<PAGE>
                                                                    EXHIBIT 99.4

Consolidated Financial Statements of

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

Years ended September 30, 2002, 2001 and 2000


<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Stockholder of
Sterling Canada, Inc.

We have audited the accompanying consolidated balance sheets of Sterling Canada,
Inc. (Debtor-in-Possession) (the "Company") and subsidiaries as of September 30,
2002 and 2001 and the related consolidated statements of operations, changes in
stockholder's equity and cash flows for each of the three years in the period
ended September 30, 2002. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
2002 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 2002 in conformity with
accounting principles generally accepted in the United States of America.


/s/ DELOITTE & TOUCHE LLP

Chartered Accountants

Mississauga, Ontario, Canada

November 1, 2002, except as to Note 1, which is as of December 13, 2002


  COMMENTS BY AUDITOR ON CANADA-UNITED STATES OF AMERICA REPORTING DIFFERENCE

As discussed in Note 1, on July 16, 2001, the Debtors (as defined in Note 1)
filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The
accompanying financial statements do not purport to reflect or provide for the
consequences of the bankruptcy proceedings. In particular, such financial
statements do no purport to show (a) as to assets, their realizable value on a
liquidation basis or their availability to satisfy liabilities; (b) as to
pre-petition liabilities, the amounts that may be allowed for claims or
contingencies or the status and priority thereof; (c) as to stockholder
accounts, the effect of any changes that may be made in the capitalization of
the Company; or (d) as to operations, the effect of any changes that may be made
in the Company's business.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, Sterling
Chemicals Inc.'s (the Company's parent) recurring losses from operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also discussed in Note 1. The financial
statements do not include adjustments that might result from the outcome of this
uncertainty.
<PAGE>

STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                                                    September 30,
                                                                              ---------------------------
                                                                                 2002              2001
                                                                              ---------         ---------
<S>                                                                           <C>               <C>
ASSETS

CURRENT
  Cash and cash equivalents                                                   $   3,619         $   1,100
  Accounts receivable, net                                                       29,600            34,668
  Inventories (Note 2)                                                            7,236             9,190
  Prepaid expenses                                                                1,204               887
                                                                              ---------         ---------
                                                                                 41,659            45,845

Property, plant and equipment, net (Note 2)                                     100,293           107,093
Due from parent company (Note 1)                                                220,802           203,793
Other assets (Note 2)                                                             4,078             9,869
                                                                              ---------         ---------
                                                                              $ 366,832         $ 366,600
                                                                              =========         =========

LIABILITIES

CURRENT
  Accounts payable                                                            $  15,424         $  11,996
  Due to parent company                                                             609               668
  Accrued liabilities (Note 2)                                                    5,635             4,506
  Current portion of long-term debt (Note 4)                                      4,071             1,206
                                                                              ---------         ---------
                                                                                 25,739            18,376

Pre-petition liabilities - subject to compromise (Note 3)                       181,675           181,965
Pre-petition liabilities - not subject to compromise (Notes 3 and 4)             82,491            73,084
Long-term debt (Note 4)                                                           1,164            18,798
Deferred income taxes (Note 6)                                                    8,413             9,171
Deferred credits and other liabilities (Note 2)                                   9,361             9,909
                                                                              ---------         ---------
                                                                                308,843           311,303
                                                                              ---------         ---------

COMMITMENTS AND CONTINGENCIES (Notes 1, 3, 4 and 8)

STOCKHOLDER'S EQUITY
  Common Stock                                                                     ---               ---
  Additional paid-in capital                                                     83,396            83,396
  Retained earnings                                                               7,151             3,921
  Accumulated other comprehensive loss                                          (32,558)          (32,020)
                                                                              ---------         ---------
                                                                                 57,989            55,297
                                                                              ---------         ---------
                                                                              $ 366,832         $ 366,600
                                                                              =========         =========
</Table>

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



                                                                    Page 1 of 35
<PAGE>

STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                            Year ended September 30,
                                                --------------------------------------------
                                                   2002             2001              2000
                                                ---------        ---------         ---------

<S>                                             <C>              <C>               <C>
REVENUES                                        $ 186,715        $ 187,625         $ 185,763

COST OF GOODS SOLD                                146,869          148,781           147,608
                                                ---------        ---------         ---------
GROSS PROFIT                                       39,846           38,844            38,155

SELLING, GENERAL AND ADMINISTRATIVE
  EXPENSES                                          9,535            8,368            12,746
REORGANIZATION EXPENSE (Note 1)                     4,204            2,072                --
INTEREST AND DEBT RELATED
  EXPENSES, NET (Note 3) (1)                       10,997           26,077            29,768
                                                ---------        ---------         ---------
INCOME BEFORE INCOME TAXES                         15,110            2,327            (4,359)

PROVISION FOR INCOME TAXES (Note 6)                11,880           16,169             2,946
                                                ---------        ---------         ---------
NET INCOME (LOSS)                               $   3,230        $ (13,842)        $  (7,305)
                                                =========        =========         =========
</Table>


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

(1) Contractual interest on allocated debt for the fiscal years ended September
    30, 2002 and 2001 totaled $41,570 and $30,351, respectively (Note 3).



                                                                    Page 3 of 35
<PAGE>

STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(U.S. DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                                               Accumulated
                                              Additional                          Other
                                 Common        Paid-In          Retained      Comprehensive
                                 Stock         Capital          Earnings           Loss            Total
                                --------       --------         --------      -------------       --------

<S>                              <C>              <C>              <C>              <C>              <C>
Balance, September 30, 1999           --       $ 83,396         $ 25,068         $(27,500)        $ 80,964
Comprehensive income:
  Net loss                            --             --           (7,305)              --
  Translation adjustment              --             --               --           (1,533)
    Comprehensive loss                                                                              (8,838)
                                --------       --------         --------         --------         --------

Balance, September 30, 2000           --         83,396           17,763          (29,033)          72,126
Comprehensive income:
  Net loss                            --             --          (13,842)              --
  Translation adjustment              --             --               --           (2,987)
    Comprehensive loss                                                                             (16,829)
                                --------       --------         --------         --------         --------

Balance, September 30, 2001           --         83,396            3,921          (32,020)          55,297
Comprehensive income:
  Net income                          --             --            3,230               --
  Pension adjustment                  --             --               --             (192)
  Translation adjustment              --             --               --             (346)
    Comprehensive income                                                                             2,692
                                 --------      --------         --------         --------         --------
Balance, September 30, 2002            --      $ 83,396         $  7,151         $(32,558)        $ 57,989
                                 ========      ========         ========         ========         ========
</Table>


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



                                                                    Page 3 of 35
<PAGE>

STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                                             Year ended September 30,
                                                                    ------------------------------------------
                                                                      2002             2001             2000
                                                                    --------         --------         --------

<S>                                                                 <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                 $  3,230         $(13,842)        $ (7,305)
  Adjustments to reconcile net income (loss) to net
    cash provided by operating activities:
      Depreciation and amortization                                   18,175           18,986           19,476
      Deferred tax expense                                            (1,509)          13,131            1,066
      Other                                                              670            2,680               60

  Changes in assets/liabilities: (1)
    Accounts receivable                                                4,980           14,125          (16,588)
    Inventories                                                        1,969           (2,097)          (1,171)
    Prepaid expenses                                                    (343)            (363)           1,301
    Due from parent                                                  (17,009)         (46,401)         (18,595)
    Other assets                                                        (643)          (1,293)           8,802
    Accounts payable                                                   4,228              449              798
    Accrued liabilities (Note 3)                                      10,301            1,120            5,273
    Other liabilities                                                     --            1,273            3,907
                                                                    --------         --------         --------
  Net cash (used in) provided by operating activities                 24,049          (12,232)          (2,976)
                                                                    --------         --------         --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                                (6,519)          (5,754)          (5,466)
                                                                    --------         --------         --------
  Net cash used in investing activities                               (6,519)          (5,754)          (5,466)
                                                                    --------         --------         --------

CASH FLOWS FROM FINANCING ACTIVITIES: (1)
   Proceeds from issuance of long-term debt                               --           20,004               --
   Repayment of long-term debt                                       (14,800)              --               --
   Debt issuance costs                                                  (206)          (1,007)              --
                                                                    --------         --------         --------
   Net cash provided by (used in) financing activities               (15,006)          18,997               --
                                                                    --------         --------         --------
Effect of United States/Canadian exchange rate on cash                    (5)               3              (60)
                                                                    --------         --------         --------
NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS                                                     2,519            1,014           (8,502)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR                                                      1,100               86            8,588
                                                                    --------         --------         --------
CASH AND CASH EQUIVALENTS,
END OF YEAR                                                         $  3,619         $  1,100         $     86
                                                                    ========         ========         ========

Supplemental disclosures of cash flow information:
  Income taxes paid                                                 $ (3,899)        $ (1,961)        $   (696)
  Interest paid, net of interest income received                    $   (814)        $ (1,130)        $     --
</Table>

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

(1)     Changes in assets/liabilities adjusted for reclassifications to
        pre-petition liabilities in fiscal 2001.



                                                                    Page 4 of 35
<PAGE>

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

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Sterling Canada, Inc., (incorporated in the United States of America)
        through its subsidiaries (Sterling Canada, Inc. and its subsidiaries,
        collectively, the "Company") manufactures chemicals for use primarily
        in the pulp and paper industry at four plants in Canada and one plant
        in Valdosta, Georgia. These plants primarily produce sodium chlorate,
        a chemical used primarily to make chlorine dioxide, which in turn is
        used by pulp mills in the pulp bleaching process. The Company also
        produces sodium chlorite at one of its Canadian locations and oversees
        construction of large-scale chlorine dioxide generators for the pulp
        and paper industry.

        The consolidated financial statements of Sterling Canada, Inc. represent
        the financial statements of Sterling Canada, Inc. and its subsidiaries.
        Sterling Canada, Inc. is a wholly-owned subsidiary of Sterling
        Chemicals, Inc. ("Chemicals"), which was previously a wholly-owned
        subsidiary of Sterling Chemicals Holdings, Inc. ("Holdings").

        BASIS OF PRESENTATION

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

        The filing of the Chapter 11 petitions was driven by the Debtors'
        inability to meet their funded debt obligations over the long-term,
        largely brought about by weak demand for petrochemicals products caused
        by declines in general worldwide economic conditions, the relative
        strength of the U.S. dollar (which caused the Debtors' export sales to
        be at a competitive disadvantage) and higher raw material and energy
        costs. As a result of these conditions, the Debtors incurred significant
        operating losses. Chapter 11 is designed to permit debtors to preserve
        cash and to give debtors the opportunity to restructure their debt.
        During the pendency of the Chapter 11 cases, with approval of the
        Bankruptcy Court, the Debtors have assumed favorable pre-petition
        contracts and leases, rejected unfavorable pre-petition contracts and
        leases and entered into purchase and sale agreements to otherwise
        dispose of assets. Most of these actions will be consummated on or
        before the effective date of the Debtors' plan of reorganization (the
        "Plan").



                                                                    Page 5 of 35
<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        The consummation of the Plan is the primary objective of the Debtors. On
        May 14, 2002, the Debtors filed the Plan with the Bankruptcy Court,
        along with an accompanying Disclosure Statement. As a result of
        negotiations among the key creditor constituencies in the Chapter 11
        cases, including Resurgence Asset Management, L.L.C.("Resurgence"),
        the single largest unsecured creditor and a proposed equity investor
        in the reorganized company, a revised Plan and Disclosure Statement
        were filed with the Bankruptcy Court on September 13, 2002. The Plan
        and the Disclosure Statement were further revised on October 7, 2002
        and October 11, 2002, in connection with the hearing in the Bankruptcy
        Court to consider the adequacy of the Disclosure Statement. On October
        11, 2002, the Bankruptcy Court issued an order approving the
        Disclosure Statement and authorizing the Debtors to commence the
        process of soliciting votes to accept or reject the Plan, with a
        voting deadline of November 13, 2002. The approval of the Disclosure
        Statement and the authorization to commence the solicitation of votes
        was made subject to the conduct of an alternative plan process. As
        part of that process, alternative plan proposals were required to be
        submitted by no later than October 28, 2002, however, no such
        proposals were received by the deadline. The Plan was approved by a
        large percentage of the votes cast and, on November 20, 2002, the Plan
        was confirmed by the Bankruptcy Court.

        The Plan provides for the sale of the Debtors' pulp chemicals business,
        which includes the Company, to Superior Propane Inc. ("Superior") and
        the transfer of the Debtors' acrylic fibers business pursuant to a
        management buyout for little or no consideration, effective upon
        consummation of the plan, and for the continuation of the Debtors' core
        petrochemicals business as restructured under the Plan. A portion of the
        net proceeds from the sale of the pulp chemicals business, $80 million,
        will remain with the Debtors and will be used to fund the Debtors'
        obligations under the Plan and to support future operations of the
        restructured petrochemicals business. The remaining net proceeds will be
        allocated to the holders of the 12 3/8% Senior Secured Notes, who will
        also receive approximately $93 million in secured notes in satisfaction
        of their claims. The holders of Holdings' 13 1/2% Senior Secured
        Discount Notes were issued 65,000 shares of new common equity of
        Chemicals. Unsecured creditors of the Debtors (other than unsecured
        creditors of Holdings), which include holders of Chemicals' 11 1/4%
        Senior Subordinated Notes and 11 3/4% Senior Subordinated Notes, will
        receive a pro rata share of 11.7% of the new Chemicals' shares to be
        issued pursuant to the Plan, thereby participating in the common equity
        ownership of the restructured petrochemicals business, along with
        Resurgence and its affiliated client accounts (the "Investor").
        The Investor has agreed to provide equity funding of $30 million
        in exchange for certain new preferred equity interests in the
        reorganized company and to underwrite an additional $30 million of
        equity funding through a rights offering for common equity interests in
        the reorganized company. All or a portion of certain unsecured claims
        will be paid if contracts associated with their claim are assumed
        pursuant to orders of the Bankruptcy Court. Following the satisfaction
        or waiver of certain conditions, Chemicals expects the Plan to become
        effective on or before December 31, 2002, at which time the Debtors will
        emerge from Chapter 11.

        Chemicals has received an exit financing commitment from The CIT
        Group/Business Credit, Inc. for a $100 million secured revolving credit
        facility for the restructured petrochemicals business (the "Revolver").
        Chemicals is in the process of finalizing this agreement and it is
        expected to close contemporaneously with the Debtors' emergence from
        Chapter 11. The DIP Financing (as described in Note 4) will be retired
        concurrent with the emergence from Chapter 11.

        Reorganization items reflected in the Statement of Operations for fiscal
        2002 and fiscal 2001 are composed primarily of professional fees
        directly related to the bankruptcy cases.



                                                                    Page 6 of 35
<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        Emergence from Chapter 11 in accordance with the confirmed Plan is
        dependent upon several factors, including:

        o       consummation of the sale of the Debtors' pulp chemicals business
                to Superior,

        o       transfer of the Debtors' acrylic fibers facility pursuant to a
                management buyout;

        o       receipt of investment funds from Resurgence and

        o       finalization of the Revolver.

        While no assurance can be provided, Chemicals believes that it will
        satisfactorily complete these items and emerge from Chapter 11.

        The ability of the Debtors to continue as a going concern is dependent
        upon the Debtors' emergence from Chapter 11 with the capital structure
        contemplated under the Plan. As the Debtors can give no assurance that
        they will accomplish any of the foregoing, there is substantial doubt
        about Chemicals' and the Debtors' ability to continue as a going
        concern. The accompanying financial statements do not purport to reflect
        or provide for the consequence of the bankruptcy proceedings and do not
        include any adjustments that might result from the outcome of the going
        concern uncertainty.

        SIGNIFICANT ACCOUNTING POLICIES

        The significant accounting policies of the Company are described below.

        The consolidated financial statements of the Company are presented in
        accordance with accounting principles generally accepted in the United
        States of America ("U.S.") and are in U.S. dollars.

        Principles of consolidation

        The consolidated financial statements include the accounts of (i)
        Sterling Canada, Inc. and its subsidiaries, Sterling Pulp Chemicals,
        Ltd., Sterling Pulp Chemicals, Inc., Sterling Pulp Chemicals US, Inc.,
        Sterling NRO, Ltd., Sterling Pulp Chemicals Fuzhou Ltd. and Sterling
        Pulp Chemicals (Australia) Pty Limited. All significant intercompany
        accounts and transactions have been eliminated.

        Cash and cash equivalents

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



                                                                    Page 7 of 35
<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        Significant accounting policies (continued)

        Inventories

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

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

        Property, plant, and equipment

        Property, plant, and equipment are recorded at cost. Major renewals and
        improvements which extend the useful lives of equipment are capitalized,
        while repair and maintenance expenses are charged to operations as
        incurred. Disposals are removed at carrying costs less accumulated
        depreciation with any resulting gain or loss reflected in operations.
        Depreciation is provided using the straight-line method over estimated
        useful lives ranging from 3 to 25 years, with the predominant life of
        plant and equipment being 15 years.

        Impairment of long-lived assets

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

        Investment tax credits

        Investment tax credits are accounted for using the flow-through method
        whereby the investment tax credit is treated as a reduction of income
        taxes for the year in which the credit arises.

        Patents and royalties

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

        Income taxes

        The Company's U.S. subsidiaries are included in the consolidated U.S.
        federal income tax returns filed by Holdings and Chemicals. The
        Company's provision for U.S. income taxes has been allocated as if
        the Company filed its annual tax returns on a separate return basis.
        The Company's Canadian subsidiaries file separate federal
        Canadian tax returns, as well as returns in the provinces in which they
        operate. Deferred income taxes are recorded to reflect the tax effect of
        the temporary differences between the financial reporting basis and the
        tax basis of assets and liabilities.



                                                                    Page 8 of 35
<PAGE>

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

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        Revenue recognition

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

        Foreign currency translation

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

        Earnings per share

        Chemicals either directly or indirectly holds all issued and outstanding
        shares of the Company entities and, accordingly, earnings per share
        information is not presented.

        Environmental costs

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

        Disclosures about fair value of financial instruments

        In preparing disclosures about the fair value of financial instruments,
        the Company has assumed that the carrying amount approximates fair value
        for cash and cash equivalents, accounts receivable, accounts payable and
        certain accrued liabilities due to the short maturities of those
        instruments. The fair values of long-term debt instruments allocated to
        the Company by Chemicals are estimated based upon quoted market values
        (if applicable) or on the current interest rates available for debt with
        similar terms and remaining maturities. The fair value of the amount due
        from parent company (non-interest bearing), pre-petition liabilities
        subject to compromise and pre-petition liabilities not subject to
        compromise is not possible to determine given the uncertainty of the
        impact of the bankruptcy proceedings. Considerable judgment is required
        in developing these estimates and, accordingly, no assurance can be
        given that the estimated values presented herein are indicative of the
        amounts that would be realized in a free market exchange.



                                                                    Page 9 of 35

<PAGE>

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

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        Accounting estimates

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

        Allocations

        The Company is wholly owned by Chemicals, which incurs certain direct
        and indirect expenses for the benefit and support of the Company. These
        services include, among others, tax planning, treasury, legal, risk
        management, and the maintenance of insurance coverage for the Company.
        Chemicals allocated $2.3 million, $2.3 million, and $3.5 million of such
        expenses to the Company in fiscal years 2002, 2001, and 2000,
        respectively, which are included in selling, general, and administrative
        expenses. Additionally, Chemicals allocated $4.2 and $2.1 of
        reorganization expenses primarily comprised of professional fees
        directly related to the bankruptcy during fiscal 2002 and 2001,
        respectively. Allocations are based on the Company's proportionate share
        of the respective amounts and are determined using various criteria
        including headcount, payroll, number of vehicles, amount of pre-petition
        liabilities and revenue.

        New accounting standards

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

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

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



                                                                   Page 10 of 35
<PAGE>

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

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        New accounting standards (continued)

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

        In April 2002, the Financial Accounting Standards Board issued SFAS No.
        145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
        Statement No. 13, and Technical Corrections." SFAS No. 145 eliminates
        Statement No. 4 and as a result, gains and losses from extinguishment of
        debt should be classified as extraordinary items only if they meet the
        criteria in APB Opinion No. 30. SFAS No. 145 amends SFAS No. 13,
        "Accounting for Leases," to eliminate an inconsistency between the
        required accounting for sale-leaseback transactions and the required
        accounting for certain lease modifications that have economic effects
        that are similar to sale-leaseback transactions. SFAS No. 145 also
        amends other existing authoritative pronouncements to make various
        technical corrections, clarify meanings or describe their applicability
        under changed conditions. The provisions of this Statement related to
        the rescission of SFAS No. 4 apply to fiscal years beginning after May
        15, 2002. The provisions of this Statement related to SFAS No. 13 apply
        to transactions occurring after May 15, 2002. All other provisions of
        this Statement are effective for financial statements issued on or after
        May 15, 2002. The adoption of SFAS No. 145 is not expected to have a
        significant impact on the Company's financial statements.

        In July 2002, the FASB issued SFAS No. 146, "Accounting For Costs
        Associated with Exit or Disposal Activities." SFAS No. 146 is effective
        for exit or disposal activities initiated after December 31, 2002. The
        Company has not yet adopted SFAS No. 146 nor determined the effect of
        the adoption of SFAS No. 146 on the financial position or results of
        operations.

        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 the net income (loss) or
        stockholder's equity.



                                                                   Page 11 of 35

<PAGE>

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

2.       DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

<Table>
<Caption>
                                                          September 30,
                                                   ---------------------------
                                                      2002              2001
                                                   ---------         ---------
                                                       (Dollars in Thousands)

<S>                                                <C>               <C>
Inventories:
  Finished products                                $   3,840         $   5,821
  Raw materials                                          251               259
                                                   ---------         ---------

Inventories, at cost                                   4,091             6,080
Inventories under exchange agreements                    (63)               80
Stores and supplies                                    3,208             3,030
                                                   ---------         ---------
                                                   $   7,236         $   9,190
                                                   =========         =========

Property, plant and equipment:
  Land                                             $   1,355         $   1,362
  Buildings                                           26,853            26,671
  Plant and equipment                                168,313           163,602
                                                   ---------         ---------
Property, plant and equipment, at cost               196,521           191,635
Less accumulated depreciation                        (96,228)          (84,542)
                                                   ---------         ---------
                                                   $ 100,293         $ 107,093
                                                   =========         =========

Other assets:
  Debt placement fees, net                         $     787         $   1,007
  Capitalized project costs                            1,917             1,358
  Intangible assets, net                                  --             5,924
  Prepaid pension asset                                  116               170
  Other                                                1,258             1,410
                                                   ---------         ---------
                                                   $   4,078         $   9,869
                                                   =========         =========

Accrued liabilities:
  Accrued compensation                             $   1,480         $     565
  Accrued interest                                        --               136
  Pension liability                                    1,087               712
  Other                                                3,068             3,093
                                                   ---------         ---------
                                                   $   5,635         $   4,506
                                                   =========         =========

Deferred credits and other liabilities
  Deferred revenue                                 $   5,115         $   5,836
  Accrued pension liability                              308               170
  Accrued postretirement benefits
    other than pensions                                3,938             3,903
                                                   ---------         ---------
                                                   $   9,361         $   9,909
                                                   =========         =========
</Table>



                                                                   Page 12 of 35
<PAGE>

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

3.      PRE-PETITION LIABILITIES

        LIABILITIES SUBJECT TO COMPROMISE

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

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

        Recorded liabilities subject to compromise under Chapter 11 proceedings
        consisted of:

<Table>
<Caption>
                                                            September 30,
                                                     ---------------------------
                                                        2002              2001
                                                     ---------         ---------
                                                        (Dollars in Thousands)

<S>                                                  <C>               <C>
Accrued liabilities                                  $      --         $     130
Trade accounts payable                                   2,607             2,767
Accrued interest                                         5,846             5,846
Allocated debt(1)
11 1/4% Notes                                           52,224            52,224
11 3/4% Notes                                          120,998           120,998
                                                     ---------         ---------
Total liabilities subject to compromise              $ 181,675         $ 181,965
                                                     =========         =========
</Table>

        (1)     Debt liabilities are presented net of allocated unamortized debt
                issue costs of $3.6 million for both September 30, 2002 and
                September 30, 2001.

        As a result of the bankruptcy filing, principal and interest payments
        may not be made on pre-petition debt without Bankruptcy Court approval
        or until a plan of reorganization defining the repayment terms has been
        confirmed. The total allocated interest on pre-petition debt that was
        not paid or charged to earnings was $4.2 million for the period from
        July 16, 2001 to September 30, 2001 and $30.6 million for fiscal 2002.
        Such interest is not being accrued since management believes it is not
        probable that it will be treated as an allowed claim. The Bankruptcy
        Code generally disallows the payment of post-petition interest that
        accrues with respect to unsecured or undersecured claims.



                                                                   Page 13 of 35
<PAGE>

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

3.      PRE-PETITION LIABILITIES (CONTINUED)

        LIABILITIES NOT SUBJECT TO COMPROMISE

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

        Recorded liabilities not subject to compromise under Chapter 11
        proceedings consisted of:

<Table>
<Caption>
                                                                   September 30,
                                                              ----------------------
                                                                2002           2001
                                                              -------        -------
                                                               (Dollars in Thousands)
<S>                                                           <C>            <C>
Debt allocated from Parent
12 3/8% Senior secured notes (see Note 4)                     $67,152        $67,152
Accrued interest on 12 3/8% Senior secured notes               15,339          5,932
                                                              -------        -------
Total liabilities not subject to compromise                   $82,491        $73,084
                                                              =======        =======
</Table>

4.      LONG-TERM DEBT

        This note contains information regarding the Company's debt as of
        September 30, 2002 and September 30, 2001. As a result of the filing of
        the Chapter 11 cases previously described, no payments will be made by
        the Debtors on pre-petition debt except as approved by the Bankruptcy
        Court.

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

        Effective July 19, 2001, the Debtors (excluding Holdings) entered into a
        Revolving Credit Agreement with a group of lenders led by The CIT
        Group/Business Credit, Inc. to provide up to $195 million in
        Debtor-In-Possession financing (the "DIP Financing"). By interim order
        dated July 18, 2001 and final order dated September 14, 2001, the
        Bankruptcy Court approved up to $155 million in lending commitments
        under the DIP Financing (the "Base Facility"), which was later increased
        to $195 million through the entry of a priming order by the Bankruptcy
        Court on November 2, 2001 (the "Priming Facility"). In separate actions,
        the indenture trustee for Chemicals' 12 3/8% Senior Secured Notes
        appealed both the final order for the Base Facility and the priming
        order for the Priming Facility to the United States District Court.



                                                                   Page 14 of 35
<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

4.      LONG-TERM DEBT (CONTINUED)

        After numerous proceedings before the United States District Court and
        the Bankruptcy Court, the United States District Court ultimately upheld
        the final order for the Base Facility in its original form and upheld
        the priming order for the Priming Facility in a modified form. The
        indenture trustee appealed these decisions by the United States District
        Court to the United States Court of Appeals for the 5th Circuit. The 5th
        Circuit consolidated all of the pending appeals. By agreement of the
        indenture trustee, the consolidated appeal has been held in abeyance
        pending the effectiveness of the Plan. Under the Plan, the indenture
        trustee will file a voluntary dismissal of the consolidated appeal upon
        the effective date of the Plan. In the event that the Plan does not
        become effective on or before January 1, 2003, in the absence of an
        agreement or order holding the consolidated appeal in abeyance for a
        longer period, the indenture trustee will be free to further pursue the
        consolidated appeal if it so desires.

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

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

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

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

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

                o       a first priority lien on all accounts receivable,
                        inventory and other specified assets of Chemicals and
                        the other co-borrowers;

                o       a second priority lien on 35% of the capital stock of
                        certain of Chemicals' subsidiaries incorporated outside
                        the United States; and

                o       third priority liens on the remaining 65% of that stock,
                        all of the capital stock of the co-borrowers (other than
                        Chemicals) and all of Chemicals' United States
                        production facilities and related assets.

        Upon entry of the priming order, the maximum availability under the
        current assets revolving credit facility was increased to $125 million.
        The monthly borrowing base was revised to consist of 85% of eligible
        accounts receivable, the lesser of $10 million or 33% of specified
        estimated future royalty payments related to the Debtors' chlorine
        dioxide generator technology and 65% of eligible inventory, with an
        inventory cap of $62.5 million, and, the amount by which the borrowing
        base for the current assets revolver is required to exceed outstanding
        borrowings was reduced to $6 million. During October 2002, an amendment
        to the DIP Financing was effected, resulting in abolishment of the
        minimum EBITDA covenant unless excess availability (as defined in the
        amendment) falls below $25.0 million. In addition, the amount by which
        the borrowing base for the current assets revolver must exceed
        borrowings was increased to $12 million at all times.



                                                                   Page 15 of 35
<PAGE>

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

4.       LONG-TERM DEBT (CONTINUED)

         If the priming order remains effective and the total commitments under
         the current assets revolver are increased to $125 million, the
         incremental $40 million is secured by first priority liens on all of
         the U.S. production facilities and related assets and all of the
         capital stock of the co-borrowers (other than Chemicals) to secure up
         to $40 million under the current assets revolver, as well as all of the
         same collateral securing the initial $85 million current assets
         revolver. Consequently, after giving effect to the priming order, the
         DIP Financing consists of:

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

                  -        second priority liens on all of the U.S. production
                           facilities and related assets, all of the capital
                           stock of the co-borrowers (other than Chemicals), all
                           accounts receivable, inventory and other specified
                           assets of Chemicals and the other co-borrowers and
                           35% of the capital stock of certain of the
                           subsidiaries incorporated outside the United States;
                           and

                  -        a third priority lien on the remaining 65% of that
                           stock; and

         o        a $125 million current assets revolving credit facility:

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

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

         Borrowings under the fixed assets revolving credit facility bear
         interest, at Chemicals' option, at an annual rate of either the "LIBOR
         Rate" (as defined in the DIP Financing) plus 3.75% or the "Alternate
         Base Rate" (as defined in the DIP Financing) plus 2.25%. Borrowings
         under the current assets revolving credit facility bear interest, at
         Chemicals' option, at an annual rate of either the LIBOR Rate plus
         3.50% or the Alternate Base Rate plus 2.00%. At September 30, 2002, the
         weighted-average interest rate in effect was 6.0%. The DIP Financing
         also requires Chemicals and the co-borrowers to pay an aggregate
         commitment fee ranging from 0.75% to 1.25% on the unused portion of the
         commitment for the fixed assets revolving credit facility, depending on
         the amount drawn, and an aggregate commitment fee of 0.5% on the unused
         portion of the commitment for the current assets revolving credit
         facility.



                                                                   Page 16 of 35
<PAGE>



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

4.       LONG-TERM DEBT (CONTINUED)

         At September 30, 2002, the total credit available under the DIP
         Financing was $139.1 million due to the current assets revolver portion
         of the DIP Financing borrowing base limitations discussed above. At
         September 30, 2002, $57.2 million was drawn under the fixed assets
         revolver portion of the DIP Financing and there were no borrowings
         outstanding under the current assets revolver. In addition,
         approximately $3.6 million of letters of credit were outstanding under
         the current assets revolver, leaving at September 30, 2002, unused
         borrowing capacity under the DIP Financing of approximately $78.3
         million. No borrowings under the DIP Financing have been allocated to
         the Company.

         In August of 1996, in connection with a recapitalization transaction,
         Chemicals allocated $276.8 million of debt to the Company. Principal
         payments were allocated to the Company by Chemicals as scheduled
         principal payments were made on a basis consistent with the original
         allocation. In addition, the Company has made payments to Chemicals,
         from time to time, out of available cash which were applied by
         Chemicals as a reduction of the principal of the previously allocated
         debt. Interest expense is allocated to the Company based on the terms
         of Chemicals' debt agreements. At September 30, 2002, the interest rate
         on allocated debt was 12.375% (2001 - ranged from 11.25% to 12.375%).
         Debt issue costs relating to allocated long-term debt have been
         allocated to the Company by Chemicals on a basis consistent with
         long-term debt and are included as a valuation against pre-petition
         liabilities subject to compromise.

         As of July 11, 2001, Sterling Pulp entered into a financing agreement
         with CIT Company Credit (Canada) Inc. ("CIT Canada") to provide up to
         the Canadian dollar equivalent of U.S. $30 million (the "Canadian
         Financing Agreement"). The initial advance under this facility,
         approximately U.S. $20 million, was used by Sterling Pulp to discharge
         a portion of an intercompany debt and was ultimately transferred to the
         Debtors through an intercompany loan. The intercompany loan was
         approved by the Bankruptcy Court's interim order entered on July 18,
         2001 and final order entered on September 14, 2001, which is a subject
         of the appeal of the final order discussed above. Under the Plan, the
         intercompany loan will be extinguished concurrent with the Debtors'
         emergence from Chapter 11. The initial term of the Canadian Financing
         Agreement extends to July 2004. CIT Canada has been notified of the
         expected termination of the Canadian Financing Agreement that will
         occur concurrent with the sale of the Debtors' pulp chemicals business
         to Superior. All outstanding balances under the Canadian Financing
         Agreement will be paid from the proceeds of the sale.

         Available credit under the CIT Canada revolver is generally subject to
         a borrowing limit equal to the lesser of Cdn. $25 million and the
         amount determined as follows: 85% of eligible accounts receivable, plus
         the lesser of 50% of the aggregate amount of the obligations
         outstanding and 65% of the value of eligible inventory. As of September
         30, 2002 the Company has no outstanding obligations against the
         borrowing base.

         At September 30, 2002 and 2001, $5.2 million (against the term loan)
         and $20 million (against the term loan and the revolver), respectively,
         was drawn under the Canadian Financing Agreement. Borrowings under the
         Canadian Financing Agreement bear interest at the CIBC Bank Rate (as
         defined in the Canadian Financing Agreement) plus between 2.0% and
         2.5%, or at the LIBOR Rate plus 3.5%.



                                                                   Page 17 of 35
<PAGE>



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

4.       LONG-TERM DEBT (CONTINUED)

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

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

         o        a second priority lien on all of Chemicals' United States
                  production facilities and related assets;

         o        a second priority pledge of all of the capital stock of each
                  subsidiary guarantor; and

         o        a first priority pledge of 65% of the stock of certain of
                  Chemicals' subsidiaries incorporated outside of the United
                  States.

         As a result of the priming order, the second priority liens held by the
         12 3/8% Notes on all Chemicals' United States production facilities and
         related assets and the capital stock of each subsidiary guarantor
         became third priority liens. The priming order does not affect the
         priority of the pledge held by the 12 3/8% Notes of 65% of the stock of
         certain of Chemicals' subsidiaries incorporated outside of the United
         States.

         The 12 3/8% Notes bear interest at the annual rate of 12 3/8%, payable
         semi-annually on January 15 and July 15 of each year commencing January
         15, 2000. During the pendency of the Chapter 11 cases, interest may
         accrue to the extent permitted by the Bankruptcy Code but is not
         payable unless ordered by the Bankruptcy Court. Without regard to the
         Chapter 11 filings, and except as otherwise provided below, the 12 3/8%
         Notes may not be redeemed by Chemicals prior to July 15, 2003. From
         that date until July 15, 2004, the 12 3/8% Notes may be redeemed at a
         premium of the principal amount thereof at maturity of 106.188% and,
         from July 15, 2004 until July 15, 2005, the 12 3/8% Notes may be
         redeemed at a premium of the principal amount thereof at maturity of
         103.094%. Thereafter, Chemicals may redeem the 12 3/8% Notes at their
         face value plus accrued and unpaid interest. Prior to July 15, 2002,
         Chemicals could redeem in the aggregate up to 35% of the original
         principal amount of the 12 3/8% Notes with the proceeds of one or more
         specified Public Equity Offerings. Such redemptions could be made at a
         redemption price of 112.375% of the face value of the 12 3/8% Notes
         plus accrued and unpaid interest to the redemption date. After such
         redemption, at least $191.75 million aggregate principal amount of the
         12 3/8% Notes must remain outstanding. No redemptions may be made
         during the pendency of the Chapter 11 cases and these notes will be
         extinguished upon the Debtors' emergence from Chapter 11.



                                                                   Page 18 of 35
<PAGE>



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

4.       LONG-TERM DEBT (CONTINUED)

         On July 23, 1999, Chemicals also established two secured revolving
         credit facilities providing up to $155,000,000 in revolving credit
         loans (the "Prior Revolvers") under a single Revolving Credit Agreement
         (the "Prior Credit Agreement"). Under the Prior Credit Agreement,
         Chemicals and each of its direct and indirect United States
         subsidiaries (other than Sterling Chemicals Acquisitions, Inc.) were
         co-borrowers and were jointly and severally liable for any indebtedness
         thereunder. The Prior Revolvers consisted of (i) an $85,000,000
         revolving credit facility secured by a first priority lien on all
         accounts receivable, inventory and other specified assets of Chemicals
         and the other co-borrowers and (ii) a $70,000,000 revolving credit
         facility secured by a first priority lien on all of the United States
         production facilities and related assets, all of the capital stock of
         Chemicals and all of the capital stock of each co-borrower and a second
         priority lien on all accounts receivable, inventory and other specified
         assets of Chemicals and the other co-borrowers. As mentioned above, the
         initial draw under the DIP Financing was used to repay all amounts
         under the Prior Revolvers.

         As part of Chemical's recapitalization in August of 1996, Chemicals
         issued $276.8 million of its 11 3/4% Senior Subordinated Notes due 2006
         (the "11 3/4% Notes") and Holdings issued 191,751 Units, with each Unit
         consisting of one 13 1/2% Senior Secured Discount Note due 2008
         (collectively, the "13 1/2% Notes") and one warrant to purchase three
         shares of the common stock, par value $0.01 per share, of Holdings
         ("Holdings Common Stock") for $0.01 per share. Holdings received $100
         million in initial proceeds upon issuing $191.8 million of 13 1/2%
         Notes under the Units offering. On April 7, 1997, Chemicals issued
         $150.0 million of its 11 1/4% Senior Subordinated Notes due 2007 (the
         "11 1/4% Notes").

         The 11 3/4% Notes are unsecured senior subordinated obligations of
         Chemicals, ranking subordinate in right of payment to all existing and
         future senior debt of Chemicals, but pari passu with the 11 1/4% Notes
         and all future senior subordinated indebtedness. The 11 3/4% Notes bear
         interest at the annual rate of 11 3/4%, payable semi-annually on
         February 15 and August 15 of each year commencing February 15, 1997.
         However, no interest will be paid during the pendency of the Chapter 11
         cases. As management believes this interest liability is subject to
         compromise, interest expense is not being recorded after the Petition
         Date. The 11 3/4% Notes were not redeemable by Chemicals prior to
         August 15, 2001. Under the indenture for the 11 3/4% Notes, from that
         date through August 15, 2004, the 11 3/4% Notes may be redeemed at a
         premium of the principal amount thereof at maturity varying between
         105.875% and 101.958% and, after August 15, 2004, Chemicals may redeem
         the 11 3/4% Notes at their face value plus accrued and unpaid interest.
         However, notwithstanding the foregoing, no redemptions may be made
         during the pendency of the Chapter 11 cases and these notes will be
         extinguished upon the Debtors' emergence from Chapter 11.



                                                                   Page 19 of 35
<PAGE>


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

4.       LONG-TERM DEBT (CONTINUED)

         The 11 1/4% Notes are unsecured senior subordinated obligations of
         Chemicals, ranking subordinate in right of payment to all existing and
         future senior debt of Chemicals, but pari passu with the 11 3/4 % Notes
         and all future senior subordinated indebtedness of Chemicals. The
         11 1/4% Notes bear interest at the annual rate of 11 1/4%, payable
         semi-annually on April 1 and October 1 of each year commencing October
         1, 1997. However, no interest will be paid during the pendency of the
         Chapter 11 cases. As management believes this interest liability is
         subject to compromise, interest expense is not being recorded after the
         Petition Date. Under the indenture for the 11 1/4% Notes, the 11 1/4%
         Notes may not be redeemed by Chemicals prior to April 1, 2002 and, from
         that date through April 1, 2005, the 11 1/4% Notes may be redeemed at a
         premium of the principal amount thereof at maturity varying between
         105.625% and 101.875%. After April 1, 2005, Chemicals may redeem the
         11 1/4% Notes at their face value plus accrued and unpaid interest.
         However, notwithstanding the foregoing, no redemptions may be made
         throughout the duration of the Chapter 11 cases and these notes will be
         extinguished upon the Debtors' emergence from Chapter 11.

         DEBT MATURITIES

         The estimated remaining principal payments on the outstanding debt of
         the Company (excluding debt allocated from Chemicals) are as follows:

<Table>
<Caption>
Year ending
September 30,                                            Dollars in Millions
-------------                                            -------------------
<S>                                                      <C>
2003                                                           $      4.1
2004                                                                  1.1
2005                                                                    -
2006                                                                    -
2007                                                                    -
                                                               ----------
Total                                                          $      5.2
                                                               ==========

</Table>



                                                                   Page 20 of 35
<PAGE>




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

5.       CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY

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


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                                Year ended September 30, 2002
                                                 --------------------------------------------------------------
                                                  Entities in        Entities Not in
                                                 Reorganization      Reorganization                           Consolidated
                                                 Proceedings(1)        Proceedings       Eliminations            Totals
                                                 ---------------     ---------------    ---------------     ---------------
<S>                                              <C>                 <C>                <C>                 <C>
Revenues                                         $        55,355     $       134,551    $        (3,191)    $       186,715
Cost of goods sold                                        41,934             108,126             (3,191)            146,869
                                                 ---------------     ---------------    ---------------     ---------------
Gross profit                                              13,421              26,425                 --              39,846
Selling, general and administrative
  expenses                                                 3,129               6,406                 --               9,535
Reorganization expense                                     4,204                  --                 --               4,204
Interest and debt related expenses, net                    9,831               1,166                 --              10,997
                                                 ---------------     ---------------    ---------------     ---------------

Income (loss) before income taxes                         (3,743)             18,853                 --              15,110
Provision for income taxes                                 4,369               7,511                 --              11,880
                                                 ---------------     ---------------    ---------------     ---------------

Net income (loss)                                $        (8,112)    $        11,342    $            --     $         3,230
                                                 ===============     ===============    ===============     ===============
</Table>


<Table>
<Caption>
                                                                      Year ended September 30, 2001
                                                 --------------------------------------------------------------------------
                                                  Entities in        Entities Not in
                                                 Reorganization      Reorganization                           Consolidated
                                                 Proceedings(1)        Proceedings       Eliminations            Totals
                                                 ---------------     ---------------    ---------------     ---------------
<S>                                              <C>                 <C>                <C>                 <C>
Revenues                                         $        56,230     $       134,989    $        (3,594)    $       187,625
Cost of goods sold                                        39,773             112,602             (3,594)            148,781
                                                 ---------------     ---------------    ---------------     ---------------
Gross profit                                              16,457              22,387                 --              38,844
Selling, general and administrative
  expenses                                                 2,406               5,962                 --               8,368
Reorganization expense                                     2,072                  --                 --               2,072
Interest and debt related expenses, net                   25,716                 361                 --              26,077
                                                 ---------------     ---------------    ---------------     ---------------

Income (loss) before income taxes                        (13,737)             16,064                 --               2,327
Provision for income taxes                                11,194               4,975                 --              16,169
                                                 ---------------     ---------------    ---------------     ---------------
Net income (loss)                                $       (24,931)    $        11,089    $            --     $       (13,842)
                                                 ===============     ===============    ===============     ===============
</Table>


(1)      Entities in reorganization proceedings include: Sterling Canada, Inc.,
         Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc.




                                                                   Page 21 of 35
<PAGE>



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

5.       CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY
         (CONTINUED)


CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                                                     September 30, 2002
                                                          ----------------------------------------------------------------------
                                                           Entities in     Entities Not in
                                                          Reorganization    Reorganization                         Consolidated
                                                          Proceedings(1)      Proceedings       Eliminations         Totals
                                                          ---------------   ---------------    ---------------   ---------------
<S>                                                       <C>               <C>                <C>               <C>
ASSETS
Cash and cash equivalents                                 $            47   $         3,572    $            --   $         3,619
Accounts receivable, net                                            9,332            24,658             (4,390)           29,600
Inventories                                                         1,680             5,556                 --             7,236
Prepaid expenses                                                       10             1,194                 --             1,204
Property, plant and equipment, net                                 40,921            59,372                 --           100,293
Due from parent                                                   220,802                --                 --           220,802
Other assets                                                        1,256            22,231            (19,409)            4,078
                                                          ---------------   ---------------    ---------------   ---------------
Total Assets                                              $       274,048   $       116,583    $       (23,799)  $       366,832
                                                          ===============   ===============    ===============   ===============

LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)

Current liabilities                                       $         3,783   $        26,346    $        (4,390)  $        25,739
Pre-petition liabilities subject to compromise                    181,675                --                 --           181,675
Pre-petition liabilities not subject to compromise                 82,491                --                 --            82,491
Long-term debt                                                     19,409             1,164            (19,409)            1,164
Non-current liabilities                                             5,036            12,738                 --            17,774
Stockholder's equity (deficiency in assets)                       (18,346)           76,335                 --            57,989
                                                          ---------------   ---------------    ---------------   ---------------
Total Liabilities and Stockholder's Equity                $       274,048   $       116,583    $       (23,799)  $       366,832
                                                          ===============   ===============    ===============   ===============
</Table>


<Table>
<Caption>
                                                                                    September 30, 2001
                                                         --------------------------------------------------------------------------
                                                          Entities in       Entities Not in
                                                         Reorganization      Reorganization                          Consolidated
                                                         Proceedings(1)       Proceedings        Eliminations           Totals
                                                         ---------------     ---------------    ---------------     ---------------
<S>                                                      <C>                 <C>                <C>                 <C>
ASSETS
Cash and cash equivalents                                $         1,086    $            14    $            --   $         1,100
Accounts receivable, net                                          15,388             22,359             (3,079)           34,668
Inventories                                                        1,756              7,434                 --             9,190
Prepaid expenses                                                      16                871                 --               887
Property, plant and equipment, net                                44,332             62,761                 --           107,093
Due from parent                                                  203,793                 --                 --           203,793
Other assets                                                       7,334             21,944            (19,409)            9,869
                                                          ---------------   ---------------    ---------------   ---------------
Total Assets                                             $       273,705    $       115,383    $       (22,488)  $       366,600
                                                          ===============   ===============    ===============   ===============

LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)

Current liabilities                                      $         3,813    $        17,642    $        (3,079)  $        18,376
Pre-petition liabilities subject to compromise                   181,965                 --                 --           181,965
Pre-petition liabilities not subject to compromise                73,084                 --                 --            73,084
Long-term debt                                                    19,409             18,798            (19,409)           18,798
Non-current liabilities                                            5,727             13,353                 --            19,080
Stockholder's equity (deficiency in assets)                      (10,293)            65,590                 --            55,297
                                                          ---------------   ---------------    ---------------   ---------------
Total Liabilities and Stockholder's Equity               $       273,705    $       115,383    $       (22,488)  $       366,600
                                                          ===============   ===============    ===============   ===============
</Table>



                                                                   Page 22 of 35
<PAGE>



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

5.       CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY
         (CONTINUED)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                                                 Year ended September 30, 2002
                                                                     -------------------------------------------------------
                                                                      Entities in       Entities Not in
                                                                     Reorganization      Reorganization        Consolidated
                                                                     Proceedings(1)        Proceedings            Totals
                                                                     ---------------     ---------------     ---------------
<S>                                                                  <C>                 <C>                 <C>
Net cash provided by (used in) operating activities                  $          (217)    $        24,266     $        24,049
Cash flows from investing activities:
   Capital expenditures                                                         (822)             (5,697)             (6,519)
                                                                     ---------------     ---------------     ---------------
Net cash provided by (used in) investing activities                             (822)             (5,697)             (6,519)
Cash flows from financing activities:
   Repayments of long-term debt                                                   --             (14,800)            (14,800)
   Debt issuance costs                                                            --                (206)               (206)
                                                                     ---------------     ---------------     ---------------
Net cash provided by (used in) financing activities                               --             (15,006)            (15,006)
Effect of exchange rate changes on cash                                           --                  (5)                 (5)
                                                                     ---------------     ---------------     ---------------
Net increase(decrease) in cash and cash equivalents                           (1,039)              3,558               2,519
                                                                     ---------------     ---------------     ---------------
Cash and cash equivalents at beginning of year                                 1,086                  14               1,100
                                                                     ---------------     ---------------     ---------------
Cash and cash equivalents at end of year                             $            47     $         3,572     $         3,619
                                                                     ===============     ===============     ===============
</Table>


<Table>
<Caption>
                                                                                 Year ended September 30, 2002
                                                                     -------------------------------------------------------
                                                                      Entities in       Entities Not in
                                                                     Reorganization      Reorganization        Consolidated
                                                                     Proceedings(1)        Proceedings            Totals
                                                                     ---------------     ---------------     ---------------
<S>                                                                  <C>                 <C>                 <C>
Net cash provided by (used in) operating activities                  $       (24,565)    $        12,333     $       (12,232)
Cash flows from investing activities:
   Capital expenditures                                                         (627)             (5,127)             (5,754)
   Investments                                                                 6,764              (6,764)                 --
                                                                     ---------------     ---------------     ---------------
Net cash provided by (used in) investing activities                            6,137             (11,891)             (5,754)
Cash flows from financing activities:
   Proceeds from long-term debt                                                   --              20,004              20,004
   Repayments of long-term debt                                               19,409             (19,409)                 --
   Debt issuance costs                                                           105              (1,112)             (1,007)
                                                                     ---------------     ---------------     ---------------
Net cash provided by (used in) financing activities                           19,514                (517)             18,997
Effect of exchange rate changes on cash                                           --                   3                   3
                                                                     ---------------     ---------------     ---------------
Net increase(decrease) in cash and cash equivalents                            1,086                 (72)              1,014
                                                                     ---------------     ---------------     ---------------
Cash and cash equivalents at beginning of year                                    --                  86                  86
                                                                     ---------------     ---------------     ---------------
Cash and cash equivalents at end of year                             $         1,086     $            14     $         1,100
                                                                     ===============     ===============     ===============
</Table>



                                                                   Page 23 of 35
<PAGE>


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

6.       INCOME TAXES

         The Company's US subsidiaries are included in the consolidated federal
         United States tax returns filed by Holdings. The Company's provision
         (benefit) for United States income taxes has been allocated as if the
         Company filed its annual federal United States tax returns on a
         separate return basis. As of September 30, 2002, 2001, the Company
         recorded nil and nil, respectively, of deferred income tax assets in
         due from parent company.

         For the years ended September 30, 2002, 2001 and 2000, the Company
         recorded $5.7, $11.2 and nil million, respectively, of United States
         income tax provision in its provision for income taxes.

         Deferred income taxes are recorded to reflect the tax consequences in
         future years of differences between the tax basis of assets and
         liabilities and the financial reporting amounts. A reconciliation of
         the Canadian income taxes to the Canadian effective tax provision
         follows:

<Table>
<Caption>
                                                                                Year ended September 30,
                                                                         ----------------------------------------
                                                                            2002           2001           2000
                                                                         ----------     ----------     ----------
                                                                                   (Dollars in Thousands)
<S>                                                                      <C>            <C>            <C>
Provision for federal income tax at the statutory rate                   $    4,273     $    3,713     $    2,308
Provincial income taxes at the statutory rate                                 2,251          2,072          1,114
Federal and provincial manufacturing and
   processing tax credits                                                      (264)          (810)          (476)
                                                                         ----------     ----------    ----------
                                                                         $    6,260     $    4,975     $    2,946
                                                                         ==========     ==========    ==========
</Table>

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

<Table>
<Caption>
                                                                                 Year ended September 30,
                                                                          ---------------------------------------
                                                                             2002           2001          2000
                                                                          ----------     ----------    ----------
                                                                                   (Dollars in Thousands)
<S>                                                                       <C>            <C>           <C>
Current federal                                                           $    4,712     $    2,135    $    1,107
Deferred federal                                                                (703)           768           725
Current provincial                                                             2,630          1,640           611
Deferred provincial                                                             (379)           432           503
                                                                          ----------     ----------    ----------
                                                                          $    6,260     $    4,975    $    2,946
                                                                          ==========     ==========    ==========
</Table>




                                                                   Page 24 of 35
<PAGE>


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

6.      INCOME TAXES (CONTINUED)

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

<Table>
<Caption>
                                                                      September 30,
                                                                -------------------------
                                                                   2002           2001
                                                                ----------     ----------
                                                                  (Dollars in Thousands)
<S>                                                             <C>            <C>
Deferred tax assets:
  Accrued liabilities                                           $      136     $      452
  Accrued postretirement cost                                        1,418          1,522
  Investment tax credits                                                --            115
                                                                ----------     ----------
                                                                     1,554          2,089
                                                                ----------     ----------
Deferred tax liabilities:
  Property, plant and equipment                                     (9,718)       (11,260)
  Other                                                               (249)            --
                                                                ----------     ----------
                                                                    (9,967)       (11,260)
                                                                ----------     ----------
Net deferred tax liabilities                                    $   (8,413)    $   (9,171)
                                                                ==========     ==========
</Table>

7.       EMPLOYEE BENEFITS

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

         The Debtors have received approval from the Bankruptcy Court to pay or
         otherwise honor certain of their pre-petition obligations, including
         payments for employee wages and salaries, benefits and other employee
         obligations. The Debtors' obligations under its employee benefit plans
         are liabilities that are subject to compromise under the Chapter 11
         reorganization proceedings. See Note 3 for further information on
         pre-petition liabilities subject to compromise.

         Employee Savings Plan

         The Company introduced an Employee Savings Plan for all eligible
         full-time Canadian employees with an effective date of October 1, 2000.
         Each participant has the option to contribute a percentage of his or
         her earnings to the Canadian savings plan, with no limit on the maximum
         percentage contributed. The Company will match 100% of a participant's
         contributions, to the extent such contributions do not exceed 3.5% of
         such participant's cash compensation (excluding bonuses, profit
         sharing, and similar types of compensation). The Company has recorded
         an expense of $0.3 and $0.2 million related to the Savings Plan for the
         fiscal years ended September 30, 2002 and 2001, respectively.




                                                                   Page 25 of 35
<PAGE>
STERLING CANADA, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


7.      EMPLOYEE BENEFITS (CONTINUED)

        Profit Sharing and Bonus Plans

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

        The Company has recorded (income) and expense of nil, ($0.1) million,
        $1.3 million related to the Profit Sharing Plan and nil, nil and $1.1
        million related to the Bonus Plan for each of the fiscal years ended
        September 30, 2002, 2001 and 2000, respectively.

        Phantom Stock Plan

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

        The Company has recorded (income) and expense of nil, $(0.4) million and
        $0.2 million related to the phantom stock plan for the fiscal years
        ended September 30, 2002, 2001 and 2000, respectively.




                                                                   Page 26 of 35
<PAGE>


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

7.      EMPLOYEE BENEFITS (CONTINUED)

        Savings and Investment Plan

        Chemicals' Sixth Amended and Restated Savings and Investment Plan covers
        substantially all United States employees of the Company, including
        executive officers. This Plan is qualified under Section 401(k) of the
        Internal Revenue Code. Each participant has the option to defer taxation
        of a portion of his or her earnings by directing the Company to
        contribute a percentage of such earnings to this Plan. A participant may
        direct up to a maximum of 20% of eligible earnings to this Plan, subject
        to certain limitations set forth in the Internal Revenue Code for
        "highly compensated" participants. A participant's contributions become
        distributable upon the termination of his or her employment. The Company
        did not make any contribution to this Plan in fiscal 2000. Beginning
        October 1, 2000, the Company began matching 50% of a participant's
        contributions, to the extent such contributions do not exceed 7% of such
        participant's cash compensation (excluding bonuses, profit sharing, and
        similar types of compensation). The Company has recorded an expense of
        $0.1 and $0.1 million related to the Savings and Investment Plan for the
        fiscal years ended September 30, 2002 and 2001.

        Retirement Benefit Plans

        Chemicals has non-contributory pension plans in the United States which
        cover all salaried and wage employees of the Company. The benefits under
        these plans are based primarily on years of U.S. service and employees'
        pay near retirement. Chemicals' funding policy is consistent with the
        funding requirements of federal law and regulations. Plan assets consist
        principally of government and corporate securities. The liability
        relating to United States employees allocated to the Company by
        Chemicals for the retirement benefit plans and included in Due to parent
        company was $1.0 million and $0.8 million at September 30, 2002 and
        2001, respectively. The total pension expense relating to United States
        employees allocated to the Company was $0.2 million, $0.2 million and
        $0.2 million for the years ended September 30, 2002, 2001, and 2000,
        respectively.



                                                                   Page 27 of 35
<PAGE>

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


7.      EMPLOYEE BENEFITS (CONTINUED)

        The Company sponsors defined benefit and defined contribution pension
        plans in Canada which cover all Canadian salaried and wage employees.

        Information for Canadian defined benefit plans concerning the pension
        obligation, plan assets, amounts recognized in the Company's financial
        statements, and underlying actuarial assumptions is stated below.


<Table>
<Caption>
                                                                       September 30,
                                                               ------------------------------
                                                                   2002              2001
                                                               ------------      ------------
                                                                   (Dollars in Thousands)

<S>                                                            <C>               <C>
Change in benefit obligation:
  Benefit obligation at beginning of year                      $     19,470      $     17,608
  Currency rate conversion                                              430              (855)
  Service cost                                                          863               713
  Interest cost                                                       1,491             1,293
  Plan amendments                                                        --               196
  Actuarial loss (gain)                                                (257)              985
  Benefits paid                                                        (486)             (470)
                                                               ------------      ------------
  Benefit obligation at end of year                            $     21,511      $     19,470
                                                               ============      ============

Change in plan assets:
  Fair value at beginning of year                              $     14,856      $     17,817
  Currency rate conversion                                               59              (865)
  Actual return on plan assets                                         (475)           (2,348)
  Employer contributions                                              1,394               722
  Benefits paid                                                        (486)             (470)
                                                               ------------      ------------
  Fair value at end of year                                    $     15,348      $     14,856
                                                               ============      ============

Development of net amount recognized:
  Funded status                                                $     (6,163)     $     (4,614)
  Supplemental retirement plan                                         (418)               --
  Unrecognized cost:
    Actuarial loss                                                    5,082             3,449
    Prior service cost                                                  412               453
                                                               ------------      ------------
Net amount recognized                                          $     (1,087)     $       (712)
                                                               ============      ============

Amounts recognized in the statement of financial position:
  Prepaid pension asset                                        $        116      $        170
  Accrued pension liability                                          (1,395)             (882)
  Accumulated other comprehensive income                                192                --
                                                               ------------      ------------
Net amount recognized                                          $     (1,087)     $       (712)
                                                               ============      ============
</Table>





                                                                   Page 28 of 35
<PAGE>

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


7.     EMPLOYEE BENEFITS (CONTINUED)

        Net periodic pension costs for the Canadian defined benefit pension
        plans consist of the following components:



<Table>
<Caption>
                                                                         September 30,
                                                       --------------------------------------------------
                                                           2002               2001               2000
                                                       ------------       ------------       ------------
                                                                     (Dollars in Thousands)

<S>                                                    <C>                <C>                <C>
Components of net pension costs:
  Service cost-benefits earned during the year         $        863       $        713       $        716
  Interest on projected benefit obligation                    1,491              1,293              1,240
  Expected return on plan assets                             (1,369)            (1,281)            (1,144)
  Net amortization:
    Actuarial loss (gain)                                       240                (89)                28
    Prior service cost                                           41                 27                 (2)
                                                       ------------       ------------       ------------
Net pension costs                                      $      1,266       $        663       $        838
                                                       ============       ============       ============

Weighted average assumptions:
  Discount rate                                                 7.3%               7.3%               7.5%
  Rates of increase in salary compensation level                5.0%               4.5%               4.5%
  Expected long-term rate of return on plan assets              8.0%               7.5%               7.5%
</Table>


        Postretirement Benefits Other than Pensions

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

        Health care benefits are provided to employees who retire with ten or
        more years of service, excluding Canadian employees covered by
        collective bargaining agreements. All employees are eligible for
        postretirement life insurance. Postretirement health care benefits for
        United States plans are non-contributory. Benefit provisions for most
        hourly and some salaried employees are subject to collective bargaining
        agreements. In general, the plans stipulate that retiree health care
        benefits are paid as covered expenses are incurred. The liability
        relating to United States employees allocated to the Company by
        Chemicals for the postretirement benefits other than pensions and
        included in Due to parent company was $0.6 million and $0.5 million at
        September 30, 2002 and 2001, respectively. The total postretirement
        benefits other than pensions expense for United States employees
        allocated to the Company was $0.1 million, $ 0.2 million and $0.3
        million for the years ended September 30, 2002, 2001, and 2000,
        respectively.



                                                                   Page 29 of 35
<PAGE>

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


7.      EMPLOYEE BENEFITS (CONTINUED)

        Information for Canadian postretirement benefit plans other than
        pensions, with respect to the plan obligation, the funded status,
        amounts recognized in the Company's financial statements, and underlying
        actuarial assumptions is stated below.


<Table>
<Caption>
                                                     September 30,
                                              ------------------------------
                                                  2002              2001
                                              ------------      ------------
                                                 (Dollars in Thousands)
<S>                                           <C>               <C>
Change in benefit obligation:
  Benefit obligation at beginning of year     $      5,551      $      4,751
  Service cost                                         119               238
  Interest cost                                        192               355
  Actuarial loss (gain)                             (2,822)              407
  Benefits paid                                        (30)             (200)
                                              ------------      ------------
Benefit obligation at end of year             $      3,010      $      5,551
                                              ============      ============

Development of net amount recognized:
  Funded status                               $     (3,010)     $     (5,551)
  Currency rate conversion                             240               191
  Unrecognized cost:
  Actuarial loss (gain)                             (2,396)              267
                                              ------------      ------------
Net amount recognized                         $     (5,166)     $     (5,093)
                                              ============      ============
</Table>


        The Company allocated $1.2 million and $1.2 million to a company related
        by common control for the years ended September 30, 2002 and 2001,
        respectively, based upon the number of employees at each Canadian
        location.

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

<Table>
<Caption>
                                                                   September 30,
                                                -------------------------------------------------
                                                    2002               2001              2000
                                                ------------       ------------      ------------
                                                              (Dollars in Thousands)

<S>                                             <C>                <C>               <C>
Components of net plan costs:
  Service cost                                  $        119       $        238      $        314
  Interest cost                                          192                355               329
  Net amortization of actuarial (gain) loss             (160)                 7                16
                                                ------------       ------------      ------------
Net plan costs                                  $        151       $        600      $        659
                                                ============       ============      ============

Weighted-average assumptions:
  Discount rate                                         6.75%              7.25%             7.50%
  Rate of compensation increase                         4.00%              4.00%             4.00%

</Table>



                                                                   Page 30 of 35
<PAGE>

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

7.     EMPLOYEE BENEFITS (CONTINUED)

        The weighted average annual assumed health care trend rate is 11% for
        2002. The rate is assumed to decrease gradually to 6% in 2006 and remain
        level thereafter. Assumed health care cost trend rates have a
        significant effect on the amounts reported for health care plans. A one
        percentage point change in assumed health care trend rates would have
        the following effects:


<Table>
<Caption>
                                                            1% Increase      1% Decrease
                                                            -----------------------------
                                                                (Dollars in Thousands)

<S>                                                         <C>              <C>
Effect on total of service and interest cost components     $         15     $        (13)
Effect on postretirement benefit obligation                 $        127     $       (111)
</Table>


8.      COMMITMENTS AND CONTINGENCIES

        Lease Commitments

        The Company has entered into various long-term noncancellable operating
        leases. Future minimum lease commitments at September 30, 2002 are as
        follows: fiscal 2003 - $5.9 million; fiscal 2004 - $5.2 million; fiscal
        2005 - $4.3 million; fiscal 2006 - $3.1 million; fiscal 2007 - $2.0
        million; and thereafter - $2.8 million.

        Rent expense for the years ended September 30, 2002, 2001 and 2000 was
        $4.1 million, $4.2 million and $3.7 million, respectively.

        Environmental and Safety Matters

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




                                                                   Page 31 of 35
<PAGE>

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

8.     COMMITMENTS AND CONTINGENCIES (CONTINUED)

        The Company conducts environmental management programs designed to
        maintain compliance with applicable environmental requirements at all of
        its facilities. The Company routinely conducts inspection and
        surveillance programs designed to detect and respond to leaks or spills
        of regulated hazardous substances and to correct identified regulatory
        deficiencies. The Company believes that its procedures for waste
        handling are consistent with industry standards and applicable
        requirements. In addition, the Company believes that its operations are
        consistent with good industry practice. However, a business risk
        inherent with chemical operations is the potential for personal injury
        and property damage claims from employees, contractors and their
        employees, and nearby landowners and occupants. While the Company
        believes its business operations and facilities generally are operated
        in compliance in all material respects with all applicable environmental
        and health and safety requirements, the Company cannot be sure that past
        practices or future operations will not result in material claims or
        regulatory action, require material environmental expenditures, or
        result in exposure or injury claims by employees, contractors and their
        employees, and the public. Some risk of environmental costs and
        liabilities is inherent in the Company's operations and products, as it
        is with other companies engaged in similar businesses. In addition, a
        catastrophic event at any of the Company's facilities could result in
        the incurrence of liabilities substantially in excess of its insurance
        coverages.

        The Company's operating expenditures for environmental matters, mostly
        waste management and compliance, were approximately $3.4 million, $3.4
        million and $2.5 million for fiscal years 2002, 2001 and 2000,
        respectively. The Company also spent approximately $0.7 million, $0.6
        million and $0.7 million for environmentally related capital projects in
        fiscal years 2002, 2001 and 2000, respectively.

        A significant ban on all chlorine containing compounds could have a
        materially adverse effect on our financial condition and results of
        operations. British Columbia had a regulation in place requiring
        elimination of the use of all chlorine products, including chlorine
        dioxide, in the bleaching process by December 31, 2002. However, in
        April 2001, a new government came into power in British Columbia. This
        new administration was aware of the issues surrounding this regulation
        and commissioned a study by the British Columbia Absorbable Organic
        Halogens (AOX) Scientific Advisory Panel. The panel concluded that there
        was no evidence available to it at this time to indicate that further
        reductions of effluent AOX beyond that already achieved would result in
        any demonstrable environmental benefit. On July 5, 2002, British
        Columbia amended the previous regulation that now permits a monthly
        average discharge of 0.6 kg of AOX per air dry metric ton, which is
        similar to the U.S. EPA regulations governing bleach pulp mills.






                                                                   Page 32 of 35
<PAGE>


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

8.      COMMITMENTS AND CONTINGENCIES (CONTINUED)

        Legal Proceedings

        As discussed in Note 1, the Debtors filed petitions for reorganization
        under Chapter 11 of the Bankruptcy Code on July 16, 2001. As a result of
        the Debtors' commencement of the Chapter 11 cases, an automatic stay has
        been imposed against the commencement or continuation of legal
        proceedings against the Debtors outside of the Bankruptcy Court. The
        automatic stay will not apply, however, to governmental authorities
        exercising their police or regulatory powers, including the application
        of environmental laws. Claimants against the Debtors may assert their
        claims in the Chapter 11 cases by filing a timely proof of claim, to
        which the Debtors may object and seek a determination from the
        Bankruptcy Court as to the allowability of the claim. Claimants who
        desire to liquidate their claims in legal proceedings outside of the
        Bankruptcy Court will be required to obtain relief from the automatic
        stay by order of the Bankruptcy Court. If such relief is granted, the
        automatic stay will remain in effect with respect to the collection of
        liquidated claim amounts. As a general rule, all claims against the
        Debtors that seek a recovery from assets of the Debtors' estates will be
        addressed in the Chapter 11 cases and paid only pursuant to the terms of
        a confirmed plan of reorganization.

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

        Guarantees and Pledges of Common Stock

        The subsidiaries of Chemicals which guaranteed the 12 3/8% notes consist
        of Sterling Canada, Inc. (excluding Sterling Chemicals Acquisitions,
        Inc. and its subsidiaries), Sterling Pulp Chemicals US, Inc., Sterling
        Pulp Chemicals, Inc., Sterling Chemicals Energy, Inc., Sterling
        Chemicals International, Inc. and Sterling Fibers, Inc. which, together
        with Sterling Pulp Chemicals Ltd. and Sterling NRO, Ltd., are
        collectively referred to as the "Guarantors."

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

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

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






                                                                   Page 33 of 35
<PAGE>

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

8.      COMMITMENTS AND CONTINGENCIES (CONTINUED)

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

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

9.       RELATED PARTY TRANSACTIONS

        In the normal course of operations of the Company, the following
        represents significant transactions with related parties for the fiscal
        years ended September 30, 2002, 2001 and 2000:



<Table>
<Caption>
                                             Year ended September 30,
                                   ----------------------------------------------
                                       2002             2001             2000
                                   ------------     ------------     ------------
                                              (Dollars in Thousands)

<S>                                <C>              <C>              <C>
Commonly-controlled companies:
  Sale of goods                    $      3,635     $      2,866     $      3,500
  Purchase of goods                       7,440            8,364            6,087
  Administration fee revenue                318              326              340
</Table>

10.     FINANCIAL INSTRUMENTS

        Foreign Exchange

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

        Electricity Contracts

        Sterling Pulp periodically enters fixed price agreements for a portion
        of their electrical energy requirements. Sterling Pulp had entered into
        a fixed price agreement relating to the supply of a portion of the
        electrical energy at one of the Canadian sodium chlorate production
        facilities. The difference between the forecasted price of energy and
        the fixed price resulted in the recognition of an unrealised gain (loss)
        of $0.2 million and $(1.2) million at September 30, 2002 and 2001,
        respectively, based upon on current market prices and quantities to be
        delivered. The current agreement expires December 31, 2002.



                                                                   Page 34 of 35
<PAGE>


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

9.      FINANCIAL INSTRUMENTS (CONTINUED)

        Concentrations of Risk

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

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

        Approximately 31% of the Company's employees are covered by union
        agreements. Two agreements will expire during fiscal 2003.

        Investments

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

        Fair Value of Financial Instruments

        The carrying amounts reflected in the consolidated balance sheet for
        cash and cash equivalents, accounts receivable, accounts payable and
        certain accrued liabilities approximate fair value due to the short
        maturities of these instruments. The following table presents the
        carrying value and fair value of the long-term debt (including current
        maturities) at September 30, 2002:

<Table>
<Caption>
                                 Carrying Value        Fair Value
                                 ---------------     ---------------
                                         (Dollars in Millions)

<S>                              <C>                 <C>
Canadian Financing Agreement     $           5.2     $           5.2
</Table>

        Due to the uncertainty resulting from the Bankruptcy filings discussed
        in Note 1, it is not practical to estimate the fair value of the amount
        due from parent company (non-interest bearing) and the pre-petition
        liabilities or the Debtors' borrowings allocated to the Company. As the
        Canadian Financing Agreement has variable interest rates, the fair value
        approximates its carrying value.

        At September 20, 2002 and 2001, the Company's forward power contract had
        a fair market value of $0.2 and ($1.2) million, respectively based on
        the Company's estimate of what the Company would have to pay to
        terminate the contract at September 30, 2002.





                                                                   Page 35 of 35