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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-50132
STERLING CHEMICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0502785
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
1200 SMITH STREET, SUITE 1900
HOUSTON, TEXAS 77002-4312 (713) 650-3700
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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]
APPLICABLE ONLY TO ISSUERS 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 a court.
Yes [X] No [ ]
As of April 30, 2003, Sterling Chemicals, Inc. had 2,825,000 shares of
common stock outstanding.
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1
IMPORTANT INFORMATION REGARDING THIS FORM 10-Q
Unless otherwise indicated, references to "we," "us," "our" and "ours" in
this Form 10-Q refer collectively to Sterling Chemicals, Inc. and its
wholly-owned subsidiaries.
Readers should consider the following information as they review this Form 10-Q:
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made or incorporated by reference from
time to time by us or our representatives are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements other than statements of historical fact are, or may be
deemed to be, forward-looking statements. Forward-looking statements include,
without limitation, any statement that may project, indicate or imply future
results, events, performance or achievements, and may contain or be identified
the words "expect," "intend," "plan," "predict," "anticipate," "estimate,"
"believe," "should," "could," "may," "might," "will be," "will continue," "will
likely result," "project," "forecast," "budget" and similar expressions.
Statements in this report that contain forward-looking statements include, but
are not limited to, information concerning our possible or assumed future
results of operations and statements about the following subjects:
o the cyclicality of the petrochemicals industry;
o current and future industry conditions;
o the potential effects of market and industry conditions and cyclicality
on our business strategy, results of operations or financial position;
o the adequacy of our liquidity;
o our environmental management programs and safety initiatives;
o our market sensitive financial instruments;
o future uses of and requirements for financial resources;
o future contractual obligations;
o business strategy;
o growth opportunities;
o competitive position;
o expected financial position;
o future cash flows;
o future dividends;
o financing plans;
o budgets for capital and other expenditures;
o plans and objectives of management;
o outcomes of legal proceedings;
o compliance with applicable laws; and
o adequacy of insurance or indemnification.
Such statements are based upon current information and expectations and
inherently are subject to a variety of risks and uncertainties that could cause
actual results to differ materially from those expected or expressed in
forward-looking statements. Such risks and uncertainties include, among others,
the following:
o the timing and extent of changes in commodity prices;
o petrochemicals industry production capacity and operating rates;
o market conditions in the petrochemicals industry, including the
supply-demand balance for our products;
o competition, including competitive products and pricing pressures;
o the timing and extent of changes in global economic and business
conditions;
o increases in raw materials and energy costs;
o our ability to obtain raw materials and energy at acceptable prices, in
a timely manner and on acceptable terms;
o regulatory initiatives and compliance with governmental regulations;
o compliance with environmental laws and regulations;
o customer preferences;
o the availability of skilled personnel;
o our ability to attract or retain high quality employees;
o operating hazards attendant to the petrochemicals industry;
2
o casualty losses;
o changes in foreign, political, social and economic conditions;
o risks of war, military operations, other armed hostilities, terrorist
acts and embargoes;
o changes in technology, which could require significant capital
expenditures in order to maintain competitiveness;
o effects of litigation;
o cost, availability and adequacy of insurance;
o adequacy of our sources of liquidity; and
o various other matters, many of which are beyond our control.
The risks included here are not exhaustive. Other sections of this report
and our other filings with the Securities and Exchange Commission, including,
without limitation, our Annual Report on Form 10-K for the fiscal year ended
September 30, 2002 (our "Annual Report"), include additional factors that could
adversely affect our business, results of operations and financial performance.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Known Events, Trends, Uncertainties and Risk Factors"
contained in our Annual Report. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements. Forward-looking
statements included in this report speak only as of the date of this report and
are not guarantees of future performance. 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.
We expressly disclaim any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statement to reflect any change in
our expectations with regard thereto or any change in events, conditions or
circumstances on which any forward-looking statement is based. 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 May 13, 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 May 13, 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.
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 our Annual Report, other periodic reports we file with the Securities and
Exchange Commission or this Form 10-Q.
AVAILABLE INFORMATION
Access to our annual reports on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K, and amendments to those reports, filed with or
furnished to the Securities and Exchange Commission pursuant to Section 13(a) of
the Exchange Act, as well as any Beneficial Ownership Reports that have been
electronically filed by our directors, officers and stockholders that own at
least 10% of our capital securities, may be obtained through our website
(http://www.sterlingchemicals.com). Our website provides a hyperlink to a
third-party website where these reports may be viewed and printed at no cost as
soon as reasonably practicable after we have electronically filed or furnished
such material. The contents of our website are not, and shall not be deemed to
be, incorporated into this report.
3
STERLING CHEMICALS, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................................... 23
Item 4. Controls and Procedures.......................................................................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................ 24
Item 6. Exhibits and Reports on Form 8-K................................................................. 24
4
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
REORGANIZED STERLING | PREDECESSOR STERLING
----------------------- | -----------------------
THREE MONTHS ENDED | THREE MONTHS ENDED
MARCH 31, 2003 | MARCH 31, 2002
----------------------- | -----------------------
|
Revenues............................................... $ 122,368 | $ 61,922
Cost of goods sold..................................... 124,493 | 65,092
----------------------- | -----------------------
Gross loss............................................. (2,125) | (3,170)
|
Selling, general and administrative expenses........... 4,686 | 3,631
Other income........................................... (3,678) | --
Reorganization items................................... -- | 4,681
Interest and debt related expenses, net of interest |
income (1)........................................... 1,838 | 11,068
----------------------- | -----------------------
Loss from continuing operations before income taxes.... (4,971) | (22,550)
Provision (benefit) for income taxes................... (1,431) | 25
----------------------- | -----------------------
Loss from continuing operations........................ (3,540) | (22,575)
Income (loss) from discontinued operations net of tax |
expense of $342 and $2,429, respectively............. (634) | 7,160
----------------------- | -----------------------
Net loss .............................................. (4,174) | (15,415)
Preferred stock dividends ............................. 1,207 | --
----------------------- | -----------------------
Net loss attributable to common stockholders........... $ (5,381) | $ (15,415)
======================= | =======================
|
Net loss per share of common stock, basic and diluted.. $ (1.90) | $ --
======================= | =======================
|
Weighted average shares of common stock outstanding: |
Basic and diluted................................... 2,825,000 | --
(1) Contractual interest for the three months ended March 31, 2002 totaled
$23,365.
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
REORGANIZED STERLING
------------------------------------------------ | PREDECESSOR STERLING
MARCH 31, 2003 DECEMBER 31, 2002 | SEPTEMBER 30, 2002
------------------------ ---------------------- | ----------------------
|
ASSETS |
Current assets: |
Cash and cash equivalents........................... $ 75,123 $ 99,818 | $ 9,843
Accounts receivable, net............................ 59,662 41,814 | 70,306
Inventories......................................... 39,253 31,011 | 32,836
Prepaid expenses.................................... 5,440 4,561 | 3,678
Deferred tax asset.................................. 13,680 11,988 | --
Assets held for sale................................ -- -- | 215,178
------------------------ ---------------------- | ----------------------
Total current assets.............................. 193,158 189,192 | 331,841
|
Property, plant and equipment, net..................... 279,191 283,378 | 117,222
Goodwill............................................... 48,463 48,463 | --
Other assets........................................... 22,292 22,998 | 40,585
------------------------ ---------------------- | ----------------------
Total assets...................................... $ 543,104 $ 544,031 | $ 489,648
======================== ====================== | ======================
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
Current liabilities: |
Accounts payable.................................... $ 32,842 $ 31,214 | $ 30,591
Accrued liabilities................................. 27,230 26,635 | 31,720
Current portion of long-term debt................... -- -- | 57,242
Liabilities related to discontinued operations...... -- -- | 90,110
------------------------ ---------------------- | ----------------------
Total current liabilities........................... 60,072 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 94,275 | --
Deferred tax liability................................. 59,597 59,597 | --
Deferred credits and other liabilities................. 94,154 93,131 | 19,731
Redeemable preferred stock............................. 31,376 30,170 | --
Commitments and contingencies (Note 8)................. |
Stockholders' equity (deficiency in assets): |
Common stock, $.01 par value........................ 28 28 | --
Additional paid-in capital.......................... 209,320 210,527 | (141,786)
Accumulated deficit................................. (5,718) (1,546) | (419,437)
Accumulated other comprehensive income.............. -- -- | (50,254)
------------------------ ---------------------- | ----------------------
Total stockholders' equity |
(deficiency in assets)............................ 203,630 209,009 | (611,477)
------------------------ ---------------------- | ----------------------
|
Total liabilities and stockholders' equity |
(deficiency in assets).............................. $ 543,104 $ 544,031 | $ 489,648
======================== ====================== | ======================
The accompanying notes are an integral part of the condensed
consolidated financial statements.
6
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
REORGANIZED STERLING | PREDECESSOR STERLING
---------------------- | -----------------------
THREE MONTHS ENDED | THREE MONTHS ENDED
MARCH 31, 2003 | MARCH 31, 2002
---------------------- | -----------------------
|
Cash flows from operating activities: |
Net loss from continuing operations....................... $ (3,540) | $ (22,575)
Adjustments to reconcile net loss to net |
cash used in operating activities: |
Depreciation and amortization.......................... 6,521 | 5,614
Interest amortization.................................. 63 | 879
Deferred tax benefit................................... (1,692) | --
Other.................................................. (1) | (1,409)
Change in assets/liabilities: |
Accounts receivable.................................... (17,848) | 2,855
Inventories............................................ (8,242) | 5,353
Prepaid expenses....................................... (879) | (366)
Other assets........................................... 204 | (635)
Accounts payable....................................... 994 | 14,641
Accrued liabilities.................................... 595 | (4,276)
Other liabilities...................................... 1,022 | (2,845)
---------------------- | -----------------------
|
Net cash used in operating activities..................... (22,803) | (2,764)
---------------------- | -----------------------
|
Cash flows used in investing activities: |
Capital expenditures................................... (1,892) | (4,752)
|
Cash flows from financing activities: |
Net borrowings under DIP Facility...................... -- | 4,641
|
Net increase in cash and cash equivalents from continuing |
operations.............................................. (24,695) | (2,875)
Net decrease in cash and cash equivalents from |
discontinued operations................................. -- | 2,888
Cash and cash equivalents - beginning of period........... 99,818 | 623
---------------------- | -----------------------
Cash and cash equivalents - end of period................. $ 75,123 | $ 636
====================== | =======================
|
Supplemental disclosures of cash flow information: |
Net interest paid (received)........................... $ (782) | $ 1,339
Cash paid for reorganization items..................... 12,701 | 3,542
The accompanying notes are an integral part of the condensed
consolidated financial statements.
7
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 ("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 (as modified, 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
covered by this period 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 have been the close of business on December 19,
2002 (the "Effective Date"). Due to the Debtors' emergence from Chapter 11 and
the implementation of fresh-start accounting (see Note 4), the quarterly
financial results have been separately presented under the labels Reorganized
Sterling Chemicals, Inc. ("Reorganized Sterling") for the periods after December
19, 2002 and Predecessor Sterling Chemicals, Inc. ("Predecessor Sterling") for
periods prior to and including December 19, 2002. Our financial statements as of
and for the three-month period ended March 31, 2003 are not comparable to those
of Predecessor Sterling for the same period ended March 31, 2002.
In our opinion, the accompanying unaudited condensed 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 March 31, 2003 and March 31, 2002,
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 loss or stockholders' equity (deficiency in assets).
The accompanying unaudited condensed 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") and
with the transition report on Form 10-Q/A for the three months ended December
31, 2002 (the "Transition Report"). The accompanying condensed 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, and the accompanying condensed consolidated balance sheet as of December
31, 2002 has been derived from the consolidated balance sheet as of December 31,
2002 included in the Transition Report. The accompanying condensed consolidated
financial statements as of and for the three-month period ended March 31, 2003
have been reviewed by Deloitte & Touche LLP, our independent public accountants,
whose report is included herein. In December 2002, we changed our fiscal
year-end from September 30 to December 31.
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
materials 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 for our petrochemicals products,
although we cannot give any assurances that our new capital structure will
provide us with sufficient liquidity over any specific period.
8
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 continues 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, and these severance costs were paid during the first quarter of
2003.
2. 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, all
equity interests in Holdings, including all options issued under Holdings' stock
based incentive plans, were cancelled upon consummation of the merger. In
connection with the implementation of the Plan of Reorganization, we adopted our
2002 Stock Plan. Under our 2002 Stock 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. Our 2002 Stock 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
our 2002 Stock 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 per share were granted under our 2002 Stock Plan.
We account for our stock-based compensation arrangements using the
intrinsic value method in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and related interpretations. Under APB 25, if the exercise price of
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. Our stock options have all
been granted with exercise prices at estimated fair value, therefore no
compensation expense has been recognized under APB 25.
The following table illustrates the effect on net loss and earnings per
share assuming the compensation costs for our stock option plan had been
determined using the estimated market value at the grant dates amortized on a
pro rata basis over the vesting period as required under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
for the three months ended March 31, 2003. There were no options outstanding
prior to February 11, 2003.
THREE MONTHS ENDED
MARCH 31, 2003
-------------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA,
UNAUDITED)
Net loss attributable to common stockholders, as reported........ $ (5,381)
Add: Stock-based employee compensation expense included in
reported net loss, net of related tax effects.................. --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects..................................... 297
-------------------------
Pro forma net loss for SFAS No. 123.............................. $ (5,678)
=========================
Loss per share of common stock as reported, basic and diluted.... $ (1.90)
Loss per share pro forma for SFAS No. 123, basic and diluted..... $ (2.01)
3. EMERGENCE FROM CHAPTER 11 PROCEEDINGS
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, Inc. ("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, which 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 $94.3 million in principal amount of new 10% Senior
Secured Notes due 2007 issued by
9
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 a lender, and
certain other lenders (the "New Revolver"). We had not, as of March 31, 2003,
borrowed any money under the New Revolver, although we had approximately $1.6
million in letters of credit outstanding under the New Revolver as of March 31,
2003.
On December 6, 2002, Holdings was merged with and into Predecessor
Sterling. Under the terms of the merger and the Plan of Reorganization, all
equity interests in Holdings were cancelled upon consummation of the merger and
we issued 65,000 shares of Reorganized Sterling common stock 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' managed 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.
4. 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 pursuant to the Plan of Reorganization. In
connection with our Plan of Reorganization, our financial advisor, Greenhill &
Co., LLC ("Greenhill") prepared a valuation of our business. In preparing its
valuation, Greenhill considered a number of factors including valuations by
other parties and the application of various valuation methods, including
discounted cash flow analysis, comparable company analysis and precedent
transaction analysis. Based on Greenhill's 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 we now expense
all costs for turnarounds as they are incurred. A one-time credit to reverse a
$5.2 million existing accrual for turnaround expenses was recorded as part of
our fresh-start accounting transactions. A reconciliation of the adjustments
recorded in connection with our debt restructuring, the adoption of fresh-start
accounting and the accounting for discontinued operations at December 19, 2002
is presented below:
10
PREDECESSOR REORGANIZED
STERLING STERLING
DECEMBER 19, DISCONTINUED REORGANIZATION FRESH-START DECEMBER 19,
2002 OPERATIONS ADJUSTMENTS ADJUSTMENTS 2002
---------------------------------------------------------------------------------
(dollars in thousands, unaudited)
ASSETS:
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
Deferred tax asset........................... - - - 11,134 11,134
---------------------------------------------------------------------------------
Total current assets......................... 144,764 303,097 (271,803) 11,214 187,272
Property, plant and equipment, net........... 253,875 (139,940) - 170,121 284,056
Goodwill..................................... - - - 48,463 48,463
Other assets................................. 45,212 (6,039) (3,027) (13,059) 23,087
---------------------------------------------------------------------------------
Total assets................................. $ 443,851 $ 157,118 $ (274,830) $ 216,739 $ 542,878
=================================================================================
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 tax liability....................... 13,835 (13,835) - 59,597 59,597
Deferred credits and other liabilities....... 39,189 (15,011) 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) $ 216,739 $ 542,878
=================================================================================
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. Fresh-start
adjustments primarily reflect the recording of property, plant and equipment at
fair market value, the recording of a net deferred tax liability arising out of
the difference between the book and tax basis of certain assets and liabilities
(along with the resulting amount of goodwill recorded) and the recognition of
previously unrecognized pension and other post-employment benefits liabilities.
5. DISPOSAL OF LONG LIVED ASSETS
Pursuant to the Plan of Reorganization, on December 19, 2002, we sold our
pulp chemicals business to Superior Propane for approximately $373 million and
sold our acrylic fibers business to local management of that business for
nominal consideration. In accordance with SFAS 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
11
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 three months ended March 31, 2002, 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
-------------------------
THREE MONTHS ENDED
MARCH 31, 2002
-------------------------
(Dollars in Thousands)
(Unaudited)
REVENUES:
Pulp chemicals business....................................... $ 56,372
Acrylic fibers business....................................... 4,275
-------------------------
Total....................................................... $ 60,647
=========================
NET INCOME (LOSS):
Pulp chemicals business....................................... 8,536
Acrylic fibers business....................................... (1,376)
-------------------------
Total....................................................... $ 7,160
=========================
6. INVENTORIES
| PREDECESSOR
REORGANIZED STERLING | STERLING
----------------------------------- | ------------------
MARCH 31, 2003 DECEMBER 31, 2002 | SEPTEMBER 30, 2002
--------------- ----------------- ------------------
(Dollars in Thousands)
(Unaudited)
|
|
Inventories consisted of the following: |
Finished products..................................................... $ 19,376 $ 12,228 | $ 15,470
Raw materials......................................................... 12,706 12,259 | 9,656
Inventories under exchange agreements................................. 1,199 550 | 1,682
Stores and supplies................................................... 5,972 5,974 | 6,028
----------------- ---------------- | ------------------
$ 39,253 $ 31,011 | $ 32,836
================= ================ | ==================
7. LONG-TERM DEBT
Pursuant to the Plan of Reorganization, on December 19, 2002, we issued
approximately $94.3 million in principal amount of New Notes to the holders of
Predecessor Sterling's 123/8% Notes. The New Notes are 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 all of our
existing
12
and future subordinated indebtedness. The New Notes are guaranteed by
Sterling Chemicals Energy, Inc. ("Sterling Energy"), one of our wholly owned
subsidiaries. Sterling Energy's guaranty ranks equally in right of payment with
all of its existing and future senior indebtedness and senior in right of
payment to all of its existing and future subordinated indebtedness. 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 an annual rate of 10%, payable semi-annually
on June 15 and December 15 of each year, commencing June 15, 2003. Under certain
circumstances, for any interest period ending on or before December 19, 2004 ,
we may elect to pay interest on the New Notes through the issuance of additional
New Notes rather than the payment of cash. However, if we pay interest through
the issuance of additional New Notes rather than the payment of 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 would, upon
their 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, we established the New
Revolver with The CIT Group/Business Credit, Inc., individually and as
administrative agent, and certain other lenders, which provides up to $100
million in revolving credit loans. The New Revolver has an initial term ending
on September 19, 2007. Under the New Revolver, Reorganized Sterling 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
Reorganized Sterling 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 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 plus 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 March 31, 2003, the
total credit available under the New Revolver was $50.0 million. We had not, as
of March 31, 2003, borrowed any money under the New Revolver, although we had
approximately $1.6 million in letters of credit outstanding under the New
Revolver as of March 31, 2003, leaving unused borrowing capacity under the New
Revolver of approximately $48.4 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 would, upon their occurrence and subject in certain cases to
notice and grace periods, create an event of default thereunder.
8. 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, disodium
iminodiacetic acid ("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
13
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 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 are operated in compliance, in all material
respects, 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 is 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 assist us in ensuring 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 $20
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 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 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. A description of this release can be found under
"Legal Proceedings" in Note 9 of the "Notes to Consolidated Financial
Statements" contained in the Annual Report. The four lawsuits listed below and
one intervention, involving a total of approximately 397 plaintiffs, were filed
based on this release alleging personal injury, property damage and nuisance
claims:
14
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; and
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 believe that
this case will settle on favorable terms in the near future, although we cannot
give any assurances to that effect.
We believe that all or substantially all of our future out-of-pocket costs
and expenses relating to these lawsuits and intervention, 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 or intervention seek a recovery from assets of the Debtors' estates,
the claims 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 the
Bankruptcy Court the assumption of our contracts with Monsanto Company
("Monsanto") governing the production of DSIDA and related cure costs. Until
this litigation is completed, we cannot determine whether we will assume these
contracts and restart the DSIDA unit or reject these contracts. In addition,
Monsanto has indicated that it may seek to terminate the DSIDA contracts in the
event that we assume the DSIDA contracts. As a result, we filed a motion with
the Bankruptcy Court seeking to include the issue of whether Monsanto has the
right to terminate the DSIDA contracts following assumption. On March 26, 2003,
the Bankruptcy Court held a hearing on our motion. On May 1, 2003, the
Bankruptcy Court denied our motion on non-justiciability grounds, although the
Bankruptcy Court has yet to enter an order related to it's ruling. The rejection
or termination of the DSIDA contracts would have a negative impact on our
business, financial position, results of operations and 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.
Effective as of December 19, 2001, Mr. Frank P. Diassi elected to terminate
his employment with us. 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. We settled Mr. Diassi's claim on March 17, 2003, and the
Bankruptcy Court approved the settlement on April 9, 2003. Pursuant to the terms
of the settlement, we paid Mr. Diassi $300,000, plus $150,000 in attorneys'
fees, and Mr. Diassi waived any and all claims against us. An accrual for this
matter was recorded on our balance sheet upon emergence from bankruptcy on
December 19, 2002 and paid during April 2003.
9. NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") 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
15
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 prior fiscal year beginning October 1, 2002, required that an
acquired intangible asset 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. The adoption of SFAS
No. 142 did not have a significant impact on our financial statements. However,
it will require an annual impairment test of the goodwill that was recorded in
connection with the application of fresh-start accounting (see Note 4).
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143, which we applied to our prior 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 FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. SFAS No. 144 was effective for our prior
fiscal year beginning October 1, 2002. Accordingly, we reported the sale of our
pulp and acrylic fibers businesses as discontinued operations in our condensed
consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission 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 4). As a result, we
classified gains and losses from our debt restructuring as a component of income
(loss) from continuing operations in the accompanying condensed 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 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. 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, however we have included the required disclosure in
Note 2.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which requires the consolidation of
variable interest entities, as defined. FIN 46 immediately applied to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. We are currently evaluating what impact, if any, the
adoption of FIN 46 will have on our financial statements.
16
INDEPENDENT ACCOUNTANTS' REPORT
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 March 31,
2003 (Successor Company balance sheet), and the related condensed consolidated
statements of operations and cash flows for the quarter ended March 31, 2003
(Successor Company operations) and for the quarter ended March 31, 2002
(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.
As discussed in Note 1 to the financial statements, on November 20, 2002, the
Bankruptcy Court entered an order confirming the plan of reorganization which
became effective after the close of business on December 19, 2002. Accordingly,
the accompanying financial statements have been prepared in conformity with
AICPA Statement of Position 90-7, "Financial Reporting for Entities in
Reorganization Under the Bankruptcy Code," for the Successor Company as a new
entity with assets, liabilities, and a capital structure having carrying values
not comparable with prior periods as described in Note 4.
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, stockholders' 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 condensed 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
May 13, 2003
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our condensed
consolidated financial statements (including the Notes thereto) included in Item
1, Part I of this report.
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 ("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 (as modified, 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
covered by this period 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 have been the close of business on December 19,
2002 (the "Effective Date"). Due to the Debtors' emergence from Chapter 11 and
the implementation of fresh-start accounting (see Note 4 to the condensed
consolidated financial statements), the quarterly financial results have been
separately presented under the labels Reorganized Sterling Chemicals, Inc.
("Reorganized Sterling") for the periods after December 19, 2002 and Predecessor
Sterling Chemicals, Inc. ("Predecessor Sterling") for periods prior to and
including December 19, 2002. Our financial statements for the three months ended
March 31, 2003 are not comparable to those of Predecessor Sterling for the same
period ended March 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
materials 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 for 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, Inc. ("Superior Propane") for
approximately $373 million 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 condensed
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 condensed consolidated balance sheet.
RECENT DEVELOPMENTS
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, which 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 $94.3
million in principal amount of 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 a lender, and
certain other lenders (the "New Revolver"). We had not, as of March 31, 2003,
borrowed any money under the New Revolver, although we had approximately $1.6
million in letters of credit outstanding under the New Revolver as of March 31,
2003.
On December 6, 2002, Holdings was merged with and into Predecessor
Sterling. Under the terms of the merger and the Plan of Reorganization, all
equity interests in Holdings were cancelled upon consummation of the merger and
we issued 65,000 shares
18
of Reorganized Sterling common stock 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' managed 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 continues 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 and these severance costs were paid during the first quarter of 2003.
Upon the retirement of Mr. Elkins, 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.
Fiscal Year
In December 2002, we changed our fiscal year-end from September 30 to
December 31.
RESULTS OF OPERATIONS
As previously mentioned, 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 4 to the condensed
consolidated financial statements), the quarterly financial results have been
separately presented under the labels Reorganized Sterling for the periods after
December 19, 2002 and Predecessor Sterling for periods prior to and including
December 19, 2002. Our financial statements as of and for the three-month period
ended March 31, 2003 are not comparable to those of Predecessor Sterling for the
three month period ended March 31, 2002.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Revenues, Cost of Goods Sold and Net Loss
Our revenues were approximately $122.4 million for the three months ended
March 31, 2003, compared to Predecessor Sterling's approximately $62.0 million
in revenues during the three months ended March 31, 2002. This increase in
revenues resulted primarily from an increase in styrene sales prices and sales
volumes. Styrene sales volumes increased during the three months ended March 31,
2003 compared to the three months ended March 31, 2002, primarily due to the
styrene plant being shut down for a portion of February and March 2002 for
routine maintenance. The increase in styrene sales prices between these two
periods was primarily a result of large increases in raw materials and energy
prices. We recorded a net loss attributable to common stockholders of
approximately $5.4 million for the three months ended March 31, 2003, compared
to the net loss attributable to common stockholders of approximately $15.4
million that Predecessor Sterling recorded for the same period in 2002. This
reduction in net loss was primarily due to reduced interest expense and costs
related to our emergence from bankruptcy.
Revenues from our styrene operations were approximately $90.5 million for
the quarter ended March 31, 2003, an increase of approximately 158% from
Predecessor Sterling's approximately $34.6 million in revenues from those
operations in the quarter ended March 31, 2002. Our total sales volumes for
styrene for the quarter ended March 31, 2003 increased approximately 42% from
those realized by Predecessor Sterling during the quarter ended March 31, 2002.
Direct sales prices for styrene in the quarter ended March 31, 2003 increased
approximately 78% from those realized during the quarter ended March 31, 2002.
During the quarter ended March 31, 2003, prices for benzene and ethylene, the
two primary raw materials required for styrene, increased approximately 91% and
63%, respectively, from the prices paid for these products in the quarter ended
March 31, 2002. The average price for natural gas increased 78% during the
quarter ended March 31, 2003 compared to the same period in 2002. Due to
19
the factors discussed above, margins on our styrene sales for the quarter ended
March 31, 2003 increased somewhat from those realized by Predecessor Sterling
during the quarter ended March 31, 2002.
Our acrylonitrile unit continued to be shut down during the quarter ended
March 31, 2003 and was primarily responsible for our loss from continued
operations during the quarter ended March 31, 2003. The acrylonitrile unit is
projected to be restarted toward the end of the second quarter or the beginning
of the third quarter of 2003, although no assurances can be given to that
effect.
Revenues from our other petrochemicals operations, including acetic acid,
plasticizers and methanol, were $31.1 million for the quarter ended March 31,
2003, an increase of 21% from the $25.7 million in revenues received by
Predecessor Sterling from these operations during the quarter ended March 31,
2002 primarily due to higher sales volumes of acetic acid and improved revenues
from our methanol relationship with Methanex Corporation.
Selling, General and Administrative ("SG&A") Expenses
Our SG&A expenses for the three months ended March 31, 2003 were
approximately $4.7 million compared to Predecessor Sterling's approximately $3.6
million in SG&A expenses for the three months ended March 31, 2002. This
increase was primarily due to the inclusion in the current period of bankruptcy
related professional fees that were classified as reorganization items during
the three months ended March 31, 2002, pursuant to SOP 90-7 and ongoing matters
related to our recent emergence from bankruptcy, including litigation related to
the possible assumption of our DSIDA contracts with Monsanto, final
determinations as to the classification and allowed amount of disputed claims,
final determinations of the amount of rejection damages assessed for contracts
we rejected in our bankruptcy proceedings and continuing filing obligations with
the Bankruptcy Court (see Note 8 to the consolidated financial statements).
Other Income
Our other income for the quarter ended March 31, 2003 consisted of a Texas
sales tax refund of approximately $3.7 million.
Reorganization Items
There were no reorganization items incurred during the three months ended
March 31, 2003, as we emerged from bankruptcy prior to the beginning of the
quarter and items previously recorded as reorganizations items are now included
in SG&A. In the three months ended March 31, 2002, we recorded $4.7 million in
reorganization items, which consisted primarily of professional fees incurred in
connection with the Debtors' Chapter 11 proceedings.
Interest Expense
We recorded interest income of approximately $0.7 million for the quarter
ended March 31, 2003 in conjunction with the above-mentioned sales tax refund,
which resulted in a one-time reduction in interest expense. Our total interest
expense of $1.8 million for the quarter ended March 31, 2003 was substantially
lower than the $11.1 million in interest expense we recorded for the quarter
ended March 31, 2002, primarily due to the cancellation of our pre-existing debt
upon emergence from bankruptcy.
Provision (Benefit) for Income Taxes
During the quarter ended March 31, 2003, we recorded an approximate $1.4
million benefit for income taxes compared to a less than $0.1 million provision
for income taxes for the quarter ended March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Pursuant to the Plan of Reorganization, on December 19, 2002, we issued
approximately $94.3 million in principal amount of New Notes to the holders of
Predecessor Sterling's 12 3/8% Notes. The New Notes are 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 all of our
existing and future subordinated indebtedness. The New Notes are guaranteed by
Sterling Chemicals Energy, Inc. ("Sterling Energy"), one of our wholly owned
subsidiaries. Sterling Energy's guaranty ranks equally in right of payment with
all its existing and future senior indebtedness and senior in right of payment
to all of its existing and future subordinated indebtedness. 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 an annual rate of 10%, payable semi-annually
on June 15 and December 15 of each year, commencing June 15, 2003. Under certain
circumstances, for any interest period ending on or before December 19, 2004, we
may elect to pay interest on the New Notes through the issuance of additional
New Notes rather than the payment of cash. However, if
20
we pay interest through the issuance of additional New Notes rather than the
payment of 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 would, upon
their 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, we established the New
Revolver with The CIT Group/Business Credit, Inc., individually and as
administrative agent, and certain other lenders which provides up to $100
million in revolving credit loans. The New Revolver has an initial term ending
on September 19, 2007. Under the New Revolver, Reorganized Sterling 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
Reorganized Sterling 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 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 plus 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 March 31, 2003, the
total credit available under the New Revolver was $50.0 million. We had not, as
of March 31, 2003, borrowed any money under the New Revolver, although we had
approximately $1.6 million in letters of credit outstanding under the New
Revolver as of March 31, 2003, leaving unused borrowing capacity under the New
Revolver of approximately $48.4 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 would, upon their 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 cannot give any assurances to
that effect.
Working Capital
Our working capital at March 31, 2003 was $133.1 million, a slight increase
from our working capital of $131.3 million on December 31, 2002. This increase
was due to increases in accounts receivable and inventories, partially offset by
a reduction in cash and cash equivalents.
Cash Flow
Net cash used in our operations was $22.8 million for the quarter ended
March 31, 2003, compared to net cash used in Predecessor Sterling's operations
of approximately $2.8 million during the same period in 2002. This increase in
cash used was primarily due to an increase in accounts receivable and inventory.
Net cash flow used in our investing activities was $1.9 million for the quarter
ended March 31, 2003, compared to cash used in Predecessor Sterling's investing
activities of $4.8 million during the quarter ended March 31, 2002. The
reduction in cash used in investing activities during this quarter was due to
the inclusion of capital expenditures associated with the turnaround of our
styrene manufacturing facility in the quarter ended March 31, 2002. There were
no financing activities for the quarter ended March 31, 2003, compared to cash
provided by Predecessor Sterling's financing activities of $4.6 million during
the same period in 2002 which was predominantly due to the reorganization of our
debt upon emergence from bankruptcy.
21
Capital Expenditures
Our capital expenditures were $1.9 million during the quarter ended March
31, 2003, compared to $4.8 million of expenditures by Predecessor Sterling
during the quarter ended March 31, 2002, and primarily related to routine
safety, environmental and equipment replacement matters in both quarters. During
the remainder of 2003, capital expenditures are anticipated to be approximately
$15 to $20 million for routine safety, environmental and equipment replacement
matters.
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 condensed consolidated
financial statements and related notes. 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 our results of operations and financial position in future periods.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 prior fiscal
year beginning October 1, 2002, required that an acquired intangible asset 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. The adoption of SFAS No. 142 did not have a
significant impact on our financial statements. However, it will require an
annual impairment test of the goodwill that was recorded in connection with the
application of fresh-start accounting (see Note 4).
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143, which we applied to our prior 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 FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. SFAS No. 144 was effective for our prior
fiscal year beginning October 1, 2002. Accordingly, we reported the sale of our
pulp and acrylic fibers businesses as discontinued operations in our condensed
consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission 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 4 to the condensed
consolidated financial statements). As a result, we 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 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
22
reported results. 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, however we have included the required
disclosure in Note 2 to the consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which requires the consolidation of
variable interest entities, as defined. FIN 46 immediately applied to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. We are currently evaluating what impact, if any, the
adoption of FIN 46 will have on our financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial results can be affected by volatile changes in raw materials,
natural gas and finished product sales prices. Due to the sale of our pulp
chemicals business, which had significant operations in Canada, 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 outstanding 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 Exchange Act Rule 13a-14(c). 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.
23
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information under "Legal Proceedings" and "Other Claims" in Note 8
to the consolidated financial statements included in Item 1 of Part I of this
report is hereby incorporated by reference.
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 EXHIBIT
------ ----------------------
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 fiscal 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 fiscal year
ended September 30, 2002).
3.2 - 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 Registration Statement on Form 8-A filed on
December 19, 2002).
3.3 - Restated Bylaws of Sterling Chemicals, Inc. (incorporated by
reference to Exhibit 3.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 2002).
**10.1 - Settlement Agreement, Waiver and General Release dated March
17,2003 between Frank P. Diassi and Sterling Chemicals, Inc.
**99.1 - Certification by the chief executive officer furnished solely
pursuant to 18 U.S.C.ss.1350 (as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002).
**99.2 - Certification by the chief financial officer furnished solely
pursuant to 18 U.S.C.ss.1350 (as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002).
** Filed or furnished herewith
(b) Reports on Form 8-K.
1. On January 6, 2003, we filed a Current Report on Form 8-K
reporting Items 5, 7 and 8 related to the retirement of our
President and Co-CEO and our change in fiscal year end from
September 30 to December 31.
2. On January 10, 2003, we filed a Current Report on Form 8-K/A
amending our Current Report on Form 8-K filed on December 23, 2002
and reporting Items 2, 7 and 9 to include unaudited pro forma
financial statements and additional information regarding the
previously announced disposition of certain assets.
3. On January 28, 2003, we furnished a Current Report on Form 8-K
reporting Items 7 and 9 related to the filing of the Debtors'
Monthly Operating Reports with the Bankruptcy Court.
4. On February 28, 2003, we furnished a Current Report on Form 8-K
reporting Items 7 and 9 related to the filing of the Debtors'
Monthly Operating Reports with the Bankruptcy Court.
5. On March 21, 2003, we furnished a Current Report on Form 8-K
reporting Items 7 and 9 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 registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
STERLING CHEMICALS, INC.
(Registrant)
Date: May 13, 2003 /s/ RICHARD K. CRUMP
-------------------------------------
Richard K. Crump
President and Chief Executive Officer
Date: May 13, 2003 /s/ PAUL G. VANDERHOVEN
-------------------------------------
Paul G. Vanderhoven
Senior Vice President-Finance and
Chief Financial Officer (Principal
Financial Officer)
25
CERTIFICATIONS
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: May 13, 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: May 13, 2003 /s/ PAUL G. VANDERHOVEN
------------------------------------
Paul G. Vanderhoven
Senior Vice President - Finance and
Chief Financial Officer
27
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
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 fiscal 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 fiscal year
ended September 30, 2002).
3.2 - 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 Registration Statement on Form 8-A filed on
December 19, 2002).
3.3 - Restated Bylaws of Sterling Chemicals, Inc. (incorporated by
reference to Exhibit 3.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 2002).
**10.1 - Settlement Agreement, Waiver and General Release dated March
17,2003 between Frank P. Diassi and Sterling Chemicals, Inc.
**99.1 - Certification by the chief executive officer furnished solely
pursuant to 18 U.S.C.ss.1350 (as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002).
**99.2 - Certification by the chief financial officer furnished solely
pursuant to 18 U.S.C.ss.1350 (as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002).
** Filed or furnished herewith