10-Q 1 g72197e10-q.txt STATIA TERMINALS GROUP - FORM 10-Q 09/30/2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ______________________ COMMISSION FILE NUMBER 0-25821 STATIA TERMINALS GROUP N.V. (Exact name of registrant as specified in its charter) Netherlands Antilles 52-2003016 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) C/o Covenant Managers L.B. Smithplein 3 Curacao, Netherlands Antilles (011) (599-9) 4623700 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 14, 2001, 6,013,253 class A common shares of the registrant were outstanding. STATIA TERMINALS GROUP N.V. Quarterly Report On Form 10-Q September 30, 2001 TABLE OF CONTENTS

THIS QUARTERLY REPORT ON FORM 10-Q (THIS "REPORT") CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN ITEMS 1, 2, AND 3 OF PART I HEREOF, AS WELL AS WITHIN THIS REPORT GENERALLY. IN ADDITION, WHEN USED IN THIS REPORT, THE WORDS "MAY," "WILL," "BELIEVE," "ANTICIPATE," "EXPECT," "ESTIMATE," "PROJECT," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW, AND SPEAK ONLY AS OF THE DATE HEREOF. ACTUAL RESULTS IN THE FUTURE COULD DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF FLUCTUATIONS IN THE SUPPLY OF AND DEMAND FOR CRUDE OIL AND PETROLEUM PRODUCTS, CHANGES IN THE PETROLEUM TERMINALING INDUSTRY, ADDED COSTS DUE TO CHANGES IN GOVERNMENT REGULATIONS AFFECTING THE PETROLEUM INDUSTRY, INABILITY TO MAINTAIN OUR TAX STATUS, THE LOSS OF A MAJOR CUSTOMER OR CUSTOMERS, THE LOSS OF A MAJOR VENDOR OR SUPPLIER OF PETROLEUM PRODUCTS, THE FINANCIAL CONDITION OF OUR CUSTOMERS, INTERRUPTION OF OUR OPERATIONS CAUSED BY ADVERSE WEATHER CONDITIONS, CHANGES TO OUR CONTRACT LABOR ARRANGEMENTS, THE CONDITION OF THE U.S. AND CERTAIN FOREIGN ECONOMIES, CAPITAL MARKET UNCERTAINTIES, AND OTHER MATTERS INCLUDED IN THIS REPORT AND THE COMPANY'S ANNUAL REPORT ON FORM 10-K. WE DO NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES. FREQUENTLY IN THIS REPORT, ESPECIALLY WHEN DISCUSSING OUR OPERATIONS, WE REFER TO OURSELVES, STATIA TERMINALS GROUP N.V. AND OUR SUBSIDIARIES, AS "WE" OR "US". PART I - FINANCIAL INFORMATION Item 1. Financial Statements STATIA TERMINALS GROUP N.V. AND SUBSIDIARIES Consolidated Condensed Balance Sheets (Dollars in Thousands)

The accompanying notes are an integral part of these consolidated condensed financial statements. Page 1 STATIA TERMINALS GROUP N.V. AND SUBSIDIARIES CONSOLIDATED CONDENSED INCOME STATEMENTS (Unaudited) (Dollars in Thousands Except Per Share Amounts)

The accompanying notes are an integral part of these consolidated condensed financial statements. Page 2 STATIA TERMINALS GROUP N.V. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in Thousands)

The accompanying notes are an integral part of these consolidated condensed financial statements. Page 3 STATIA TERMINALS GROUP N.V. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements (Unaudited) (In thousands except share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION The unaudited consolidated condensed financial statements of Statia Terminals Group N.V. ("Group") and subsidiaries (together with Group, the "Company") have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Significant accounting policies followed by the Company were disclosed in the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (the "Form 10-K"). In the opinion of the Company's management, the accompanying consolidated condensed financial statements contain all adjustments and accruals necessary to present fairly the financial position of the Company at September 30, 2001, and the results of its operations and cash flows for the nine months ended September 30, 2000, and 2001. Operating results for the three and nine months ended September 30, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. These financial statements should be read in conjunction with the Form 10-K. For all periods presented herein, there were no differences between net income and comprehensive income. 2. SEGMENT INFORMATION The Company is organized around several different factors, the two most significant of which are services and products and geographic location. The Company's primary services are terminaling services (resulting in revenues from storage, throughput, dock usage, emergency response, and other terminal services) and product sales (including bunker fuels and bulk oil sales). The primary measures of profit and loss utilized by the Company's management to make decisions about resources to be allocated to each segment are earnings before interest expense, income taxes, depreciation, amortization, and certain non-recurring income and expenses ("Adjusted EBITDA") and earnings before interest expense, income taxes, and certain non-recurring income and expenses ("Adjusted EBIT"). Page 4 STATIA TERMINALS GROUP N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) (Unaudited) (In thousands except share amounts) 2. SEGMENT INFORMATION- (CONTINUED) The following information is provided for the Company's terminaling services and product sales segments:

A reconciliation of Adjusted EBIT to the Company's income before provision for income taxes is as follows:

3. EARNINGS PER SHARE AND STOCK OPTION GRANTS Earnings per share are computed based upon the "Participating Securities and Two-Class Common Stock" methodology as required by Statement of Financial Accounting Standards ("SFAS") No. 128. Under this methodology, all of the earnings and losses will be allocated to the class A common shares until such time as the book value equity of the Company divided by the outstanding class A common shares exceeds $20 per share. All earnings and losses for the periods presented herein have been allocated to the class A common shareholders. Page 5 STATIA TERMINALS GROUP N.V. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements - (Continued) (Unaudited) (In thousands except share amounts) Basic earnings per share are computed by dividing the earnings and losses allocated to each class of equity by the weighted average number of shares outstanding for each class during the period. Diluted earnings per share are computed the same as basic earnings per share except the denominator is adjusted for the effect of class A common share and class B subordinated share equivalents outstanding. Class A common share equivalents include, where appropriate, the assumed exercise of outstanding stock options and the conversion of the class B subordinated shares. For all periods presented herein there were no class B subordinated share equivalents outstanding. The following additional information is presented with respect to the Company's earnings per share amounts:

On January 24, 2001, options to purchase 235,500 class A common shares were granted to certain of the Company's employees and non-employee directors at an exercise price of $8.094 per share, representing the fair market value of the class A common shares on the date of grant. On August 27, 2001, options to purchase 680,000 class A common shares were granted to certain of the Company's employees at an exercise price of $5.00 per share which was below the fair market value of the class A common shares on the date of grant. During the three months ended September 30, 2001, the Company recognized $56 of compensation expense related to the options granted on August 27, 2001 in accordance with Accounting Principles Board Opinion No. 25. All such options were granted pursuant to the Company's 1999 share option plan and generally vest in proportion to the conversion of the Company's class B subordinated shares to class A common shares after the subordination period, and as otherwise described in the Company's articles of incorporation or upon a change in control as defined in the stock option plan. As of September 30, 2001, options on 4,000 shares of class A common shares remained available for grant under the Company's existing stock option plan. 4. REPLACEMENT OF SINGLE POINT MOORING SYSTEM HOSES During the three months ended March 31, 2000, the Company replaced certain large hoses attached to its single point mooring system (the "SPM"). In connection with this hose change-out, the Company adopted the component depreciation method for the SPM and its hoses as of January 1, 2000, which resulted in a change in the estimated useful lives for depreciation purposes for these hoses. As a result, in addition to recurring depreciation charges, the Company incurred a non-cash charge to depreciation expense of $832 during the first quarter of 2000, which is included in costs of terminaling services revenues. Page 6 STATIA TERMINALS GROUP N.V. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements - (Continued) (Unaudited) (In thousands except share amounts) 5. CANADIAN REORGANIZATION On September 30, 2001, and October 1, 2001, Statia Terminals Canada, Incorporated ("STCI"), together with Point Tupper Marine Services Limited ("PTMS") and Statia Terminals Canada Holdings, Inc. ("STCHI"), a newly formed wholly-owned subsidiary of STCI, reorganized such that the businesses previously carried on by these corporations, other than the spill response business of PTMS, were transferred to Statia Terminals Canada Partnership ("STCP"), a general partnership formed under the laws of the Province of Nova Scotia, Canada, consisting of STCI, PTMS, and STCHI as the only partners. We effected the reorganization of our Canadian operations in order to consolidate certain activities and gain operational efficiencies. Additionally, as a result of the reorganization, Canadian net operating loss carry-forwards, substantially all of which were to expire unutilized at the end of 2001, were applied against the tax gain arising from the transfer of certain assets to the partnership. The resultant step-up in the tax basis of the assets transferred will be available for future years' tax depreciation deductions. The Company has provided a full valuation allowance against the net deferred tax asset resulting from this reorganization, aggregating approximately $19,600, because it cannot determine that it is likely that the deferred tax asset will be utilized in the future. 6. EMPLOYMENT AGREEMENTS AND SEVERANCE PLAN In August and November 2001, the Company entered into amended and restated employment agreements with six members of senior management. These agreements provide for an annual base salary which is subject to review at least annually by the Company's Board of Directors or a committee thereof, increasing at least at the growth rate of the consumer price index. The respective annual base salaries in effect for the remainder of 2001 are unchanged except for Mr. Pine whose annual base salary increased to $195 from $175. These agreements also provide for an annual cash incentive bonus to be awarded based on the difference between target earnings before interest expense, taxes, depreciation, and amortization ("EBITDA") and actual EBITDA. However, no change to the annual cash incentive bonus occurred as a result of these amendments and restatements. The employment agreements were amended to generally continue to December 31, 2004, and automatically extend for an additional year beginning January 1, 2003, of each year unless either party gives notice of non-renewal ninety days prior to January 1. Additional benefits include participation in a modified executive life insurance plan for Mr. Cameron. Also unchanged, if the Company terminates any of these employment agreements without substantial cause or the employee terminates for good reason, as these terms are defined in each of the employment agreements, the employee shall be entitled to his current compensation, welfare benefits and an incentive bonus for the remaining portion of the term of the relevant employment agreement. In exchange for the addition of three year non-compete arrangements, upon a change in control, as this term is defined in each of the employment agreements, these employees shall now be entitled to a change in control bonus aggregating $4,100. Should any of these employment agreements be terminated after a change in control, the employee shall be entitled to his current compensation, welfare benefits and an incentive bonus for the remaining portion of the term of the relevant employment agreement payable in a lump-sum cash payment. In August 2001, the Company adopted a severance plan for certain salaried employees, excluding members of senior management with whom the Company has entered into employment agreements. The severance plan provides for a lump-sum payment to covered employees and the continuation of certain welfare benefits for the severance term. The severance term is determined based on the employee's length of service, as defined in the severance plan, and the employee's grade level. Benefits are provided for a minimum 13 weeks and a maximum 52 weeks. Benefits are only paid if the employee is terminated within two years of a change in control, as defined in the severance plan. Page 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations For purposes of the discussion below, reference is made to the unaudited Consolidated Condensed Financial Statements and Notes thereto of Statia Terminals Group N.V. ("Group") and subsidiaries (together with Group, the "Company") as of September 30, 2001, and for the three and nine-month periods ended September 30, 2000 and 2001, included herein. Reference should also be made to the Company's Annual Report on Form 10-K that includes the Company's Consolidated Financial Statements as of and for the year ended December 31, 2000. OVERVIEW OF OPERATIONS Our operations are organized around several different factors, the two most significant of which are services and products and geographic location. Our primary services and products are terminaling services (resulting in revenue from storage, throughput, dock usage, emergency response, and other terminal services) and product sales (including bunker fuels and bulk oil sales). A majority of our revenues are generated by product sales, which fluctuate with global oil prices. As a result, we experience volatility in our revenue stream, which is not necessarily indicative of our profitability. Gross profit from terminaling services is generally higher than gross profit from product sales. Vessels call at our facilities to load and/or discharge cargo and/or to take on bunker fuel. We earn higher port charges (which consist of dock charges, emergency response fees, and other terminal charges) when a vessel calls to load and/or discharge cargo than we earn when a vessel calls only to take on bunker fuel. Our operating costs for terminaling services are relatively fixed and generally do not change significantly with changes in storage capacity leased. However, our operating costs are impacted by inflationary cost increases, and we have certain variable operating costs which increase or decrease based on changes in storage capacity available, storage capacity leased, throughput, vessel calls, and changes in ancillary services offered by us. Additions or reductions in storage, throughput, port charges, and ancillary service revenues directly impact our gross profit. Costs for the procurement of petroleum products for sale are variable and linked to global oil prices. Our product costs are also impacted by market supply conditions, types of products sold, and volumes delivered. The following table sets forth, for the periods indicated, total capacity, capacity leased, throughput, and vessel calls for each of our operating locations. "Total capacity" represents the average storage capacity available for lease for a period. "Capacity leased" represents the storage capacity leased to third parties weighted for the number of days leased in the month divided by the capacity available for lease. "Throughput" volume is the total number of inbound barrels discharged from a vessel, rail car, or tanker truck, and generally does not include across-the-dock or tank-to-tank transfers. A "vessel call" occurs when a vessel docks or anchors at one of our terminal locations in order to load and/or discharge cargo and/or to take on bunker fuel. Such dockage or anchorage is counted as one vessel call regardless of the number of activities carried on by the vessel. A vessel call also occurs when we sell and deliver bunker fuel to a vessel not calling at our terminals for the above purposes. Each of these statistics is a measure of the utilization of our facilities and equipment. Page 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Capacity, Capacity Leased, Throughput and Vessel Calls by Location (Total Capacity and Throughput in thousands of barrels)

RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of revenues represented by some items in our consolidated condensed income statements. Results of Operations (Dollars in Thousands)

Page 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)

The following tables set forth, for the periods indicated, (a) the total revenues and total operating income, after allocation of administrative expenses and elimination of certain intercompany transactions, at each of our operating locations and (b) the percentage of such revenues and operating income relative to our total revenues and operating income. Revenues by Location (Dollars in Thousands)

Page 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Operating Income by Location (Dollars in Thousands)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001, COMPARED WITH THE SAME PERIODS OF 2000 REVENUES Total revenues for the three months ended September 30, 2001, and 2000, were $51.1 million and $57.5 million, respectively, representing a decrease of $6.4 million or 11.3%. The decrease in total revenues is primarily due to lower average selling prices in the product sales segment. Total revenues for the nine months ended September 30, 2001, and 2000, were $155.1 million and $154.1 million, respectively, representing an increase of $1.0 million or 0.7%. The increase in total revenues during this period is primarily due to increased revenues from terminaling services, partially offset by lower average selling prices on product sales. Revenues from terminaling services for the three and nine months ended September 30, 2001, were $17.8 million and $55.0 million, compared to $17.9 million and $44.7 million for the same periods of 2000, representing a decrease of $0.1 million or 0.9%, and an increase of $10.3 million or 23.1%, respectively. The decrease in terminaling services revenues for the three months ended September 30, 2001, compared to the same period in 2000, was primarily the result of decreased throughput of crude oil at St. Eustatius, partially as a result of maintenance at certain refineries receiving crude oil from our customers, and fewer vessels working cargo. The increase in terminaling services revenues for the nine months ended September 30, 2001, compared to the same period in 2000, was primarily the result of improved leasing of our available capacity, additional barrels of throughput, and increased vessel calls working cargo. As of September 30, 2001, approximately 70.8% of our total storage capacity was leased pursuant to long-term contracts. For the nine months ended September 30, 2001, approximately 59.9% of our storage and throughput revenues, excluding related ancillary services, were derived from long-term contracts. Page 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Revenues from terminaling services at St. Eustatius decreased approximately $1.8 million or 14.3% during the three months ended September 30, 2001, as compared to the same period of 2000. The decrease in revenues from terminaling services was primarily due to reduced throughput and fewer vessels working cargo. Twenty-three fewer cargo vessels (excluding vessels calling only to take on bunker fuel) called at the St. Eustatius facility during the three months ended September 30, 2001, than during the same period of 2000, resulting in lower revenues from port charges. Additionally, during the three months ended September 30, 2001, throughput decreased 27.4%, as compared to the same period of 2000. Revenues from terminaling services at St. Eustatius increased approximately $3.8 million or 12.0% during the nine months ended September 30, 2001, as compared to the same period of 2000. The increase in revenues from terminaling services was due primarily to improved leasing of our available capacity, additional barrels of throughput, and increased vessel calls working cargo. Thirty additional cargo vessels (excluding vessels calling only to take on bunker fuel) called at the St. Eustatius facility during the nine months ended September 30, 2001, than during the same period of 2000, resulting in higher revenues from port charges. Additionally, during the nine months ended September 30, 2001, throughput increased 26.4%, as compared to the same period of 2000. For the nine months ended September 30, 2001, the overall percentage of capacity leased at St. Eustatius was 94% as compared to 86% for the same period of 2000, primarily reflecting increases in the percentage of capacity leased for fuel oil storage. The increase in the percentage of capacity leased for fuel oil storage resulted principally from new short-term and long-term product storage contracts. For the three months ended September 30, 2001 and 2000, the overall percentage of capacity leased at St. Eustatius remained unchanged at 94%. During the three and nine months ended September 30, 2001, our average revenue per barrel leased has increased for this facility by 0.4% and 3.9%, respectively. Revenues from terminaling services at Point Tupper increased approximately $1.6 million or 28.6%, and $6.5 million or 48.9% during the three and nine months ended September 30, 2001, as compared to the same periods of 2000. The increases in revenues from terminaling services were due primarily to a higher percentage of tank capacity leased resulting from new short-term storage contracts, a long-term storage contract with a gasoline blender, a long-term crude oil storage contract, and from increased throughput of crude oil. The percentage of tank capacity leased at Point Tupper was 87% and 84% for the three and nine months ended September 30, 2001, as compared to 76% and 67% for the same periods of 2000. Sixteen and sixty-one additional cargo vessels called during the three and nine months ended September 30, 2001, as compared to the same periods of 2000, which led to higher revenues from port charges at this facility. During the three and nine months ended September 30, 2001, our average revenue per barrel leased has increased for this facility. Revenues from product sales were $33.3 million and $100.2 million for the three and nine months ended September 30, 2001, compared to $39.6 million and $109.4 million for the same periods of 2000, representing decreases of $6.3 million or 15.9% and $9.2 million or 8.5%, respectively. The decreases were primarily due to lower average selling prices. Average selling prices decreased 17.4% and 11.1% when comparing the three and nine months ended September 30, 2001, with the same periods of 2000. Metric tons of bunkers and bulk oil delivered increased 1.8% and 3.0% during the three and nine months ended September 30, 2001, respectively, as compared to the same periods of 2000. Page 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) GROSS PROFIT Gross profit for the three months ended September 30, 2001, was $8.5 million compared to $9.2 million for the same period of 2000, representing a decrease of $0.7 million or 7.4%. The decrease in gross profit for the three months ended September 30, 2001, was primarily the result of the decreased revenues from terminaling services discussed above. Gross profit for the nine months ended September 30, 2001, was $27.9 million compared to $19.4 million for the same period of 2000, representing an increase of $8.5 million. The increase in gross profit for the nine months ended September 30, 2001, was primarily the result of the increased revenues from terminaling services discussed above. Additionally, during the nine months ended September 30, 2000, we replaced certain hoses attached to our single point mooring system. As a result, we incurred a non-cash charge to depreciation expense of $0.8 million during the first quarter of 2000 which is included in costs of terminaling services revenues. Gross profit from our product sales segment for the three and nine months ended September 30, 2001, was $2.2 million and $6.5 million compared to $1.5 million and $5.1 million for the same periods of 2000, representing increases of $0.7 million or 49.2% and $1.4 million or 27.8%, respectively. These increases in gross profit from product sales are primarily due to greater quantities of bunker fuels delivered and higher margins realized due to improved purchasing of products. Our operating expenses, which are included in costs of revenues, are relatively fixed. However, operating expenses at both St. Eustatius and Point Tupper have increased during the three and nine months ended September 30, 2001, as compared to the same periods of 2000, primarily due to increased personnel costs, contract labor and marine equipment expenses resulting from the significantly higher throughput and number of vessels working cargo at both facilities during the first nine months of 2001. ADMINISTRATIVE EXPENSES Administrative expenses were $2.7 million and $8.1 million for the three and nine months ended September 30, 2001, as compared to $2.4 million and $7.1 million for the same periods of 2000, representing increases of $0.3 million or 15.4% and $1.0 million or 15.0%, respectively. The increases during the three and nine months ended September 30, 2001, as compared to the same periods of 2000, were primarily the result of higher personnel costs (including certain performance-based compensation), depreciation, and costs associated with marketing, financing, and development projects. INTEREST EXPENSE During the three and nine months ended September 30, 2001, we incurred $3.3 million and $9.9 million of interest expense compared to $3.2 million and $9.6 million for the same periods of 2000, representing increases of $0.1 million or 3.9% and $0.3 million or 4.1%, respectively. The increases during the three and nine months ended September 30, 2001, as compared to the same periods of 2000, were primarily due to interest on equipment financing secured by the M/V STATIA RESPONDER, which is discussed further below. Interest expense includes interest accrued on our long-term debt, interest expense and commitment fees on our revolving credit facility, amortization expense related to deferred financing costs, and bank charges. PROVISION FOR INCOME TAXES The provisions for income taxes were $0.3 million and $0.7 million for the three and nine months ended September 30, 2001, and $0.2 million and $0.7 million for the three and nine months ended September 30, 2000, respectively. Page 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) NET INCOME The Company produced net income of $2.4 million and $9.7 million for the three and nine months ended September 30, 2001, as compared to net income of $3.6 million and $2.3 million for the same periods of 2000, representing a decrease of $1.2 million and an increase of $7.4 million, respectively. These changes were primarily attributable to the net effect of the factors discussed above. SELECTED PROJECTED FINANCIAL INFORMATION The 2001 year end results will be dictated by numerous market factors, including the general direction of world economies, the crude oil production decisions of the Organization of Petroleum Exporting Countries and other producers, the relationship of natural gas prices to other liquid petroleum products, overall gasoline and diesel oil supplies throughout the Americas, longer term effects of competition for products we sell, weather conditions in North America, and ultimately our ability to renew or replace existing storage contracts. We are projecting that Adjusted EBITDA (a measure of cash flow from recurring operations) for the year ending December 31, 2001, will range between $37.0 million and $40.0 million. Adjusted EBITDA for the fourth quarter of 2001 is presently anticipated to fall between $7.5 million and $10.5 million. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW FROM OPERATING ACTIVITIES Net cash provided by operating activities was $19.9 million and $16.2 million for the nine months ended September 30, 2001 and 2000, respectively. Cash flow from operations has been our primary source of liquidity during these periods. Differences between net income and positive operating cash flow have resulted primarily from depreciation and amortization burdens, and changes in various working capital accounts. The provision for possible bad debts for the nine months ended September 30, 2000, was partially reversed during the fourth quarter of 2000 when payment was received from a customer. We periodically purchase refined petroleum products for resale as product sales, and our inventory balances change based on these activities. At September 30, 2001, we had an inventory balance of $4.2 million compared to $1.6 million at December 31, 2000. CASH FLOW FROM INVESTING ACTIVITIES Net cash used in investing activities, consisting primarily of purchases of property and equipment, was $6.2 million and $7.3 million for the nine months ended September 30, 2001 and 2000, respectively. See the table below entitled "Summary of Capital Expenditures by Type." During the three months ended September 30, 2000, we acquired an interest for $0.5 million in a technology investment company which holds as its sole investment an investment in a company providing on-line trading of certain petroleum products. During the three months ended March 31, 2001, we invested an additional $0.1 million in the technology investment company. In April 2001, we provided the online petroleum products trading company $0.03 million in the form of a convertible loan in conjunction with similar loans from other investors. This loan and accrued interest thereon were replaced in September 2001 with a new loan with a maturity date of December 31, 2001. The online petroleum products trading company is currently experiencing potential cash flow shortfalls. We are evaluating alternatives for recovering our investments and loans (carried at cost as of September 30, 2001) in the technology investment company and on-line petroleum products trading company. Should these efforts prove unsuccessful, we may incur an immediate charge to write-off all or a portion of our investment aggregating $0.7 million at November 13, 2001. Page 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) CASH FLOW FROM FINANCING ACTIVITIES As more fully discussed in our Annual Report on Form 10-K for the year ended December 31, 2000, under our articles of incorporation we are required to distribute to our shareholders all of our "available cash" (as defined therein) generated from operations. "Available cash" as defined generally includes cash from various sources after deducting such reserves as our board of directors may deem necessary or appropriate to provide for the proper conduct of our business, including future capital expenditures, anticipated operational needs, and to comply with debt obligations. On February 14, 2001, we paid $1.2 million to holders of our class A common shares, representing a distribution of $0.20 per share. The $0.25 per share difference between the declared distribution and the target quarterly distribution of $0.45 per share represents an arrearage which must be paid from future available cash. On May 15, 2001, and August 14, 2001, we paid $2.7 million to holders of our class A common shares, representing distributions of $0.45 per share. On October 17, 2001, our board of directors declared a distribution of $0.45 per share on our class A common shares payable November 14, 2001, to shareholders of record on October 31, 2001. Since the distribution equals the target quarterly distribution rate stated in our articles of incorporation, the aggregate class A common share arrearage remains unchanged at $1.60 per share. For the period from inception of our Stock Purchase Program through September 30, 2001, and November 13, 2001, we had acquired 1,586,747 class A common shares, at an aggregate cost of $11.1 million. As conditions warrant, we intend to continue periodic open market purchases of our class A common shares. On January 24, 2001, options to purchase 235,500 class A common shares were granted to certain of our employees and non-employee directors at an exercise price of $8.094 per share, representing the fair market value of the class A common shares on the date of grant. On August 27, 2001, options to purchase 680,000 class A common shares were granted to certain of our employees at an exercise price of $5.00 per share which was below the fair market value of the class A common shares on the date of grant. These options were granted pursuant to our 1999 share option plan and generally vest in proportion to the conversion of our class B subordinated shares to class A common shares after the subordination period, and as otherwise described in our articles of incorporation or upon a change in control as defined in the stock option plan. As of November 13, 2001, options on 4,000 shares of class A common shares remained available for grant under our existing stock option plan. As of November 13, 2001, no event of default existed and was continuing under the indenture to our 11 3/4% mortgage notes of which $101.0 million are outstanding. The consolidated fixed charge coverage ratio as defined in the indenture was at least 2.0 to 1 at September 30, 2001. Additionally, at September 30, 2001, the sum of Statia Terminals International's dividends, restricted payments, aggregate consolidated net income (deficit) and capital stock proceeds was approximately $14.9 million. We have a $17.5 million revolving credit facility secured by our accounts receivable and oil inventory, which renews annually under the original terms of the agreement unless otherwise canceled by either party. The revolving credit facility is available for working capital needs and letter of credit financing, and it permits us to borrow in accordance with a defined available borrowing base, which was approximately $14.2 million at September 30, 2001. The revolving credit facility bears interest at the prime rate plus 0.50% per annum (5.50% at November 13, 2001) and will expire on November 27, 2002. There was no outstanding balance at September 30, 2001. Page 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) In March 2000, the ownership of the M/V STATIA RESPONDER, an emergency response and maintenance vessel, was transferred from one of our existing subsidiaries to a newly created subsidiary. In December 2000, this newly created subsidiary borrowed $7.0 million from an equipment financing company utilizing the vessel as collateral. The loan requires monthly payments of principal and interest over six years. Interest accrues at three month London InterBank Offered Rates plus 3.2% (6.76% at November 13, 2001) and adjusts each month. The loan is subject to certain financial covenants, the most restrictive of which include, but are not limited to, the following: (i) a debt service coverage ratio of at least 1.50 to 1, (ii) the maintenance of $70.0 million of net worth, and (iii) the maintenance of specified insurance coverage limits on the collateral. We are in compliance with the financial covenants of the loan. During the nine months ended September 30, 2001, we repaid $0.8 million of the loan principal. We believe that cash flow generated by operations and amounts available under the revolving credit facility will be sufficient, until the maturity of our $101.0 million outstanding 11 3/4% mortgage notes due November 15, 2003, to fund working capital needs, capital expenditures, other operating requirements, including any expenditures required by applicable environmental laws and regulations, and to service debt. It is unlikely that we will be able to repay the mortgage notes at maturity through projected operating cash flow, and it will be necessary to refinance all or a portion of the mortgage notes, or redeem the mortgage notes from additional equity funds, on or before their maturity on November 15, 2003. We continuously monitor financial market conditions and our financial position to determine when and whether we will refinance or redeem all or a portion of the mortgage notes prior to their maturity. Although we intend to refinance and believe that we will be able to refinance the mortgage notes prior to November 15, 2003, our operating performance and ability to service or refinance the mortgage notes and to extend or refinance the revolving credit facility will be subject to future economic conditions and to commercial, financial, and other factors, many of which are beyond our control. There can be no assurances that we will be able to repay at maturity or refinance our indebtedness in whole or in part, or at all, on terms acceptable to us. If we are unable to repay or refinance the mortgage notes at or prior to maturity, we will be forced to adopt alternative strategies that may include seeking additional equity capital. It is anticipated that any common share arrearages will not adversely impact our ability to repay or refinance the mortgage notes since the mortgage notes are obligations of two of our subsidiaries, not of Statia Terminals Group. Depending on the terms and conditions of any refinancing of the mortgage notes, our ability to pay the target quarterly distributions and common share arrearages may be impacted. CAPITAL EXPENDITURES Our projected capital spending for 2001 will range between $7.0 million and $8.0 million primarily for operations sustaining capital expenditures. Additional spending is contingent upon the addition of incremental terminaling business. Page 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) The following table sets forth capital expenditures and separates such expenditures into those which produce, or have the potential to produce, incremental revenues and those which sustain our operations. Summary of Capital Expenditures by Type (Dollars in Thousands)

We continue to investigate a salt deposit located on a parcel of land very near our Point Tupper facility. At this point in time, we have not established sufficient information to determine whether or not this project will ever produce income. However, it is anticipated that should the project prove successful, it would not produce revenues until at least 2004. This project, like any project in which we may become involved, will require adequate prospective returns in order to be developed. Through September 30, 2001, we have capitalized $1.0 million related to this project of which approximately $0.4 million was capitalized during the nine months ended September 30, 2001. Should this or any project be abandoned, we may incur an immediate charge to write-off any amounts capitalized. We continue to review and develop certain software applications used in the operations of our marine terminals and certain internally developed applications intended to upgrade the existing software. In addition, we are evaluating the suitability of commercially available software including possible integration of third-party software with our systems. The ultimate outcome of this effort may result in a decision to enhance or replace the existing and internally developed applications or abandon this software. As of September 30, 2001, net third-party capitalized costs related to the development and enhancement of these applications were approximately $0.8 million. Page 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) ENVIRONMENTAL, HEALTH, AND SAFETY MATTERS In connection with the acquisition of certain companies from Praxair, Inc. by Castle Harlan Partners II L.P. (the "Castle Harlan Acquisition"), studies were undertaken by and for Praxair, Inc. to identify potential environmental, health, and safety matters. Certain matters involving potential environmental costs were identified at the Point Tupper facility. Praxair, Inc. has agreed to pay for certain of these environmental costs subject to certain limitations. Praxair, Inc. has paid approximately $5.6 million during the period from November 27, 1996, to September 30, 2001, related to such costs. As of September 30, 2001, Praxair, Inc. owed us approximately $0.1 million related to such costs. Based on investigations conducted and information available to date, the potential cost of additional remediation and compliance is estimated at approximately $13 million, substantially all of which we believe is the responsibility of Praxair, Inc. per the Castle Harlan Acquisition agreement. We believe that environmental, health, and safety costs will not have a material adverse effect on our financial position, cash flows, or results of operations, subject to reimbursements from Praxair, Inc. We have also identified certain other environmental, health, and safety costs not covered by the agreement with Praxair, Inc. for which $1.5 million were accrued in 1996 in conjunction with the Castle Harlan Acquisition, of which $1.1 million remained at December 31, 2000. During the nine months ended September 30, 2001, $0.04 million were expended against this accrual. During the nine months ended September 30, 2001, we identified certain other environmental, health, and safety costs not covered by the agreement with Praxair, Inc. and accrued $0.05 million related to these costs, against which $0.03 million were expended through September 30, 2001. TAX MATTERS Our Free Zone and Profit Tax Agreement with the island government of St. Eustatius expired on December 31, 2000. The agreement required, among other things, payment of a minimum annual tax of 0.5 million Netherlands Antilles Guilders or approximately $0.3 million. We have been adhering to the terms of this agreement since its expiration. Discussions regarding a modified and extended agreement are in progress, and we believe that, although some terms and conditions will be modified from those of the prior agreement and that the amounts payable may increase or decrease, the execution of a new extended agreement is likely. However, if the beneficial tax status of our facilities is terminated, or if significant adverse modifications are made to the tax agreement, our business, financial condition, results of operations, and cash flows may be adversely affected. On September 30, 2001, and October 1, 2001, certain of our subsidiaries, Statia Terminals Canada, Incorporated ("STCI"), together with Point Tupper Marine Services Limited ("PTMS") and Statia Terminals Canada Holdings, Inc. ("STCHI"), a newly formed wholly-owned subsidiary of STCI, reorganized such that the businesses previously carried on by these corporations, other than the spill response business of PTMS, were transferred to Statia Terminals Canada Partnership ("STCP"), a general partnership formed under the laws of the Province of Nova Scotia, Canada, consisting of STCI, PTMS, and STCHI as the only partners. We effected the reorganization of our Canadian operations in order to consolidate certain activities and gain operational efficiencies. Additionally, as a result of the reorganization, Canadian net operating loss carry-forwards, substantially all of which were to expire unutilized at the end of 2001, were applied against the tax gain arising from the transfer of certain assets to the partnership. The resultant step-up in the tax basis of the assets transferred will be available for future years' tax depreciation deductions. We have provided a full valuation allowance against the net deferred tax asset resulting from this reorganization, aggregating approximately $19.6 million, because we cannot determine that it is likely that the deferred tax asset will be utilized in the future. ACCOUNTING STANDARDS Effective January 1, 2001, we adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS Nos. 137 and 138, Page 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) which establishes standards of accounting for derivative instruments including specific hedge accounting criteria. The adoption of SFAS No. 133 did not have a material impact on us. The Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants is currently formulating a new accounting standard, which is expected to modify the accounting rules for major repairs and maintenance expenditures, among other things. AcSEC recently released a proposed Statement of Position entitled "Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment." We cannot determine at the present time whether or not the ultimate implementation of the final standard by us will have a material effect on our business, financial condition, results of operations, or cash flows. The Financial Accounting Standards Board ("FASB") recently issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The new rule modifies the accounting rules for obligations associated with the retirement of an asset and must be adopted for fiscal years beginning after June 15, 2002. We are currently evaluating the new standard but have not determined whether or not the ultimate implementation of this standard by us will have a material effect on our business, financial condition, results of operations, or cash flows. The FASB recently issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." The new rule addresses financial accounting and reporting for the impairment or disposal of long-lived assets, establishes a single accounting model for long-lived assets to be disposed of by sale and resolves significant implementation issues related to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The new rule must be adopted for fiscal years beginning after December 15, 2001. We are currently evaluating the new standard but have not determined whether or not the ultimate implementation of this standard by us will have a material effect on our business, financial condition, results of operations, or cash flows. RECENT DEVELOPMENTS On November 12, 2001, Group and Kaneb Pipe Line Operating Partnership, L.P. ("Kaneb"), a limited partnership organized under the laws of the State of Delaware, entered into a Stock Purchase Agreement, pursuant to which Group will sell to Kaneb all of the outstanding capital stock of each of Statia Terminals International N.V., Statia Technology, Inc. and Statia Marine, Inc. (the "Operating Subsidiaries"), which constitute substantially all of Group's assets, in consideration for a purchase price of approximately $307 million including cash on hand and the assumption of approximately $107 million of indebtedness of the Operating Subsidiaries. The purchase price is subject to adjustment following the sale to reflect the amount of combined cash of the Operating Subsidiaries and their respective subsidiaries on the date of the sale. Following the sale, Group intends to distribute the proceeds of the sale to holders of Group's class A common shares, class B subordinated shares and class C shares, and subsequently to liquidate. Consummation of the sale is not subject to any financing condition, but is subject to other customary closing conditions, including approval of the sale by 66-2/3% of all votes cast by holders of the class A common shares and class B subordinated shares, voting together, at a special meeting at which at least one-half of Group's voting securities are represented. In addition, consummation of the sale and subsequent liquidation is subject to approval by 66-2/3% of all votes cast by holders of the class A common shares, voting separately as a class, of an amendment to Group's articles of incorporation to provide the method of distribution of the proceeds from the sale among the holders of the class A common shares, the class B subordinated shares and the class C shares. Subject to receipt of the shareholder approvals referred to above, following the consummation of the sale, a distribution in the aggregate of $108.2 million will be made to the holders of the class A common shares (representing a distribution of $18.00 per class A common share) and a distribution in the aggregate of $62.3 million will be made to the holders of the class B subordinated shares (representing a distribution of $16.40 per class B subordinated share). Holders of class C will be entitled to receive Group's remaining assets after any adjustment to the purchase price described above and after payment of Group's liabilities (including payments to optionholders described below) immediately prior to liquidation. Based on information currently available to Group, assuming the closing of the sale in the first quarter of 2002 and assuming no unanticipated claims are presented between the date hereof and the date of the liquidation, Group believes that holders of the class C shares are likely to receive an aggregate distribution of approximately $8.1 million. In addition, holders of options to purchase class A common shares will be paid an aggregate of $13.9 million out of the sale proceeds in consideration for the surrender of such options. The distribution to the holders of class A common shares following consummation of the sale includes payment for all unpaid dividends that will have accrued in favor of the class A common shares prior to the date of the distribution. For additional information on this transaction, please see Form 8-K filed by Statia Terminals Group N.V. with the U.S. Securities and Exchange Commission on November 14, 2001. Page 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk We periodically purchase refined petroleum products from our customers and others for resale as bunker fuel, for small volume sales to commercial interests, and to maintain an inventory of blend stocks for our customers. Petroleum product inventories are held for short periods, generally not exceeding 90 days. We do not presently have any derivative positions to hedge our inventory of petroleum products. Therefore, during the period we hold inventory of petroleum products, we are subject to market risk from changes in the global oil markets which may cause the value of this inventory to increase or decrease from the amounts we paid. Such changes are reflected in the gross margins of the product sales segment. The following table indicates the aggregate carrying amount of our petroleum products on hand at September 30, 2001, computed at average costs, net of any lower of cost or market valuation provisions, and the estimated fair value of such products. The fair value of such products is estimated based on recent sales activity at our facilities. ON BALANCE SHEET COMMODITY POSITION (DOLLARS IN THOUSANDS) As of September 30, 2001 --------------------------------- Carrying Amount Fair Value --------------- ---------- Petroleum Inventory: Statia Terminals N.V $2,866 $3,404 Statia Terminals Canada 1,364 1,777 ------ ------ Total $4,230 $5,181 ====== ====== Except for minor local operating expenses in Canadian dollars and Netherlands Antilles guilders, and certain Canadian dollar-denominated revenues, all of our transactions are in U.S. dollars. Therefore, we believe we are not significantly exposed to exchange rate fluctuations. Most of our present debt obligations carry a fixed rate of interest. Therefore, we believe our exposure to interest rate fluctuations is minimal. The revolving credit facility varies with changes in the lender's prime lending rate, and the loan collateralized by the M/V STATIA RESPONDER is indexed to three month London InterBank Offered Rates. Page 20 PART II - OTHER INFORMATION Item 1. Legal Proceedings. Reference is made to Item 3. Legal Proceedings included in the Company's 2000 Annual Report on Form 10-K. There have been no material developments in the Company's legal proceedings since the Form 10-K was filed. Item 2. Changes in Securities and Use of Proceeds. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. The Company's web site is located at http://www.statiaterm.com. Page 21 PART II - OTHER INFORMATION - (Continued) Item 6. Exhibits and Reports On Form 8-K. (a) Exhibits (for electronic filing only) 3.1a Articles of Incorporation Statia Terminals Group N.V., as amended July 30, 2001. 4.1e Fifth Amendment, dated as of September 30, 2001, to the Indenture, dated as of November 27, 1996, among Statia Terminals International N.V., a Netherlands Antilles corporation, Statia Terminals Canada, Incorporated, a corporation organized under the laws of Nova Scotia, Canada, the Subsidiary Guarantors named therein and HSBC Bank USA (formerly known as Marine Midland Bank), as Trustee. 4.16a Amendment to Share Pledge Agreement, dated as of September 30, 2001, by Statia Terminals Canada, Incorporated. 4.25 Statia Terminals Canada Partnership Agreement made as of September 21, 2001, between Statia Terminals Canada, Incorporated, Point Tupper Marine Services Limited, and Statia Terminals Canada Holdings, Inc. 4.26 Securities Pledge Agreement, dated as of September 30, 2001, by and among Point Tupper Marine Services Limited and Statia Terminals Canada Holdings, Inc. and HSBC Bank USA (formerly known as Marine Midland Bank), as Trustee. 4.27 Guarantee, dated as of September 30, 2001 made by Statia Terminals Canada, Incorporated, Point Tupper Marine Services Limited and Statia Terminals Canada Holdings, Inc. 4.28 Guarantee, dated as of September 30, 2001 made by Statia Terminals Canada Holdings, Inc. 10.6a Amended and restated Employment Agreement, effective August 29, 2001, between Statia Terminals Group N.V., Statia Terminals, Inc. and James G. Cameron. 10.6b Amended and restated Employment Agreement, effective November 12, 2001, between Statia Terminals Group N.V., Statia Terminals, Inc. and James G. Cameron. 10.7a Amended and restated Employment Agreement, effective August 29, 2001, between Statia Terminals Group N.V., Statia Terminals, Inc. and Thomas M. Thompson, Jr. 10.7b Amended and restated Employment Agreement, effective November 12, 2001, between Statia Terminals Group N.V., Statia Terminals, Inc. and Thomas M. Thompson, Jr. 10.8a Amended and restated Employment Agreement, effective August 29, 2001, between Statia Terminals Group N.V., Statia Terminals, Inc. and Robert R. Russo. 10.8b Amended and restated Employment Agreement, effective November 12, 2001, between Statia Terminals Group N.V., Statia Terminals, Inc. and Robert R. Russo. 10.9a Amended and restated Employment Agreement, effective August 29, 2001, between Statia Terminals Group N.V., Statia Terminals, Inc. and John D. Franklin. 10.9b Amended and restated Employment Agreement, effective November 12, 2001, between Statia Terminals Group N.V., Statia Terminals, Inc. and John D. Franklin. 10.10a Amended and restated Employment Agreement, effective August 29, 2001, between Statia Terminals Group N.V., Statia Terminals, Inc. and James F. Brenner. 10.10b Amended and restated Employment Agreement, effective November 12, 2001, between Statia Terminals Group N.V., Statia Terminals, Inc. and James F. Brenner. 10.11a Amended and restated Employment Agreement, effective August 29, 2001, between Statia Terminals Group N.V., Statia Terminals, Inc. and Jack R. Pine. 10.11b Amended and restated Employment Agreement, effective November 12, 2001, between Statia Terminals Group N.V., Statia Terminals, Inc. and Jack R. Pine. 10.16 Statia Salaried Employee Severance Pay Plan, as adopted effective August 29, 2001. (b) Reports on Form 8-K On November 14, 2001, Statia Terminals Group N.V. filed a Form 8-K with the U.S. Securities Exchange Commission announcing the potential sale of substantially all of its operating subsidiaries to Kaneb Pipe Line Operating Partnership, L.P. and the subsequent liquidation of Statia Terminals Group N.V. Page 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. STATIA TERMINALS GROUP N.V. (Registrant) Date: November 14, 2001 By: /s/ James G. Cameron ------------------------------------- James G. Cameron Director (As Authorized Officer) By: /s/ James F. Brenner ------------------------------------- James F. Brenner Vice President and Treasurer (As Authorized Officer and Principal Financial Officer) Page S-1

STATIA TERMINALS GROUP NV 10-Q