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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM OCTOBER 1, 2002 TO
DECEMBER 31, 2002
COMMISSION FILE NUMBER 333-04343-01
STERLING CHEMICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0502785
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1200 SMITH STREET, SUITE 1900 (713) 650-3700
HOUSTON, TEXAS 77002-4312 (REGISTRANT'S TELEPHONE NUMBER,
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of class)
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
As of January 31, 2003, Sterling Chemicals, Inc. had 2,825,000 shares
of common stock outstanding. As of such date, the aggregate market value of such
common stock, based upon the last sales price of the shares reported in the
daily publication of the National Quotation Bureau of OTC stocks was
approximately $70,625,000.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by court. Yes X No
--- ---
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IMPORTANT INFORMATION REGARDING THIS FORM 10-Q
Readers should consider the following information as they review this Form
10-Q.
FORWARD-LOOKING STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this Form 10-Q are forward-looking statements, including without
limitation the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" regarding the cyclicality of our
industry, current and future industry conditions, the potential effects of such
matters on our business strategy, results of operations or financial position,
the adequacy of our liquidity and our market sensitive financial instruments.
The forward-looking statements are based upon current information and
expectations. Estimates, forecasts and other statements contained in or implied
by the forward-looking statements speak only as of the date on which they are
made, are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to evaluate and predict.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, no assurances can be given that such expectations
will prove to have been correct. Certain important factors that could cause
actual results to differ materially from our expectations or what is expressed,
implied or forecasted by or in the forward-looking statements include the timing
and extent of changes in commodity prices and global economic conditions,
industry production capacity and operating rates, the supply-demand balance for
our products, competitive products and pricing pressures, increases in raw
material costs, our ability to obtain raw materials and energy at acceptable
prices, in a timely manner and on acceptable terms, federal and state regulatory
developments, the availability of skilled personnel, our ability to attract or
retain high quality employees and operating hazards attendant to the industry.
Additional factors that could cause actual results to differ materially from our
expectations or what is expressed, implied or forecasted by or in the
forward-looking statements are stated herein in cautionary statements made in
conjunction with the forward-looking statements or are included elsewhere in
this Form 10-Q or Sterling Chemicals, Inc.'s Annual Report on Form 10-K for the
fiscal year ended September 30, 2002 (the "Annual Report"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Certain Known Events, Trends, Uncertainties and Risk Factors" contained in the
Annual Report. All subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by these cautionary statements.
SUBSEQUENT EVENTS
All statements contained in this Form 10-Q, including the forward-looking
statements discussed above, are made as of February 18, 2003, unless those
statements are expressly made as of another date. We disclaim any responsibility
for the correctness of any information contained in this Form 10-Q to the extent
such information is affected or impacted by events, circumstances or
developments occurring after February 18, 2003 or by the passage of time after
such date and, except as required by applicable securities laws, we do not
intend to update such information.
REORGANIZATION
For financial reporting purposes, the effective date of the Plan of
Reorganization is considered to be the close of business on December 19, 2002.
Due to the Debtors' emergence from Chapter 11 and the implementation of
fresh-start accounting (see Note 3 to the consolidated financial statements),
the quarterly financial results have been separately presented under the labels
Reorganized Sterling Chemicals, Inc. ("Reorganized Sterling") for the period
December 20 to December 31, 2002 and Predecessor Sterling Chemicals, Inc.
("Predecessor Sterling") for periods prior to December 19, 2002. Our financial
statements as of and for the period ended December 31, 2002 are not comparable
to those of Predecessor Sterling for the periods prior to December 31, 2002.
DOCUMENT SUMMARIES
Statements contained in this Form 10-Q describing documents and agreements
are provided in summary form only and such summaries are qualified in their
entirety by reference to the actual documents and agreements filed as exhibits
to the Annual Report or this Form 10-Q.
2
STERLING CHEMICALS, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................................... 21
Item 4. Controls and Procedures.......................................................................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................ 22
Item 2. Changes in Securities and Use of Proceeds........................................................ 22
Item 6. Exhibits and Reports of Form 8-K................................................................. 23
3
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
REORGANIZED STERLING PREDECESSOR STERLING
-------------------- ------------------------------------------
DECEMBER 20, 2002 TO OCTOBER 1, 2002 TO THREE MONTHS ENDED
DECEMBER 31, 2002 DECEMBER 19, 2002 DECEMBER 31, 2001
-------------------- ------------------ ------------------
Revenues ................................................... $ 12,572 $ 99,888 $ 63,355
Cost of goods sold ......................................... 12,603 99,588 67,565
-------------------- ------------------ ------------------
Gross profit (loss) ........................................ (31) 300 (4,210)
Selling, general and administrative expenses ............... 1,988 3,072 4,346
Other expense .............................................. -- 368 --
Reorganization items ....................................... -- 15,214 3,633
Fresh-start adjustments .................................... -- 203,344 --
Gain on debt restructuring ................................. -- (457,824) --
Interest and debt related expenses, net of interest
income (1) ................................................. 355 12,144 10,901
-------------------- ------------------ ------------------
Income (loss) from continuing operations before income
tax ........................................................ (2,374) 223,982 (23,090)
Provision (benefit) for income taxes ....................... (828) 8 88
-------------------- ------------------ ------------------
Income (loss) from continuing operations ................... (1,546) 223,974 (23,178)
Income from discontinued operations (including a net
gain on disposal of $188,891 for the period October 1,
2002 to December 19, 2002), net of tax expense of $342
and $2,976, respectively ................................... -- 194,637 8,491
-------------------- ------------------ -----------------
Net income (loss) .......................................... (1,546) 418,611 (14,687)
Preferred stock dividends .................................. 170 -- --
-------------------- ------------------ -----------------
Net income (loss) attributable to common stockholders ...... $ (1,716) $ 418,611 $ (14,687)
==================== ================== =================
Net loss per common share, basic and diluted ............... $ (0.61) $ -- $ --
==================== ================== =================
Weighted average shares outstanding:
Basic and diluted ....................................... 2,825,000 -- --
(1) Contractual interest for the period October 1, 2002 to December 19, 2002
totaled $15,892 and for the three months ended December 31, 2001 totaled
$15,118.
The accompanying notes are an integral part of the
consolidated financial statements.
4
STERLING CHEMICALS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
REORGANIZED STERLING PREDECESSOR STERLING
DECEMBER 31, 2002 SEPTEMBER 30, 2002
-------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 99,818 $ 9,843
Accounts receivable, net ................................... 41,814 70,306
Inventories ................................................ 31,011 32,836
Prepaid expenses ........................................... 4,561 3,678
Deferred tax asset ......................................... 854 --
Assets held for sale ....................................... -- 215,178
-------------------- --------------------
Total current assets ..................................... 178,058 331,841
Property, plant and equipment, net ............................ 283,378 117,222
Other assets .................................................. 22,998 40,585
-------------------- --------------------
Total assets ............................................. $ 484,434 $ 489,648
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 31,214 $ 30,591
Accrued liabilities ........................................ 26,635 31,720
Current portion of long-term debt .......................... -- 57,242
Liabilities related to discontinued operations ............. -- 90,110
-------------------- --------------------
Total current liabilities .................................. 57,849 209,663
Pre-petition liabilities - subject to compromise .............. -- 508,895
Pre-petition liabilities - not subject to compromise .......... -- 362,836
Long-term debt ................................................ 94,275 --
Deferred credits and other liabilities ........................ 93,131 19,731
Redeemable preferred stock .................................... 30,170 --
Commitments and contingencies (Note 7)
Stockholders' equity (deficiency in assets):
Common stock, $.01 par value ............................... 28 --
Additional paid-in capital ................................. 210,527 (141,786)
Accumulated deficit ........................................ (1,546) (419,437)
Accumulated other comprehensive income ..................... -- (50,254)
-------------------- --------------------
Total stockholders' equity (deficiency in assets) .......... 209,009 (611,477)
-------------------- --------------------
Total liabilities and stockholders' equity (deficiency in
assets) ....................................................... $ 484,434 $ 489,648
==================== ====================
The accompanying notes are an integral part of the
consolidated financial statements.
5
STERLING CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
REORGANIZED STERLING PREDECESSOR STERLING
-------------------- ------------------------------------------
DECEMBER 20, 2002 TO OCTOBER 1, 2002 TO THREE MONTHS ENDED
DECEMBER 31, 2002 DECEMBER 19, 2002 DECEMBER 31, 2001
-------------------- ------------------ ------------------
Cash flows from operating activities:
Net income (loss) from continuing operations ............... $ (1,546) $ 223,974 $ (23,178)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization ........................... 858 4,857 5,684
Interest amortization ................................... 12 887 859
Fresh-start adjustments ................................. -- 203,344 --
Gain on cancellation of debt ............................ -- (457,824) --
Deferred tax benefit .................................... (854) -- --
Other ................................................... -- (2,232) 6,768
Change in assets/liabilities:
Accounts receivable ..................................... 12,076 18,382 7,500
Inventories ............................................. (3,940) 5,856 (5,713)
Prepaid expenses ........................................ 789 (1,592) (374)
Other assets ............................................ 13 1,430 (2,621)
Accounts payable ........................................ 2,298 (1,299) (4,429)
Accrued liabilities ..................................... 2,268 (7,100) 9,211
Other liabilities ....................................... (1,867) 4,447 447
-------------------- ------------------ ------------------
Net cash provided by (used in) operating activities ........ 10,107 (6,870) (5,846)
-------------------- ------------------ ------------------
Cash flows from investing activities:
Capital expenditures .................................... (116) (837) (1,265)
Net proceeds from the sale of the pulp chemicals
business ................................................ -- 357,641 --
-------------------- ------------------ ------------------
Net cash provided by (used in) investing activities: ....... (116) 356,804 (1,265)
Cash flows from financing activities:
Net borrowings under (payments on) DIP Facility ......... -- (42,200) 9,154
Proceeds from issuance of the New Notes ................. -- 94,275 --
Proceeds from issuance of new common stock .............. -- 30,000 --
Proceeds from issuance of new preferred stock ........... -- 30,000 --
Repayment of 12 3/8% Notes .............................. -- (371,916) --
-------------------- ------------------ ------------------
Net cash provided by (used in) financing activities: ....... -- (259,841) 9,154
-------------------- ------------------ ------------------
Net increase in cash and cash equivalents of continuing
operations ................................................. 9,991 90,093 2,043
Net decrease in cash and cash equivalents from
discontinued operations .................................... -- (10,109) (2,642)
Cash and cash equivalents - beginning of period ............ 89,827 9,843 1,222
-------------------- ------------------ ------------------
Cash and cash equivalents - end of period .................. $ 99,818 $ 89,827 $ 623
==================== ================== ==================
Supplement disclosures of cash flow information:
Interest paid, net of interest income received .......... $ -- $ (934) $ (1,148)
Cash paid for reorganization items ...................... (1,140) (931) (2,895)
The accompanying notes are an integral part of the
consolidated financial statements.
6
STERLING CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Unless otherwise indicated, in the Form 10-Q Sterling Chemicals, Inc. and
its wholly-owned subsidiaries are collectively referred to as "we," "our,"
"ours" and "us."
1. BASIS OF PRESENTATION
Interim Financial Information:
On July 16, 2001 (the "Petition Date"), Sterling Chemicals Holdings, Inc.
("Holdings"), Sterling Chemicals, Inc. and most of their U.S. subsidiaries
(collectively, the "Debtors") filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for
the Southern District of Texas (the "Bankruptcy Court"). A plan of
reorganization (the "Plan of Reorganization") was filed with the Bankruptcy
Court on May 14, 2002 and was confirmed on November 20, 2002. On December 19,
2002, the Plan of Reorganization became effective and the Debtors emerged from
bankruptcy pursuant to the terms of the Plan of Reorganization. During the
period from July 16, 2001 through December 19, 2002, the Debtors operated their
respective businesses as debtors-in-possession pursuant to the United States
Bankruptcy Code, and the 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").
For financial reporting purposes, the effective date of the Plan of
Reorganization is considered to be the close of business on December 19, 2002.
Due to the Debtors' emergence from Chapter 11 and the implementation of
fresh-start accounting (see Note 3), the quarterly financial results have been
separately presented under the labels Reorganized Sterling Chemicals, Inc.
("Reorganized Sterling") for the period December 20 to December 31, 2002 and
Predecessor Sterling Chemicals, Inc. ("Predecessor Sterling") for periods prior
to December 19, 2002. Our financial statements as of and for the period ended
December 31, 2002 are not comparable to those of Predecessor Sterling for the
periods prior to December 31, 2002.
In our opinion, the accompanying unaudited consolidated financial
statements reflect all adjustments necessary to present fairly our consolidated
financial position and consolidated results of operations and cash flows for the
applicable three-month periods ended December 31, 2002 and December 31, 2001,
respectively. All such adjustments are of a normal and recurring nature. The
results of operations and cash flows for the periods presented are not
necessarily indicative of the results to be expected for the full year. Certain
amounts reported in the financial statements for the prior periods have been
reclassified to conform with the current financial statement presentation with
no effect on net income (loss) or stockholders' equity (deficiency in assets).
The accompanying unaudited consolidated financial statements should be, and
are assumed to have been, read in conjunction with the consolidated financial
statements and notes included in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2002 (the "Annual Report"). The accompanying
consolidated balance sheet as of September 30, 2002 has been derived from the
audited consolidated balance sheet as of September 30, 2002 included in the
Annual Report. The accompanying consolidated financial statements as of and for
the three-month period ended December 31, 2002 have been reviewed by Deloitte &
Touche LLP, our independent public accountants, whose reports are included
herein.
In December 2002, we changed our fiscal year-end from September 30 to
December 31. As a result of this change, we are filing this transition report
with the Securities and Exchange Commission for the period October 1, 2002 to
December 31, 2002.
Industry Conditions and Liquidity:
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 their 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. The reorganization, effected through the
bankruptcy filings, permitted the Debtors to preserve cash and gave them the
opportunity to restructure their debt. As the market for our petrochemicals
products remains highly cyclical, the capital structure of Reorganized Sterling
has been designed with the goal of ensuring that we have sufficient liquidity
during cyclical downturns in the markets of our petrochemicals products,
although we cannot give any assurances that our new capital structure will
provide us with sufficient liquidity over any specific period.
7
Recent Developments:
Effective as of January 2, 2003, David G. Elkins retired as our President
and Co-Chief Executive Officer. Mr. Elkins joined us in January 1998 as our
General Counsel, Vice President and Secretary and later served as our Executive
Vice President - Administration and Law before being appointed as our President
in January 2001 and, subsequently, our Co-Chief Executive Officer in September
2001. Mr. Elkins will continue to serve as a member of our Board of Directors.
We entered into a Severance Agreement with Mr. Elkins at the time of his
retirement, pursuant to which we made a lump sum payment to him of approximately
$1.6 million. We also paid Mr. Elkins approximately $0.2 million under his
Employment Agreement for accrued vacation time and certain other vested
benefits. For the period December 19, 2002 to December 31, 2002, we accrued
approximately $1.6 million for severance costs associated with Mr. Elkins'
retirement.
Upon Mr. Elkins retirement, Richard K. Crump, our former Co-Chief Executive
Officer, became our sole Chief Executive Officer and assumed the duties of our
President. On January 20, 2003, our Board of Directors formally appointed Mr.
Crump as our Chief Executive Officer and President.
Segment Information:
Pursuant to the Plan of Reorganization, our pulp chemicals segment was sold
to Superior Propane, Inc. ("Superior Propane") on December 19, 2002. Our
petrochemicals segment, which previously included our acrylic fibers business,
now consists solely of our Texas City, Texas facility and is referred to as
Reorganized Sterling. Accordingly, the presentation of the segment information
is not comparable for this period nor will it be presented in future filings.
Comprehensive Net Income (Loss):
The total comprehensive net income (loss) for the twelve days ended
December 31, 2002 for Reorganized Sterling was $(1,546,000). The total
comprehensive net income (loss) for the period October 1, 2002 to December 19,
2002 for Predecessor Sterling was $420,694,000, predominantly due to the gain on
debt restructuring. The total comprehensive net income (loss) for the
three-months ended December 31, 2001 for Predecessor Sterling was $15,489,000.
2. EMERGENCE FROM CHAPTER 11 PROCEEDINGS
As previously stated, on December 19, 2002, the Debtors emerged from
bankruptcy pursuant to the terms of the Plan of Reorganization. Under the Plan
of Reorganization, the Debtors' pulp chemicals business was sold to Superior
Propane for approximately $373 million and the Debtors' acrylic fibers business
was sold to local management of that business for nominal consideration. A
portion of the net proceeds from the sale of the Debtors' pulp chemicals
business, approximately $80 million, remained with Reorganized Sterling, who
continues to own and operate the Debtors' core petrochemicals business. The
remaining net proceeds from the sale were paid to the holders of Predecessor
Sterling's 12 3/8% Senior Secured Notes (the "12 3/8% Notes"), who also received
approximately $94 million in new 10% Senior Secured Notes due 2007 issued by
Reorganized Sterling (the "New Notes") in satisfaction of their claims. In
addition, on the effective date of the Plan of Reorganization, Reorganized
Sterling established a new revolving credit facility providing up to $100
million in revolving credit loans (subject to borrowing base limitations) with
The CIT Group/Business Credit, Inc., as administrative agent, and certain other
lenders (the "New Revolver"). We have not as yet borrowed any money under the
New Revolver, although we had approximately $3.4 million in letters of credit
outstanding under the New Revolver as of December 31, 2002.
On December 6, 2002, Holdings was merged with and into Predecessor
Sterling. Under the terms of the merger and the Plan of Reorganization, upon
consummation of the merger, all equity interests in Holdings were cancelled and
65,000 shares of Reorganized Sterling common stock were issued to the holders of
Holdings' 13 1/2% Senior Secured Discount Notes in full payment of their claims.
Upon the effectiveness of the Plan of Reorganization, the unsecured creditors of
the Debtors (other than unsecured creditors of Holdings), which included holders
of Predecessor Sterling's 11 1/4% Senior Subordinated Notes and 11 3/4% Senior
Subordinated Notes, received pro rata shares of 11.7% of Reorganized Sterling's
common stock (on a fully diluted basis). In addition, upon the effectiveness of
the Plan of Reorganization, Resurgence Asset Management, L.L.C., on behalf of
itself and certain of its and its affiliates' funds and accounts (collectively,
the "Investor"), paid $30 million for certain shares of convertible preferred
stock of Reorganized Sterling. An additional $30 million was contributed to
Reorganized Sterling pursuant to a rights offering made available to the
Debtors' unsecured creditors (other than unsecured creditors of Holdings), which
offering was underwritten by the Investor. Upon the effectiveness of the Plan of
Reorganization, Reorganized Sterling issued 2,175,000 shares of its common stock
under the terms of the rights offering.
8
3. FRESH-START ACCOUNTING
Upon our emergence from bankruptcy on December 19, 2002, we implemented
fresh-start accounting under the provisions of SOP 90-7 and became a new
reporting entity. Under SOP 90-7, our reorganization value was allocated to our
assets and liabilities, our accumulated deficit was eliminated and new preferred
and common equity was issued according to the Plan of Reorganization. In
connection with our Plan of Reorganization and after consideration of a number
of factors, including valuations of other parties, and by using various
valuation methods including discounted cash flow analysis, comparable company
analysis and precedent transaction analysis, our financial advisor Greenhill &
Company, L.L.C., prepared a valuation of our business. Based on this valuation,
the estimated reorganization value was allocated as follows (dollars in
thousands):
Long-term debt $ 94,275
Redeemable preferred stock 30,000
Stockholders' equity 210,725
--------
Total $335,000
========
In connection with the cancellation of certain debt of Holdings and
Predecessor Sterling pursuant to the Plan of Reorganization, on December 19,
2002 we recorded a $457.8 million gain related to the cancellation of that debt.
Also in connection with fresh-start accounting, we changed our method of
accounting for periodic turnaround maintenance for our manufacturing units. We
previously accrued the cost of these turnarounds in advance, but now will be
expensing all costs as they are incurred. A one-time credit to reverse the $5.2
million previously accrued for shutdown reserves was recorded as part of our
fresh-start accounting transactions. A reconciliation of the adjustments
recorded in connection with the debt restructuring, the adoption of fresh-start
accounting, and the accounting for discontinued operations at December 19, 2002
is presented below, (unaudited, dollars in thousands):
PREDECESSOR REORGANIZED
STERLING STERLING
DECEMBER 19, DISCONTINUED REORGANIZATION FRESH-START DECEMBER 19,
ASSETS: 2002 OPERATIONS ADJUSTMENTS ADJUSTMENTS 2002
------------ ------------ -------------- ------------ ------------
Current assets:
Cash and cash equivalents....................... $ 5,839 $ 358,108 $ (274,120) $ -- $ 89,827
Accounts receivable, net........................ 87,435 (35,771) 2,226 -- 53,890
Inventories..................................... 44,832 (17,852) 91 -- 27,071
Prepaid expenses................................ 6,658 (1,388) -- 80 5,350
------------ ------------ ------------ ------------ ------------
Total current assets............................ 144,764 303,097 (271,803) 80 176,138
Property, plant and equipment, net.............. 253,875 (139,940) -- 170,121 284,056
Other assets.................................... 45,212 (6,039) (3,027) (13,059) 23,087
------------ ------------ ------------ ------------ ------------
Total assets.................................... $ 443,851 $ 157,118 $ (274,830) $ 157,142 $ 483,281
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 45,976 $ (16,684) $ 343 $ (719) $ 28,916
Accrued liabilities............................. 31,860 (7,240) 791 (1,044) 24,367
Current portion of long-term debt............... 52,327 (10,127) (42,200) -- --
------------ ------------ ------------ ------------ ------------
Total current liabilities....................... 130,163 (34,051) (41,066) (1,763) 53,283
Pre-petition liabilities subject to compromise.. 512,760 (2,159) (510,601) -- --
Pre-petition liabilities not subject to
compromise...................................... 372,326 -- (372,326) -- --
Long-term debt.................................. -- -- 94,275 -- 94,275
Deferred credits and other liabilities.......... 53,024 (28,846) 45,970 24,850 94,998
Commitments and contingencies...................
Redeemable preferred stock...................... -- -- 30,000 -- 30,000
Stockholders' equity (deficiency in assets):
Common stock, $.01 par value.................... -- -- -- 28 28
Additional paid-in capital...................... (141,786) -- 30,000 322,483 210,697
Retained earnings (accumulated deficit)......... (434,465) 188,891 448,918 (203,344) --
Accumulated other comprehensive income.......... (48,171) 33,283 -- 14,888 --
------------ ------------ ------------ ------------ ------------
Total stockholders' equity (deficiency in
assets)......................................... (624,422) 222,174 478,918 134,055 210,725
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders' equity
(deficiency in assets).......................... $ 443,851 $ 157,118 $ (274,830) $ 157,142 $ 483,281
============ ============ ============ ============ ============
9
Reorganization adjustments reflect the forgiveness of debt, including related
accrued interest and certain pre-petition liabilities, in consideration for new
debt and new common stock, resulting in a gain from debt restructuring of $457.8
million, partially offset by an expense of approximately $8.9 million for
professional fees incurred in connection with the reorganization.
4. DISPOSAL OF LONG LIVED ASSETS
Pursuant to the Plan of Reorganization, on December 19, 2002 we sold our
pulp chemicals business to Superior Propane and sold our acrylic fibers business
to local management of that business for nominal consideration. In accordance
with Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment and Disposal of Long Lived Assets," we have reported the operating
results of these businesses as discontinued operations in the consolidated
statement of operations and cash flows for Predecessor Sterling, and the assets
and liabilities of these businesses have been presented separately as assets
held for sale and liabilities related to discontinued operations in Predecessor
Sterling's consolidated balance sheet.
The carrying amounts of the major classes of assets held for sale and
liabilities related to discontinued operations as of September 30, 2002 were as
follows:
PREDECESSOR STERLING
SEPTEMBER 30, 2002
(Dollars in Thousands)
(Unaudited)
-------------------------------------------------
PULP CHEMICALS ACRYLIC FIBERS
BUSINESS BUSINESS TOTAL
-------------- -------------- -------------
ASSETS HELD FOR SALE:
Current assets ................................... $ 59,109 $ 11,429 $ 70,538
Property, plant and equipment, net ............... 138,614 -- 138,614
Other assets ..................................... 4,890 1,136 6,026
-------------- -------------- -------------
Total .......................................... $ 202,613 $ 12,565 $ 215,178
============== ============== =============
LIABILITIES RELATED TO DISCONTINUED OPERATIONS:
Current liabilities .............................. 32,080 2,385 34,465
Deferred credits and other liabilities ........... 42,390 13,255 55,645
-------------- -------------- -------------
Total .......................................... $ 74,470 $ 15,640 $ 90,110
============== ============== =============
For the period from October 1, 2002 through December 19, 2002 and for the
three months ended December 31, 2001, the amount of revenue and net income
(loss) (including gains or losses recorded on the sales) attributable to the
discontinued operations were as follows:
PREDECESSOR STERLING
(Dollars in Thousands)
(Unaudited)
--------------------------------------------
OCTOBER 1, 2002 TO THREE MONTHS ENDED
DECEMBER 19, 2002 DECEMBER 31, 2001
-------------------- --------------------
REVENUES:
Pulp chemicals business ...... $ 50,282 $ 56,692
Acrylic fibers business ...... 4,075 4,927
-------------------- --------------------
Total ...................... $ 54,357 $ 61,619
==================== ====================
NET INCOME (LOSS):
Pulp chemicals business ...... 201,404 9,072
Acrylic fibers business ...... (6,767) (581)
-------------------- --------------------
Total ...................... $ 194,637 $ 8,491
==================== ====================
10
5. INVENTORIES
REORGANIZED PREDECESSOR
STERLING STERLING
---------------- ----------------
DECEMBER 31, SEPTEMBER 30,
2002 2002
---------------- ----------------
(Dollars in Thousands)
(Unaudited)
Inventories consisted of the following:
Finished products ................................ $ 12,228 $ 15,470
Raw materials .................................... 12,259 9,656
Inventories under exchange agreements ............ 550 1,682
Stores and supplies .............................. 5,974 6,028
---------------- ----------------
$ 31,011 $ 32,836
================ ================
6. LONG-TERM DEBT
Pursuant to the Plan of Reorganization, on December 19, 2002 we issued the
New Notes totaling $94.3 million to the holders of Predecessor Sterling's
12 3/8% Notes. The New Notes are our senior secured obligations and rank equally
in right of payment with all of our other existing and future senior
indebtedness and senior in right of payment to any of our future subordinated
indebtedness. The New Notes are guaranteed by Sterling Chemicals Energy, Inc.
("Sterling Energy"), one of our wholly owned subsidiaries. Sterling Energy's
guarantee ranks equally in right of payment with all existing and future senior
indebtedness of Sterling Energy and senior in right of payment to any future
subordinated indebtedness of Sterling Energy. The New Notes are secured by a
first priority lien on all of our United States production facilities and
related assets.
The New Notes bear interest at the annual rate of 10%, payable
semi-annually on June 15 and December 15 of each year commencing June 15, 2003.
Under certain circumstances, for a period of up to two years after the issue
date of the New Notes, we may elect to pay interest on the New Notes in
additional notes. However, if interest is paid in additional notes rather than
cash, the interest rate for the relevant period is increased to 13 3/8%. Subject
to compliance with the terms of the New Revolver, we may redeem the New Notes at
any time at a redemption price of 100% of the outstanding principal amount
thereof plus accrued and unpaid interest. In addition, in the event of a
specified change of control or the sale of our facility in Texas City, Texas, we
are required to offer to repurchase the New Notes at 101% of the outstanding
principal amount thereof plus accrued and unpaid interest. We are also required
to offer to repurchase the New Notes at 100% of the outstanding principal amount
thereof plus accrued and unpaid interest in the event of certain other sales of
assets.
The indenture governing the New Notes contains numerous covenants and
conditions, including, but not limited to, restrictions on our ability to incur
indebtedness, create liens, sell assets, make investments, make capital
expenditures, engage in mergers and acquisitions and pay dividends. The
indenture also includes various circumstances and conditions that will, upon
occurrence and subject in certain cases to notice and grace periods, create an
event of default thereunder. However, the indenture does not require us to
satisfy any financial ratios or maintenance tests.
On the effective date of the Plan of Reorganization, Reorganized Sterling
established the New Revolver with The CIT Group/Business Credit, Inc.,
individually and as administrative agent, and certain other lenders providing up
to $100 million in revolving credit loans. The New Revolver has an initial term
ending on September 19, 2007. Under the New Revolver, we and Sterling Energy are
co-borrowers and are jointly and severally liable for any indebtedness
thereunder. The New Revolver is secured by first priority liens on all accounts
receivable, inventory and other specified assets owned by us or Sterling Energy,
as well as all of the issued and outstanding capital stock of Sterling Energy.
Borrowings under the New Revolver bear interest, at our option, at an
annual rate of either the Alternate Base Rate plus 0.75% or the "LIBO Rate" (as
defined in the New Revolver) plus 2.75%. The "Alternate Base Rate" is equal to
the greater of the "Base Rate" as announced from time to time by JPMorgan Chase
Bank in New York, New York or the 0.50% per annum above the latest "Federal
Funds Rate" (as such terms are defined in the New Revolver). Under the New
Revolver, we are also required to pay an aggregate commitment fee of 0.50%
(payable monthly) on any unused portion of the New Revolver. Available credit
under the New Revolver is subject to a monthly borrowing base of 85% of eligible
accounts receivable and the lesser of $50 million and 65% of eligible inventory.
In addition, the borrowing base for the New Revolver must exceed outstanding
borrowings thereunder by $8 million at all times. As of December 31, 2002, the
total credit available under the New Revolver was $39.4 million. We have not as
yet borrowed any money under the New Revolver, although we had approximately
$3.4 million in letters of credit outstanding under the New Revolver as of
December 31, 2002, leaving unused borrowing capacity under the New Revolver of
approximately $36.0 million.
11
The New Revolver contains numerous covenants and conditions, including, but
not limited to, restrictions on our ability to incur indebtedness, create liens,
sell assets, make investments, make capital expenditures, engage in mergers and
acquisitions and pay dividends. The New Revolver also contains a covenant that
requires us to earn a specified amount of earnings before interest, income
taxes, depreciation and amortization ("EBITDA") on a monthly basis if, for 15
consecutive days, unused availability under the New Revolver plus cash on hand
is less than $20 million. The New Revolver includes various circumstances and
conditions that will, upon occurrence and subject in certain cases to notice and
grace periods, create an event of default thereunder.
7. COMMITMENTS AND CONTINGENCIES
Product Contracts:
We have certain long-term agreements that provide for the dedication of
100% of our production of acetic acid, plasticizers, sodium cyanide, DSIDA and
methanol, each to one customer. We also have various sales and conversion
agreements that dedicate significant portions of our production of styrene and
acrylonitrile to certain customers. Some of these agreements provide for cost
recovery plus an agreed profit margin based upon market prices.
Environmental Regulations:
Our 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, health and safety laws,
regulations and permit requirements. Environmental permits required for our
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
manufacturing, handling, processing, distribution and use of our products and
the raw materials used to produce our products and, if so affected, our
business, financial position, results of operations and cash flows may be
materially and adversely affected. In addition, changes in environmental
requirements can cause us to incur substantial costs in upgrading or redesigning
our facility and processes, including our emission producing practices and
equipment and our waste treatment, storage, disposal and other waste handling
practices and equipment.
We conduct environmental management programs designed to maintain
compliance with applicable environmental requirements. We routinely conduct
inspection and surveillance programs designed to detect and respond to leaks or
spills of regulated hazardous substances and to correct identified regulatory
deficiencies. We believe that our procedures for waste handling are consistent
with industry standards and applicable requirements. In addition, we believe
that our operations are consistent with good industry practice. We continue to
participate in Responsible Care(R) initiatives as a part of our membership in
several trade groups, which are partner associations in the American Chemistry
Council. Notwithstanding our efforts and beliefs, 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 we believe that our business operations and facility generally
are operated in compliance with all applicable environmental, health and safety
requirements in all material respects, we 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 or the public. Some risk of
environmental costs and liabilities are inherent in our operations and products,
as it is with other companies engaged in similar businesses.
In light of our historical expenditures and expected future results of
operations and sources of liquidity, we believe we will have adequate resources
to conduct our operations in compliance with applicable environmental and health
and safety requirements. Nevertheless, we may be required to make significant
site and operational modifications that are not currently contemplated in order
to comply with changing facility permitting requirements and regulatory
standards. Additionally, we have incurred and may continue to incur liability
for investigation and cleanup of waste or contamination at our own facility or
at facilities operated by third parties where we have disposed of waste. We
continually review all estimates of potential environmental liabilities but can
give no assurances that all potential liabilities arising out of our past or
present operations have been identified or fully assessed or that the amount
necessary to investigate and remediate such conditions will not be significant
to us. It is our policy to make safety, environmental and replacement capital
expenditures a priority in order to ensure adequate safety and compliance at all
times.
On December 13, 2002, the Texas Commission for Environmental Quality
adopted a revised State Implementation Plan (the "SIP") for compliance with the
ozone provisions of the Clean Air Act. The SIP is currently being reviewed by
the Environmental Protection Agency ("EPA") and a decision regarding approval or
rejection of the SIP is expected to be issued by EPA by mid-2003. Under the
SIP, we would be required to reduce emissions of nitrogen oxide at our Texas
City, Texas facility by approximately 80%, and monitor, and potentially reduce,
emissions of other chemicals. We believe that we would need to make between $25
and $30 million in capital improvements in order to comply with the nitrogen
oxide emission reduction requirements, and spend an additional $2 to $3 million
in order to comply with the other provisions of the SIP. We anticipate that the
majority of
12
these capital expenditures and other expenses would need to be incurred over the
four-year period ending December 2007.
Legal Proceedings:
As previously discussed, the Debtors filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code on July 16, 2001. As a
result of the commencement of the Chapter 11 cases, an automatic stay was
imposed against the commencement or continuation of legal proceedings against
the Debtors outside of the Bankruptcy Court. Claimants with alleged claims
against the Debtors were required to assert their claims in the Chapter 11 cases
by timely filing a proof of claim, to which the Debtors were allowed to file an
objection and seek a determination from the Bankruptcy Court as to whether such
claims were allowable. Claimants who desired to liquidate their claims in legal
proceedings outside of the Bankruptcy Court were required to obtain relief from
the automatic stay by order of the Bankruptcy Court before doing so. If such
relief was granted, the automatic stay remained in effect with respect to the
collection of liquidated claim amounts. On November 20, 2002, the Bankruptcy
Court entered an order confirming the Plan of Reorganization. The effective date
under the Plan of Reorganization occurred on December 19, 2002. Pursuant to the
Plan of Reorganization, a discharge injunction prohibits collection efforts by
claimants. As a general rule, all claims against the Debtors that sought a
recovery from assets of the Debtors' estates have been addressed in the Chapter
11 cases and have been or will be paid only pursuant to the terms of the Plan of
Reorganization.
Ethylbenzene Release. The four lawsuits listed below and two interventions,
involving a total of approximately 518 plaintiffs, were filed based on this
release alleging personal injury, property damage and nuisance claims:
o Zabrina Alexander, et al. v. Sterling Chemicals Holdings, Inc., et al.;
Case No. 00-CV0217; In the 10th Judicial District Court of Galveston
County, Texas
o Nettie Allen, et al. v. Sterling Chemicals, Inc., et al.; Case No.
00-CV0304; In the 10th Judicial District Court of Galveston County, Texas
o Bobbie Adams, et al. v. Sterling Chemicals International, Inc., et al.;
Case No. 00-CV0311; In the 212th Judicial District Court of Galveston
County, Texas
o Olivia Ellis v. Sterling Chemicals, Inc.; Case No. JC5000305; In Justice
Court No. 5 of Galveston County, Texas
The Bankruptcy Court has, with our support, lifted the automatic stay for
all known claims arising out of the Zabrina Alexander, et al., Nettie Allen, et
al. and Bobbie Adams, et al. cases allowing the plaintiffs to proceed against
our liability insurance policies. As a condition to the lifting of the automatic
stay, these plaintiffs waived their right to seek any recoveries against us
directly and must look solely to insurance proceeds to satisfy their claims.
Settlement negotiations in the Olivia Ellis case are ongoing and we are
optimistic that this case will settle on favorable terms in the near future,
although we cannot guarantee such a settlement will be reached.
We believe that all or substantially all of our future out-of-pocket costs
and expenses relating to these lawsuits, including settlement payments and
judgments, will be covered by our liability insurance policies or
indemnification agreements with third parties. We do not believe that the claims
and litigation arising out of these lawsuits will have a material adverse effect
on our business, financial position, results of operations or cash flows,
although we cannot give any assurances to that effect. To the extent that the
lawsuits seek a recovery from assets of the Debtors' estates, the claims alleged
have been addressed in the Chapter 11 cases and have been or will be paid only
pursuant to the terms of the Plan of Reorganization.
A number of issues remain outstanding before the Bankruptcy Court,
including the allowability and classification of certain claims, the amount of
rejection damages payable to some parties whose contracts were rejected in the
bankruptcy proceedings and similar matters. We do not believe that the outcome
of any of these issues will have a material adverse effect on our business,
financial position, results of operations or cash flows, although we cannot give
any assurances to that effect. In addition, we are currently litigating in
Bankruptcy Court the assumption of our contracts with Monsanto Company
("Monsanto") governing the production of DSIDA and related cure costs. The
ability of Monsanto to terminate the DSIDA contracts following an assumption of
these contracts may also be determined in the course of this litigation. Until
this litigation is completed, we cannot determine whether we will assume these
contracts and restart the DSIDA unit or reject these contracts. The rejection or
termination of the DSIDA contracts would have a negative impact on our business,
financial position, results of operations or cash flows, although we do not
expect that impact to be material.
Other Claims
We are subject to various other claims and legal actions that arise in the
ordinary course of our business. Claims and legal actions against the Debtors
that existed as of the Chapter 11 filing date are subject to the discharge
injunction provided for in the Plan of Reorganization, and recoveries sought
thereon from assets of the Debtors are subject to the terms of the Plan of
Reorganization.
13
Effective as of December 19, 2001, Mr. Frank P. Diassi elected to terminate
his employment. Mr. Diassi had served as our executive Chairman of the Board
since 1996. Mr. Diassi was elected Co-Chief Executive Officer along with David
G. Elkins, our former President, in September 2001. Mr. Diassi asserted that he
had "good reason" to terminate his employment and claimed that he was entitled
to receive payments under certain of our employee retention and severance plans.
On June 3, 2002, our Compensation Committee denied Mr. Diassi's claim under our
Key Employee Protection Plan and on July 24, 2002, our Board of Directors denied
his claim under our Retention Bonus Plan. On September 6, 2002, we filed an
objection to Mr. Diassi's Proof of Claim in the Bankruptcy Court. Mr. Diassi
subsequently filed a motion in the Bankruptcy Court to compel arbitration of his
claims. The parties to this dispute have reached an agreement in principle
pursuant to which Mr. Diassi will waive any and all claims against us in
exchange for a lump sum payment of $300,000 plus $150,000 in attorneys' fees.
This settlement is currently being documented and is subject to bankruptcy court
approval. This settlement was accrued on our opening, fresh-start, balance
sheet.
8. STOCK-BASED COMPENSATION PLAN
On December 6, 2002, Holdings was merged with and into Predecessor
Sterling. Under the terms of the merger and the Plan of Reorganization, upon
consummation of the merger all equity interests in Holdings, including all
options issued under Holdings' stock based incentive plans, were cancelled. In
connection with the implementation of the Plan of Reorganization, we adopted the
SCI Management Incentive Plan. Under the SCI Management Incentive Plan, officers
and key employees, as designated by our Board of Directors, may be issued stock
options, stock awards, stock appreciation rights or stock units in accordance
with the terms of such designations, subject to such terms as are more
specifically described in the SCI Management Incentive Plan. The SCI Management
Incentive Plan may be amended or modified from time to time by our Board of
Directors in accordance with its terms. We have reserved 379,747 shares (subject
to adjustment as provided for in the SCI Management Incentive Plan) of our
common stock for issuance under this plan. On February 11, 2003, options to
purchase 348,500 shares of our common stock at an exercise price of $31.60 were
granted under the SCI Management Incentive Plan.
9. CAPITAL STOCK
Under our Certificate of Incorporation, we are authorized to issue
10,125,000 shares of capital stock, consisting of 10,000,000 shares of common
stock, par value $0.01 per share, and 125,000 shares of preferred stock, par
value $0.01 per share. In connection with the Plan of Reorganization and the
merger of Holdings into Predecessor Sterling, we issued a total of 2,825,000
shares of common stock. Subject to applicable law and the provisions of our
Certificate of Incorporation, the indenture governing the New Notes and the New
Revolver, dividends may be declared on our shares of capital stock at the
discretion of our Board of Directors and may be paid in cash, in property or in
shares of our capital stock.
Upon the effective date of the Plan of Reorganization, we authorized 25,000
shares and issued 2,175 shares of our Series A Convertible Preferred Stock
("Series A Preferred Stock"). Each share of Series A Preferred Stock is
convertible at the option of the holder thereof at any time into 1,000 shares of
our common stock, subject to adjustments. The Series A Preferred Stock has a
cumulative dividend rate of 4% per quarter, payable in additional shares of
Series A Preferred Stock in arrears on the first Business Day of each calendar
quarter. Our Series A Preferred Stock carries a liquidation preference of
$13,793.11 per share, subject to adjustments. We may redeem all or any number of
our shares of Series A Preferred Stock at any time after December 19, 2005, at a
redemption price determined in accordance with Certificate of Designations,
Preferences, Rights and Limitations of our Series A Preferred Stock, provided
that the current equity value of our capital stock issued on the effective date
of the Plan of Reorganization exceeds specified levels. The holders of our
Series A Preferred Stock may elect to have us redeem all or any of their shares
of Series A Preferred Stock following a specified change of control at a
redemption price equal to the greater of
o the liquidation preference for such shares (plus accrued and unpaid
dividends), or
o in the event of a merger or consolidation, the fair market value of
the consideration that would have been received in such merger or
consolidation in respect of the shares of our common stock into which
such shares of Series A Preferred Stock were convertible immediately
prior to such merger or consolidation had such shares of Series A
Preferred Stock been converted prior thereto, or
o in the event of some other specified change of control, the current
market value of the shares of our common stock into which such shares
of Series A Preferred Stock were convertible immediately prior to such
change of control had such shares of Series A Preferred Stock been
converted prior thereto (plus accrued and unpaid dividends).
Upon the effective date of our Plan of Reorganization, we also issued
warrants (the "Warrants") to purchase, in the aggregate, 949,367 shares of
common stock. Each Warrant represents the right, at any time on or before
December 19, 2008, to purchase one
14
share of our common stock at an exercise price of $52 per share (subject to
adjustments).
10. 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 requires separate identification and recognition
of intangible assets, other than goodwill. The statement applies to all business
combinations initiated after June 30, 2001 and also applies to all entities
emerging from bankruptcy. SFAS No. 142, which was effective for our fiscal year
beginning October 1, 2002, 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. 141 was applied through our implementation of fresh-start accounting
under the provisions of SOP 90-7. However, the adoption of SFAS No. 142 did not
have a significant impact on our financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143, which we applied to our fiscal year
beginning on October 1, 2002, addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. There was no impact on our financial
statements upon the adoption of SFAS No. 143.
In August 2001, the Financial Accounting Standards Board issued SFAS 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 144 was effective for
our fiscal year beginning October 1, 2002. Accordingly, we reported the sale of
our pulp and acrylic fibers businesses as discontinued operations in our
consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements
4, 44 and 64, Amendment to FASB Statement 13, and Technical Corrections." One of
the major changes of this statement is to change the accounting for the
classification of gains and losses from the extinguishment of debt. We adopted
SFAS No. 145 as part of our fresh-start accounting (see Note 3). As a result, we
have classified gains and losses from our debt restructuring as a component of
income (loss) from continuing operations in the accompanying consolidated
statements of operations.
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. We adopted SFAS No.
146 through the implementation of fresh-start accounting under the provisions of
SOP 90-7 and it did not have an impact on our financial statements.
In January 2003, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends FASB SFAS No.
123, "Accounting for Stock-Based Compensation," to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements of the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for fiscal years beginning
after December 15, 2002. We adopted SFAS No. 148 through the implementation of
fresh-start accounting under the provisions of SOP 90-7 and it did not have an
impact on our financial statements.
15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Sterling Chemicals, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Sterling Chemicals, Inc. and its subsidiaries (the "Company") as of December 31,
2002 (Successor Company balance sheet), and the related condensed consolidated
statements of operations and cash flows for the period from December 20, 2002 to
December 31, 2002 (Successor Company operations) and for the period from October
1, 2002 to December 19, 2002 and the three-month period ended December 31, 2001
(Predecessor Company operations). These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheets of the
Company as of September 30, 2002 (Predecessor Company balance sheet), and the
related consolidated statements of operations, stockholder's equity (deficiency
in assets), and cash flows for the year then ended (not presented herein)
(Predecessor Company operations); and in our report dated December 13, 2002, we
expressed an unqualified opinion on those consolidated financial statements and
included an explanatory paragraph concerning matters that raise substantial
doubt about the Company's ability to continue as a going concern. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of September 30, 2002 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Houston, Texas
February 18, 2003
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
On July 16, 2001 (the "Petition Date"), Sterling Chemicals Holdings, Inc.
("Holdings"), Sterling Chemicals, Inc. and most of their U.S. subsidiaries
(collectively, the "Debtors") filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for
the Southern District of Texas (the "Bankruptcy Court"). A plan of
reorganization (the "Plan of Reorganization") was filed with the Bankruptcy
Court on May 14, 2002 and was confirmed on November 20, 2002. On December 19,
2002, the Plan of Reorganization became effective and the Debtors emerged from
bankruptcy pursuant to the terms of the Plan of Reorganization. During the
period from July 16, 2001 through December 19, 2002, the Debtors operated their
respective businesses as debtors-in-possession pursuant to the United States
Bankruptcy Code, and the 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").
For financial reporting purposes, the effective date of the Plan of
Reorganization is considered to be the close of business on December 19, 2002.
Due to the Debtors' emergence from Chapter 11 and the implementation of
fresh-start accounting (see Note 3 to the consolidated financial statements),
the quarterly financial results have been separately presented under the labels
Reorganized Sterling Chemicals, Inc. ("Reorganized Sterling") for the period
December 20 to December 31, 2002 and Predecessor Sterling Chemicals, Inc.
("Predecessor Sterling") for periods prior to December 19, 2002. Our financial
statements as of December 31, 2002 are not comparable to those of Predecessor
Sterling for the periods prior to December 31, 2002.
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 their 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. The reorganization, effected through the
bankruptcy filings, permitted the Debtors to preserve cash and gave them the
opportunity to restructure their debt. As the market for our petrochemicals
products remains highly cyclical, the capital structure of Reorganized Sterling
has been designed with the goal of ensuring that we have sufficient liquidity
during cyclical downturns in the markets of our petrochemicals products,
although we cannot give any assurances that our new capital structure will
provide us with sufficient liquidity over any specific period.
Pursuant to the Plan of Reorganization, on December 19, 2002 we sold our
pulp chemicals business to Superior Propane and sold our acrylic fibers business
to local management of that business for nominal consideration. In accordance
with Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment and Disposal of Long Lived Assets," we have reported the operating
results of these businesses as discontinued operations in the consolidated
statement of operations and cash flows for Predecessor Sterling, and the assets
and liabilities of these businesses have been presented separately as assets
held for sale and liabilities related to discontinued operations in Predecessor
Sterling's consolidated balance sheet.
In December 2002, we changed our fiscal year-end from September 30 to
December 31. As a result of this change, we are filing this transition report
with the Securities and Exchange Commission for the period October 1, 2002 to
December 31, 2002.
RECENT DEVELOPMENTS
As previously stated, on December 19, 2002, the Debtors emerged from
bankruptcy pursuant to the terms of the Plan of Reorganization. Under the Plan
of Reorganization, the Debtors' pulp chemicals business was sold to Superior
Propane for approximately $373 million and the Debtors' acrylic fibers business
was sold to local management of that business for nominal consideration. A
portion of the net proceeds from the sale of the Debtors' pulp chemicals
business, approximately $80 million, remained with Reorganized Sterling, who
continues to own and operate the Debtors' core petrochemicals business. The
remaining net proceeds from the sale were paid to the holders of Predecessor
Sterling's 12 3/8% Senior Secured Notes (the "12 3/8% Notes"), who also received
approximately $94 million in new 10% Senior Secured Notes due 2007 issued by
Reorganized Sterling (the "New Notes") in satisfaction of their claims. In
addition, on the effective date of the Plan of Reorganization, Reorganized
Sterling established a new revolving credit facility providing up to $100
million in revolving credit loans (subject to borrowing base limitations) with
The CIT Group/Business Credit, Inc., as administrative agent, and certain other
lenders (the "New Revolver"). We have not as yet borrowed any money under the
New Revolver, although we had approximately $3.4 million in letters of credit
outstanding under the New Revolver as of December 31, 2002.
On December 6, 2002, Holdings was merged with and into Predecessor
Sterling. Under the terms of the merger and the Plan of Reorganization, upon
consummation of the merger, all equity interests in Holdings were cancelled and
65,000 shares of Reorganized Sterling common stock were issued to the holders of
Holdings' 13 1/2% Senior Secured Discount Notes in full payment of their claims.
Upon the effectiveness of the Plan of Reorganization, the unsecured creditors of
the Debtors (other than unsecured
17
creditors of Holdings), which included holders of Predecessor Sterling's 11 1/4%
Senior Subordinated Notes and 11 3/4% Senior Subordinated Notes, received pro
rata shares of 11.7% of Reorganized Sterling's common stock (on a fully diluted
basis). In addition, upon the effectiveness of the Plan of Reorganization,
Resurgence Asset Management, L.L.C., on behalf of itself and certain of its and
its affiliates' funds and accounts (collectively, the "Investor"), paid $30
million for certain shares of convertible preferred stock of Reorganized
Sterling. An additional $30 million was contributed to Reorganized Sterling
pursuant to a rights offering made available to the Debtors' unsecured creditors
(other than unsecured creditors of Holdings), which offering was underwritten by
the Investor. Upon the effectiveness of the Plan of Reorganization, Reorganized
Sterling issued 2,175,000 shares of its common stock under the terms of the
rights offering.
Effective as of January 2, 2003, David G. Elkins retired as our President
and Co-Chief Executive Officer. Mr. Elkins joined us in January 1998 as our
General Counsel, Vice President and Secretary and later served as our Executive
Vice President - Administration and Law before being appointed as our President
in January 2001 and, subsequently, our Co-Chief Executive Officer in September
2001. Mr. Elkins will continue to serve as a member of our Board of Directors.
We entered into a Severance Agreement with Mr. Elkins at the time of his
retirement, pursuant to which we made a lump sum payment to him of approximately
$1.6 million. We also paid Mr. Elkins approximately $0.2 million under his
Employment Agreement for accrued vacation time and certain other vested
benefits. For the period December 19, 2002 to December 31, 2002, we accrued
approximately $1.6 million for severance costs associated with Mr. Elkins'
retirement.
Upon Mr. Elkins retirement, Richard K. Crump, our former Co-Chief Executive
Officer, became our sole Chief Executive Officer and assumed the duties of our
President. On January 20, 2003, our Board of Directors formally appointed Mr.
Crump as our Chief Executive Officer and President.
LIQUIDITY AND CAPITAL RESOURCES
Pursuant to the Plan of Reorganization, on December 19, 2002 we issued the
New Notes totaling $94.3 million to the holders of Predecessor Sterling's
12 3/8% Notes. The New Notes are our senior secured obligations and rank equally
in right of payment with all of our other existing and future senior
indebtedness and senior in right of payment to any of our future subordinated
indebtedness. The New Notes are guaranteed by Sterling Chemicals Energy, Inc.
("Sterling Energy"), one of our wholly owned subsidiaries. Sterling Energy's
guarantee ranks equally in right of payment with all existing and future senior
indebtedness of Sterling Energy and senior in right of payment to any future
subordinated indebtedness of Sterling Energy. The New Notes and Sterling
Energy's guaranty are secured by a first priority lien on all of our United
States production facilities and related assets.
The New Notes bear interest at the annual rate of 10%, payable
semi-annually on June 15 and December 15 of each year commencing June 15, 2003.
Under certain circumstances, for a period of up to two years after the issue
date of the New Notes, we may elect to pay interest on the New Notes in
additional notes. However, if interest is paid in additional notes rather than
cash, the interest rate for the relevant period is increased to 13 3/8%. Subject
to compliance with the terms of the New Revolver, we may redeem the New Notes at
any time at a redemption price of 100% of the outstanding principal amount
thereof plus accrued and unpaid interest. In addition, in the event of a
specified change of control or the sale of our facility in Texas City, Texas, we
are required to offer to repurchase the New Notes at 101% of the outstanding
principal amount thereof plus accrued and unpaid interest. We are also required
to offer to repurchase the New Notes at 100% of the outstanding principal amount
thereof plus accrued and unpaid interest in the event of certain other sales of
assets.
The indenture governing the New Notes contains numerous covenants and
conditions, including, but not limited to, restrictions on our ability to incur
indebtedness, create liens, sell assets, make investments, make capital
expenditures, engage in mergers and acquisitions and pay dividends. The
indenture also includes various circumstances and conditions that will, upon
occurrence and subject in certain cases to notice and grace periods, create an
event of default thereunder. However, the indenture does not require us to
satisfy any financial ratios or maintenance tests.
On the effective date of the Plan of Reorganization, Reorganized Sterling
established the New Revolver with The CIT Group/Business Credit, Inc.,
individually and as administrative agent, and certain other lenders providing up
to $100 million in revolving credit loans. The New Revolver has an initial term
ending on September 19, 2007. Under the New Revolver, we and Sterling Energy are
co-borrowers and are jointly and severally liable for any indebtedness
thereunder. The New Revolver is secured by first priority liens on all accounts
receivable, inventory and other specified assets owned by us or Sterling Energy,
as well as all of the issued and outstanding capital stock of Sterling Energy.
Borrowings under the New Revolver bear interest, at our option, at an
annual rate of either the Alternate Base Rate plus 0.75% or the "LIBO Rate" (as
defined in the New Revolver) plus 2.75%. The "Alternate Base Rate" is equal to
the greater of the "Base Rate" as announced from time to time by JPMorgan Chase
Bank in New York, New York or the 0.50% per annum above the latest "Federal
Funds Rate" (as such terms are defined in the New Revolver). Under the New
Revolver, we are also required to pay an aggregate commitment fee of 0.50%
(payable monthly) on any unused portion of the New Revolver. Available credit
under the
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New Revolver is subject to a monthly borrowing base of 85% of eligible accounts
receivable and the lesser of $50 million and 65% of eligible inventory. In
addition, the borrowing base for the New Revolver must exceed outstanding
borrowings thereunder by $8 million at all times. As of December 31, 2002, the
total credit available under the New Revolver was $39.4 million. We have not as
yet borrowed any money under the New Revolver, although we had approximately
$3.4 million in letters of credit outstanding under the New Revolver as of
December 31, 2002, leaving unused borrowing capacity under the New Revolver of
approximately $36.0 million.
The New Revolver contains numerous covenants and conditions, including, but
not limited to, restrictions on our ability to incur indebtedness, create liens,
sell assets, make investments, make capital expenditures, engage in mergers and
acquisitions and pay dividends. The New Revolver also contains a covenant that
requires us to earn a specified amount of earnings before interest, income
taxes, depreciation and amortization ("EBITDA") on a monthly basis if, for 15
consecutive days, unused availability under the New Revolver plus cash on hand
is less than $20 million. The New Revolver includes various circumstances and
conditions that will, upon occurrence and subject in certain cases to notice and
grace periods, create an event of default thereunder. We believe that our cash
on hand, together with credit available under the New Revolver and other
internally generated funds, will be sufficient to meet our liquidity needs for
the reasonably foreseeable future, although we can give no assurances to that
effect.
Working Capital
Our working capital at December 31, 2002 was $120.2 million, a slight
decrease from the $122.2 million in working capital for Predecessor Sterling on
September 30, 2002. The decrease was primarily a result of the absence of the
assets held for sale, net of liabilities related to discontinued operations,
partially offset by an increase in cash and cash equivalents.
Cash Flow
Net cash provided by our operations was $3.2 million for the three months
ended December 31, 2002, compared to net cash used in Predecessor Sterling's
operations of approximately $5.8 million during the same period in 2001. Net
cash flow provided by our investing activities was $356.7 million for the three
months ended December 31, 2002, compared to cash used in Predecessor Sterling's
investing activities of $1.3 million during the three months ended December 31,
2001. Net cash used in our financing activities was $259.8 million for the three
months ended December 31, 2002, compared to cash provided by Predecessor
Sterling's financing activities of $9.2 million during the same period in 2001.
The difference in both net cash provided by (used in) investing and financing
activities for the three months ended December 31, 2002, compared to the three
months ended December 31, 2001, was predominantly due to the reorganization of
our debt and the sale of our pulp chemicals business.
Capital Expenditures
Our capital expenditures were $1 million during the three months ended
December 31, 2002, compared to $1.3 million of expenditures by Predecessor
Sterling during the same period in 2001, and were primarily related to routine
safety, environmental and equipment replacement matters. During fiscal 2003,
capital expenditures are anticipated to be approximately $25 to $30 million for
routine safety, environmental and equipment replacement matters.
RESULTS OF OPERATIONS
For financial reporting purposes, the effective date of the Plan of
Reorganization is considered to be the close of business on December 19, 2002.
Due to the Debtors' emergence from Chapter 11 and the implementation of
fresh-start accounting (see Note 3 to the consolidated financial statements),
the quarterly financial results have been separately presented under the labels
Reorganized Sterling for the period December 20 to December 31, 2002 and
Predecessor Sterling for periods prior to December 19, 2002. Our financial
statements as of and for the period ended December 31, 2002 are not comparable
to those of Predecessor Sterling for the periods prior to December 31, 2002.
Three Months Ended December 31, 2002 Compared to Three Months Ended December 31,
2001
For the three months ended December 31, 2002, the financial data presented
below combines the period from December 20, 2002 to December 31, 2002,
representing Reorganized Sterling, with the period October 1, 2002 to December
19, 2002, which represents Predecessor Sterling.
Revenues, Cost of Goods Sold and Gross Profit (Loss)
Our revenues were approximately $112 million for the three months ended
December 31, 2002, compared to Predecessor Sterling's approximately $63 million
in revenues during the same period in 2001. This increase in revenues resulted
primarily from an increase in styrene sales prices and sales volumes due to
improved market conditions. We recorded net income
19
attributable to common stockholders of approximately $416.9 million for the
three months ended December 31, 2002, compared to the net loss attributable to
common stockholders of approximately $14.7 million that Predecessor Sterling
recorded for the same period in 2001. The increase in net income was primarily
due to transactions related to the Plan of Reorganization.
Revenues from our styrene operations were approximately $83 million for the
three months ended December 31, 2002, an increase of approximately 117% from
Predecessor Sterling's approximately $38 million in revenues from those
operations in the same period of 2001. Our total sales volumes for styrene for
the three months ended December 31, 2002 increased approximately 34% from those
realized by Predecessor Sterling during the same period in 2001. Direct sales
prices for styrene in the three months ended December 31, 2002 increased
approximately 37% from those realized during the three months ended December 31,
2001. Spot prices for styrene, a component of our direct sales prices, ranged
from approximately $0.25 to $0.35, per pound during the three months ended
December 31, 2002, compared to approximately $0.17 to $0.19 per pound during the
same period of 2001. During the three months ended December 31, 2002, prices for
benzene and ethylene, the two primary raw materials for styrene, increased
approximately 50% and 13%, respectively, from the prices paid for these products
in the same period in 2001. The average price for natural gas increased 63%
during the three months ended December 31, 2002 compared to the same period in
2001. Due to the factors discussed above, margins on our styrene sales for the
three months ended December 31, 2002 increased somewhat from those realized by
Predecessor Sterling during the same period in 2001.
Revenues for acrylonitrile remained essentially the same during the three
months ended December 31, 2002 compared to the same period of 2001. Our
acrylonitrile unit is projected to be restarted by the end of the first calendar
quarter of 2003, although no assurances can be given to that affect.
Revenues from our other petrochemicals operations, including acetic acid,
plasticizers and methanol, were $29 million for the three months ended December
31, 2002, an increase of 25% from the $24 million in revenues received by
Predecessor Sterling from these operations during the same period in 2001. Our
other petrochemicals operations reported an increase of $3.0 million in
operating earnings for the three months ended December 31, 2002, compared to
that realized by Predecessor Sterling during the same period of 2001. These
increases in revenues and operating earnings were largely due to improved sales
margins.
Selling, General, and Administrative ("SG&A") Expenses
Our SG&A expenses for the three months ended December 31, 2002 were
approximately $5 million compared to Predecessor Sterling's approximately $4.3
million in SG&A expenses for the same period of 2001. This increase was
primarily due to the $1.6 million severance accrual during the three months
ended December 31, 2002 for our former President and Co-CEO, David Elkins,
partially offset by cost containment efforts.
Reorganization Items
Reorganization items incurred during the three months ended December 31,
2002 were approximately $15.2 million compared to $3.6 million for the three
months ended December 31, 2001, primarily due to an increase in professional
fees incurred in connection with the Debtors' emergence from Chapter 11.
Provision (Benefit) for Income Taxes
During the three months ended December 31, 2002, we recorded an approximate
$0.8 million benefit for income taxes compared to a $0.1 million provision for
income taxes for the same period of 2001. The benefit was recorded as a deferred
tax asset as we believe that it is more likely than not that we will be able to
utilize the deferred tax asset in future periods.
CRITICAL ACCOUNTING POLICIES, USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and related notes to financial statements. Actual results could
differ from those estimates. On an ongoing basis, management reviews its
estimates, including those related to the allowance for doubtful accounts,
recoverability of long-lived assets, deferred tax asset valuation allowance,
litigation, environmental liabilities, pension and post-retirement benefits and
various other operating allowances and accruals, based on currently available
information. Changes in facts and circumstances may alter such estimates and
affect results of operations and financial position in future periods.
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
20
purchase method and requires separate identification and recognition of
intangible assets, other than goodwill. The statement applies to all business
combinations initiated after June 30, 2001 and also applies to all entities
emerging from bankruptcy. SFAS No. 142, which was effective for our fiscal year
beginning October 1, 2002, 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. 141 was applied through our implementation of fresh-start accounting
under the provisions of SOP 90-7. However, the adoption of SFAS No. 142 did not
have a significant impact on our financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143, which we applied to our fiscal year
beginning on October 1, 2002, addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. There was no impact on our financial
statements upon the adoption of SFAS No. 143.
In August 2001, the Financial Accounting Standards Board issued SFAS 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 144 was effective for
our fiscal year beginning October 1, 2002. Accordingly, we reported the sale of
our pulp and acrylic fibers businesses as discontinued operations in our
consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements
4, 44 and 64, Amendment to FASB Statement 13, and Technical Corrections." One of
the major changes of this statement is to change the accounting for the
classification of gains and losses from the extinguishment of debt. We adopted
SFAS No. 145 as part of our fresh-start accounting (see Note 3 to the
consolidated financial statements). As a result, we have classified gains and
losses from our debt restructuring as a component of income (loss) from
continuing operations in the accompanying consolidated statements of operations.
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. We adopted SFAS No.
146 through the implementation of fresh-start accounting under the provisions of
SOP 90-7 and it did not have an impact on our financial statements.
In January 2003, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends FASB SFAS No.
123, "Accounting for Stock-Based Compensation," to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements of the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for fiscal years beginning
after December 15, 2002. We adopted SFAS No. 148 through the implementation of
fresh-start accounting under the provisions of SOP 90-7 and it did not have an
impact on our financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Due to the sale of our foreign businesses, we are no longer susceptible to
market risk exposure in the form of currency exchange rate movements.
Additionally, we do not currently have exposure to changing U.S. interest rates,
as there are no draws under our New Revolver.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an
evaluation under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Securities Exchange Act Rule 13a-14. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective. There were no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
21
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information under "Legal Proceedings" in Note 7 of the Notes to
Consolidated Financial Statements included herein is hereby incorporated by
reference. See also "Item 3. Legal Proceedings" in the Annual Report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the Plan of Reorganization and the merger of Holdings
into Predecessor Sterling, we issued a total of 2,825,000 shares of common
stock. Subject to applicable law and the provisions of our Certificate of
Incorporation, the indenture governing the New Notes and the New Revolver,
dividends may be declared on our shares of capital stock at the discretion of
our Board of Directors and may be paid in cash, in property or in shares of our
capital stock.
Upon the effective date of the Plan of Reorganization, we authorized 25,000
shares and issued 2,175 shares of our Series A Convertible Preferred Stock
("Series A Preferred Stock"). Each share of Series A Preferred Stock is
convertible at the option of the holder thereof at any time into 1,000 shares of
our common stock, subject to adjustments. The Series A Preferred Stock has a
cumulative dividend rate of 4% per quarter, payable in additional shares of
Series A Preferred Stock in arrears on the first Business Day of each calendar
quarter. Our Series A Preferred Stock carries a liquidation preference of
$13,793.11 per share, subject to adjustments. We may redeem all or any number of
our shares of Series A Preferred Stock at any time after December 19, 2005, at a
redemption price determined in accordance with Certificate of Designations,
Preferences, Rights and Limitations of our Series A Preferred Stock, provided
that the current equity value of our capital stock issued on the effective date
of the Plan of Reorganization exceeds specified levels. The holders of our
Series A Preferred Stock may elect to have us redeem all or any of their shares
of Series A Preferred Stock following a specified change of control at a
redemption price equal to the greater of
o the liquidation preference for such shares (plus accrued and unpaid
dividends), or
o in the event of a merger or consolidation, the fair market value of
the consideration that would have been received in such merger or
consolidation in respect of the shares of our common stock into which
such shares of Series A Preferred Stock were convertible immediately
prior to such merger or consolidation had such shares of Series A
Preferred Stock been converted prior thereto, or
o in the event of some other specified change of control, the current
market value of the shares of our common stock into which such shares
of Series A Preferred Stock were convertible immediately prior to such
change of control had such shares of Series A Preferred Stock been
converted prior thereto (plus accrued and unpaid dividends).
Upon the effective date of our Plan of Reorganization, we also issued
warrants (the "Warrants") to purchase, in the aggregate, 949,367 shares of
common stock. Each Warrant represents the right, at any time on or before
December 19, 2008, to purchase one share of our common stock at an exercise
price of $52 per share (subject to adjustments).
Under the terms of the Plan of Reorganization, Predecessor Sterling's old
Series A Preferred Stock, old Series B Preferred Stock and old common stock were
cancelled as of the effective date of the Plan of Reorganization.
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are filed as part of this Form 10-Q:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
2.1 - Certificate of Ownership and Merger merging Sterling
Chemicals Holdings, Inc. into Sterling Chemicals, Inc.
(incorporated by reference to Exhibit 2.1 to the
Company's Annual Report on Form 10-K for the year ended
September 30, 2002).
2.2 - Joint Plan of Reorganization of Sterling Chemicals
Holdings, Inc., et al., dated October 14, 2002
(incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K filed on November 26, 2002).
2.3 - First Modification to Amendment to Joint Plan of
Reorganization of Sterling Chemicals Holdings, Inc., et
al., dated November 18, 2002 (incorporated by reference
to Exhibit 2.2 to the Company's Form 8-K filed on
November 26, 2002).
3.1 - Amended and Restated Certificate of Incorporation of
Sterling Chemicals, Inc. (incorporated by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-K
for the year ended September 30, 2002).
3.2 - Restated Bylaws of Sterling Chemicals, Inc.
(incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended
September 30, 2002).
3.3 - Certificate of Designations, Preferences, Rights and
Limitations of Series A Convertible Preferred Stock of
Sterling Chemicals, Inc. (incorporated by reference to
Exhibit 4 to the Company's Form 8-A filed on December
19, 2002).
4.1 - Indenture dated December 19, 2002 between Sterling
Chemicals, Inc., as Issuer, Sterling Chemicals Energy,
Inc., as Guarantor, and National City Bank, a national
banking association, as Trustee, governing the 10%
Senior Secured Notes due 2007 of Sterling Chemicals,
Inc. (incorporated by reference to Exhibit T3-C to the
Company's Amendment No. 3 to Form T-3 filed on December
19, 2002).
**4.2 - Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing dated December 19, 2002
made by Sterling Chemicals, Inc., as Trustor, to Thomas
S. Henderson, as Individual Trustee for the benefit of
National City Bank, in its capacity as described
therein, as Beneficiary
**4.3 - Security Agreement dated as of December 19, 2002 among
Sterling Chemicals, Inc. and Sterling Chemicals Energy,
Inc., as Assignors, National City Bank, as Collateral
Agent, and National City Bank, as Indenture Trustee for
the benefit of the holders the 10% Senior Secured Notes
due 2007 of Sterling Chemicals, Inc.
**4.4 - Revolving Credit Agreement dated as of December 19, 2002
among Sterling Chemicals, Inc. and Sterling Chemicals
Energy, Inc., as Borrowers, the various financial
institutions as are or may become parties thereto from
time to time, as the Lenders, and The CIT Group/Business
Credit, Inc., as Administrative Agent for the Lenders.
**4.4(a) - First Amendment to Revolving Credit Agreement dated as
of February 12, 2003, among Sterling Chemicals, Inc. and
Sterling Chemicals Energy, Inc., as Borrowers, the
various financial institutions a party thereto, as the
Lenders, and The CIT Group/Business Credit, Inc., as
Administrative Agent for the Lenders.
**4.5 - Security Agreement dated as of December 19, 2002 by
Sterling Chemicals, Inc. and Sterling Chemicals Energy,
Inc., as Grantors, in favor of The CIT Group/Business
Credit, Inc., as - Administrative Agent for the Secured
Parties.
**4.6 - Pledge Agreement dated as of December 19, 2002 by
Sterling Chemicals, Inc. and Sterling Chemicals Energy,
Inc., as Pledgors, in favor of The CIT Group/Business
Credit, Inc., as Administrative Agent for the Secured
Parties.
4.7 - Warrant Agreement, dated as of December 19, 2002, by and
between Sterling Chemicals, Inc., and Wells Fargo Bank
Minnesota, N.A., as warrant agent (incorporated by
reference to Exhibit 5 to the Company's Form 8-A filed
on December 19, 2002).
**10.1 - Seventh Amendment to the Sterling Chemicals, Inc.
Amended and Restated Salaried Employees' Pension Plan.
**10.2 - Eighth Amendment to the Sterling Chemicals, Inc. Amended
and Restated Salaried Employees' Pension Plan.
**10.3 - Ninth Amendment to the Sterling Chemicals, Inc. Amended
and Restated Salaried Employees' Pension Plan.
**10.4 - Fourth Amendment to the Sterling Chemicals, Inc. Amended
and Restated Hourly Paid Employees' Pension Plan.
**10.5 - Fifth Amendment to the Sterling Chemicals, Inc. Amended
and Restated Hourly Paid Employees' Pension Plan.
**10.6 - Second Amendment to the Sixth Amended and Restated
Savings and Investment Plan.
23
**10.7 - Third Amendment to the Sixth Amended and Restated
Savings and Investment Plan.
**10.8 - Sixth Amendment to Sterling Chemicals ESOP.
**10.9 - Seventh Amendment to Sterling Chemicals ESOP.
**10.10 - Severance Agreement dated effective as of January 2,
2003 between Sterling Chemicals, Inc. and David G.
Elkins.
10.11 - Sterling Chemicals, Inc. 2002 Stock Plan (incorporated
by reference to Exhibit 6 to the Company's Form 8-A
filed on December 19, 2002).
10.12 - Registration Rights Agreement, dated as of December 19,
2002, by and among Sterling Chemicals, Inc. and
Resurgence Asset Management, L.L.C. (incorporated by
reference to Exhibit 7 to the Company's Form 8-A filed
on December 19, 2002).
10.13 - Tag Along Agreement, dated as of December 19, 2002, by
and among Sterling Chemicals, Inc., Resurgence Asset
Management, L.L.C. and the Official Committee of the
Unsecured Creditors (incorporated by reference to
Exhibit 8 to the Company's Form 8-A filed on December
19, 2002).
**99.1 - Certification of CEO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
**99.2 - Certification of CEO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
** Filed herewith
(b) Reports on Form 8-K.
1. On December 18, 2002, the Company filed a Current Report on Form 8-K
reporting Items 1, 5, and 7 of such Form related to the merger of
Sterling Chemicals Holdings, Inc. into Sterling Chemicals, Inc.
2. On December 23, 2002, the Company filed a Current Report on Form 8-K
reporting Items 7 and 9 of such Form related to the Company's
emergence from bankruptcy and the execution of a $100 million
revolving credit facility.
3. On January 6, 2003, the Company filed a Current Report on Form 8-K
reporting Items 5, 7 and 8 of such Form related to the retirement of
the Company's President and Co-CEO and the Company's change in fiscal
year end from September 30 to December 31.
4. On January 10, 2003, the Company filed a Current Report on Form 8-K/A
reporting Items 2 and 7 of such Form amending the Current Report on
Form 8-K filed on December 23, 2002 to include unaudited pro forma
financial statements and additional information regarding the
previously announced disposition of certain assets.
5. On January 28, 2003, the Company filed a Current Report on Form 8-K
reporting Items 3 and 7 of such Form related to the filing of the
Debtors' Monthly Operating Reports with the Bankruptcy Court.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrants have duly caused this report to be signed on their
behalf by the undersigned thereunto duly authorized.
STERLING CHEMICALS, INC.
(Registrants)
Date: February 18, 2003 /s/ RICHARD K. CRUMP
---------------------------------------
Richard K. Crump
President and Chief Executive Officer
Date: February 18, 2003 /s/ PAUL G. VANDERHOVEN
---------------------------------------
Paul G. Vanderhoven
Senior Vice President-Finance and Chief
Financial Officer
(Principal Financial Officer)
25
I, Richard K. Crump, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sterling
Chemicals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 18, 2003 /s/ RICHARD K. CRUMP
--------------------------
Richard K. Crump
President and Chief Executive Officer
26
I, Paul G. Vanderhoven, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sterling
Chemicals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 18, 2003 /s/ PAUL G. VANDERHOVEN
-----------------------------------
Paul G. Vanderhoven
Senior Vice President - Finance and
Chief Financial Officer
27
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
2.1 - Certificate of Ownership and Merger merging Sterling
Chemicals Holdings, Inc. into Sterling Chemicals, Inc.
(incorporated by reference to Exhibit 2.1 to the
Company's Annual Report on Form 10-K for the year ended
September 30, 2002).
2.2 - Joint Plan of Reorganization of Sterling Chemicals
Holdings, Inc., et al., dated October 14, 2002
(incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K filed on November 26, 2002).
2.3 - First Modification to Amendment to Joint Plan of
Reorganization of Sterling Chemicals Holdings, Inc., et
al., dated November 18, 2002 (incorporated by reference
to Exhibit 2.2 to the Company's Form 8-K filed on
November 26, 2002).
3.1 - Amended and Restated Certificate of Incorporation of
Sterling Chemicals, Inc. (incorporated by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-K
for the year ended September 30, 2002).
3.2 - Restated Bylaws of Sterling Chemicals, Inc.
(incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended
September 30, 2002).
3.3 - Certificate of Designations, Preferences, Rights and
Limitations of Series A Convertible Preferred Stock of
Sterling Chemicals, Inc. (incorporated by reference to
Exhibit 4 to the Company's Form 8-A filed on December
19, 2002).
4.1 - Indenture dated December 19, 2002 between Sterling
Chemicals, Inc., as Issuer, Sterling Chemicals Energy,
Inc., as Guarantor, and National City Bank, a national
banking association, as Trustee, governing the 10%
Senior Secured Notes due 2007 of Sterling Chemicals,
Inc. (incorporated by reference to Exhibit T3-C to the
Company's Amendment No. 3 to Form T-3 filed on December
19, 2002).
**4.2 - Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing dated December 19, 2002
made by Sterling Chemicals, Inc., as Trustor, to Thomas
S. Henderson, as Individual Trustee for the benefit of
National City Bank, in its capacity as described
therein, as Beneficiary
*4.3 - Security Agreement dated as of December 19, 2002 among
Sterling Chemicals, Inc. and Sterling Chemicals Energy,
Inc., as Assignors, National City Bank, as Collateral
Agent, and National City Bank, as Indenture Trustee for
the benefit of the holders the 10% Senior Secured Notes
due 2007 of Sterling Chemicals, Inc.
**4.4 - Revolving Credit Agreement dated as of December 19, 2002
among Sterling Chemicals, Inc. and Sterling Chemicals
Energy, Inc., as Borrowers, the various financial
institutions as are or may become parties thereto from
time to time, as the Lenders, and The CIT Group/Business
Credit, Inc., as Administrative Agent for the Lenders.
**4.4(a) - First Amendment to Revolving Credit Agreement dated as
of February 12, 2003, among Sterling Chemicals, Inc. and
Sterling Chemicals Energy, Inc., as Borrowers, the
various financial institutions a party thereto, as the
Lenders, and The CIT Group/Business Credit, Inc., as
Administrative Agent for the Lenders.
**4.5 - Security Agreement dated as of December 19, 2002 by
Sterling Chemicals, Inc. and Sterling Chemicals Energy,
Inc., as Grantors, in favor of The CIT Group/Business
Credit, Inc., as - Administrative Agent for the Secured
Parties.
**4.6 - Pledge Agreement dated as of December 19, 2002 by
Sterling Chemicals, Inc. and Sterling Chemicals Energy,
Inc., as Pledgors, in favor of The CIT Group/Business
Credit, Inc., as Administrative Agent for the Secured
Parties.
4.7 - Warrant Agreement, dated as of December 19, 2002, by and
between Sterling Chemicals, Inc., and Wells Fargo Bank
Minnesota, N.A., as warrant agent (incorporated by
reference to Exhibit 5 to the Company's Form 8-A filed
on December 19, 2002).
**10.1 - Seventh Amendment to the Sterling Chemicals, Inc.
Amended and Restated Salaried Employees' Pension Plan.
**10.2 - Eighth Amendment to the Sterling Chemicals, Inc. Amended
and Restated Salaried Employees' Pension Plan.
**10.3 - Ninth Amendment to the Sterling Chemicals, Inc. Amended
and Restated Salaried Employees' Pension Plan.
**10.4 - Fourth Amendment to the Sterling Chemicals, Inc. Amended
and Restated Hourly Paid Employees' Pension Plan.
**10.5 - Fifth Amendment to the Sterling Chemicals, Inc. Amended
and Restated Hourly Paid Employees' Pension Plan.
**10.6 - Second Amendment to the Sixth Amended and Restated
Savings and Investment Plan.
**10.7 - Third Amendment to the Sixth Amended and Restated
Savings and Investment Plan.
**10.8 - Sixth Amendment to Sterling Chemicals ESOP.
**10.9 - Seventh Amendment to Sterling Chemicals ESOP.
**10.10 - Severance Agreement dated effective as of January 2,
2003 between Sterling Chemicals, Inc. and David G.
Elkins.
10.11 - Sterling Chemicals, Inc. 2002 Stock Plan (incorporated
by reference to Exhibit 6 to the Company's Form 8-A
filed on December 19, 2002).
10.12 - Registration Rights Agreement, dated as of December 19,
2002, by and among Sterling Chemicals, Inc. and
Resurgence Asset Management, L.L.C. (incorporated by
reference to Exhibit 7 to the Company's Form 8-A filed
on December 19, 2002).
10.13 - Tag Along Agreement, dated as of December 19, 2002, by
and among Sterling Chemicals, Inc., Resurgence Asset
Management, L.L.C. and the Official Committee of the
Unsecured Creditors (incorporated by reference to
Exhibit 8 to the Company's Form 8-A filed on December
19, 2002).
**99.1 - Certification of CEO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
**99.2 - Certification of CEO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
** Filed herewith