................................................     (6,500)        --
 
   Commitments and contingencies (Note 7)
   Stockholders' equity (Deficiency in assets):
     Common stock, $.01 par value, 150,000 shares authorized, 10,599 shares issued and
      outstanding at September 30, 1996; 60,327 shares issued, 55,674 shares outstanding
      at September 30, 1995...............................................................        106        603
     Additional paid-in capital...........................................................   (560,077)    33,269
     Retained earnings....................................................................    306,656    275,052
     Pension adjustment...................................................................         --     (1,556)
     Accumulated translation adjustment...................................................    (19,124)   (17,307)
     Deferred compensation................................................................         --       (129)
                                                                                            ---------   --------
                                                                                             (272,439)   289,932
     Treasury stock, at cost, 4,653 shares at September 30, 1995..........................         --    (50,614)
                                                                                            ---------   --------
     Total stockholders' equity (deficiency in assets)....................................   (272,439)   239,318
                                                                                            ---------   --------
     Total liabilities and stockholders' equity (deficiency in assets)....................  $ 689,684   $609,939
                                                                                            =========   ========
 
</TABLE>
   The accompanying notes are an integral part of the consolidated financial
   statements.

                                      34
<PAGE>
 
                       STERLING CHEMICALS HOLDINGS, INC.
                           CONSOLIDATED STATEMENTS OF
             CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
                             (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
 
                                                                                  
                                           COMMON STOCK        ADDITIONAL                          ACCUMULATED
                                     -----------------------    PAID-IN    RETAINED    PENSION     TRANSLATION
                                        SHARES       AMOUNT     CAPITAL    EARNINGS   ADJUSTMENT    ADJUSTMENT   
                                     -----------    --------  -----------  --------  ------------  ------------  
<S>                                  <C>            <C>       <C>          <C>       <C>           <C>           
   Balance, September 30, 1993.....        60,325     $ 603    $  34,708   $105,871      $(1,297)     $(16,184)  
 
   Net income......................            --        --           --     19,132           --            --   
   Translation adjustment..........            --        --           --         --           --        (1,138)  
   Common stock issued.............             2        --            6         --           --            --   
   Treasury stock transactions.....            --        --       (1,482)        --           --            --   
   Amortization of deferred
    compensation...................            --        --           --         --           --            --   
   Pension adjustment..............            --        --           --         --          347            --   
                                          -------     -----    ---------   --------  -----------   -----------   
   Balance, September 30, 1994.....        60,327       603       33,232    125,003         (950)      (17,322)  
 
   Net income......................            --        --           --    150,049           --            --   
   Translation adjustment..........            --        --           --         --           --            15   
   Treasury stock transactions.....            --        --           37         --           --            --   
   Amortization of deferred
    compensation...................            --        --           --         --           --            --   
   Pension adjustment..............            --        --           --         --         (606)           --   
                                          -------     -----    ---------   --------  -----------   -----------  
   Balance, September 30, 1995.....        60,327       603       33,269    275,052       (1,556)      (17,307)     
 
   Net income......................            --        --           --     31,604           --            --      
   Redemption of common stock......       (50,690)     (507)    (616,892)        --           --            --      
   Common stock issued in
     Transaction...................         5,349        54       64,084         --           --            --      
   Employee stock purchase.........           250         2        3,000         --           --            --      
   Stock warrants..................            --        --        6,900         --           --            --      
   Translation adjustment..........            --        --           --         --           --        (1,817)     
   Treasury stock transactions.....        (4,637)      (46)     (50,438)        --           --            --      
   Amortization of deferred
     compensation..................            --        --           --         --           --            --      
   Pension adjustment..............            --        --           --         --        1,556            --      
                                          -------     -----    ---------   --------  -----------   -----------   
   Balance, September 30, 1996.....        10,599     $ 106    $(560,077)  $306,656      $    --      $(19,124)  
                                          =======     =====    =========   ========  ===========   ===========   
 


 
                                        DEFERRED         TREASURY
                                      COMPENSATION        STOCK
                                     -------------      --------- 
<S>                                  <C>                   <C> 
   Balance, September 30, 1993.....       $  (164)      $ (53,201)
 
   Net income......................            --              --
   Translation adjustment..........            --              --
   Common stock issued.............            --              --
   Treasury stock transactions.....            --           2,437
   Amortization of deferred
    compensation...................            96              --
   Pension adjustment..............            --              --
                                          -------       ---------
   Balance, September 30, 1994.....           (68)        (50,764)

   Net income......................            --              --
   Translation adjustment..........            --              --
   Treasury stock transactions.....            --             150
   Amortization of deferred
    compensation...................           (61)             --  
   Pension adjustment..............            --              --
                                          -------       ---------   
   Balance, September 30, 1995.....          (129)        (50,614)
 
   Net income......................            --              --
   Redemption of common stock......            --              --
   Common stock issued in
     Transaction...................            --              --
   Employee stock purchase.........            --              --
   Stock warrants..................            --              --
   Translation adjustment..........            --              --
   Treasury stock transactions.....            --          50,614
   Amortization of deferred
     compensation..................           129              --
   Pension adjustment..............            --              --
                                          -------       ---------   
   Balance, September 30, 1996.....       $    --       $      -- 
                                          =======       =========   
 
</TABLE>


The accompanying notes are an integral part of the consolidated financial 
statements.
                                      35
<PAGE>
 
                       STERLING CHEMICALS HOLDINGS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
 
                                                                                   YEAR ENDED SEPTEMBER 30,
                                                                             ------------------------------------
                                                                                1996         1995         1994
                                                                             ----------  ------------  ----------
<S>                                                                          <C>         <C>           <C>
   Cash flows from operating activities:
     Cash received from customers..........................................  $ 874,253    $1,159,192   $ 709,026
     Miscellaneous cash receipts...........................................     17,758        14,007      10,618
     Cash paid to suppliers and employees..................................   (804,414)     (893,324)   (614,856)
     Interest paid.........................................................     (9,492)      (14,811)    (20,443)
     Interest received.....................................................      1,114         2,540          60
     Income taxes paid.....................................................    (15,618)      (75,766)     (9,156)
                                                                             ---------    ----------   ---------
   Net cash provided by operating activities...............................     63,601       191,838      75,249
   Cash flows from investing activities:
     Capital expenditures..................................................    (95,957)      (53,962)    (12,343)
     Proceeds from sale of assets..........................................          -             -       2,606
                                                                             ---------    ----------   ---------
   Net cash used in investing activities...................................    (95,957)      (53,962)     (9,737)
   Cash flows from financing activities:
     Proceeds from long-term debt..........................................    800,350       217,000           -
     Repayment of long-term debt...........................................   (196,285)     (322,282)    (65,517)
     Redemption of common stock............................................   (616,160)            -           -
     Purchase of other equity interests....................................    (14,587)            -           -
     Issuance of common stock..............................................     64,040             -           -
     Sale of warrants......................................................      6,900             -           -
     Debt issuance costs...................................................    (33,070)            -           -
     Other merger fees.....................................................     (3,709)            -           -
     Other.................................................................       (289)       (3,735)        643
                                                                             ---------    ----------   ---------
   Net cash provided by (used in) financing activities.....................      7,190      (109,017)    (64,874)
   Effect of U.S./Canadian exchange rate on cash...........................       (107)           10          23
                                                                             ---------    ----------   ---------
   Net increase (decrease) in cash and cash equivalents....................    (25,273)       28,869         661
   Cash and cash equivalents - beginning of year...........................     30,882         2,013       1,352
                                                                             ---------    ----------   ---------
   Cash and cash equivalents - end of year.................................  $   5,609    $   30,882   $   2,013
                                                                             =========    ==========   =========
 
   Reconciliation of net income to cash provided by operating activities:
   Net income..............................................................  $  31,604    $  150,049   $  19,132
   Adjustments to reconcile net income to net cash provided by
     operating activities:
     Depreciation and amortization.........................................     42,702        43,033      40,953
     Loss (gain) on disposal/write off of assets...........................      3,706             -      (2,606)
     Extraordinary item....................................................      1,900         3,104           -
     Deferred tax expense (benefit)........................................      4,172         4,280      (4,817)
     Accrued compensation including SARs...................................      8,984        (2,638)     21,941
     Merger related expenses...............................................      3,633             -           -
     Discount notes amortization...........................................      1,656             -           -
     Other.................................................................     (3,766)        1,058       1,426
   Change in assets/liabilities:
     Accounts receivable...................................................    (18,297)       22,540     (52,304)
     Inventories...........................................................     14,147         1,921      (9,493)
     Prepaid expenses......................................................     (5,173)       (1,183)      2,649
     Other assets..........................................................     (8,900)       (4,075)     (1,437)
     Accounts payable......................................................     (5,454)       (4,117)     34,083
     Accrued liabilities...................................................     (7,018)      (21,447)     17,604
     Other liabilities.....................................................       (295)         (687)      8,118
                                                                             ---------    ----------   ---------
   Net cash provided by operating activities...............................  $  63,601    $  191,838   $  75,249
                                                                             =========    ==========   =========
</TABLE>
   The accompanying notes are an integral part of the consolidated financial
   statements.

                                      36
<PAGE>
 
                            STERLING CHEMICALS, INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
 
 
                                                         MAY 14, 1996
                                                      (DATE OF INCEPTION)
                                                   TO SEPTEMBER 30, 1996/1/
                                                   -------------------------
<S>                                                <C>
 
   Revenues......................................                   $83,410
   Cost of goods sold............................                    83,047
                                                                    -------
   Gross profit..................................                       363
 
   Selling, general and administrative expenses..                     3,426
   Interest and debt related expenses............                     1,615
   Interest income from parent...................                    (5,236)
                                                                    -------
 
   Income before taxes...........................                       558
   Provision for income taxes....................                       384
                                                                    -------
 
   Net Income....................................                   $   174
                                                                    =======
 
</TABLE>

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

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

                                      37
<PAGE>
 
                            STERLING CHEMICALS, INC.
                           CONSOLIDATED BALANCE SHEET
                            AS OF SEPTEMBER 30, 1996
                  (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
 
 
ASSETS
<S>                                                                       <C>
   Current assets:
     Cash and cash equivalents..........................................  $   5,581
     Accounts receivable................................................    135,635
     Inventories........................................................     53,720
     Prepaid expenses...................................................      9,076
     Deferred income tax benefit........................................      7,214
                                                                          ---------
     Total current assets...............................................    211,226
 
   Property, plant and equipment, net...................................    365,765
   Other assets.........................................................    108,460
                                                                          ---------
     Total assets.......................................................  $ 685,451
                                                                          =========
 
   LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
   Current liabilities:
     Accounts payable...................................................  $  66,562
     Accrued liabilities................................................     55,740
     Current portion of long-term debt..................................     11,625
                                                                          ---------
     Total current liabilities..........................................    133,927
 
   Long-term debt.......................................................    619,875
   Deferred income tax liability........................................     47,478
   Deferred credits and other liabilities...............................     68,473
   Commitments and contingencies (Note 7)
   Stockholders' equity (deficiency in assets):
     Common stock, $.01 par value.......................................          -
     Additional paid-in capital.........................................   (165,352)
     Retained earnings..................................................        174
     Accumulated translation adjustment.................................    (19,124)
                                                                          ---------
     Total stockholders' equity (deficiency in assets)..................   (184,302)
                                                                          ---------
 
     Total liabilities and stockholders' equity (deficiency in assets)..  $ 685,451
                                                                          =========
 
</TABLE>
     The accompanying notes are an integral part of the consolidated financial
   statements.

                                      38
<PAGE>
 
                            STERLING CHEMICALS, INC.
                           CONSOLIDATED STATEMENT OF
             CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
 
                                                  ADDITIONAL                          ACCUMULATED
                                   COMMON STOCK     PAID-IN    RETAINED    PENSION    TRANSLATION
                                  --------------
                                  SHARES  AMOUNT    CAPITAL    EARNINGS  ADJUSTMENT    ADJUSTMENT
                                  ------  ------  -----------  --------  -----------  ------------
   <S>                               <C>     <C>     <C>          <C>       <C>          <C>
   Balance, May 14,1996                -  $    -    $      -   $      -  $        -      $      -
   Common stock issued..........       1       -           1          -           -             -
   Capital transfer, net........       -       -    (165,353)         -      (1,556)      (20,194)
   Net income...................       -       -           -        174           -             -
   Pension adjustment...........       -       -           -          -       1,556             -
   Translation adjustment.......       -       -           -          -           -         1,070
                                  ------  ------   ---------   --------  ----------      --------
   Balance, September 30, 1996..       1  $    -   $(165,352)  $    174  $        -      $(19,124)
                                  ======  ======   =========   ========  ==========      ========
 
</TABLE>


                                      39
<PAGE>
 
                            STERLING CHEMICALS, INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
 
                                                                        MAY 14, 1996
                                                                     (DATE OF INCEPTION)
                                                                  TO SEPTEMBER 30, 1996/1/
                                                                  -------------------------
<S>                                                               <C>
   Cash flows from operating activities:
     Cash received from customers...............................          $ 102,900
     Miscellaneous cash receipts................................              1,749
     Cash paid to suppliers and employees.......................            (92,800)
     Interest paid..............................................             (3,129)
     Interest received..........................................                474
     Income taxes paid..........................................             (4,950)
                                                                          ---------
   Net cash provided by operating activities....................              4,244
   Cash flows from investing activities:                                
     Capital expenditures.......................................             (6,398)
                                                                          ---------
   Net cash used in investing activities........................             (6,398)
   Cash flows from financing activities:                                
     Proceeds from long-term debt...............................            637,900
     Debt issuance costs........................................            (27,939)
     Distribution from parent...................................           (609,961)
     Repayment of long-term debt................................             (6,400)
     Distribution to parent.....................................             14,165
                                                                          ---------
   Net cash provided by financing activities....................              7,765
   Effect of U.S./Canadian exchange rate on cash................                (30)
                                                                          ---------
   Net increase in cash and cash equivalents....................              5,581
   Cash and cash equivalents - beginning of period..............                  -
                                                                          ---------
   Cash and cash equivalents - end of year......................          $   5,581
                                                                          =========
 
   Reconciliation of Net Income to
   Cash Provided by Operating Activities
   Net income...................................................          $     174
   Adjustments to reconcile net income to net cash provided by
     operating activities:
     Depreciation and amortization..............................               4,801
     Deferred tax expense.......................................               1,457
     Other......................................................                (511)
   Change in assets/liabilities:
     Accounts receivable........................................                 164
     Inventories................................................                (468)
     Prepaid expenses...........................................              (2,428)
     Other assets...............................................                 784
     Accounts payable...........................................               7,025
     Accrued liabilities........................................              (4,460)
     Other liabilities..........................................              (2,294)
                                                                           ---------
   Net cash provided by operating activities....................           $   4,244
                                                                           =========
</TABLE>

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

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

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



   1.  MERGER ACTIVITIES

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

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


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

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


   2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The Company operates petrochemical facilities in Texas City, Texas, and
   pulp chemical facilities throughout Canada.  Construction of a new sodium
   chlorate plant is nearing completion in Valdosta, Georgia.  The significant
   accounting policies of the Company are described below.


   PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of all wholly
   owned and majority-owned subsidiaries.  All significant intercompany accounts
   and transactions have been eliminated. The Company's
 
                                      41
<PAGE>
 
   investment in a cogeneration joint venture of a 50% equity interest is
   accounted for under the equity method with the Company's share of earnings
   from the joint venture recorded as a reduction of cost of goods sold.


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


   CASH EQUIVALENTS

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


   INVENTORIES

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

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


   PROPERTY, PLANT, AND EQUIPMENT

     Property, plant, and equipment are recorded at cost.  Major renewals and
   improvements which extend the useful lives of the equipment are capitalized.
   Major planned maintenance expenses are accrued for during the periods prior
   to the maintenance, while routine repair and maintenance expenses are charged
   to operations as incurred.  Disposals are removed at carrying cost less
   accumulated depreciation with any resulting gain or loss reflected in
   operations.  Depreciation is provided using the straight-line method over
   estimated useful lives ranging from 5 to 25 years with the predominant life
   of the plant and equipment being 15 years.  The Company capitalizes interest
   costs which are incurred as part of the cost of constructing major facilities
   and equipment.  The amount of interest capitalized for the fiscal years 1996,
   1995 and 1994 was $4.1 million, $1.0 million and $145,000, respectively.


   PATENTS AND ROYALTIES

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


   DEBT ISSUE COSTS

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

                                      42
<PAGE>
 
   INCOME TAXES

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


   REVENUE RECOGNITION

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


   FOREIGN EXCHANGE

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

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


   EARNINGS PER SHARE

     Income per share for fiscal years 1996, 1995 and 1994 has been computed
   using a weighted average shares outstanding of 50,700,000, 55,674,000, and
   55,606,000, respectively.  The weighted average shares outstanding used in
   the computation of earnings per share are net of the shares held by the ESOP
   that are not allocated to the employees.


   ENVIRONMENTAL COSTS

     Environmental costs are expensed unless the expenditures extend the
   economic useful life of the assets.  Costs that extend the economic life of
   the assets are capitalized and depreciated over the remaining life of such
   assets.


   DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

      In preparing disclosures about the fair value of financial instruments,
   the Company has assumed that the carrying amount approximates fair value for
   cash and cash equivalents, receivables, short-term borrowings, accounts
   payable and certain accrued expenses because of the short maturities of those
   instruments.  The fair values of long-term debt instruments are estimated
   based upon quoted market values (if applicable), or on the current interest
   rates available to the Company for debt with similar terms and remaining
   maturities.  Considerable judgment is required in developing these estimates
   and, accordingly, no assurance can be given that the estimated values
   presented herein are indicative of the amounts that would be realized in a
   free market exchange.
                                      43
<PAGE>
 
   ACCOUNTING ESTIMATES

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


   RECLASSIFICATION

     Certain amounts reported in the financial statements for the prior periods
   have been reclassified to conform with the current financial statement
   presentation with no effect on net income or stockholders' equity.
 
 
   3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

<TABLE>
<CAPTION>

                                                   SEPTEMBER 30,
                                              ---------------------
                                                 1996        1995
                                              ----------   ---------
                                               (Dollars in Thousands)
<S>                                           <C>          <C>
   Inventories:
     Finished products......................   $  31,868   $  44,802
     Raw materials..........................       9,499      16,506
                                               ---------   ---------
   Inventories at FIFO cost.................      41,367      61,308
                                               ---------   ---------
     Inventories under exchange agreements..         722      (4,783)
     Stores and supplies....................      11,631      11,342
                                               ---------   ---------
                                               $  53,720   $  67,867
                                               =========   =========
   Property, plant and equipment:
     Land...................................   $  11,720   $  11,775
     Buildings..............................      27,448      26,955
     Plant and equipment....................     468,647     422,479
     Construction in progress...............      85,490      49,782
     Less:  accumulated depreciation........    (227,540)   (201,907)
                                               ---------   ---------
                                               $ 365,765   $ 309,084
                                               =========   =========
   Other assets:
     Patents and technology, net............   $  34,902   $  40,971
     Estimated insurance recoveries.........      15,600      10,315
     Intangible pension asset...............          --       3,733
     Deferred catalyst......................       8,288       4,357
     Debt issue costs.......................      34,025       3,370
     Other..................................      22,086      17,758
                                               ---------   ---------
                                               $ 114,901   $  80,504
                                               =========   =========
   Accrued liabilities:
     Repairs................................   $  11,417   $   9,021
     Income taxes...........................       1,190       2,250
     Interest...............................       3,869         574
     Estimated contract adjustments.........          --       1,536
     Property taxes.........................       6,772       6,179
     Litigation contingency.................          --       6,000
     Accrued compensation...................       5,646      10,019
     Other..................................      25,004      20,279
                                               ---------   ---------
                                               $  53,898   $  55,858
                                               =========   =========
   Deferred credits and other liabilities:
     Deferred revenue.......................   $  17,720   $  21,969
     Accrued postretirement benefits........      27,143      24,722
     Additional minimum pension liability...          --       6,127
     Accrued compensation...................          --       2,922
     Litigation contingency.................      16,000      10,315
     Other..................................       7,610      14,957
                                               ---------   ---------
                                               $  68,473   $  81,012
                                               =========   =========
</TABLE>

                                      44
<PAGE>
 

   4. LONG-TERM DEBT:
 
       Long-term debt consisted of the following:

<TABLE> 
<CAPTION> 
                                                       SEPTEMBER 30,
                                                   -------------------
                                                     1996       1995
                                                   --------   --------
                                                  (Dollars in Thousands)
<S>                                                <C>        <C> 
   Revolving credit facilities...................  $     --   $    902
   Term loans....................................   350,000    120,536
   ESOP term loan................................     6,500         --
   Subordinated notes............................   275,000         --
   Discount notes................................    94,757         --
                                                   --------   --------
     Total debt outstanding......................   726,257    121,438
                                                   ========   ========
   Less:
     Current maturities..........................   (11,625)   (17,857)
                                                   --------   --------
   Total long-term debt..........................  $714,632   $103,581
                                                   ========   ========
</TABLE>

   TERM LOANS, REVOLVER AND ESOP LOANS

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

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

     The Credit Agreement requires the principal amount of the Term Loans to be
   amortized in quarterly installments beginning with the fiscal quarter ending
   December 31, 1996, plus additional mandatory prepayments based upon
   consolidated Excess Cash Flow (as defined in the Credit Agreement).  The ESOP
   Loan will be amortized in 16 equal quarterly installments of $406,250 during
   its four-year term.  Advances under the Revolver will be subject to a
   borrowing base consisting of 85% of eligible accounts receivable and 65% of
   eligible inventory with an inventory cap of 50% of the borrowing base.

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

     The Credit Agreement contains numerous financial and operating covenants,
   including, but not limited to, restrictions on Chemicals' ability to incur
   indebtedness, pay dividends, create liens, sell assets, engage in mergers and
   acquisitions, and refinance existing indebtedness.  The Credit Agreement also
   requires Chemicals to satisfy certain financial covenants and tests.  As a
   result of weaker than expected market conditions in styrene and acrylonitrile
   during the first quarter of fiscal 1997 and costs that were expensed related
   to the Merger in the fourth quarter of fiscal 1996, the Company may not be in
   compliance with its leverage ratio under the Credit Agreement as of the end
   of the first quarter of fiscal 1997.  The Company intends to obtain a waiver
   to correct any noncompliance.  

                                      45
<PAGE>
 
   The Company expects to be in compliance with all other coverage ratios under
   the Credit Agreement as of December 31, 1996, but there can be no assurance
   in this regard nor can there be any assurance that the requisite waiver will
   be obtained with respect to the leverage ratio covenant. In addition, the
   Credit Agreement includes various circumstances that will constitute, upon
   occurrence and subject in certain cases to notice and grace periods, an event
   of default thereunder.

     At September 30, 1996, Chemicals had indebtedness of $350 million under the
   Term Loans and $6.5 million under the ESOP Loan.  Additionally, the Company
   had $470,000 in letters of credit under the Revolver, thereby reducing the
   available commitment to $99.5 million.   Available credit under the Revolver
   for loans and letters of credit is subject to a monthly borrowing base and at
   September 30, 1996, the borrowing base did not limit such available credit.

     At September 30, 1995, indebtedness under former credit agreements dated
   April 1995 totaled $120.5 million in term loans and $902,000 drawn against a
   $150 million revolving credit facility and a Cdn $20 million revolving credit
   facility.  All amounts outstanding under these agreements were repaid in the
   current year as part of the Merger financing and such agreements were
   terminated and replaced with the new Credit Agreement upon consummation of
   the Merger financing.  Interest under the former credit agreements was based
   on the Base Rate (the greater of the Prime Rate or the Federal Funds Rate
   plus  1/2%) or the Eurodollar Rate (the Eurodollar Interbank Rate plus a
   margin ranging from 0.65% to 1 1/4%).  The variable rate on the term loan
   under the former credit agreements was fixed at approximately 7% per annum
   with an interest swap agreement.

     On September 28, 1995, Chemicals entered into a seven-year credit agreement
   (the "Chlorate Plant Credit Agreement") to finance the construction of the
   Georgia sodium chlorate plant.  The borrowing margins under the Chlorate
   Plant Credit Agreement were similar to those contained in the former credit
   agreements.  During fiscal 1996, Chemicals borrowed $39 million under this
   agreement to finance the construction of the Georgia sodium chlorate plant.
   The entire amount was repaid as a part of the Merger financing.

     In connection with arranging the Credit Agreement, the Company incurred
   fees of approximately $16 million which are being amortized over the term of
   the loans under the effective interest method. Unamortized debt issue costs
   related to the retired loans of approximately $3 million, before tax effect
   of $1.1 million, were expensed in August 1996 and recorded as an
   extraordinary loss from early extinguishment of debt.


   DISCOUNT NOTES AND SUBORDINATED NOTES

     As part of the Merger financing, Chemicals also issued $275 million in
   aggregate principal amount of senior subordinated notes (the "Subordinated
   Notes") maturing on August 15, 2006 and Holdings issued $191.8 million ($100
   million initial proceeds) representing 191,751 Units, with each Unit
   consisting of one 13 1/2% senior subordinated discount note due 2008 (the
   "Discount Notes") and one warrant to purchase three shares of Holding's
   common stock for $.01 per share (the "Warrants").

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

     The Subordinated Notes may not be redeemed by Chemicals prior to August 15,
   2001, and from thereon through August 15, 2004, the Subordinated Notes may be
   redeemed at a premium varying between 105.875% to 101.958%.  Subsequent to
   August 15, 2004, Chemicals may redeem the Subordinated Notes at their face
   value plus accrued interest.  Prior to August 15, 1999, Chemicals may redeem
   in the aggregate up to 35% of the original principal amount of the
   Subordinated Notes with the proceeds of one or more public equity offerings
   following which there is a public market.  Such redemptions may be made at a
   redemption price of 111 3/4% of the face value plus accrued interest to the
   redemption date.  After such redemption, at least $178.8 million aggregate
   principal amount of the Subordinated Notes must remain outstanding.

                                      46
<PAGE>
 
     The Discount Notes may not be redeemed by Holdings prior to August 15,
   2001, and from thereon through August 15, 2006, the Discount Notes may be
   redeemed at a premium varying between 106.75% to 101.35%.  Subsequent to
   August 15, 2006, the Company may redeem the Discount Notes at their Accreted
   Value (as defined in the indenture) plus accrued interest.  Prior to August
   15, 1999, Holdings may redeem in the aggregate up to 35% of the Accreted
   Value of the Discount Notes with the proceeds of one or more public equity
   offerings following which there is a public market.  Such redemptions may be
   made at a redemption price of 113 1/2% of the face value plus accrued
   interest to the redemption date.  After such redemption, at least $124.6
   million aggregate principal amount of the Discount Notes must remain
   outstanding.

     The indentures for both Subordinated Notes and Discount Notes contain
   numerous financial and operating covenants, including, but not limited to,
   restrictions on Chemicals' or Holdings' ability to incur indebtedness, pay
   dividends, create liens, sell assets, engage in mergers and acquisitions, and
   refinance existing indebtedness.  In addition, the indentures includes
   various circumstances that will constitute, upon occurrence and subject in
   certain cases to notice and grace periods, an event of default thereunder.

     The Credit Agreement and the indenture for the Subordinated Notes contain
   provisions which restrict the payment of advances, loans and dividends from
   Chemicals to Holdings.  The most restrictive of the covenants limits such
   payments during fiscal 1997 to approximately $1.6 million, plus any amounts
   due to Holdings from Chemicals under the intercompany tax sharing agreement.
   As of September 30, 1996, Chemicals had a deficiency in net assets of $184.3
   million.


   DEBT MATURITIES

     The estimated remaining principal payments on the outstanding Term Loans,
   Revolver, and ESOP Loan are as follows:
 
           YEAR ENDING                                  PRINCIPAL
          SEPTEMBER 30,                                 PAYMENTS
          -------------                                 ---------
                                                (Dollars in Thousands)

             1997......................................   $ 11,625
             1998......................................     26,625
             1999......................................     26,625
             2000......................................     31,625
             2001......................................     40,000
             Thereafter................................    220,000
                                                          --------
             Total Term Loans, Revolver and ESOP Loan..   $356,500
                                                          ========


   5. INCOME TAXES:

     A reconciliation of federal statutory income taxes to the Company's
   effective tax provision (benefit) before extraordinary item follows:
<TABLE>
<CAPTION>
                                                              YEAR ENDED SEPTEMBER 30,
                                                             ---------------------------
                                                               1996      1995     1994
                                                             --------  --------  -------
                                                               (Dollars in Thousands)
<S>                                                          <C>       <C>       <C>
   Provision for federal income tax at the statutory rate..  $17,641   $79,855   $9,772
   Foreign sales corporation...............................     (700)   (7,991)      --
   State and foreign income taxes..........................    1,529     2,862       90
   Estimated income tax settlement and other...............   (1,572)      279     (740)
                                                             -------   -------   ------
   Effective tax provision.................................  $16,898   $75,005   $9,122
                                                             =======   =======   ======
 
</TABLE>

                                      47
<PAGE>
 
   The provision (benefit) for income taxes is composed of the following:
<TABLE>
<CAPTION>
                            YEAR ENDED SEPTEMBER 30,
                          ---------------------------
                            1996     1995      1994
                          --------  -------  --------
                            (Dollars in Thousands)
<S>                       <C>       <C>      <C>
   From operations:
     Current federal....  $12,084   $67,393  $18,618
     Deferred federal...   (3,249)    1,075   (7,809)
     Deferred foreign...    7,421     3,489   (1,687)
     Current state......      642     2,947       --
     Deferred state.....                101       --
                          -------   -------  -------
   Total tax provision..  $16,898   $75,005  $ 9,122
                          =======   =======  =======
 
</TABLE>
     The components of the Company's deferred income tax assets and liabilities
   are summarized below:
<TABLE>
<CAPTION>
 
                                                       SEPTEMBER 30,
                                                 ----------------------
                                                    1996        1995
                                                 ----------  ----------
                                                 (Dollars in Thousands)
<S>                                              <C>         <C>
   Assets:
   Accrued liabilities.........................     $10,348     $10,475
   Accrued postretirement cost.................       9,544       8,719
   Tax loss and credit carryforward and other..       5,817       7,470
                                                    -------     -------
   Total deferred tax assets...................      25,709      26,664
                                                    -------     -------
 
   Less:  current deferred income tax benefit..       7,214       5,622
                                                    -------     -------
   Noncurrent deferred tax assets..............     $18,495     $21,042
                                                    =======     =======
 
   Liabilities:
   Property, plant and equipment...............     $61,304     $57,466
   Accrued pension cost........................       2,525       2,471
   Other.......................................       1,599       1,402
                                                    -------     -------
   Total deferred tax liabilities..............     $65,428     $61,339
                                                    -------     -------
   Net deferred tax liability..................     $46,933     $40,297
                                                    =======     =======
</TABLE>

     The Company has approximately Cdn. $13.2 million in Canadian tax loss
   carryforwards which will expire from 1999 through 2001 and approximately Cdn.
   $15.1 million in Canadian tax credit carryforwards which will expire from
   2000 through 2004.


   6.  EMPLOYEE BENEFITS:

     The Company has established the following benefit plans:


   RETIREMENT BENEFIT PLANS

     The Company has non-contributory pension plans in the United States and
   employer and employee contributory plans in Canada which cover all salaried
   and wage employees.  The benefits under these plans are based primarily on
   years of service and employees' pay near retirement.  For those Company
   employees who were employed by the Company as of September 30, 1986 and were
   previously employed by Monsanto, the Company recognizes their Monsanto
   pension years of service for purposes of determining benefits under the
   Company's plans.  For those Company employees who were employed by the
   Company on August 21, 1992 and were previously employed by Tenneco Inc., the
   Company recognizes their Tenneco Inc. pension years of service for purposes
   of determining benefits under the Company's plans.  The Company's funding
   policy is consistent with the funding requirements of federal law and
   regulations.  Plan assets consist principally of common stocks and government
   and corporate securities.

                                      48
<PAGE>
 
     The Company has recorded its additional minimum liability in accordance
   with Statement of Financial Accounting Standards No. 87 "Employers'
   Accounting for Pensions."  In recognizing the additional pension liability at
   September 30, 1995, the Company recorded a liability of $6.1 million, an
   intangible asset of  $3.7 million, which is included with other assets, and a
   reduction of stockholders' equity of $1.6 million, net of deferred tax of
   $838,000.  There were no additional pension liabilities to recognize at
   September 30, 1996.

     The components of pension expense for the years ended September 30, 1996,
   1995 and 1994 were as follows:
<TABLE>
<CAPTION>
 
                                                                                   1996          1995          1994
                                                                                 --------     --------       -------
                                                                                        (Dollars in Thousands)
<S>                                                                             <C>          <C>           <C>        
Service cost (for benefits earned during the period).......................      $ 3,664      $  3,288       $ 3,386
Interest cost on projected benefit obligation..............................        5,044         4,471         3,891
Actual return on plan assets and contributions.............................       (6,001)       (5,825)          617
Deferral of asset gain (loss)..............................................        1,050         1,909        (3,997)
Net amortization of unrecognized amounts...................................          926           871           848
                                                                                 -------      --------       -------
Pension expense............................................................      $ 4,683      $  4,714       $ 4,745
                                                                                 =======      ========       =======
 
</TABLE> 
  Assumptions used in determining the projected benefit obligation and
   pension cost for the periods were as follows:
 
<TABLE> 
<CAPTION> 

                                                                                             FISCAL YEAR
                                                                                 -----------------------------------
                                                                                  1996          1995          1994
                                                                                 -------      --------       -------
<S>                                                                              <C>          <C>           <C> 
Discount rates.............................................................      7.75%        7.5%           8.0%
Rates of increase in salary compensation level.............................      5.5%         5.5%           5.5%
Expected long-term rate of return on assets................................      9.0%         9.0%           9.0%
 
</TABLE> 

  The funded status of the Company's pension plans for which assets exceed
   accumulated benefits and plans for which accumulated benefits exceed
   assets as of the actuarial valuation dates of August 31, 1996 and 1995
   were as follows:

<TABLE> 
<CAPTION> 
                                                                                        1996                      1995
                                                                             -------------------------   ------------------------- 
                                                                               ASSETS      ACCUMULATED     ASSETS      ACCUMULATED
                                                                               EXCEED       BENEFITS       EXCEED       BENEFITS
                                                                             ACCUMULATED     EXCEED      ACCUMULATED     EXCEED
                                                                              BENEFITS       ASSETS       BENEFITS       ASSETS
                                                                             -----------   -----------   -----------   -----------
                                                                                                (Dollars in Thousands)
<S>                                                                             <C>             <C>        <C>           <C> 
Actuarial present value of benefits based on service
 to date and present pay levels:
Vested benefit obligation..................................................      $52,053       $   525      $ 26,222       $21,743
Non-vested benefit obligation..............................................        2,064             2         1,029         1,293
Accumulated benefit obligation.............................................       54,117           527        27,251        23,036
Plan assets at fair value..................................................       65,443            --        33,540        21,134
Plan assets in excess of (less than) accumulated
 benefit obligation........................................................       11,326          (527)        6,289        (1,902)
Additional amounts related to projected salary
 increases.................................................................       16,568           177        16,431           658
Plan assets less than total projected benefit
 obligation................................................................       (5,242)         (704)      (10,142)       (2,560)
Unrecognized net (gain) loss resulting from plan
 experience and changes in actuarial assumptions...........................        3,688          (107)        5,995         2,579
Unrecognized prior service cost............................................        3,376            --             2         3,689
Unrecognized transition obligation.........................................        2,486             7         2,716           156
Prepaid (accrued) pension cost before additional
 minimum liability.........................................................        4,308          (804)       (1,429)        3,864
Additional minimum liability...............................................           --            --            --        (6,127)
Total prepaid (accrued) pension obligation.................................      $ 4,308       $  (804)     $ (1,429)      $(2,263)
 
</TABLE>

                                      49
<PAGE>
 
   POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

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

     Health care benefits are provided to employees who retire from the Company
   with ten or more years of service except for Canadian employees covered by
   collective bargaining agreements.  All of the Company's employees are
   eligible for postretirement life insurance.  Postretirement health care
   benefits for U.S. employees are provided for under a contributory,
   comprehensive plan while all other plans are non-contributory.  Benefit
   provisions for most hourly and some salaried employees are subject to
   collective bargaining.  In general, the plans stipulate that retiree health
   care benefits are paid as covered expenses are incurred.  For U.S. employees,
   postretirement medical plan deductibles are assumed to increase at the rate
   of the long-term consumer price index.  The components of postretirement
   benefits cost other than pensions for the years ended September 30, 1996,
   1995 and 1994 were as follows:
<TABLE>
<CAPTION>
                                                            1996    1995     1994
                                                           ------  -------  -------
                                                            (Dollars in Thousands)
<S>                                                        <C>     <C>      <C>
   Service cost (for benefits earned during the period)..  $1,155   $1,084   $1,064
   Interest cost on projected benefit obligation.........   1,985    1,835    1,688
   Amortization of plan amendments.......................     243       29       29
                                                           ------   ------   ------
                                                           $3,383   $2,948   $2,781
                                                           ======   ======   ======
</TABLE>

     Actuarial assumptions used to determine fiscal years 1996, 1995 and 1994
   costs and benefit obligations for postretirement benefit plans other than
   pensions include an average discount rate of 7.5% and an average rate of
   future increases in benefit compensation of 5.5%.  The assumed composite rate
   of future increases in per capita cost of health care benefits (health care
   cost trend rate) was 7.8% for fiscal 1996, exclusive of demographic changes,
   decreasing gradually to 5.5% by the year 2028.

     These trend rates reflect current cost performance and the Company's
   expectation that future rates will decline. Increasing the health care cost
   trend rate by one percentage point would increase the accumulated
   postretirement benefit obligation by $1.5 million and would increase annual
   aggregate service and interest costs by $187,000.

     The following sets forth the plan's funded status reconciled with amounts
   reported in the Company's consolidated balance sheet at September 30, 1996
   and 1995.

   Accumulated postretirement benefit obligation (APBO):
<TABLE>
<CAPTION>
                                                  1996         1995
                                               -----------  -----------
                                                (Dollars in Thousands)
<S>                                            <C>          <C>
   Retirees..................................     $ 7,896      $ 7,315
   Fully eligible active plan participants...       8,301        7,690
   Other active plan participants............      12,906       11,956
                                                  -------      -------
     Total APBO..............................      29,103       26,961
   Plan assets at fair value.................          --           --
   Unrecognized loss.........................      (1,737)      (1,987)
   Unrecognized prior service cost...........        (223)        (252)
                                                  -------      -------
   Accrued postretirement benefit liability..     $27,143      $24,722
                                                  =======      =======
 
</TABLE>
   POSTEMPLOYMENT BENEFITS

     During the first quarter of fiscal 1993, the Financial Accounting Standards
   Board issued Statement of Financial Accounting Standards No. 112, "Employers'
   Accounting for Postemployment Benefits" ("SFAS 112"). SFAS 112 requires
   accrual accounting for benefits provided to former or inactive employees
   after employment but before retirement.  The Company implemented the
   provisions of SFAS 112 in fiscal 1995 and the effect of adoption on the
   Company's financial position and results of operations was not material.

                                      50
<PAGE>
 
   EMPLOYEE STOCK PURCHASE PLAN 250,000 SHARES

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


   EMPLOYEE STOCK OWNERSHIP TRUST

     The original Employee Stock Ownership Trust ("old ESOT") was formed to
   invest primarily in the Company's common stock and includes only participants
   contributing to the Company's Savings and Investment Plan (the "Savings
   Plan").  The Company's contribution to the old ESOT was 60% of the
   participant's Savings Plan contributions to the extent that such
   participant's contributions did not exceed 7.5% of the employee's eligible
   earnings.  The Company's contributions were subject to a 20% per year vesting
   schedule commencing after one year of service.  The Company's contributions
   to the old ESOT for the years ended September 30, 1996, 1995 and 1994 were
   $1.7 million per year.

     An application for determination has been filed with the Internal Revenue
   Service to terminate the old ESOT and distribute assets to participants.

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


   SAVINGS AND INVESTMENT PLAN

     The Savings Plan covers substantially all employees, including executive
   officers.  The Savings Plan is qualified under Section 401(k) of the Internal
   Revenue Code (the "Code").  Each participant has the option to defer taxation
   of a portion of his or her earnings by directing the Company to contribute a
   percentage of such earnings to the Savings Plan.  A participant may direct up
   to a maximum of 15% of eligible earnings to the Savings Plan, subject to
   certain limitations set forth in the Code for "highly compensated"
   participants, as defined in Section 414(q) of the Code.  A participant's
   contributions become distributable upon the termination of his or her
   employment.


   PROFIT SHARING PLANS

     The Company is currently planning the establishment of new profit sharing
   plans for the benefit of salaried and hourly employees meeting certain
   eligibility requirements.  Under the Company's previous profit sharing plans,
   expense for the years ended September 30, 1996, 1995 and 1994 was $2.8
   million, $13.0 million and $3.8 million, respectively.


                                      51
<PAGE>
 
   OMNIBUS STOCK AND INCENTIVE PLAN

     The Company had an Omnibus Stock and Incentive Plan ("Omnibus Plan"), under
   which the Company could grant to key employees incentive and nonincentive
   stock options, stock appreciation rights, restricted stock, performance units
   and performance shares.  The terms and amounts of the awards were determined
   by the Compensation Committee of the Board of Directors.  Upon a change of
   control of the Company, all awards granted under the plan were to become
   fully vested and all performance based awards were to be paid at the higher
   of performance goals or actual performance to date.  3,000,000 shares of the
   Company's stock were reserved under the plan when it was established.  At
   September 30, 1995, 263,000 shares had been issued.

     In fiscal 1993, the Company granted SARs to certain key employees and
   directors.  Total expense (benefit) is determined based on 3.6 million SARs
   granted, the vesting period (five years beginning September 1992) and the
   appreciation of the Company's stock price above $4 per share, which was the
   fair market value of the Company's common stock on the date of grant of the
   SARs.  In October 1994, the Company amended the SAR program by modifying the
   vesting periods and limiting the amount of appreciation for each SAR during
   each vesting period, thereby limiting the Company's aggregate future
   expenses.  The Company recorded expense (benefit) for the years ended
   September 30, 1996, 1995 and 1994 of 8.5 million, $(2.8) million and $21.8
   million, respectively, and paid $8.3 million in October 1994, $5.8 million in
   September 1995 and $13.8 million in August 1996 pursuant to the SARs, as
   amended.  The expense (benefit) for the SARs is included in selling, general
   and administrative expenses in the Company's income statement.

     In fiscal 1995, the Company granted 82,500 stock options to certain
   officers of the Company with an exercise price of $13.50 per share.  The
   options were exercisable from the third through the tenth anniversary of the
   date of the grant.  All existing stock options were terminated in connection
   with the Merger.

     Upon consummation of the Merger, the Omnibus Plan was terminated.  However,
   the Company is expected to establish a new stock option plan.


   7. COMMITMENTS AND CONTINGENCIES:

   PRODUCT CONTRACTS

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


   LEASE COMMITMENTS

     The Company has entered into various long-term noncancellable operating
   leases.  Future minimum lease commitments at September 30, 1996 are as
   follows: fiscal 1997 -- $2.5 million; fiscal 1998 -- $2.4 million; fiscal
   1999 -- $2.2 million; fiscal 2000 -- $2.1 million; fiscal 2001 -- $1.3
   million; and $4.9 million thereafter. Rent expense for fiscal years 1996,
   1995 and 1994 was not material.


   ENVIRONMENTAL AND SAFETY MATTERS

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

                                      52
<PAGE>
 
     New laws or permit requirements and conditions may affect the Company's
   operations, products or waste disposal. Past or future operations may result
   in claims or liabilities.  Expenditures could be required to upgrade
   wastewater collection, pretreatment or disposal systems or other matters.

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

     At its Texas City Plant, the Company has reduced emissions of targeted
   chemicals 71% from 1987 levels under the EPA's voluntary 33/50 program.
   These reductions included a 95% reduction in hydrogen cyanide emissions and
   an 83% reduction in benzene emissions.  Additionally, the Company will
   initiate appropriate actions or preventive projects necessary to insure that
   the facility continues to operate in a safe and environmentally responsible
   manner.  No assurances can be given that the Company will not incur material
   environmental expenditures associated with its facilities, operations or
   products.

     The Company's sodium chlorate market is sensitive to potential
   environmental regulations.  In general, environmental regulations support
   substitution of chlorine dioxide, which is produced from sodium chlorate, for
   elemental chlorine in the pulp bleaching process.  Certain environmental
   groups are encouraging passage of regulations which restrict the amount of
   Absorbable Organic Halides (AOX) or chlorine derivatives in bleach plant
   effluent.  Increased substitution of chlorine dioxide for elemental chlorine
   in the pulp bleaching process significantly reduces the amount of AOX and
   chlorine derivatives in bleach plant effluent.  As long as there is not an
   outright ban on chlorine-containing compounds, regulations restricting AOX or
   chlorine derivatives in bleach plant effluent should favor the use of
   chlorine dioxide, thus sodium chlorate.  Any significant ban on all chlorine-
   containing compounds could have a material adverse effect on the Company's
   financial condition and results of operations.

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


   LEGAL PROCEEDINGS

   PETROCHEMICALS

     HUNTSMAN LAWSUIT:  On January 30, 1995, the Company filed a lawsuit against
   Huntsman Chemical Corporation and certain affiliates seeking a declaratory
   judgment in connection with an alleged agreement arising from discussions,
   previously suspended by the Company, relating to possible future capacity
   rights for a significant portion of the Company's styrene monomer unit at its
   Texas City Plant.  In the lawsuit, the Company requested a judicial
   determination that, among other things, there was no enforceable agreement
   between the Company and any of the defendants.  In response, the defendants
   filed a counterclaim demanding a jury trial and asserting that a contractual
   agreement existed, that the Company breached the alleged agreement, and that
   as a result the defendants incurred an unspecified amount of "massive
   damages".  Subsequently, the Company filed a motion for summary judgment.

     On November 30, 1995, the trial court granted the Company's motion for
   summary judgment establishing that as a matter of law, no enforceable
   contract or agreement ever existed between the Company and the defendants.
   The court's order of summary judgment also moots the defendants' counterclaim
   against the Company for damages resulting from breach of the alleged
   contract.  The defendants have appealed from that judgment.  The Company 

                                      53
<PAGE>
 
   and the defendants have filed their principal briefs before the Court of
   Appeals, but oral argument has not been set and the Court of Appeals has not
   rendered any decision.

     The Company believes a loss with respect to this matter is not probable and
   is unable to quantify a reasonably possible loss estimate (as defined in
   Statement of Financial Accounting Standards No. 5, "Accounting for
   Contingencies") at this time.

     ALLEMAND LAWSUIT:  On June 19, 1995, a lawsuit was filed against the
   Company and several other corporate defendants asserting personal injury and
   mental anguish resulting from an incident occurring on June 16, 1995 in which
   a hose being used to unload a barge of sulfuric acid at the Company's Texas
   City Plant ruptured, spraying sulfuric acid on an employee of Marine Fueling
   Service, Inc. ("Marine Fueling").  The plaintiffs' claims against the Company
   in this lawsuit have been settled.  The Company, however, remains a defendant
   in the lawsuit by virtue of a maritime law cross-claim asserted by Marine
   Fueling against the Company and the other defendants in the lawsuit for
   recovery of a portion of the settlement money Marine Fueling previously paid
   to the plaintiffs.  The amount sought in Marine Fueling's claim against the
   Company is not a material amount.

     AMMONIA RELEASE LAWSUITS:  On May 8, 1994, an ammonia release occurred at
   the Company's Texas City Plant while a reactor in the acrylonitrile unit was
   being restarted after a shutdown for routine maintenance.  A total of 52
   lawsuits and interventions, involving approximately five thousand five
   hundred plaintiffs, have been filed against the Company seeking an
   unspecified amount of money for alleged damages from the ammonia release.
   Many of these lawsuits were filed in April and early May 1996, presumably in
   anticipation of the expiration of the two-year statute of limitations
   applicable to this release.

     Approximately two thousand six hundred of the plaintiffs agreed to submit
   their damage claims to binding arbitration.  Each of the plaintiffs who
   agreed to participate in the arbitration waived any right of recovery for
   punitive or exemplary damages.  Pursuant to the agreement to arbitrate, a
   two-week evidentiary proceeding was conducted in July 1996 before a three
   judge panel which will make a determination of the amount of damages.
   Currently, the Company anticipates that the results of this arbitration will
   be rendered in early February 1997.

     The Company continues to vigorously defend the claims of the approximately
   two thousand nine hundred plaintiffs who did not participate in the July 1996
   arbitration.

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


   LITIGATION CONTINGENCY

     In accordance with Statement of Financial Accounting Standards No. 5,
   "Accounting for Contingencies" and Financial Accounting Standards Board
   Interpretation No. 39 "Offsetting of Amounts Related to Certain Contracts",
   the Company has made estimates of the reasonably possible range of liability
   with regard to its outstanding litigation for which it may incur liability.
   These estimates are based on the Company's judgments using currently
   available information as well as consultation with the Company's insurance
   carriers and outside legal counsel.  A number of the claims in these
   litigation matters are covered by the Company's insurance policies or by
   third-party indemnification of the Company.  The Company therefore has also
   made estimates of its probable recoveries under insurance policies or from
   third-party indemnitors based on its understanding of its insurance policies
   and indemnifications, discussions with its insurers and indemnitors and
   consultation with outside legal counsel, in addition to the Company's
   judgments.  Based on the foregoing as of September 30, 1996, the Company has
   accrued approximately $16.0 million as its estimate of aggregate contingent
   liability for these matters, and has also recorded aggregate receivables from
   its insurers and third-party indemnitors of approximately $15.6 million.  In
   addition, the Company estimates that at present, the reasonably possible
   range of loss is from $0 to $44.8 million.  The Company believes that it is
   insured or indemnified for this additional reasonably possible loss, except
   for a portion which is not material.

                                      54
<PAGE>
 
     While the Company has based its estimates on its evaluation of available
   information to date and the other matters described above, much of the
   litigation remains in the discovery stage and it is impossible to predict
   with certainty the ultimate outcome.  The Company will adjust its estimates
   as necessary as additional information is developed and evaluated.  However,
   the Company believes that the final resolution of these contingencies will
   not have a material adverse impact on the financial position, results of
   operations, or cash flows of the Company.

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


                                      55
<PAGE>
 
   8. SEGMENT AND GEOGRAPHIC INFORMATION:

     Sales to individual customers constituting 10% or more of total revenues
   and sales by geographic region were as follows (there were no sales to
   individual customers constituting 10% or more of total revenues in fiscal
   1996):
<TABLE>
<CAPTION>
 
                                                                                      YEAR ENDED SEPTEMBER 30,
                                                                                  ---------------------------------
                                                                                    1996        1995        1994
                                                                                  ---------  -----------  ---------
                                                                                       (Dollars in Thousands)
<S>                                                                               <C>        <C>          <C>
Major Customers:
British Petroleum plc and subsidiaries..........................................         *   $  169,944   $103,637
Mitsubishi International Corporation............................................         *   $  129,812   $ 69,920
Export Sales:
Export revenues.................................................................  $267,153   $  534,067   $324,930
Percentage of total revenues....................................................        34%          52%        46%
Export revenues (as a percent of total exports) by geographical area:
 Asia...........................................................................        66%          64%        80%
 Europe.........................................................................        34%          36%        16%
 Other..........................................................................         -            -          4%
</TABLE> 
 
*DOES NOT COMPRISE 10% OF TOTAL REVENUE FOR 1996 AND, THEREFORE, NOT REPORTED.

<TABLE> 
<CAPTION> 
                                                                                        YEAR ENDED SEPTEMBER 30,
                                                                                  --------------------------------
                                                                                    1996        1995        1994
                                                                                  --------   ----------   --------
                                                                                        (Dollars in Thousands)
<S>                                                                               <C>        <C>          <C> 
Geographic Segment Information:
Revenues:
  United States.................................................................  $633,754   $  886,247   $578,295
  Canada........................................................................   156,711      143,951    122,545
                                                                                  --------   ----------   --------
Total...........................................................................  $790,465   $1,030,198   $700,840
Income before taxes and extraordinary item:
  United States.................................................................  $ 27,540   $  210,320   $ 27,106
  Canada........................................................................    22,862       17,838      1,148
                                                                                  --------   ----------   --------
Total...........................................................................  $ 50,402   $  228,158   $ 28,254
Net Income:
  United States.................................................................  $ 18,330   $  140,382   $ 17,979
  Canada........................................................................    13,274        9,667      1,153
                                                                                  --------   ----------   --------
Total...........................................................................  $ 31,604   $  150,049   $ 19,132
Assets:
  United States.................................................................  $457,273   $  405,324   $376,594
  Canada........................................................................   232,411      204,615    204,331
                                                                                  --------   ----------   --------
Total...........................................................................  $689,684   $  609,939   $580,925
Selling, general and administrative expenses:
  United States.................................................................  $ 14,570   $   14,535   $ 10,232
  Canada........................................................................    17,195       17,088     14,075
  SARs..........................................................................     8,540       (2,767)    21,843
                                                                                  --------   ----------   --------
Total...........................................................................  $ 40,305   $   28,856   $ 46,150
</TABLE>

                                      56
<PAGE>
 
   9. FINANCIAL INSTRUMENTS

   FOREIGN EXCHANGE

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

     The Company enters into forward foreign exchange contracts to reduce risk
   due to Canadian dollar exchange rate movements.  The Company does not engage
   in currency speculation.  The Company had a notional amount of approximately
   $30 million and $26 million of forward foreign exchange contracts outstanding
   to buy Canadian dollars at September 30, 1996 and 1995, respectively.  The
   deferred gain on these forward foreign exchange contracts at September 30,
   1996 and 1995 was immaterial.


   CONCENTRATION OF CREDIT RISK

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

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


   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 U.S.
   corporations with ratings of A1 by Standard & Poor's Ratings Group or P1 by
   Moody's Investor Services, Inc., loan participation of major U.S.
   corporations with a short term credit rating of A1/P1 and direct obligations
   of the U.S. Government or its agencies.  In addition, not more than $5
   million will be invested with any single bank, financial institution, or U.S.
   corporation.


   FAIR VALUE OF FINANCIAL INSTRUMENTS

     At September 30, 1996, the fair market value of all of the Company's
   financial instruments approximated the book value, except as stated below.
 
                      Book Value  Fair Value
                      ----------  ----------
                      (Dollars in Thousands)
Discount Notes          $ 94,757    $121,302
Subordinated Notes       275,000     289,273

     The fair values of the Discount Notes and the Subordinated Notes are based
   on quoted market prices.


                                      57
<PAGE>
 
   10. RELATED PARTY TRANSACTIONS

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

     Also in connection with the Merger, CS First Boston Corporation served as
   managing underwriter for the Public Offering and provided certain financial
   advisory services to STX Acquisition and Chemicals, for which such firm
   received underwriting discounts and commissions and financial advisory fees
   totaling approximately $20 million.  John L. Garcia, a director and
   stockholder of the Company, is a Managing Director of CS First Boston
   Corporation.

     Koch Capital Services, Inc. formerly known as Koch Equities, Inc., a
   subsidiary of Koch Industries, Inc. ("Koch Industries") owns approximately 9%
   of the outstanding capital stock of Holdings.  The Company and affiliates of
   Koch Industries have ongoing commercial relationships, including, from time
   to time, supply of raw materials or sales of petrochemicals.  For fiscal
   1996, sales to and purchases from Koch Industries and its affiliates
   represented less than 1% of the Company's revenues.


                                      58
<PAGE>
 
                   STERLING CHEMICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


   1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   CASH FLOWS

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


   INCOME TAXES

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


   EARNINGS PER SHARE

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


   2. INCOME TAXES

     A reconciliation of federal statutory income taxes to Chemicals' effective
   tax provision (benefit) before extraordinary item follows:
<TABLE>
<CAPTION>
 
                                                                          PERIOD FROM MAY 14, 1996
                                                                          -------------------------
                                                                            TO SEPTEMBER 30, 1996
                                                                          -------------------------
                                                                           (Dollars in Thousands)
<S>                                                                       <C>
Provision for federal income tax at the statutory rate..................                   $   195
Foreign sales corporation...............................................                      (116)
State and foreign income taxes..........................................                       115
Other...................................................................                       190
                                                                                           -------
Effective tax provision.................................................                   $   384
                                                                                           =======
</TABLE> 
 
The provision (benefit) for income taxes is composed of the following:
<TABLE> 
<CAPTION> 
                                                                          PERIOD FROM MAY 14, 1996
                                                                          -------------------------
                                                                            TO SEPTEMBER 30, 1996
                                                                          -------------------------
                                                                            (Dollars in Thousands)
<S>                                                                        <C> 
From operations:
 Current federal........................................................                   $(1,001)
 Deferred federal.......................................................                     1,457
 Deferred foreign.......................................................                        90
 Current state..........................................................                      (162)
                                                                                           -------
 Total tax provision....................................................                   $   384
                                                                                           =======
 
</TABLE>

                                      59
<PAGE>
 
     The components of Chemicals' deferred income tax assets and liabilities are
   summarized below:
<TABLE>
<CAPTION>
 
                                                   SEPTEMBER 30, 1996
                                                 ----------------------
                                                 (Dollars in Thousands)
<S>                                              <C>
   Assets:
   Accrued liabilities.........................                 $ 9,803
   Accrued postretirement cost.................                   9,544
   Tax loss and credit carryforward and other..                   5,817
                                                                -------
   Total deferred tax assets...................                  25,164
                                                                -------
 
   Less:  current deferred income tax benefit..                   7,214
                                                                -------
   Noncurrent deferred tax assets..............                 $17,950
                                                                =======
 
   Liabilities:
   Property, plant and equipment...............                 $61,304
   Accrued pension cost........................                   2,525
   Other.......................................                   1,599
                                                                -------
   Total deferred tax liabilities..............                 $65,428
                                                                -------
   Net deferred tax liability..................                 $47,478
                                                                =======
</TABLE>

     Chemicals has approximately Cdn. $13.2 million in Canadian tax loss
   carryforwards which will expire from 1999 through 2001 and approximately Cdn.
   $15.1 million in Canadian tax credit carryforwards which will expire from
   2000 through 2004.

                                      60
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS



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

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

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

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



   DELOITTE & TOUCHE LLP
   December 6, 1996

   Houston, Texas

                                      61
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS



   To the Stockholder of Sterling Chemicals, Inc.

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

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

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



   DELOITTE & TOUCHE LLP
   December 6, 1996
   Houston, Texas

                                      62
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS



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

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

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

   In our opinion, the financial statements referred to above present fairly, in
   all material respects, the consolidated financial position of Sterling
   Chemicals Holdings, Inc. and subsidiaries as of September 30, 1995 and the
   consolidated results of their operations and their cash flows for each of the
   two years in the period ended September 30, 1995, in conformity with
   generally accepted accounting principles.



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


                                      63
<PAGE>
 
                              REPORT OF MANAGEMENT



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

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

     Deloitte & Touche LLP and Coopers & Lybrand LLP performed a separate
   independent audit of the Company's financial statements for fiscal years 1996
   and 1995, respectively, for the purpose of determining that the statements
   are presented fairly and in accordance with generally accepted accounting
   principles.  The independent auditors are appointed by the Board of Directors
   and meet regularly with the Audit Committee of the Board.  The Audit
   Committee of the Board of Directors is composed solely of outside directors.
   The Audit Committee meets periodically with the Company's senior officers and
   independent accountants to review the adequacy and reliability of the
   Company's accounting, financial reporting and internal controls.



   Robert W. Roten
   President and Chief Executive Officer



   Jim P. Wise
   Vice President - Finance and Chief Financial Officer



   December 6, 1996

                                      64
<PAGE>
 
                       STERLING CHEMICALS HOLDINGS, INC.
                       SUPPLEMENTAL FINANCIAL INFORMATION
                  (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)

                      QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
 
                                           FISCAL     FIRST     SECOND    THIRD     FOURTH
                                            YEAR     QUARTER   QUARTER   QUARTER    QUARTER
                                          ---------  --------  --------  --------  ---------
<S>                                       <C>        <C>       <C>       <C>       <C>
Revenues                                       1996  $191,542  $190,879  $218,371  $189,673
                                               1995   240,622   303,954   298,491   187,131
 
Gross Profit                                   1996    29,395    29,398    33,250    19,383
                                               1995    48,354    93,530   103,504    26,230
 
Income (loss) before extraordinary item        1996    12,787     6,427    16,420    (2,130)
                                               1995    22,259    56,077    59,767    15,050
 
Net income (loss)                              1996    12,787     6,427    16,420    (4,030)
                                               1995    22,259    56,077    56,663    15,050
 
Per Share Data:

Income (loss) before extraordinary item        1996  $    .23  $    .12  $    .29  $   (.06)
                                               1995       .40      1.01      1.08       .27
 
Net income (loss)                              1996       .23       .12       .29      (.11)
                                               1995       .40      1.01      1.02       .27
 
Cash dividends per common share                1996        --        --        --        --
                                               1995        --        --        --        --
 
Price range of common stock               1996 High     9 1/4    13        13 1/8    12 1/2
                                          1996 Low      7 1/2     8        11 1/8    10 7/8
 
                                          1995 High    13 7/8    14        13        12 7/8
                                          1995 Low      9 3/4    10 7/8    10 1/4     8 1/4
</TABLE>

     There is no established public trading market for the Holdings' Common
   Stock, although the Common Stock is traded on the OTC Electronic Bulletin
   Board under the symbol "STXX".  Prior to the Merger, the Common Stock was
   listed on the New York Stock Exchange ("NYSE") under the symbol "STX".  The
   table above sets forth the price range of the Common Stock during the fiscal
   years ended September 30, 1996 and September 30, 1995.  Information for the
   fourth quarter of fiscal 1996 reflects high and low sales prices on the NYSE
   for the period of July 1 through August 21, and high and low sales price
   information as reported on the OTC Electronic Bulletin Board maintained by
   the National Association of Securities Dealers, Inc. ("NASD") for the period
   of August 22 through September 30.

     As of September 30, 1996, there were approximately 280 record holders of
   the Common Stock.

     Holdings has not paid dividends on the Common Stock in any of the last
   three fiscal years and does not anticipate paying dividends in the
   foreseeable future.  Any future determination as to the payment of dividends
   will be made at the discretion of the Board of Directors of Holdings and will
   depend upon the Company's operating results, financial condition, capital
   requirements, general business conditions and such other factors that the
   Board of Directors deems relevant.  In addition, the payment of dividends on
   the Common Stock is restricted by the terms of the indenture governing the
   Discount Notes and indirectly restricted by the terms of the Chemicals Credit

                                      65
<PAGE>
 
   Agreement and the indenture governing the Subordinated Notes which restrict
   the ability of Chemicals to transfer funds to Holdings.


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

     Termination of Coopers & Lybrand L.L.P.  On October 25, 1995, the Audit
   Committee of the Board of Directors of the Company recommended and the Board
   of Directors of the Company approved the engagement of the firm of Arthur
   Andersen LLP ("Andersen") as its independent auditors for the year ending
   September 30, 1996, to replace the firm of Coopers & Lybrand L.L.P.
   ("Coopers").  The termination by the Company of the engagement of Coopers was
   effective upon the completion of the audit for the year ended September 30,
   1995, and the filing of the Company's Annual Report on Form 10-K for such
   year.  The appointment of Andersen as the Company's independent auditors for
   the fiscal year ending September 30, 1996 was ratified by the stockholders at
   the 1996 Annual Meeting of Stockholders.

     During the two previous fiscal years and the subsequent period through
   December 18, 1995, the date of filing of the Company's Annual Report on Form
   10-K, there were no disagreements with Coopers on any matter of accounting
   principles or practices, financial statement disclosure, or audit scope or
   procedures, which disagreements, if not resolved to their satisfaction, would
   have caused them to make reference in connection with their report to the
   subject matter of the disagreement.

     During the two previous fiscal years and the subsequent period through
   December 18, 1995, the date of filing of the Company's Annual Report on Form
   10-K, the Company was not advised by Coopers of any of the reportable events
   listed in Item 304(a)(1)(v)(A) through (D) of SEC Regulation S-K and during
   such period of the Company did not consult with Andersen regarding any matter
   referenced under Item 304(a)(2) of the SEC Regulation S-K.

     The audit reports of Coopers on the consolidated financial statements of
   the Company as of and for the fiscal years ended September 30, 1995 and 1994,
   did not contain any adverse opinion or disclaimer of opinion, nor were they
   qualified or modified as to uncertainty, audit scope, or accounting
   principles, except for an explanatory paragraph noting that the Company
   changed its method of accounting for income taxes effective October 1, 1993.

     The Company requested that Coopers furnish a letter addressed to the SEC
   stating whether Coopers agreed with the above statements.  A copy of the
   Coopers letter to the SEC stating that such firm agreement with the above
   statements, dated December 18, 1995, was filed as Exhibit 16 to the Company's
   Form 8-K, dated December 18, 1995.

     Resignation of Arthur Andersen LLP.  On August 21, 1996, Andersen resigned
   effective immediately in connection with the Merger.  The Company engaged
   Deloitte & Touche LLP ("Deloitte") as its independent auditors for the fiscal
   year ended September 30, 1996.  Deloitte served as independent auditors of
   STX Acquisition prior to the Merger.

     Andersen did not perform an audit of the Company's financial statements for
   any period.  During the period of the engagement of Andersen, there were no
   disagreements with Andersen on any matter of accounting principles or
   practices or financial statement disclosure.  The Company has not been
   advised by Andersen of any of the reportable events listed in Item
   304(a)(1)(v)(A) through (D) of Regulation S-K.

     The Company requested that Andersen furnish a letter, addressed to the SEC,
   stating whether Andersen agreed with the above statements.  A copy of the
   letter of Andersen to the SEC stating that such firm agreed with the above
   statements, dated August 28, 1996, was filed as Exhibit 16.1 to the Company's
   Form 8-K, dated August 21, 1996.


                                      66
<PAGE>
 
                                    PART III

   ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information beginning on page 4 and the information beginning on page
   18 of the Proxy Statement for the Company's 1997 Annual Meeting of
   Stockholders is incorporated herein by reference in response to this item.


   ITEM 11. EXECUTIVE COMPENSATION

     The information beginning on page 7 of the Proxy Statement for the
   Company's 1997 Annual Meeting of Stockholders is incorporated herein by
   reference in response to this item.


   ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information beginning on page 16 of the Proxy Statement for the
   Company's 1997 Annual Meeting of Stockholders is incorporated herein by
   reference in response to this item.


   ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     This information beginning on page 12 of the Proxy Statement for the
   Company's 1997 Annual Meeting of Stockholders is incorporated herein by
   reference in response to this item.


                                      67
<PAGE>
 
                                    PART IV


   ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
            FORM 8-K.
 
     (a) Financial Statements, Financial Statement Schedules and Exhibits

        1. Consolidated Financial Statements
<TABLE>
<CAPTION>
 
                                                                 PAGE OF 
                                                                THIS 10-K
                                                                ---------
<S>                                                             <C>
           Sterling Chemicals Holdings, Inc. Consolidated
             Statements of Operations for the fiscal years
             ended September 30, 1996, 1995 and 1994............    33
           Sterling Chemicals Holdings, Inc. Consolidated 
             Balance Sheet as of September 30, 1996 and 1995....    34
           Sterling Chemicals Holdings, Inc. Consolidated 
             Statement of Changes in Stockholders' Equity       
             (Deficiency in Assets) for the fiscal years ended
             September 30, 1996, 1995 and 1994..................    35
           Sterling Chemicals Holdings, Inc. Consolidated 
             Statement of Cash Flows for the fiscal years ended 
             September 30, 1996, 1995 and 1994..................    36
           Sterling Chemicals, Inc. Consolidated Statement of
             Operations for the period from May 14, 1996 to 
             September 30, 1996.................................    37
           Sterling Chemicals, Inc. Consolidated Balance Sheet
             as of September 30, 1996...........................    38
           Sterling Chemicals, Inc. Consolidated Statement of
             Changes in Stockholders' Equity (Deficiency in 
             Assets) for the period from May 14, 1996 to 
             September 30, 1996.................................    39
           Sterling Chemicals, Inc. Consolidated Statement of
             Cash Flows for the period from May 14, 1996 to 
             September 30, 1996.................................    40
           Notes to Consolidated Financial Statements...........    41
           Reports of Independent Accountants...................    61
           Report of Management.................................    64
 
</TABLE>

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

                                      68
<PAGE>
 
        3. Exhibits

     The following exhibits are filed as part of this Form 10-K:
 
  EXHIBIT
  NUMBER                        DESCRIPTION OF EXHIBIT
  -------                       ----------------------

     2.1  --Amended and Restated Agreement and Plan of Merger between STX 
            Acquisition Corp. and Sterling Chemicals, Inc. dated as of
            April 24, 1996, incorporated by reference from the Company's  
            Current Report on Form 8-K dated April 24, 1996 as amended by Form
            8-K/A.
   **3.1  --Restated Certificate of Incorporation of Sterling Chemicals 
            Holdings, Inc.
   **3.2  --Certificate of Incorporation of Sterling Chemicals, Inc., as 
            amended. 
   **3.3  --Restated Bylaws of Sterling Chemicals Holdings, Inc.
     3.4  --Bylaws of Sterling Chemicals, Inc., incorporated by reference from
            Exhibit 3.4 to the Registration Statement on Form S-1 of STX
            Acquisition Corp. and STX Chemicals Corp. 
            (Registration No. 333-04343).
     4.1  --Form of Warrant Agreement, incorporated by reference from Exhibit
            4.4 to the Registration Statement on Form S-1 of STX Acquisition 
            Corp. and STX Chemicals Corp. (Registration No. 333-04343).
     4.2  --Form of Indenture governing the 13 1/2% Senior Secured Discount 
            Notes Due 2008 of the Company, incorporated by reference from
            Exhibit 4.5 to the Registration Statement on Form S-1 of STX
            Acquisition Corp. and STX Chemicals Corp. (Registration 
            No. 333-04343).
     4.3  --Form of Indenture governing the 11 3/4% Senior Subordinated Notes
            Due 2006 of Sterling Chemicals, Inc. (formerly known as STX
            Chemicals Corp.), incorporated by reference from Exhibit 4.7 to the
            Registration Statement on Form S-1 of STX Acquisition Corp. and STX
            Chemicals Corp. (Registration No. 333-04343).
     4.4  --Credit Agreement among Sterling Chemicals, Inc. (formerly known as
            STX Chemicals Corp.), Texas Commerce Bank as Agent, Credit Suisse
            and Chase Securities, Inc. as co-arrangers and the lenders named 
            therein, incorporated by reference from Exhibit (a) to the
            Company's Schedule 13E-3, Commission File No. 5-40034.
     4.5  --Stockholders Agreement, incorporated by reference from Exhibit 4.10
            to the Registration Statement on Form S-1 of STX Acquisition Corp.
            and STX Chemicals Corp. (Registration No. 333-04343).
     4.6  --Registration Rights Agreement, incorporated by reference from 
            Exhibit 4.11 to the Registration Statement on Form S-1 of STX
            Acquisition Corp. and STX Chemicals Corp. (Registration 
            No. 333-04343).
     4.7  --Voting Agreement, incorporated by reference from Exhibit 4.12 to the
            Registration Statement on Form S-1 of STX Acquisition Corp. and STX
            Chemicals Corp. (Registration No. 333-04343).
     4.8  --Tag-Along Agreement, incorporated by reference from Exhibit 4.13 
            to the Registration Statement on Form S-1 of STX Acquisition Corp.
            and STX Chemicals Corp. (Registration No. 333-04343).
     4.9  --Intercreditor Agreement, incorporated by reference from Exhibit 4.14
            to the Registration Statement on Form S-1 of STX Acquisition Corp.
            and STX Chemicals Corp. (Registration No. 333-04343).
    4.10  --Security Agreement (Pledge) between STX Acquisition Corp. and Texas
            Commerce Bank, incorporated by reference from Exhibit 4.15 to the 
            Registration Statement on Form S-1 of STX Acquisition Corp. and STX
            Chemicals Corp. (Registration No. 333-04343).
   +10.1  --Assets Purchase Agreement dated August 1, 1986, between Monsanto
            Company and the Company, incorporated by reference from Exhibit 10.1
            to the Company's Annual Report on Form 10-K for the fiscal year 
            ended September 30, 1992.
    10.2  --Sterling Chemicals, Inc. Salaried Employees' Pension Plan (Restated
            as of October 1, 1993), incorporated by reference from Exhibit 10.6
            to the Company's Annual Report on Form 10-K for the fiscal year 
            ended September 30, 1993.
   10.2(a)--Supplement to the Sterling Chemicals, Inc. Salaried Employee's 
            Pension Plan (Restated as of January 1, 1994), incorporated by
            reference from Exhibit 10.6(a) to the Company's Annual Report on 
            Form 10-K for the fiscal year ended September 30, 1994.

                                      69
<PAGE>
 
  EXHIBIT
  NUMBER                        DESCRIPTION OF EXHIBIT
  -------                       ----------------------

   10.2(b)--First and Second Amendments to the Sterling Chemicals, Inc. Salaried
            Employees' Pension Plan dated April 27, 1994 and September 23, 1994,
            respectively, incorporated by reference from Exhibit 10.6(b) to 
            the Company's Annual Report on Form 10-K for the fiscal year ended
            September 30, 1994.
    10.3  --Sterling Chemicals, Inc. Hourly Paid Employees' Pension Plan 
            (Restated as of October 1, 1993), incorporated by reference from 
            Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
            fiscal year ended September 30, 1993.
   10.3(a)--Supplement to the Sterling Chemicals, Inc. Hourly Paid Employee's 
            Pension Plan (Restated as of January 1, 1994), incorporated by
            reference from Exhibit 10.8(a) to the Company's Annual Report on
            Form 10-K for the fiscal year ended September 30, 1994.
   10.3(b)--First Amendment to the Sterling Chemicals, Inc. Hourly Paid 
            Employees' Pension Plan dated April 27, 1994, incorporated by
            reference from Exhibit 10.8(b) to the Company's Annual Report
            on Form 10-K for the fiscal year ended September 30, 1994.
 **10.3(c)--Sterling Chemicals, Inc. Amended and Restated Hourly Paid 
            Employees' Pension Plan (Effective as of May 1, 1996).
    10.4  --Sterling Chemicals, Inc. Amended and Restated Savings and 
            Investment Plan, incorporated by reference from Exhibit 10.10 to the
            Company's Annual Report on Form 10-K for the fiscal year ended
            September 30, 1993.
   10.4(a)--Supplements to the Sterling Chemicals, Inc. Savings and Investment
            Plan for Hourly Paid Employees and Salaried Employees, incorporated
            by reference from Exhibit 10.10(a) to the Company's Annual Report 
            on Form 10-K for the fiscal year ended September 30, 1994.
   10.4(b)--First and Second Amendments to the Sterling Chemicals, Inc. Amended
            and Restated Savings and Investment Plan dated April 27, 1994 and
            October 26, 1994, respectively, incorporated by reference from 
            Exhibit 10.10(b) to the Company's Annual Report on Form 10-K for the
            fiscal year ended September 30, 1994.
    10.5  --Sterling Chemicals, Inc. Pension Benefit Equalization Plan, 
            incorporated by reference from Exhibit 10.10 to the Company's
            Registration Statement on Form S-1 (Registration No. 33-24020).
  **10.6  --Sterling Chemicals Employee Stock Ownership Plan (ESOP).
    10.7  --Sterling Chemicals, Inc. Amended and Restated Employee Stock 
            Ownership Plan, incorporated by reference from Exhibit 10.12 to the
            Company's Annual Report on Form 10-K for the fiscal year ended 
            September 30, 1993. 
   10.7(a)--First Amendment to the Sterling Chemicals, Inc. Amended and Restated
            Employees' Stock Ownership Plan dated April 27, 1994, incorporated 
            by reference from Exhibit 10.12(a) to the Company's Annual Report 
            on Form 10-K for the for the fiscal year ended September 30, 1994.
   +10.8  --Styrene Monomer Conversion Contract dated November 3, 1995, between
            Monsanto Company (subsequently assigned to Bayer Corporation, a 
            subsidiary of Bayer AG) and the Company, incorporated by reference
            from Exhibit 10.13 to the Company's Annual Report on Form 10-K for
            the fiscal year ended September 30, 1995.
   +10.9  --Acrylonitrile Exchange Contract dated January 1, 1994, between the
            Company and Monsanto Company, incorporated by reference from
            Exhibit 10.19 to the Company's Annual Report on Form 10-K for the 
            fiscal year ended September 30, 1994.
  +10.10  --Production Agreement dated April 15, 1988 between BP Chemicals 
            Americas Inc. and the Company and First and Second Amendment
            thereto, incorporated by reference from Exhibit 10.21 to the 
            Company's Registration Statement on Form S-1 (Registration No.
            33-24020).
  +10.11  --Agreement dated May 2, 1988, between E.I. du Pont de Nemours and 
            Company and the Company, incorporated by reference from Exhibit 
            10.22 to the Company's Registration Statement on Form S-1 
            (Registration No. 33-24020).
   10.12  --License Agreement dated April 15, 1988, between BP Chemicals 
            Americas Inc. and the Company, incorporated by reference from
            Exhibit 10.23 to the Company's Registration Statement on Form S-1 
            (Registration No. 33-24020).
  +10.13  --Product Sales Agreement dated August 1, 1986, between BASF 
            Corporation and the Company, incorporated by reference from Exhibit
            10.22 to the Company's Annual Report on Form 10-K for the fiscal
            year ended September 30, 1992.

                                      70
<PAGE>
 
  EXHIBIT
  NUMBER                        DESCRIPTION OF EXHIBIT
  -------                       ----------------------
 +10.13(a)--Amendment No. 3 to Product Sales Agreement as of January 1,1994, 
            between BASF Corporation and the Company, incorporated by reference
            from Exhibit 10.22(a) to the Company's Annual Report on Form 10-K
            for the fiscal year ended September 30, 1994.
   10.14  --License Agreement dated August 1, 1986, between Monsanto Company 
            and the Company, incorporated by reference from Exhibit 10.25 to 
            the Company's Registration Statement on Form S-1 (Registration 
            No. 33-24020).
  +10.15  --Amended Lease and Production Agreement dated August 8, 1994, between
            BP Chemicals Americas Inc. and the Company, incorporated by 
            reference from Exhibit 10.21 to the Company's Annual Report on Form
            10-K for the fiscal year ended September 30, 1994.
   10.16  --Form of Indemnity Agreement executed between the Company and each 
            of its officers and directors prior to the Merger, incorporated by
            reference from Exhibit 10.30 to the Company's Annual Report on Form
            10-K for the fiscal year ended September 30, 1994.
 **10.17  --Form of Indemnity Agreement executed between the Company and each 
            of its officers and directors.
   10.18  --Amended and Restated Sterling Chemicals, Inc. Hourly Employees'
            Profit Sharing Plan, incorporated by reference from Exhibit
            10.32 to the Company's Annual Report on Form 10-K for the fiscal 
            year ended September 30, 1993.
   10.19  --Amended and Restated Sterling Chemicals, Inc. Salaried Employee's
            Profit Sharing Plan, incorporated by reference from Exhibit 10.31
            to the Company's Annual Report on Form 10-K for the fiscal year 
            ended September 30, 1993.
   10.20  --Sterling Chemicals, Inc. Amended and Restated Supplemental Employee
            Retirement Plan, incorporated by reference from Exhibit 10.34 to
            the Company's Annual Report on Form 10-K for the fiscal year ended
            September 30, 1989 (Commission File Number 1-10059).
   10.21  --Sterling Chemicals, Inc. Deferred Compensation Plan, incorporated by
            reference from Exhibit 10.35 to the Company's Annual Report on
            Form 10-K for the fiscal year ended September 30, 1989 (Commission
            File Number 1-10059).
 **10.22  --Articles of Agreement between the Company, its successors and 
            assigns, and Texas City, Texas Metal Trades Council, AFL-CIO Texas
            City, Texas, May 1, 1996 to May 1, 1999.
   10.23  --Conditional Performance Guaranty dated as of August 20, 1992, by
            Albright & Wilson, Ltd. in favor of Sterling Pulp Chemicals, Ltd.,
            Sterling Canada, Inc. and the Indemnities identified in Section 10.2
            of the Purchase Agreement, incorporated by reference from Exhibit
            10.38 to the Company's Current Report on Form 8-K dated September 
            3, 1992.
   10.24  --Performance Guaranty dated as of August 20, 1992, by the Company in
            favor of Tenneco Canada Inc., Rio Linda Chemical Co., Albright
            & Wilson Americas, Inc. and the Indemnities identified in Section
            10.3 of the Purchase Agreement, incorporated by reference from
            Exhibit 10.39 to the Company's Current Report on Form 8-K dated
            September 3, 1992.
   10.25  --Lease dated March 1, 1990, between Procter & Gamble, Inc. and 
            Tenneco Canada Inc., as amended by a Lease Modification Agreement
            dated August 9, 1991, and Consent and Assignment Agreement dated as
            of August 21, 1992, among 982174 Ontario Limited, Sterling Pulp
            Chemicals, Ltd., Proctor & Gamble, Inc., Tenneco Canada Inc. and The
            Bank of Nova Scotia, incorporated by reference from Exhibit 10.45 to
            the Company's Annual Report on Form 10-K for the fiscal year ended
            September 30, 1992.
   10.26  --Lease dated July 1, 1977 between Canadian National Railway Company
            and ERCO Industries Limited, and Consent and Assignment Agreement
            dated as of August 21, 1992, among Tenneco Canada Inc., Sterling
            Pulp Chemicals, Ltd., Canadian National Railway Company and The Bank
            of Nova Scotia, incorporated by reference from Exhibit 10.46 to the
            Company's Annual Report on Form 10-K for the fiscal year ended
            September 30, 1992.
  +10.27  --Sales and Purchase Agreement dated April 1, 1994, between BP
            Chemicals Ltd. and the Company, incorporated by reference from
            Exhibit 10.48 to the Company's Annual Report on Form 10-K for the
            fiscal year ended September 30, 1994.
  +10.28  --Contract for Sale and Purchase of Ethylene dated October 28, 1988,
            between Phillips 66 Company and the Company, incorporated by
            reference from Exhibit 10.49 to the Company's Annual Report on Form
            10-K for the fiscal year ended September 30, 1994.

                                      71
<PAGE>
 
  EXHIBIT
  NUMBER                        DESCRIPTION OF EXHIBIT
  -------                       ----------------------
   10.29  --Agreement between Sterling Pulp Chemicals Ltd. North Vancouver
            British Columbia and Pulp, Paper and Woodworkers of Canada Local 5
            British Columbia effective December 1, 1994 to November 30, 1997,
            incorporated by reference from Exhibit 10.50 to the Company's Annual
            Report on Form 10-K for the fiscal year ended September 30, 1994.
   10.30  --Agreement between Sterling Pulp Chemicals Ltd. Buckingham, Quebec
            and the Energy and Chemicals Workers Union effective November 30,
            1994 to November 30, 1997, incorporated by reference from Exhibit
            10.53 to the Company's Annual Report on Form 10-K for the fiscal
            year ended September 30, 1995.
   10.31  --Agreement between Sterling Pulp Chemicals Ltd. Buckingham, Quebec,
            and the Office and Professional Employees International Union
            effective June 25, 1995 to November 14, 1997, incorporated by
            reference from Exhibit 10.54 to the Company's Annual Report on Form
            10-K for the fiscal year ended September 30, 1995.
  +10.32  --Product Supply Agreement dated May 15, 1995, between Praxair
            Hydrogen Supply, Inc. and the Company, incorporated by reference
            from Exhibit 10.55 to the Company's Annual Report on Form 10-K for
            the fiscal year ended September 30, 1995.
 ++10.33  --Methanol Production Agreement between BP Chemicals Inc. and the
            Company dated September 26, 1996.
 **10.34  --Consulting Agreement dated April 23, 1996, among The Sterling Group,
            Inc. STX Acquisition Corp. and STX Chemicals Corp.
  **21.1  --Subsidiaries of Sterling Chemicals Holdings, Inc.
  **27.1  --Financial Data Schedule - Sterling Chemicals Holdings, Inc.
  **27.2  --Financial Data Schedule - Sterling Chemicals, Inc.

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

       (b) Reports on Form 8-K.

       On August 28, 1996, the Company filed a Current Report on Form 8-K
   reporting under Items 1, 2, 4, and 5 of such Form.



                                      72
<PAGE>
 
                                   SIGNATURES

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

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


                                    By     /s/ ROBERT W. ROTEN
                                      -------------------------------------
                                               (Robert W. Roten)
                                      President and Chief Executive Officer
   DATE: DECEMBER 18, 1996

     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS
   BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF EACH OF THE
   REGISTRANTS AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
 
                SIGNATURE                               TITLE                            DATE
                ---------                               -----                            ----             
<S>                                             <C>                             <C>
 
     /s/  FRANK P. DIASSI                       Chairman of the Board of        December 18, 1996
------------------------------------------        Directors
         (Frank P. Diassi) 
 
     /s/   ROBERT W. ROTEN                      President, Chief Executive      December 18, 1996
------------------------------------------        Officer and Director
         (Robert W. Roten)                      (principal executive officer)
 
        /s/ JIM P. WISE                         Vice President--Finance and     December 18, 1996
------------------------------------------        Chief Financial Officer
           (Jim P. Wise)                        (principal financial officer)
 
     /s/ PAUL G. VANDERHOVEN                    Controller                      December 18, 1996
------------------------------------------      (principal accounting officer)
        (Paul G. Vanderhoven)                   
 
      /s/ J. VIRGIL WAGGONER                    Vice Chairman of the Board of   December 18, 1996
------------------------------------------        Directors
          J. Virgil Waggoner)             
 
      /s/  FRANK J. HEVRDEJS                    Director                        December 18, 1996
------------------------------------------
          (Frank J. Hevrdejs)
 
      /s/   T. HUNTER NELSON                    Director                        December 18, 1996
------------------------------------------
           (T. Hunter Nelson)
 
      /s/   JOHN L. GARCIA                      Director                        December 18, 1996
------------------------------------------
           (John L. Garcia)
 
                                                Director                        December 18, 1996
------------------------------------------      
          (Allan R. Dragone)
 
     /s/   GEORGE B. GREGORY                    Director                        December 18, 1996
------------------------------------------
          (George B. Gregory)
 
     /s/   ROBERT B. CALHOUN                    Director                        December 18, 1996
------------------------------------------
          (Robert B. Calhoun)
</TABLE>

                                      73
<PAGE>
 
CORPORATE INFORMATION


ANNUAL MEETING                           STOCK LISTING
Date:   January 22, 1997                 OTC Electronic Bulletin Board
Time:   9:00 a.m.                        Ticker Symbol - STXX
Place:  Texas Commerce
        Center Auditorium
        601 Travis
        Houston, Texas  77002



LEGAL COUNSEL                            STOCK TRANSFER AGENT
Andrews & Kurth L.L.P.                   AND REGISTRAR
600 Travis, Suite 4200                   Society National Bank
Houston, Texas 77002                     c/o KeyCorp Shareholder Services, Inc.
(713) 220-4200                           700 Louisiana, Suite 2620
                                         Houston, Texas 77002-2729



INDEPENDENT                              CORPORATE HEADQUARTERS
ACCOUNTANTS                              Sterling Chemicals Holdings, Inc.
Deloitte & Touche LLP                    1200 Smith, Suite 1900
333 Clay, Suite 2300                     Houston, Texas  77002-4312
Houston, Texas  77002                    (713) 650-3700
(713) 756-2000