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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002
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 333-04343-01
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STERLING CHEMICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0502785
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1200 SMITH STREET SUITE 1900 (713) 650-3700
HOUSTON, TEXAS 77002-4312 (Registrant's telephone number, including area
code)
(Address of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether each of the registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of each of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
On December 6, 2002 the registrant's Chapter 11 Plan of Reorganization was,
in part, implemented through a merger of Sterling Chemicals Holdings, Inc. with
and into Sterling Chemicals, Inc. The old shares of common stock were cancelled
and new shares of common stock were authorized and part of the new shares
issuable under the Plan of Reorganization were issued. As of December 9, 2002,
Sterling Chemicals, Inc. had 65,000 shares of common stock outstanding. As of
such date, the aggregate value of such common stock, based upon the value of the
expected equity contribution pursuant to these companies' confirmed Plan of
Reorganization, was approximately $897,000.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X].
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ].
DOCUMENTS INCORPORATED BY REFERENCE: None.
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TABLE OF CONTENTS
PAGE
----
Important Information Regarding this Form 10-K.............. 2
PART I
Item 1. Business.................................................... 4
Recent Developments....................................... 4
Business Strategy......................................... 6
Industry Overview......................................... 7
Product Summary........................................... 10
Products.................................................. 11
Sales and Marketing....................................... 13
Contracts................................................. 14
Raw Materials for Products and Energy Resources........... 16
Technology and Licensing.................................. 18
Competition............................................... 19
Environmental Matters..................................... 19
Employees................................................. 23
Insurance................................................. 23
Item 2. Properties.................................................. 24
Item 3. Legal Proceedings........................................... 24
Item 4. Submission of Matters to Vote of Security Holders........... 25
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 26
Item 6. Selected Financial Data..................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 27
Overview.................................................. 27
Liquidity and Capital Resources........................... 32
Critical Accounting Policies, Use of Estimates and
Assumptions................................................. 37
New Accounting Standards.................................. 38
Certain Known Events, Trends, Uncertainties and Risk
Factors..................................................... 39
Results of Operations..................................... 43
Comparison of Fiscal 2002 to Fiscal 2001.................. 43
Comparison of Fiscal 2001 to Fiscal 2000.................. 45
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 47
Item 8. Financial Statements and Supplementary Data................. 49
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 121
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 121
Item 11. Executive Compensation...................................... 127
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 136
Item 13. Certain Relationships and Related Transactions.............. 136
Item 14. Controls and Procedures..................................... 136
PART IV
Item 15. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K......................................... 136
1
IMPORTANT INFORMATION REGARDING THIS FORM 10-K
Readers should consider the following information as they review this Form
10-K.
PRESENTATION OF FINANCIAL STATEMENTS
This Form 10-K includes four separate sets of financial statements and
related notes:
- The first set of financial statements and related notes present the
consolidated financial position, results of operations and cash flows of
Sterling Chemicals, Inc. ("Chemicals," together with its subsidiaries,
unless otherwise indicated, Chemicals and its subsidiaries are
collectively referred to as "we," "our," "ours" and "us"). On December 6,
2002, Sterling Chemicals Holdings, Inc. ("Holdings"), the sole holder of
all the outstanding common stock of Chemicals, was merged with and into
Chemicals. On December 11, 2002, Holdings filed a Form 15 and, as of that
date, was no longer required to file periodic or other reports under the
Securities and Exchange Act of 1934 with the SEC. Certain pro forma
financial information related to this merger is presented in the
financial statements of Chemicals contained in this Form 10-K.
- The second set of financial statements and related notes present the
combined financial position, results of operations and cash flows of the
Guarantors (as defined below) and their subsidiaries (discussed below).
- The third and fourth sets of financial statements and related notes
present the consolidated financial position, results of operations and
cash flows of Sterling Canada, Inc. and its subsidiaries ("Sterling
Canada") and the financial position, results of operations and cash flows
of Sterling Pulp Chemicals, Ltd. ("Sterling Pulp"), our two significant
subsidiaries whose securities have been pledged to secure a series of
debt securities issued by Chemicals.
Under SEC rules, specified financial information is required to be provided with
respect to subsidiaries of an issuer of debt securities that guarantee the
repayment of those debt securities. In July 1999, Chemicals issued $295 million
of its 12 3/8% Senior Secured Notes due 2006 (the "12 3/8% Notes"). The
obligations of Chemicals related to the 12 3/8% Notes were guaranteed by most of
its subsidiaries incorporated in the United States (the "Guarantors"). In
addition, all of the capital stock of each of the Guarantors was pledged to
secure the repayment of the 12 3/8% Notes. Finally, 65% of the capital stock of
three of Chemicals' subsidiaries incorporated outside of the United States was
pledged to secure the repayment of the 12 3/8% Notes, but these subsidiaries did
not guarantee the repayment of the 12 3/8% Notes. In order to comply with these
SEC rules, the financial statements of the Guarantors, each of which guaranteed
the repayment of the 12 3/8% Notes, and the financial statements of Sterling
Canada and Sterling Pulp, our significant subsidiaries whose securities are
pledged to secure the repayment of the 12 3/8% Notes, are included with this
Form 10-K. The financial statements of the Guarantors are included in this Form
10-K under Item 8, and the financial statements of Sterling Canada and Sterling
Pulp are filed as exhibits to this Form 10-K. However, under our plan of
reorganization, the 12 3/8% Notes will be cancelled and thus there would be no
expectation of Guarantor financial statements in the future.
FORWARD-LOOKING STATEMENTS
This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this Form 10-K, including without limitation the statements under
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Qualitative and Quantitative Disclosure about
Market Risk" regarding the cyclicality of our industry, current and future
industry conditions, the potential effects of such matters on our business
strategy, results of operations or financial position, the adequacy of our
liquidity and our market sensitive financial instruments and other statements
identified by such words as "expects," "projects," "plans" and similar
expressions, are forward-looking statements. The forward-looking statements are
based upon current information and expectations. Estimates, forecasts and other
statements contained in or implied by the
2
forward-looking statements speak only as of the date on which they are made, are
not guarantees of future performance and involve certain risks, uncertainties
and assumptions that are difficult to evaluate and predict. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, no assurances can be given that such expectations will prove to have
been correct. Certain important factors that could cause actual results to
differ materially from our expectations or what is expressed, implied or
forecasted by or in the forward-looking statements include developments in our
Chapter 11 proceedings, the timing and extent of changes in commodity prices and
global economic conditions, industry production capacity and operating rates,
the supply-demand balance for our products, competitive products and pricing
pressures, increases in raw material costs, our ability to obtain raw materials
and energy at acceptable prices, in a timely manner and on acceptable terms,
federal and state regulatory developments, our high financial leverage,
petitions or motions filed or actions taken in connection with our bankruptcy
proceedings, the availability of skilled personnel and our ability to attract or
retain high quality employees and operating hazards attendant to the industry.
Additional factors that could cause actual results to differ materially from our
expectations or what is expressed, implied or forecasted by or in the
forward-looking statements are stated herein in cautionary statements made in
conjunction with the forward-looking statements or are included elsewhere in
this Form 10-K. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Certain Known Events, Trends, Uncertainties and
Risk Factors."
SUBSEQUENT EVENTS
All statements contained in this Form 10-K, including the forward-looking
statements discussed above, are made as of December 13, 2002, 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-K to the extent
such information is affected or impacted by events, circumstances or
developments occurring after December 13, 2002 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 and disclaim any responsibility to do so.
DOCUMENT SUMMARIES
Statements contained in this Form 10-K 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 this Form 10-K.
FISCAL YEAR
We keep our books of record and accounts based on annual accounting periods
ending on September 30 of each year. Accordingly, all references in this Form
10-K to a particular fiscal year refer to the twelve calendar-month period
ending on September 30 of that year.
3
PART I
ITEM 1. BUSINESS
We were organized as a Delaware corporation in 1986 and have our principal
executive offices in Houston, Texas. We, together with our subsidiaries, own or
operate facilities for the manufacture of eight commodity petrochemicals at our
Texas City, Texas plant. We also currently manufacture chemicals for use
primarily in the pulp and paper industry at five plants in Canada and a plant in
Valdosta, Georgia and acrylic fibers at our plant near Pensacola, Florida. At
our Texas City facility, we have production capacity for styrene, acrylonitrile,
acetic acid, plasticizers, methanol, tertiary butylamine ("TBA"), sodium cyanide
and disodium iminodiacetic acid ("DSIDA"). We generally sell our petrochemicals
products to customers for use in the manufacture of other chemicals and
products, which in turn are used in the production of a wide array of consumer
goods and industrial products. We currently produce specialty textile fibers and
technical fibers at our acrylic fibers facility, as well as licensing our
acrylic fibers manufacturing technology to producers worldwide. Sodium chlorate
is produced at our five plants in Canada and our Valdosta facility. Sodium
chlorite is produced at one of our Canadian locations. In addition, chlor-alkali
and calcium hypochlorite are produced at one of our Canadian locations. We also
license, engineer and oversee construction of large-scale chlorine dioxide
generators for the pulp and paper industry as part of our pulp chemicals
business. These generators convert sodium chlorate into chlorine dioxide at pulp
mills. Under our plan of reorganization (the "Plan"), our pulp chemicals
business and acrylic fibers business will be sold.
RECENT DEVELOPMENTS
CHAPTER 11 PROCEEDINGS
On July 16, 2001 (the "Petition Date"), Holdings, Chemicals and most of
their U.S. subsidiaries (collectively, the "Debtors") filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy
Code") in the U.S. Bankruptcy Court for the Southern District of Texas (the
"Bankruptcy Court") and began operating their businesses as
debtors-in-possession pursuant to the Bankruptcy Code. None of our foreign
subsidiaries, including our Canadian subsidiaries, were included in the Chapter
11 filings. The accompanying consolidated financial statements have been
presented in conformity with the AICPA's Statement of Position 90-7, "Financial
Reporting By Entities In Reorganization Under the Bankruptcy Code" ("SOP 90-7").
The statement requires a segregation of liabilities subject to compromise as of
the Petition Date and identification of all transactions and events that are
directly associated with the reorganization of the Debtors.
Effective July 19, 2001, the Debtors (excluding Holdings) entered into a
Revolving Credit Agreement with a group of lenders led by The CIT Group/Business
Credit, Inc. to provide up to $195 million in debtor-in-possession financing
(the "DIP Financing"). At September 30, 2002, the total credit available under
the DIP Financing was limited to $139.1 million due to borrowing base
restrictions under the current assets revolver portion of the DIP Financing. At
September 30, 2002, $57.2 million was drawn under the fixed assets revolver
portion of the DIP Financing and there were no borrowings outstanding under the
current assets revolver. In addition, approximately $3.6 million of letters of
credit were outstanding under the current assets revolver leaving, at September
30, 2002, unused borrowing capacity under the DIP Financing of approximately
$78.3 million.
The filing of the Chapter 11 petitions was driven by the Debtors' inability
to meet their funded debt obligations over the long-term, largely brought about
by weak demand for petrochemicals products caused by declines in general
worldwide economic conditions, the relative strength of the U.S. dollar (which
caused the Debtors' export sales to be at a competitive disadvantage) and higher
raw material and energy costs. As a result of these conditions, the Debtors
incurred significant operating losses. Chapter 11 is designed to permit debtors
to preserve cash and to give debtors the opportunity to restructure their debt.
During the pendency of the Chapter 11 cases, with approval of the Bankruptcy
Court, the Debtors assumed favorable pre-petition contracts and leases, rejected
unfavorable pre-petition contracts and leases
4
and entered into purchase and sale agreements to otherwise dispose of assets.
Most of these actions will be consummated on or before the effective date of the
Plan.
The consummation of the Plan is the primary objective of the Debtors. On
May 14, 2002, the Debtors filed the Plan with the Bankruptcy Court, along with
an accompanying Disclosure Statement. As a result of negotiations among the key
creditor constituencies in the Chapter 11 cases, including Resurgence Asset
Management, L.L.C. ("Resurgence"), the single largest unsecured creditor and a
proposed equity investor in the reorganized company, a revised Plan and
Disclosure Statement were filed with the Bankruptcy Court on September 13, 2002.
The Plan and the Disclosure Statement were further revised on October 7, 2002
and October 11, 2002, in connection with the hearing in the Bankruptcy Court to
consider the adequacy of the Disclosure Statement. On October 11, 2002, the
Bankruptcy Court issued an order approving the Disclosure Statement and
authorizing the Debtors to commence the process of soliciting votes to accept or
reject the Plan and established a confirmation objection and voting deadline of
November 13, 2002. The approval of the Disclosure Statement and the
authorization to commence the solicitation of votes was made subject to the
conduct of an alternative plan process. As part of that process, alternative
plan proposals were required to be submitted by no later than October 28, 2002.
However, no such proposals were received by the deadline. The Plan was approved
by a large percentage of votes cast and, on November 20, 2002, the Plan was
confirmed by the Bankruptcy Court.
The Plan provides for the sale of the Debtors' pulp chemicals business to
Superior Propane Inc. ("Superior"), for the transfer of the Debtors' acrylic
fibers business pursuant to a management buyout for little or no consideration
effective upon consummation of the Plan and for the continuation of the Debtors'
core petrochemicals business, as restructured under the Plan. A portion of the
net proceeds from the sale of the pulp chemicals business, $80 million, will
remain with the Debtors and will be used to fund the Debtors' obligations under
the Plan and to support future operations of the restructured petrochemicals
business. The remaining net proceeds will be allocated to the holders of the
12 3/8% Notes, who will also receive approximately $93 million in secured notes
in satisfaction of their claims. As part of the Plan, on December 6, 2002,
Holdings was merged into Chemicals. Holdings' classes of equity interests were
cancelled, and the holders of Holdings' 13 1/2% Senior Secured Discount Notes
were issued 65,000 shares of new common stock of Chemicals. On the effective
date of the Plan, these shares will constitute 1.3% of the common equity
interests in Chemicals. Unsecured creditors and stockholders of Holdings will
not receive any distribution under the Plan due to their structural
subordination and the absence of assets at Holdings. Unsecured creditors of the
Debtors (other than unsecured creditors of Holdings), which include holders of
Chemicals' 11 1/4% Senior Subordinated Notes and 11 3/4% Senior Subordinated
Notes, will receive a pro rata share of 11.7% of the new Chemicals' shares of
common stock to be issued pursuant to the Plan, thereby participating in the
common equity ownership of the restructured petrochemicals business, along with
Resurgence and its affiliated client accounts (the "Investor"). The Investor has
agreed to provide equity funding of $30 million in exchange for certain new
preferred equity interests in the reorganized company and to underwrite an
additional $30 million of equity funding through a rights offering for common
equity interests in the reorganized company. All, or a portion of, certain
unsecured claims will be paid if contracts associated with these claims are
assumed pursuant to the Plan. Following the satisfaction or waiver of certain
conditions, we expect the Plan to become effective on or before December 31,
2002, at which time the Debtors will emerge from Chapter 11.
The Debtors have received an exit financing commitment from The CIT
Group/Business Credit, Inc. for a $100 million secured revolving credit facility
for the restructured petrochemicals business (the "Revolver"). We are in the
process of finalizing this agreement and it is expected to close
contemporaneously with our emergence from Chapter 11. The DIP Financing will be
retired upon our emergence from Chapter 11.
CERTAIN BANKRUPTCY IMPLICATIONS
The Debtors have continued to operate their businesses and manage their
properties in the ordinary course without prior approval from the Bankruptcy
Court. Transactions outside of the ordinary course of
5
business, including certain types of capital expenditures, certain sales of
assets and certain requests for additional financing, require approval by the
Bankruptcy Court.
Emergence from Chapter 11 in accordance with the Plan is dependent upon
several factors, including:
- consummation of the sale of the Debtors' pulp chemicals business to
Superior;
- transfer of the Debtors' acrylic fibers facility pursuant to a management
buyout;
- receipt of investment funds from Resurgence and
- finalization of the Revolver.
While we can provide no assurances, we believe that we will satisfactorily
complete these items and emerge from Chapter 11.
The ability of the Debtors to continue as a going concern is dependent upon
the Debtors' emergence from Chapter 11 with the capital structure contemplated
under the Plan. As the Debtors' can give no assurance that they will accomplish
any of the foregoing, there is substantial doubt about Chemicals' and the
Debtors' ability to continue as a going concern. The accompanying financial
statements do not purport to reflect or provide for the consequence of the
bankruptcy proceedings and do not include any adjustments that might result from
the outcome of the going concern uncertainty.
ADOPTION OF FRESH START ACCOUNTING
Upon emerging from Chapter 11, the Debtors will implement fresh start
accounting under the provisions of SOP 90-7. Under SOP 90-7, the reorganization
value of the Debtors will be allocated to its assets and liabilities, its
accumulated deficit will be eliminated and new equity will be issued according
to the Plan. In addition, changes in accounting principles that become effective
within the twelve months following the adoption of fresh start accounting will
be adopted. We are still evaluating the impact of adopting fresh start
accounting. However, we anticipate that the adoption of fresh start accounting
will have a material effect on our financial statements because of the revised
valuation of the reorganized company, the allocation of reorganization value to
the assets and liabilities of the reorganized company, the disposition of our
pulp chemicals and acrylic fibers businesses and the potential adoption of new
accounting standards upon our emergence from Chapter 11.
The Plan contemplates the infusion of $60 million of new equity capital in
exchange for 87% of the equity of the reorganized company. Based upon this cash
transaction, we anticipate that the estimated equity value for the reorganized
company at the effective date of the Plan will be approximately $69 million.
OTHER DEVELOPMENTS
On May 1, 2002, the collective bargaining agreement covering most of the
hourly employees at our Texas City facility expired. On June 7, 2002, we locked
out our union employees, numbering about 215, after several weeks of
unsuccessful negotiations with the union leadership and after a majority of the
union members voted not to accept our final proposal. During the lockout, the
Texas City facility was operated, without interruption or loss of production, by
our salaried personnel and contract workers. On October 1, 2002, a new agreement
covering approximately 200 employees was signed and is subject to renegotiation
in April 2004. The lockout had no material adverse effect on our business,
financial position, results of operations or cash flows.
BUSINESS STRATEGY
Our objectives are to improve our capital structure as we emerge from
bankruptcy, to be a high quality producer of chemicals, to maintain a strong
market position, to continuously improve our cost performance in all of our
major products and to provide superior customer service. The Debtors'
6
Chapter 11 case was filed, in part, to improve the Debtors' capital structure.
In addition, our management team has adopted the following strategies in pursuit
of these objectives:
- continue to improve our cost structure;
- pursue improvements to our businesses and facilities through expansions,
upgrades and strategic alliances; and
- optimize capacity utilization rates through long-term supply
arrangements.
The cyclicality of the markets for our primary products, however, subjects these
markets to periods of overcapacity accompanied by lower prices and profit
margins. In addition, the instruments governing the DIP Financing and the
financing agreement entered into by our principal Canadian subsidiary, Sterling
Pulp, Ltd., with CIT Business Credit Canada, Inc., limit our ability to incur
additional debt. Upon emergence, our new senior secured notes and the Revolver
will continue to restrict our ability to incur debt. These and other factors,
including our Chapter 11 filings, limit our ability to successfully implement
our business strategy.
INDUSTRY OVERVIEW
PETROCHEMICALS
Styrene. Current global styrene annual capacity is approximately 52
billion pounds. Current total North American annual styrene capacity is
approximately 15 billion pounds. As is the case with other petrochemicals, the
styrene market from time to time experiences periods of strong demand, resulting
in tight supply and high prices and margins. This tight balance in supply and
demand often results in new capacity additions. In most cases, incremental
capacity comes in the form of large new plants or major expansions of existing
facilities. As this new capacity comes on line, it often exceeds current demand
growth and results in a decline in prices and margins.
Following a period of strong demand growth and high utilization rates from
1994 to 1996, several major petrochemical producers announced new capacity
increases in 1997 and 1998, particularly in the Far East. At the time of this
announced new capacity, there was a general slowdown in the economic growth rate
in the Far East, prompting petrochemicals customers to begin utilizing their
available inventories and decrease purchases of additional product. As a result,
our average styrene prices declined from fiscal 1997 through fiscal 1999, as the
previously announced new capacity came on line at the same time that economic
events in various Asian countries significantly reduced demand growth for
styrene.
During fiscal 2000, styrene prices and margins increased significantly from
levels experienced in fiscal 1999. These improvements were driven by a
combination of stronger market demand, operating problems experienced at several
of our competitors and generally low inventory levels worldwide. Styrene prices
and margins peaked in April 2000 at a published spot price of $0.48 per pound
and decreased over the second half of 2000.
During fiscal 2001, U.S. and world economies experienced a general slowdown
which negatively impacted demand for most petrochemicals. Raw material and
energy costs spiked upward during the first half of fiscal 2001, increasing
significantly from the prior year, primarily due to the sharp increase in
natural gas prices. As a result, U.S. Gulf Coast petrochemicals producers
experienced significant margin erosion for most of their products. Due to these
conditions, many U.S. Gulf Coast petrochemicals producers, including us, reduced
production levels. During the second half of fiscal 2001, raw material and
energy costs began to moderate, although demand remained weak due to the
continued economic slowdown.
Demand for styrene, relative to supply, increased late in the second
quarter of fiscal 2002 due to a variety of factors, including economic
improvements in the U.S. manufacturing sector, global restocking of low
inventory levels and styrene plant shutdowns attributable to scheduled
maintenance and operating problems at several of our competitors. These factors
led to an increase in spot prices for styrene reported on a month-end,
industry-wide basis, from $0.17 per pound in January 2002 to as high as $0.40
per pound
7
in March 2002. Thereafter, reported month-end spot prices for styrene ranged
from $0.26 per pound to $0.34 per pound, with September 2002 spot prices
reported at $0.29-0.30 per pound. Styrene cash margins for spot sales turned
positive in February 2002 and continued positive during the remainder of fiscal
2002. Styrene cash margins for spot sales are expected to decline, but still
remain positive, in the first quarter of fiscal 2003 as plants in North America
that were down for maintenance repairs during the previous quarter resume
operations. We cannot predict future increases or decreases in styrene prices
and margins.
Acrylonitrile. Current global acrylonitrile capacity is approximately 13
billion pounds per year. The acrylonitrile market exhibits similar
characteristics to those of styrene regarding capacity utilization, selling
prices and profit margins. Moreover, as a high percentage of our acrylonitrile
sales are made in the export market, demand for our acrylonitrile is
significantly influenced by export customers, particularly those that supply
acrylic fibers to customers in China. During 1996, strong demand for acrylic
fibers and ABS resins, particularly in China, increased demand for
acrylonitrile, resulting in high prices and margins. High utilization rates and
prices prompted many major producers to announce new capacity increases and
approximately 1.5 billion pounds of capacity increases came on line between 1996
and 2000. As new acrylonitrile capacity in the U.S. and Asia came on line,
demand growth in Asian markets weakened, causing acrylonitrile prices and
margins to decrease significantly from 1996 through 1999. Beginning in early
fiscal 2000, acrylonitrile prices increased significantly due to improved market
demand, operating problems experienced at several of our competitors and
generally low inventory levels.
Due to the startup of new acrylonitrile plants in the U.S. and Taiwan, a
general slowdown of U.S. and world economies, and higher raw material and energy
costs, acrylonitrile prices and margins weakened significantly in fiscal 2001.
As a result, we rescheduled maintenance turnaround work at our Texas City
acrylonitrile facility, performing this work during the second quarter of fiscal
2001 rather than later in the year. The adverse economic conditions that made it
commercially impracticable to operate our acrylonitrile and other nitriles
production units, and that served as the basis for our decision to advance the
timing of the turnaround, persisted beyond the completion of this maintenance
turnaround work. Consequently, we elected to postpone restarting our
acrylonitrile facilities and other nitriles production units until it is
commercially practicable to operate these facilities. Our other nitriles
production units include the sodium cyanide, TBA and DSIDA production units, all
of which are dependent on the acrylonitrile facilities for feedstocks. Market
conditions for acrylonitrile improved during the second half of fiscal 2002 and,
while the additional supply of acrylonitrile may negatively impact the market,
the restart of our acrylonitrile facilities and other nitriles production units,
other than TBA and DSIDA, is projected for the second quarter of fiscal 2003,
although that restart is subject to a number of factors, the occurrence of which
cannot be assured. The DSIDA production unit is projected for restart during the
third quarter of fiscal 2003, subject to certain conditions, including the
restart of our acrylonitrile unit. However, we are currently litigating in
Bankruptcy Court the assumption of the contracts governing DSIDA production and
related cure costs. Until the litigation is completed, it is unknown whether the
contracts will be assumed and the DSIDA unit started. Our conversion agreement
with Flexsys America L.P. ("Flexsys") for the production of TBA terminated on
December 31, 2001. At this time, we are unable to operate the unit profitably as
a producer of TBA, and we are unable to identify an alternate product that can
be produced with the equipment.
Acetic Acid. We have an agreement with BP Chemicals, Inc. ("BP Chemicals")
pursuant to which we sell all of our acetic acid production to BP through 2016.
This agreement will be assumed on modified terms upon our emergence from Chapter
11. Current North American acetic acid capacity is approximately 6 billion
pounds per year. Several capacity additions occurred in 1998 and 1999, including
an expansion of our acetic acid unit in Texas City from 800 million pounds of
rated annual production capacity to one billion pounds. In addition, in late
2000, BP Chemicals and Celanese AG began operating 880 million-pound and 1,100
million-pound acetic acid production units in Malaysia and Singapore,
respectively. The capacity additions were somewhat offset by a 1,600 million
pound global capacity reduction due to the shutdown of various outdated plants
from 1999 through 2001. The North American acetic acid market is mature and well
developed, with demand being linked to the demand for vinyl
8
acetate monomer, a key intermediate in the production of a wide array of
polymers. Vinyl acetate monomer is the largest derivative of acetic acid,
representing about 50% of total demand.
Plasticizers. We have an agreement with BASF Corporation ("BASF") pursuant
to which we sell all of our plasticizers production to BASF through 2007. Our
plasticizers are produced from linear alpha-olefins (an ethylene-based
technology), while many of our competitors use propylene-based technology. Our
plasticizers typically receive a premium over certain propylene-based products
due to their performance enhancing properties. However, the financial
performance of our business can be affected by the cost of underlying raw
materials, especially when the cost of one olefin rises faster than the other,
or by the introduction of new products.
Acrylic Fibers. In fiscal 2001, we withdrew from the traditional commodity
textile business and significantly reduced our operations and staffing at our
acrylic fibers plant in Santa Rosa, Florida. The decision came after our
rationalization and cost reduction programs failed to return this business to
profitable levels. We made this reduction due to extremely difficult operating
conditions facing the domestic acrylic textile industry, including conditions
caused by the importation of finished goods by offshore producers and higher
domestic energy and raw materials costs. We continue to produce our specialty
textile fibers and technical fibers products at this facility. As part of the
Plan, our acrylic fibers business will be transferred to existing local
management of that business in a management buyout for little or no
consideration upon our emergence from Chapter 11.
PULP CHEMICALS
Sodium Chlorate. Historically, sodium chlorate has also experienced cycles
in capacity utilization, selling prices and profit margins, although not to the
extremes seen in the petrochemicals markets. Since 1990, North American demand
for sodium chlorate has grown at an average annual rate of approximately 7%, as
pulp mills have accelerated substitution of chlorine dioxide for elemental
chlorine in bleaching applications. Substitution of chlorine dioxide for
elemental chlorine is driven primarily by environmental concerns. Chlorine
dioxide is produced from sodium chlorate, which is our primary pulp chemicals
product. Under the U.S. Environmental Protection Agency's "Cluster Rules,"
effective April 2001, elemental chlorine cannot be used in bleaching
applications, which has resulted in increased substitution of chlorine dioxide
for elemental chlorine by the North American pulp and paper industry.
In 1999, demand for sodium chlorate did not increase at historical rates
due to weak market conditions and lower operating rates in the pulp and paper
industry. In addition, new sodium chlorate production capacity was added while
implementation of the Cluster Rules was delayed. However, during fiscal 2000,
2001 and 2002, average sodium chlorate prices increased due to improved
operating rates at pulp mills and the continued conversion to elemental chlorine
free bleaching at pulp mills. The industry average market price (as reported by
Chemical Week Associates) increased by approximately 10% from fiscal 2000 to
fiscal 2001 and increased approximately 4% from fiscal 2001 to fiscal 2002. We,
together with two other companies, collectively account for more than 65% of
North American sodium chlorate production capacity. As part of the Plan, our
pulp chemicals business will be sold to Superior upon our emergence from Chapter
11.
9
PRODUCT SUMMARY
The following table summarizes our principal products, including our
capacity, primary end uses, raw materials and major competitors for each
product. "Capacity" represents rated annual production capacity at September 30,
2002, which is calculated by estimating the number of days in a typical year a
production facility is capable of operating after allowing for downtime for
regular maintenance and multiplying that number by an amount equal to the
facility's optimal daily output based on the design feedstock mix. As the
capacity of a facility is an estimated amount, actual production may be more or
less than capacity, and the following table does not reflect whether the
facility is presently operating at capacity.
STERLING PRODUCT
(CAPACITY) INTERMEDIATE PRODUCTS PRIMARY END PRODUCTS RAW MATERIALS MAJOR COMPETITORS
---------------- --------------------- --------------------- --------------------- ---------------------
PETROCHEMICALS
Styrene Polystyrene, ABS/SAN Building products, Ethylene and benzene Dow Chemical Company,
(1.7 billion pounds resins, styrene boat and automotive Lyondell Chemical
per year) butadiene latex and components, Company, BP Chemicals
unsaturated polyester disposable cups and Inc., Chevron
resins trays, packaging and Phillips Chemical
containers, Company, Shell
housewares, tires, Chemicals, Inc.,
audio and video Cos-Mar (a joint
cassettes, luggage, venture of General
children's toys, Electric Company and
paper coating, FINA Inc.) and Nova
appliance parts and Corporation
carpet backing
Acrylonitrile Acrylic fibers and Apparel, furnishings, Ammonia and propylene BP Chemicals Inc.,
(740 million pounds ABS/SAN resins upholstery, household Cytec Industries
per year) appliances, carpets Inc., E.I. du Pont de
and plastics for Nemours and Company,
automotive parts Asahi Chemical
using ABS and SAN Industry Company,
polymers Ltd., Solutia Inc.,
Tae Kwang, Formosa
Plastics, CPDC and
DSM
Acrylic Fibers N/A Apparel, fleece, Acrylonitrile, vinyl Solutia, Inc., Cydsa,
(150 million pounds hosiery, sweaters, acetate, sodium S.A. de C.V. and
per year) pile fabrics, outdoor thiocyanate, sodium Bayer AG
furniture, friction bisulfate and finish
materials, gaskets, oil
specialty papers and
non-wovens
Acetic Acid Vinyl acetate, Adhesives, PET Methanol and carbon Celanese AG, Eastman
(1 billion pounds per terephthalic acid, bottles, fibers and monoxide Chemical Company and
year) and acetate solvents surface coatings Millennium Chemicals
Inc.
Methanol Acetic acid, MTBE and Adhesives, surface Natural gas and steam Methanex Corporation,
(150 million gallons formaldehyde coatings, gasoline Lyondell Methanol
per year) oxygenate and octane Company, L.P.,
enhancer and plywood Celanese AG and Terra
adhesives Industries
Plasticizers Flexible polyvinyl Flexible plastics, Alpha-olefins, carbon ExxonMobil
(280 million pounds chloride (PVC) such as shower monoxide, hydrogen, Corporation, Sunoco
per year) curtains and liners, and orthoxylene Chemicals and Eastman
floor coverings, Chemical Company
cable insulation,
upholstery and
plastic molding
TBA (21 million N/A Pesticides, solvents, Isobutylene, sulfuric BASF Corporation and
pounds per year) pharmaceuticals and acid, caustic soda Nitto Chemical
synthetic rubber and hydrogen cyanide Industry Co., Ltd.
DSIDA (80 million N/A Herbicide Caustic soda and Solutia, Inc.
pounds per year) hydrogen cyanide
10
STERLING PRODUCT
(CAPACITY) INTERMEDIATE PRODUCTS PRIMARY END PRODUCTS RAW MATERIALS MAJOR COMPETITORS
---------------- --------------------- --------------------- --------------------- ---------------------
Sodium Cyanide N/A Electroplating and Caustic soda and Degussa-Huls, FMC
(85 million pounds precious metals hydrogen cyanide Corporation, Tong Soh
per year) recovery Petrochemical, Tae
Kwang and DSM
PULP CHEMICALS
Sodium Chlorate Chlorine dioxide Bleaching agent for Electricity, salt and Akzo Nobel, N.V.,
(500,000 tons per wood pulp production; water Nexen Inc., Kerr-
year) downstream products McGee Corporation and
include high quality Finnish Chemicals
office and coated North America
papers
Chlorine Dioxide N/A Chlorine dioxide for NA Akzo Nobel, N.V.
Generators use in the bleaching
of wood pulp
Sodium Chlorite Chlorine dioxide Antimicrobial agent Sodium chlorate and Vulcan Chemicals
(3,500 metric tons for municipal water hydrochloric acid
per year) treatment and
disinfectant for
fresh produce
Chlor Alkali N/A Bleaching and Electricity, salt and Occidental Chemical
digesting agent for water Company and Dow
pulp and paper, Chemical Company
widely used in
potable water and
wastewater treatment
programs and in
swimming pools
Calcium Hypochlorite N/A Sanitizing agent to Lime, water, caustic Olin Corporation and
(9,000 metric tons control bacteria and soda, and chlorine PPG Industries
per year) algae in swimming
pools
PRODUCTS
PETROCHEMICALS
Styrene. We have the fourth largest production capacity for styrene in
North America. Our styrene unit, located at our Texas City facility, is one of
the largest in the world and has a rated annual production capacity of
approximately 1.7 billion pounds, which represents approximately 11% of total
North American capacity. We sold approximately 34% of our styrene sales volumes
pursuant to conversion and other long-term agreements during fiscal 2002.
Approximately 32% of our styrene sales volumes were exported in fiscal 2002,
principally to Asia and Mexico.
Acrylonitrile. We have the third largest production capacity for
acrylonitrile in North America. Our acrylonitrile unit, located at our Texas
City facility, has a rated annual production capacity of approximately 740
million pounds, which represents approximately 19% of total North American
capacity. As previously discussed, our acrylonitrile facility is not currently
in operation, but is projected to be restarted in the second quarter of fiscal
2003, although that restart is subject to a number of factors, the occurrence of
which cannot be assured. Our acrylonitrile agreements with BP will be assumed
with modified terms upon our emergence from Chapter 11. Under the modifications
to the BP acrylonitrile agreements, we are not obligated to deliver any
acrylonitrile to BP or ANEXCO until our acrylonitrile facilities are restarted.
In addition, if we and BP do not enter into an expanded acrylonitrile
relationship, and we have not restarted our acrylonitrile facilities by August
31, 2003, all of the BP acrylonitrile agreements that are executory in nature
will automatically terminate, we will transfer our interest in ANEXCO to BP for
nominal consideration and, if we have elected to permanently shut down our
acrylonitrile facility, we will sell all of our BP-supplied acrylonitrile
catalyst to BP for nominal consideration. On the other hand, if we have not
elected to permanently shut down our acrylonitrile facilities, BP will continue
to sell us acrylonitrile catalyst at prevailing market rates. We are also
negotiating an expanded acrylonitrile business relationship with BP. A small
quantity of acrylonitrile was
11
purchased from third parties during fiscal 2002 to fulfill the requirements of
remaining domestic contracts and to supply our acrylic fibers plant.
Acetic Acid. We have the second largest production capacity for acetic
acid in North America. Our acetic acid unit, located at our Texas City facility,
has a rated annual production capacity of approximately one billion pounds,
which represents approximately 17% of total North American capacity. All of our
acetic acid production is sold to BP Chemicals pursuant to a long-term contract
that expires in 2016. Our acetic acid agreements with BP will be assumed on
modified terms upon our emergence from Chapter 11.
Methanol. We own a methanol unit at our Texas City facility with a rated
annual production capacity of approximately 150 million gallons. On June 29,
2000, we, in conjunction with BP Chemicals, announced a multi-year contract with
Methanex Corporation ("Methanex") for the purchase of our respective methanol
requirements from Methanex. At that time, we granted Methanex exclusive rights
to acquire the output of our methanol plant, which we continue to own. Under
this agreement, Methanex chose to discontinue production at our methanol plant
on July 1, 2000, and provide our methanol requirements with methanol produced in
countries that have a significant advantage in the cost of natural gas, the
primary raw material in the production of methanol. However, Methanex may elect
to restart our methanol facility at any time, subject to notice requirements and
the payment of related expenses. Our agreement with Methanex will be assumed
upon our emergence from Chapter 11.
Plasticizers. We produce plasticizers at our Texas City facility for BASF
Corporation. Under our long-term agreement with BASF, which expires in 2007, we
sell all of our plasticizers production to BASF. Our rated annual production
capacity of plasticizers is approximately 280 million pounds. Our agreement with
BASF has been assumed on modified terms.
TBA. Our rated annual production capacity for TBA is approximately 21
million pounds. In fiscal 2001, we used a portion of our hydrogen cyanide
by-product from our Texas City acrylonitrile facility to produce TBA, which we
sold to Flexsys pursuant to a processing agreement. Flexsys terminated this
agreement as of December 31, 2001. Since the second quarter of fiscal 2001, the
TBA unit has not operated due to the continued shutdown of our acrylonitrile
unit. We have decontaminated the equipment for safety and environmental reasons,
and the unit's permits have been maintained. As a result, we can operate the
plant either for TBA or to make another product. At this time, we are unable to
operate the unit profitably as a producer of TBA, and we have been unable to
identify an alternative product that can be produced with the equipment.
Sodium Cyanide. Pursuant to a long-term arrangement, we operate a sodium
cyanide unit at our Texas City facility which is owned by E. I. du Pont de
Nemours and Company ("DuPont"). This sodium cyanide unit uses hydrogen cyanide
by-product from our Texas City acrylonitrile facility as a raw material. The
rated annual production capacity of this unit is approximately 85 million
pounds. Since the second quarter of fiscal 2001, the sodium cyanide unit has not
operated due to the continued shutdown of our acrylonitrile unit. We are
currently in negotiations with DuPont regarding modifications to our existing
sodium cyanide supply arrangements. If we are able to finalize these
negotiations and execute a definitive agreement with DuPont incorporating these
modifications on or before December 15, 2002, we will assume our sodium cyanide
supply agreement with DuPont. On the other hand, if no such definitive
documentation is executed on or before December 15, 2002, our sodium cyanide
arrangements with DuPont will terminate without liability to either party and
the sodium cyanide unit will be dismantled.
DSIDA. Near the end of the first quarter of fiscal 2001, we began
operating a DSIDA plant at our Texas City facility that is owned by Monsanto
Company ("Monsanto"). DSIDA is an essential intermediate in the production of
Monsanto's Roundup(R), a glyphosate-based herbicide. Under long-term
arrangements with Monsanto, we operate the DSIDA plant on behalf of Monsanto and
supply hydrogen cyanide by-product from our Texas City acrylonitrile facility as
a raw material. The rated annual production capacity of the DSIDA plant is 80
million pounds. Since the second quarter of fiscal 2001, the DSIDA unit has not
operated due to the continued shutdown of our acrylonitrile unit. The DSIDA
production unit is projected for restart during the third quarter of fiscal
2003, subject to certain conditions, including the restart of the acrylonitrile
unit, and as such, there can be no assurances. However we are
12
currently litigating in Bankruptcy Court the assumption of the contracts
governing DSIDA production and related cure costs. Until the litigation is
completed, it is unknown whether the contracts will be assumed and the DSIDA
unit started.
Acrylic Fibers. In fiscal 2001, we withdrew from the traditional commodity
textile business and significantly reduced our operations and staffing at our
acrylics fiber plant in Santa Rosa, Florida. We continue to produce specialty
textile fibers and technical fibers at this facility. Specialty textile fibers
are targeted for specific applications or end uses and typically have higher
margins than regular textile fibers. Technical fibers are specially engineered
for industrial, non-textile uses such as brake linings and typically have higher
margins than textile fibers. As part of the Plan, our acrylic fibers business
will be transferred to existing local management of that business in a
management buyout for little or no consideration upon our emergence from Chapter
11.
PULP CHEMICALS
As part of the Plan, our pulp chemicals business will be sold to Superior
upon our emergence from Chapter 11.
Sodium Chlorate. We are the second largest producer of sodium chlorate in
North America. Our six sodium chlorate facilities have an aggregate rated annual
production capacity of approximately 500,000 tons, which represents
approximately 23% of total North American capacity.
Chlorine Dioxide Generators. Through our ERCO Systems Group ("ERCO"), we
are the largest worldwide supplier of patented technology for generators that
certain pulp mills use to convert sodium chlorate into chlorine dioxide. Each
mill that uses chlorine dioxide requires at least one generator. We receive
revenue when a generator is sold to a mill and also receive royalties from the
mill after start-up, generally over a ten-year period, based on the amount of
chlorine dioxide produced by the generator. We have supplied approximately
two-thirds of all existing modern pulp mill generators worldwide.
The research and development group of ERCO works to develop new and more
efficient generators. When pulp mills move to higher levels of substitution of
chlorine dioxide for elemental chlorine, they are usually required to upgrade
generator capacity or purchase new generator technology. Pulp mills may also
convert to a newer generator to take advantage of efficiency advances and
technological improvements. Each upgrade or conversion requires a licensing
agreement, which generally provides for payment of an additional ten-year
royalty.
Sodium Chlorite. We have a rated annual production capacity of sodium
chlorite of approximately 3,500 tons, with a second plant having 5,000 tons of
capacity to be added in the second quarter of fiscal 2003 to supply the
increased demand for chlorine dioxide as a primary disinfectant for municipal
drinking water and industrial wastewater disinfection.
For historical information presented on a segmented basis for our
petrochemicals business and pulp chemicals business, see Note 10 of the Notes to
Consolidated Financial Statements included in this Form 10-K.
SALES AND MARKETING
We sell our petrochemicals products pursuant to:
- multi-year contracts;
- conversion agreements; and
- spot transactions in both the domestic and export markets.
13
We have certain long-term agreements that provide for the dedication of
100% of our production of acetic acid, plasticizers, sodium cyanide, methanol
and DSIDA, 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. These agreements
are intended to:
- optimize capacity utilization rates;
- lower our selling, general and administrative expenses;
- reduce our working capital requirements; and
- insulate our operations, to some extent, from the effects of declining
markets and changes in raw materials prices.
We compete on the basis of product price, quality and deliverability.
Prices for our petrochemicals products are determined by global market
factors that are largely beyond our control and, except with respect to a number
of our multi-year contracts, we generally sell these products at prevailing
market prices.
Some of our multi-year contracts for our petrochemicals products are
structured as conversion agreements, pursuant to which the customer furnishes
raw materials that we process into finished products. In exchange, we receive a
fee typically designed to cover our fixed and variable costs of production and
to generally provide an element of profit depending on the existing market
conditions for the product. These conversion agreements are intended to help us
maintain lower levels of working capital and, in some cases, gain access to
certain improvements in manufacturing process technology. Our conversion
agreements are designed to insulate us to some extent from the effects of
declining markets and changes in raw materials prices, while allowing us to
share in the benefits of favorable market conditions for most of the products
sold under these arrangements. The balance of our petrochemicals products are
sold by our direct sales force, sales agents or through ANEXCO, LLC, our
marketing joint venture with BP Chemicals.
Our acrylic fibers facility currently markets products in North America
through our internal sales staff and to international customers through
non-affiliated agents. Acrylic fibers are priced based upon market conditions,
which include, but are not limited to, raw materials costs, prices of competing
and alternative products and type of end use.
We sell sodium chlorate primarily in Canada and the United States,
generally under one to five-year supply contracts, most of which provide for
maximum volumes or a percentage of requirements at market prices. In addition,
some of our sodium chlorate sales contracts contain certain "meet or release"
pricing clauses and restrictions on the amount and timing of future price
increases or decreases. However, the percentage of our sales subject to these
clauses is decreasing over time as these contracts expire or otherwise
terminate.
We market chlorine dioxide generators worldwide to the pulp and paper
industry, providing licenses for technology and making sales of the requisite
equipment. In addition to being paid for the technology and equipment, we
receive royalties based on the amount of chlorine dioxide produced by the
generator, generally over a ten-year period.
For information regarding our export sales and domestic and foreign
operations, see Note 10 of the Notes to Consolidated Financial Statements
included in this Form 10-K.
CONTRACTS
Our key multi-year contracts, which collectively accounted for 16% of our
fiscal 2002 revenues, are described below. BP Chemicals accounted for
approximately 10%, 12% and 11% of our revenues in fiscal 2002, 2001 and 2000,
respectively. No other single customer accounted for more than 10% of our
revenues in the last three fiscal years.
14
All of the Debtors' contracts and agreements have continued in effect in
accordance with their terms notwithstanding our Chapter 11 filings, unless
otherwise ordered by the Bankruptcy Court. The Bankruptcy Code provides the
Debtors with the opportunity at any time prior to emergence from Chapter 11 to
reject any contracts or agreements that are burdensome or to assume any
contracts or agreements that are favorable or otherwise necessary to their
business operations. With the exception of the Monsanto DSIDA contract and the
DuPont sodium cyanide contract, the Debtors have made final determinations
related to the assumption or rejection of all of their material contracts and
believe all contracts necessary for the operation of the Debtors' business have
been either assumed or an alternate source of goods or materials has been
confirmed.
ACRYLONITRILE-BP CHEMICALS
In 1988, we entered into a long-term production agreement with BP Chemicals
under which BP Chemicals contributed the majority of the capital expenditures
required for starting the third acrylonitrile reactor train at our Texas City
acrylonitrile facility. Under this agreement, BP Chemicals has the option to
take up to approximately one-sixth of our total acrylonitrile capacity. BP
Chemicals furnishes the necessary raw materials, pays us a conversion fee for
the amount of acrylonitrile it takes and reimburses us for a portion of the
fixed costs related to acrylonitrile production at our Texas City facility. To
protect BP Chemicals in the event we default under the production agreement, BP
Chemicals has a first priority security interest in the third reactor and
related equipment and in the first acrylonitrile produced in our three reactor
units to the extent BP Chemicals is entitled to purchase acrylonitrile under
this production agreement. This agreement was amended and restated in April 1998
to, among other things, encourage increased manufacturing and technical
cooperation. During fiscal 2002, due to the continued shutdown of our
acrylonitrile facility, no acrylonitrile was produced for BP Chemicals pursuant
to this agreement.
We have incorporated certain BP Chemicals technological improvements into
two of our acrylonitrile reactors under a separate license agreement. We have
the right to incorporate these and any future improvements into our remaining
acrylonitrile reactor.
In order to enhance the marketing of our acrylonitrile, we and BP Chemicals
formed ANEXCO, LLC, an exclusive joint venture to market acrylonitrile in Asia
and South America. During fiscal 2002, due to the continued shutdown of our
acrylonitrile unit, we did not market acrylonitrile through ANEXCO, LLC.
Our acrylonitrile agreements with BP will be assumed on modified terms upon
our emergence from Chapter 11. We are currently negotiating an expanded
acrylonitrile business relationship with BP. Under the modifications to the BP
acrylonitrile agreements, we are not obligated to deliver any acrylonitrile to
BP or ANEXCO until our acrylonitrile facilities are restarted. In addition, if
we and BP do not enter into an expanded acrylonitrile relationship, and we have
not restarted our acrylonitrile facilities by August 31, 2003, all of the BP
acrylonitrile agreements that are executory in nature will automatically
terminate, we will transfer our interest in ANEXCO to BP for nominal
consideration and, if we have elected to permanently shut down our acrylonitrile
facility, we will sell all of our BP-supplied acrylonitrile catalyst to BP for
nominal consideration. If we have not elected to permanently shut down our
acrylonitrile facilities, BP will continue to sell us acrylonitrile catalyst at
prevailing market rates.
ACETIC ACID-BP CHEMICALS
In 1986, we entered into a long-term production agreement with BP
Chemicals, which has since been amended, under which BP Chemicals has the
exclusive right to purchase all of our acetic acid production until August 2016
and is obligated to make certain monthly payments to us until August 2006 and
reimburse us for our operating costs. We are also entitled to receive a portion
of the profits earned by BP Chemicals from the sale of the acetic acid we
produce. Our acetic acid agreements with BP will be assumed upon our emergence
from Chapter 11.
15
METHANOL-BP CHEMICALS-METHANEX
In August 1996, we entered into a long-term production and sales agreement
with BP Chemicals, under which BP Chemicals contributed a significant portion of
the capital expenditures required for the construction of our methanol
production facility at our Texas City facility and obtained the right to receive
a substantial portion of our methanol production. The initial term of this
agreement expires July 31, 2016. Historically, a portion of the output of the
methanol facility was used in our acetic acid unit and the remainder was
marketed by BP Chemicals in the merchant market and in BP Chemicals' worldwide
acetic acid business.
On July 1, 2000, we, in conjunction with BP Chemicals, entered into a
multiyear contract with Methanex for the purchase of their respective methanol
requirements from Methanex. At that time, we granted Methanex the exclusive
right to acquire the output of our methanol plant, which we continue to own.
Under this agreement, Methanex chose to discontinue production at our methanol
plant on July 1, 2000, and to provide our methanol requirements with methanol
produced in countries that have a significant advantage in the cost of natural
gas, the primary raw material in the production of methanol. However, Methanex
may elect to restart our methanol facility at any time, subject to notice
requirements and the payment of related expenses. The initial term of these
agreements expires December 31, 2003, with automatic annual renewals thereafter
unless Methanex or we elect not to renew these agreements. Our agreements with
Methanex will be assumed upon our emergence from Chapter 11.
In connection with the Methanex transaction, on July 1, 2000, we entered
into an interim methanol agreement with BP Chemicals that overrides our prior
production agreement with BP Chemicals. So long as the Methanex transaction is
in place, the interim methanol agreement governs the methanol relationship
between BP Chemicals and us. The interim methanol agreement contains provisions
designed to address issues arising under the prior production agreement due to
the arrangements with Methanex, including provisions governing the division of
any income streams received by us from Methanex. It also provides, under a
limited defined set of circumstances, for the possibility of an early
termination of our production agreement with BP Chemicals. Our methanol
agreements with BP will be assumed upon our emergence from Chapter 11.
PLASTICIZERS-BASF
Since 1986, we have sold all of our plasticizers production to BASF
pursuant to a product sales agreement that has previously been amended and
expires at the end of 2007. BASF provides us with some of the required raw
materials and markets the plasticizers we produce. BASF is obligated to make
certain quarterly payments to us and to reimburse us monthly for actual
production costs. In addition, we share in the profits and losses realized by
BASF in connection with the plasticizers we produce. Our agreement with BASF has
been assumed on modified terms.
RAW MATERIALS FOR PRODUCTS AND ENERGY RESOURCES
For most of our products, the cost of raw materials and energy resources,
including utilities in the case of pulp chemicals, is far greater than all other
production costs combined. Thus, an adequate supply of raw materials and
utilities at reasonable prices and on acceptable terms is critical to the
success of our business. Most of the raw materials we use are global commodities
which are made by a large number of producers. Prices for many of these raw
materials are subject to wide fluctuations for a variety of reasons beyond our
control. Although we believe that we will continue to be able to secure adequate
supplies of our raw materials and energy, there can be no assurance that we will
be able to do so at acceptable prices or payment terms. See "Certain Known
Events, Trends, Uncertainties and Risk Factors" in Item 7.
PETROCHEMICALS
Styrene. We manufacture styrene by converting ethylene and benzene into
ethylbenzene, which we then process into styrene. Ethylene and benzene are both
commodity petrochemicals. Prices for each can fluctuate widely due to
significant changes in the availability of these products. We have multi-year
16
arrangements with several major ethylene and benzene suppliers that provide a
significant percentage of our estimated requirements for purchased ethylene and
benzene at generally prevailing and competitive market prices. Our conversion
agreements require that the other parties to these agreements furnish us with
the ethylene or benzene necessary to fulfill our conversion obligations.
Approximately 14% of our fiscal 2002 benzene requirements and approximately 34%
of our fiscal 2002 ethylene requirements were furnished by customers pursuant to
conversion arrangements. If various customers for whom we now manufacture
styrene under conversion agreements were to cease furnishing their own raw
materials, our requirements for purchased benzene and ethylene could
significantly increase.
Acrylonitrile. We produce acrylonitrile by reacting propylene and ammonia.
Propylene and ammonia are both commodity chemicals and the price for each can
fluctuate widely due to significant changes in the availability of these
products. The propylene or ammonia needed for the acrylonitrile we produce under
conversion agreements is furnished to us by our customers. We purchase the rest
of the propylene and ammonia we need for acrylonitrile production. However, in
fiscal 2002, due to the continued shutdown of our acrylonitrile facility, we did
not produce acrylonitrile and, consequently, no propylene or ammonia was
furnished by customers pursuant to conversion agreements. Our acrylonitrile
facility is projected to be restarted in the second quarter of fiscal 2003,
although that restart is subject to a number of factors, the occurrence of which
cannot be assured. If, after restart of our acrylonitrile facilities, various
customers for whom we have historically manufactured acrylonitrile under
conversion agreements were to cease furnishing their own raw materials and seek
only to purchase acrylonitrile from us without supplying their own raw
materials, our requirements for purchased propylene and ammonia could
significantly increase from historic levels.
Acetic Acid. Acetic acid is manufactured primarily from carbon monoxide
and methanol. In the past, we produced all of the carbon monoxide and methanol
required by our acetic acid unit. However, under the previously discussed
multi-year agreements with Methanex, we have purchased all of our methanol
requirements from Methanex since July 1, 2000. In 1996, Praxair Hydrogen Supply,
Inc. constructed a partial oxidation unit at our Texas City facility that
supplies us with all of the carbon monoxide we require for the production of
acetic acid.
Plasticizers. The primary raw materials for plasticizers are alpha-olefins
and orthoxylene, which are supplied by BASF under our long-term conversion
agreement, and carbon monoxide and hydrogen, which are supplied by Praxair
Hydrogen Supply, Inc.
DSIDA. DSIDA is manufactured using hydrogen cyanide provided as a
by-product of our acrylonitrile manufacturing process. In fiscal 2002, due to
the continued shutdown of our acrylonitrile facility, DSIDA was not produced.
The DSIDA production unit is projected for restart during the third quarter of
fiscal 2003, subject to certain conditions, including the restart of the
acrylonitrile unit, and as such, there can be no assurances. However, we are
currently litigating in Bankruptcy Court the assumption of the contracts
governing DSIDA production and related cure costs. Until the litigation is
completed, it is unknown whether the contracts will be assumed and the DSIDA
unit started.
Sodium Cyanide. Sodium cyanide is manufactured using hydrogen cyanide
produced as a by-product of our acrylonitrile manufacturing process. In fiscal
2002, due to the continued shutdown of our acrylonitrile facility, sodium
cyanide was not produced.
Acrylic Fibers. Acrylonitrile is the most significant raw material used in
the production of acrylic fibers, representing approximately 50% of the total
cash cost of production. We either purchase the acrylonitrile from outside
sources, or supply the acrylonitrile from existing inventory at our Texas City
facility. As part of the Plan, our acrylic fibers business will be transferred
to existing management in a management buyout for little or no consideration
upon our emergence from Chapter 11.
PULP CHEMICALS
Sodium Chlorate. Sodium chlorate is manufactured by passing an electric
current through an undivided cell containing a solution of sodium chloride. The
primary raw materials for the production of
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sodium chlorate are electricity, salt and water. Of these, electric power
typically represents approximately 65% or more of the variable cost of
production. Consequently, the rates charged by local electric utilities are an
important competitive factor among sodium chlorate producers. Electric power is
purchased by each of our pulp chemicals facilities pursuant to contracts with
local electric utilities. On average, we believe that our electrical power costs
at our pulp chemical facilities are competitive with other producers in the
areas in which we operate. The current trend towards deregulation of electric
power makes our future cost for electric power uncertain in the short term. We
purchase most of the sodium chloride that we use in the manufacture of sodium
chlorate under requirements contracts with major suppliers.
Sodium Chlorite. Sodium chlorite is manufactured from sodium chlorate,
which is converted to chlorine dioxide and then converted to sodium chlorite.
Consequently, the same factors which impact sodium chlorate costs, primarily
power costs, impact sodium chlorite costs. As part of the Plan, our pulp
chemicals business will be sold to Superior upon our emergence from Chapter 11.
TECHNOLOGY AND LICENSING
PETROCHEMICALS
In 1986, Monsanto granted us a non-exclusive, irrevocable and perpetual
right and license to use Monsanto's technology and other technology Monsanto
acquired through third-party licenses in effect at the time of the acquisition
of our Texas City facility from Monsanto. We use these licenses in the
production of styrene, acrylonitrile, methanol, TBA, acetic acid and
plasticizers. During 1991, BP Chemicals Ltd. ("BPCL") purchased the acetic acid
technology from Monsanto, subject to existing licenses.
Under an Acetic Acid Technology Agreement with BP Chemicals and BPCL, BPCL
granted us a non-exclusive, irrevocable and perpetual right and license to use
acetic acid technology owned by BPCL and some of its affiliates at our Texas
City facility, including any new acetic technology developed by BPCL at its
acetic acid facilities in England during the term of such agreement or pursuant
to the research and development program provided by BPCL under the terms of such
agreement.
BPCL has also granted us a non-exclusive, irrevocable and perpetual
royalty-free license to use its acrylonitrile technology at our Texas City
facility as part of the 1988 acrylonitrile expansion project. This license
automatically terminates upon the termination of our acrylonitrile production
agreement with BP Chemicals. However, such termination does not prevent the
continued use of BP's catalyst and technology, or prevent the continued
production of acrylonitrile at our Texas City plant. We have agreed with BPCL to
cross-license any technology or improvements relating to the manufacture of
acrylonitrile at our Texas City facility.
Although we do not engage in alternative process research with respect to
our Texas City facility, we do monitor new technology developments and, when we
believe it is necessary, we typically seek to obtain licenses for process
improvements.
We own substantially all of the technology used in our acrylic fibers
operations. We license certain of our acrylic fibers manufacturing technology to
producers worldwide. Approximately 15% of the world's total acrylic fibers
capacity is based on our technology. As part of the Plan, our acrylic fibers
business will be transferred to existing management in a management buyout for
little or no consideration upon our emergence from Chapter 11.
PULP CHEMICALS
We produce sodium chlorate using state-of-the-art metal cell technology.
Our principal technology business is the design, sale and technical service of
custom-built patented chlorine dioxide generators. ERCO is involved in the
technical support of our sales and marketing group through joint calling efforts
which define the scope of a project, as well as producing technical schedules
and cost estimates.
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We perform detailed design of chlorine dioxide generators, which are then
fabricated by contractors. Plant installation, instrumentation testing and
generator start-up are supervised by our joint engineering/technical service
team. Our pulp chemicals research and development activities are carried out at
our Toronto, Ontario laboratories. Activities include the development of new or
improved chlorine dioxide generation processes and research into new
technologies focusing on electrochemical and membrane technology related to
chlorine dioxide, including improvement of quality and reduction of quantity of
pulp mill effluents and treatment of municipal water supplies. As part of the
Plan, our pulp chemicals business will be sold to Superior upon our emergence
from Chapter 11.
COMPETITION
The industries in which we operate are highly competitive. Many of our
competitors, particularly in the petrochemicals industry, are larger and have
substantially greater financial resources than we have. Among our competitors
are some of the world's largest chemical companies that, in contrast to us, have
their own raw materials resources. In addition, a significant portion of our
business is based upon widely available technology. The entrance of new
competitors into the industry and the addition by existing competitors of new
capacity could have a negative impact on our ability to maintain existing market
share or maintain or increase profit margins, even during periods of increased
demand for our products. You can find a list of our principal competitors in the
"Product Summary" table.
Historically, profitability of the petrochemicals industry has been
affected by vigorous price competition, which may intensify due to, among other
things, new domestic and foreign industry capacity. Our businesses are subject
to changes in the world economy, including changes in currency exchange rates.
In general, weak economic conditions, either in the United States or worldwide,
tend to reduce demand and margins for our products.
Operations outside the United States are subject to the economic and
political risks inherent in the countries in which they operate. Additionally,
export and domestic markets can be affected significantly by import laws and
regulations. During 2002, our export sales were approximately 34% of our total
revenues. It is not possible to predict accurately how changes in raw material
costs, market conditions, developments in our Chapter 11 proceedings or other
factors will affect future sales volumes, prices and margins for our products.
ENVIRONMENTAL MATTERS
GENERAL
Our operations involve the handling, production, transportation, treatment
and disposal of materials that are classified as hazardous or toxic waste and
that are extensively regulated by environmental and 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
manufacture, handling, processing, distribution and use of our chemical products
and, if so affected, our business and operations may be materially and adversely
affected. In addition, changes in environmental requirements can cause us to
incur substantial costs in upgrading or redesigning our facilities and
processes, including 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 at all of our facilities.
We routinely conduct inspection and surveillance programs designed to detect and
respond to leaks or spills of regulated hazardous substances and to correct
identified regulatory deficiencies. We believe that our procedures for waste
handling are consistent with industry standards and applicable requirements. In
addition, we believe that our operations are consistent with good industry
practice. We continue to participate in Responsible Care(R) initiatives as a
part of our membership in several trade groups which are partner associations in
the American Chemistry Council in the United States and the Canadian Chemical
Producers Association in Canada. Notwithstanding our
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efforts and beliefs, a business risk inherent in 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 our business operations and facilities generally are operated in
compliance with all applicable environmental and 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 and 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.
Our operating expenditures for environmental matters, mostly waste
management and compliance, were approximately $30 million for fiscal 2002 and
$34 million for fiscal 2001. This reduction is due to the shutdown of our
acrylonitrile and derivative HCN facilities at our Texas City Plant. We also
spent approximately $2 million for environmentally related capital projects in
fiscal 2002 and $2 million for these types of capital projects in fiscal 2001.
In fiscal 2003, we anticipate spending approximately $3 million to $8 million
for capital projects related to waste management, incident prevention and
environmental compliance, the majority of which will be for our Texas City
petrochemical facility. This increase is due to both nitrogen oxide
reduction-related projects at our Texas City plant and increased environmental
capital expenditures at our pulp chemicals facilities. As part of the Plan, our
pulp chemicals business will be sold to Superior upon our emergence from Chapter
11. There are no capital expenditures related to remediation of environmental
conditions projected for fiscal 2003.
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 facilities or
at facilities operated by third parties where we have disposed of waste. We
continually review all estimates of potential environmental liabilities but can
give no assurances that all potential liabilities arising out of our past or
present operations have been identified or fully assessed or that the amount
necessary to investigate and remediate such conditions will not be significant
to us. It is our policy to make safety, environmental and replacement capital
expenditures a priority in order to ensure adequate safety and compliance at all
times. In the event we should not have available to us, at any time, liquidity
sources sufficient to fund any of these expenditures, prudent business practice
might require that we cease operations at the affected facility to avoid
exposing our employees and contract workers, the surrounding community or
environment to potential harm.
We believe that we would be able to recover certain losses that may arise
out of claims related to environmental conditions at each of our facilities that
existed prior to their acquisition by us through contractual indemnities and/or
statutory law and common law principles, although there can be no assurance that
we would prevail against any prior owner of any of our facilities with respect
to any such claim.
Claims for environmental liabilities of the Debtors arising prior to our
Chapter 11 filings have been addressed in the Plan. In general, monetary claims
relating to remedial actions at off-site locations used for disposal prior to
the Chapter 11 filings and penalties resulting from violations of environmental
requirements before that time will be treated as general unsecured claims.
Actions by governmental authorities to determine liability for and the amount of
such penalties will generally not be subject to the automatic stay. We will be
obliged to comply with environmental requirements in the conduct of our business
as a debtor-in-possession, including the potential obligation to conduct
remedial actions at facilities we own or operate, regardless of when the
contamination at those facilities occurred.
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PETROCHEMICALS
Air emissions from our Texas City facility and our acrylic fibers facility
are subject to certain permit requirements and self-implementing emission
limitations and standards under state and federal laws. Our Texas City facility
is located in an area that the Environmental Protection Agency ("EPA") has
classified as not having attained the ambient air quality standards for ozone,
which is controlled by direct regulation of volatile organic compounds and
nitrogen oxide. The Texas Commission for Environmental Quality ("TCEQ") has
imposed strict requirements on regulated facilities, including our Texas City
facility, to ensure that the air quality control region will achieve the ambient
air quality standards for ozone. Our acrylic fibers facility is located in an
area currently designated as being in attainment for ozone under the Clean Air
Act. Our Texas City facility and our acrylic fibers facility are subject to the
federal government's June 1997 National Ambient Air Quality Standards which
lower the ozone and particulate matter threshold for attainment. Local
authorities also may impose new ozone and particulate matter standards.
Compliance with these stricter standards may substantially increase our future
nitrogen oxide, volatile organic compounds and particulate matter control costs,
the amount and full impact of which cannot be determined at this time. In fiscal
2001, the TCEQ enacted new regulations requiring significant reductions of
nitrogen oxide which apply to our Texas City facility. The TCEQ is also expected
to propose similar regulations requiring the reduction of particulate matter
which will apply to our Texas City facility. The nitrogen oxide regulations
covering the Houston/Galveston Area State Implementation Plan were approved by
the EPA on October 15, 2001. Under these regulations, we are required to reduce
emissions of nitrogen oxide at our Texas City facility by up to approximately
90%, which we estimate would require us to make between $25 million and $30
million in capital improvements at our Texas City facilities. The majority of
these capital expenditures are expected to be incurred from fiscal 2003 through
fiscal 2007. Under our production agreements with BP Chemicals, we would be able
to recover a small portion of these costs from BP Chemicals. We are currently
evaluating several alternative methods of reducing nitrogen oxide emissions at
our Texas City facility that would require less capital expenditures. However,
we cannot give any assurances that any alternative methods will be available to
us or that, even if available, these alternative methods would reduce the amount
of capital expenditures required to be made by a meaningful amount. In addition
to reducing nitrogen oxide emissions, some of these expenditures could result in
a reduction in operating costs. However, there can be no assurances that we will
be able to reduce our operating costs. We are also considering the impact of a
settlement agreement between the TCEQ and an industry group, the Business
Coalition for Clean Air, which could result in modification of the ozone
reduction requirements, including possible reductions in permissible levels of
emissions of volatile organic compounds (total or reactive), or a possible
reduction of the nitrogen oxide reduction target from 90% to 80%. Due to the
uncertainty of the final outcome of these proposed rules, it is impossible to
predict the impact of these regulations and changes on our business or financial
condition. In June 2002, the TCEQ proposed new rules that would require
additional controls of flares, cooling towers and fugitive and process vent
emissions of certain highly-reactive volatile organic compounds.
To reduce the risk of offsite consequences from unanticipated events, we
acquired a greenbelt buffer zone adjacent to our Texas City facility in 1991
and, in connection with the acquisition of our acrylic fibers facility, acquired
a greenbelt area for our acrylic fibers facility. We also participate in a
regional air monitoring network to monitor ambient air quality in the Texas City
community.
On June 11, 2001, we received a notice from the U.S. Department of Justice,
Environment and Natural Resources Division, in which the Department alleged that
on April 1, 1998, an ethylbenzene release at our Texas City facility violated
the general duty clause of the Clean Air Act and invited us to engage in
settlement discussions with respect to the matter. Although we believe that the
April 1, 1998 ethylbenzene release did not constitute a violation of the general
duty clause of the Clean Air Act, and, while admitting no liability, we settled
the Department's claim for $650,000, which is treated as a general unsecured
claim under the Plan. This settlement was approved by the Bankruptcy Court on
November 20, 2002. Additionally, an EPA bankruptcy claim for remediation costs
associated with the Malone disposal site was withdrawn as part of the settlement
discussed above.
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A settlement agreement entered into by the EPA, the Florida Department of
Environmental Protection ("FDEP") and an environmental group potentially applies
to our acrylic fibers facility. This settlement agreement imposes a no-migration
standard for injection wells in underground drinking water zones without regard
to actual risk considerations. We and several similarly situated companies have
been contesting this settlement. An April 1999 ruling by the United States Court
of Appeals for the 11th Circuit may reduce the likelihood that the no-migration
rule is enforceable, although we can give no assurances in that regard. In the
event that the no-migration rule becomes enforceable, we may incur material
costs in redesigning our wastewater handling systems. However, in September
2000, the FDEP awarded us a five-year permit to operate the deepwell injection
facilities at our acrylic fibers facilities. Under this permit, we were granted
an "injection into an aquifer" exemption, subject to monitoring of groundwater.
As a result, during the life of this permit, we would not be subject to this
no-migration rule even if it became enforceable, assuming that this permit is
not revised in any material way.
We are presently involved in discussions with the FDEP regarding
allegations that past or present waste handling practices at our acrylic fibers
facility in Santa Rosa, Florida have adversely affected the water quality of
streams on the property. The results of analysis performed by our independent
contractors have been submitted to the FDEP for review. As a proactive measure,
our acrylic fibers facility made significant reductions in the level of certain
spent precipitates disposed of in the existing, on-site landfill. Additionally,
our acrylic fibers facility has requested the consolidation of their EPA HISWA
permit application and their FDEP RCRA Part B permit, which would be
administered by the FDEP. At this time, we do not know the nature and extent of
remedial actions, if any that may ultimately be required under future permits.
As part of the Plan, our acrylic fibers business will be transferred to the
existing local management of that business in a management buyout for little or
no consideration concurrent with our emergence from Chapter 11.
PULP CHEMICALS
Our pulp chemicals business is sensitive to potential environmental
regulations. On November 14, 1997, the EPA enacted regulations that support
substitution of chlorine dioxide for elemental chlorine in paper pulp bleaching
processes to reduce the amount of absorbable organic halides and other chlorine
derivatives in bleach plant effluent. Chlorine dioxide is produced from sodium
chlorate, which is one of our pulp chemicals products. Therefore, regulations
restricting, but not completely banning, absorbable organic halides and other
chlorine derivatives in bleach plant effluent have a favorable effect on our
business.
Conversely, a significant ban on all chlorine containing compounds could
have a materially adverse effect on our financial condition and results of
operations. British Columbia had a regulation in place requiring elimination of
the use of all chlorine products, including chlorine dioxide, in the bleaching
process by December 31, 2002. However, on July 5, 2002, British Columbia amended
the regulation, which now permits a monthly average discharge of 0.6 kg of AOX
per air dry metric ton, which is similar to the U.S. EPA regulations governing
bleach pulp mills.
We acquired four of our Canadian pulp chemicals facilities from Tenneco
Canada, Inc. in 1992 and our Saskatoon facility from Weyerhauser Canada Ltd. in
1997. Groundwater data obtained during the acquisition of the Tenneco facilities
indicated elevated concentrations of certain chemicals in the soil and
groundwater. Prior to completion of that acquisition, we conducted a focused
baseline sampling of groundwater conditions beneath the facilities and confirmed
that previous data. We have addressed or are addressing elevated soil or
groundwater concentrations of chemicals that we have encountered from time to
time at the facilities we acquired from Tenneco. We also reviewed air emissions
sources during the acquisition of these facilities and considered all available
dustfall and vegetation stress studies. This review indicated emission excursion
episodes at specific locations in the scrubber systems at our Buckingham and
Vancouver facilities. The conditions at these two sites have been addressed and
satisfactorily resolved. We believe that all of the facilities we acquired from
Tenneco are otherwise in compliance in all material respects with all permit
requirements under applicable provincial law. At our Saskatoon facility,
22
remediation plans regarding ground water contamination from prior operations are
under negotiation. Weyerhauser Canada Ltd. and Crown Investments Corporation,
who previously owned the facility, along with the Saskatchewan Environmental
Resource Ministry and ourselves, are participants in the negotiations.
Currently, our role is to coordinate the activities and the prior owners are
expected to fund the remediation costs.
As part of the Plan, our pulp chemicals business will be sold to Superior
concurrent with our emergence from Chapter 11.
EMPLOYEES
As of September 30, 2002, we had approximately 871 employees, including
approximately 503 assigned to our petrochemicals operations and approximately
368 assigned to our pulp chemicals operations. After emergence from Chapter 11,
we will have approximately 450 employees. Approximately 40% of our employees are
covered by union agreements. The primary union agreement at our Texas City
facility is with the Texas City, Texas Metal Trades Council, AFL-CIO, of
Galveston County, Texas, which covers all hourly employees at our Texas City
facility. This agreement was renegotiated as of December 28, 1998 and expired on
May 1, 2002. On June 7, 2002, we locked out the union employees, numbering about
215, after several weeks of unsuccessful negotiations with the union leadership
and after a majority of the union members voted not to accept our final
proposal. During the lockout, the Texas City facility was operated, without
interruption or loss of production, by our salaried personnel and contract
workers. On October 1, 2002, a new agreement covering approximately 200
employees was signed and is subject to renegotiation in April 2004. The lockout
had no material adverse effect on our business, financial position, results of
operations or cash flows.
Approximately 74% of our employees at our Vancouver facility are
represented by the Pulp, Paper and Woodworkers Union. The Vancouver labor
agreement was renegotiated in November 2000 and is subject to further
renegotiations in November of 2003. Approximately 74% of our Buckingham
employees are members of either an operations and maintenance workers union, the
contract with which is currently being negotiated, or an office and lab workers
union, the contract with which expires in March 2003. Approximately 76% of the
employees at our Saskatoon facility are represented by the Communications,
Energy and Paperworkers of Canada. Our collective bargaining agreement with this
union was renegotiated on June 25, 2001 and is subject to further renegotiation
in September 2004. The union agreements relating to our Vancouver, Buckingham
and Saskatoon facilities, to which certain of our non-debtor Canadian
subsidiaries are parties, are not affected by our Chapter 11 filings.
Although we believe our relationship with our employees is generally good,
a strike by one or more of the unions representing our employees could have a
material adverse effect on our business.
As part of the Plan, our pulp chemicals and acrylic fibers businesses will
be sold concurrent with our emergence from Chapter 11.
INSURANCE
We maintain full replacement value insurance coverage for property damage
to all of our facilities and business interruption insurance. Nevertheless, a
significant interruption in the operation of one or more of our facilities could
have a material adverse effect on our business. We also maintain other insurance
coverages for various risks associated with our business. There can be no
assurance that we will not incur losses beyond the limits of, or outside the
coverage of, our insurance. From time to time, various types of insurance for
companies in the chemical industry have been very expensive or, in some cases,
unavailable. As a result of the September 11, 2001 terrorist attacks, many
insurers, including ours, are excluding acts of terrorism from coverage after
December 31, 2001. There can be no assurance that in the future we will be able
to maintain our existing coverage or that premiums will not increase
substantially.
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ITEM 2. PROPERTIES
Our petrochemicals facility is located in Texas City, Texas, approximately
45 miles south of Houston, on a 290-acre site on Galveston Bay near many other
chemical manufacturing complexes and refineries. We have facilities to load our
products in trucks, railcars, barges and ocean-going vessels for shipment to
customers. The site offers room for future expansion and includes a greenbelt
around the northern edge of the plant site. We own or lease all of the real
property which comprises our Texas City facility and all of the equipment and
facilities located there, other than the sodium cyanide unit which is owned by
DuPont, a cogeneration facility owned by a joint venture between us and Praxair
Energy Resources, Inc., a partial oxidation unit which is owned by Praxair
Hydrogen Supply, Inc. and the DSIDA plant which is owned by Monsanto. We also
own storage facilities, approximately 167 rail cars and an acetic acid barge in
connection with our petrochemicals business.
Our acrylic fibers facility is located on 1,100 acres near Pensacola in
Santa Rosa County, Florida. We own all of the real property on which our acrylic
fibers facility is situated and own or lease all of the facilities and equipment
located there. In July 1999, we entered into an agreement for the construction
of a cogeneration facility at our acrylic fibers facility that will be owned by
Santa Rosa Energy, LLC. As part of the Plan, our acrylic fibers business will be
transferred pursuant to a management buyout for little or no consideration at
the time we emerge from Chapter 11.
Our pulp chemicals business includes five manufacturing facilities in
Canada and our Valdosta, Georgia facility. We own the property on which our
Buckingham, Quebec and Vancouver, British Columbia manufacturing facilities are
located, with each site comprising approximately 20 acres. We also own the
property on which our Saskatoon manufacturing facility is located, which
consists of approximately 270 acres. We lease the property for our Thunder Bay,
Ontario and Grande Prairie, Alberta manufacturing facilities. Our Valdosta
facility was constructed in conjunction with, and is leased from, the
Valdosta-Lowndes County Industrial Authority. We also lease approximately 640
rail cars in connection with our pulp chemicals business. Headquarters for our
pulp chemicals operations are located in Toronto, Ontario in an office building
that we lease. As part of the Plan, our pulp chemicals business will be sold to
Superior upon our emergence from Chapter 11.
We lease our principal executive offices, located at 1200 Smith Street,
Suite 1900 in Houston, Texas.
We believe our properties and equipment are sufficient to conduct our
business.
ITEM 3. LEGAL PROCEEDINGS
As previously discussed, the Debtors filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code on July 16, 2001. As a
result of the commencement of the Chapter 11 cases, an automatic stay was
imposed against the commencement or continuation of legal proceedings against
the Debtors outside of the Bankruptcy Court. The automatic stay does not apply,
however, to governmental authorities exercising their police or regulatory
powers, including the application of environmental laws. Claimants 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 may object and seek a
determination from the Bankruptcy Court as to the allowability of such claim.
Claimants who desire to liquidate their claims in legal proceedings outside of
the Bankruptcy Court are required to obtain relief from the automatic stay by
order of the Bankruptcy Court. If such relief is granted, the automatic stay
remains in effect with respect to the collection of liquidated claim amounts. As
a general rule, all claims against the Debtors that seek a recovery from assets
of the Debtors' estates have been or will be addressed in the Chapter 11 cases
and paid only pursuant to the terms of a confirmed plan or reorganization.
Ethylbenzene Release. A description of this release is found under "Legal
Proceedings" in Note 9 of the "Notes to Consolidated Financial Statements." The
five lawsuits listed below and two interventions,
24
involving a total of approximately 571 plaintiffs, have been filed based on this
release alleging personal injury, property damage and nuisance claims:
- 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
- Nettie Allen, et al. v. Sterling Chemicals, Inc., et al.; Case No.
00-CV0304; In the 10th Judicial District Court of Galveston County, Texas
- 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
- Ida Goldman, et al. v. Sterling Chemicals, Inc., et al.; Case No.
00-CV0338; In the 56th Judicial District Court of Galveston County, Texas
- Olivia Ellis v. Sterling Chemicals, Inc.; Case No. JC5000305; In Justice
Court No. 5 of Galveston County, Texas
We believe that all or substantially all of our future out-of-pocket costs
and expenses relating to these lawsuits, including settlement payments and
judgments, will be covered by our liability insurance policies or
indemnification from third parties. We do not believe that the claims and
litigation arising out of this incident 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. All of these claims and litigation
are subject to the automatic stay, and recoveries, if any, sought thereon from
assets of the Debtors are being addressed in the Chapter 11 cases.
To date, the Bankruptcy Court has, with our support, lifted the automatic
stay in the cases of Bobbie Adams, et al. and Nettie Allen, et al., 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 look solely to insurance proceeds to
satisfy their claims. Motions to lift the stay on behalf of additional
plaintiffs are currently pending before the Bankruptcy Court. Small cash
settlements, to be funded by our liability insurance policies, have been
negotiated with the plaintiffs in the Ida Goldman, et al. case and have been
approved by the Bankruptcy Court.
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 automatic stay,
and recoveries sought thereon from assets of the Debtors are required to be
dealt with in the Chapter 11 cases.
On December 19, 2001, we announced that Frank P. Diassi had elected to
terminate his employment with the company. 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 President, in September 2001.
Mr. Diassi has asserted that he had "good reason" to terminate his employment
and is claiming that he is entitled to receive payments under certain of our
employee retention and severance plans. On June 3, 2002, our Compensation
Committee denied Mr. Diassi's claim under the Key Employee Protection Plan and
on July 24, 2002, we denied his claim under the Retention Bonus Plan. On
September 6, 2002, we filed an objection to Mr. Diassi's Proof of Claim in the
Bankruptcy Court. Mr. Diassi subsequently filed a motion in the Bankruptcy Court
to compel arbitration of his claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our security holders during
fiscal 2002. However, pursuant to an order of the Bankruptcy Court, claimants
against the Debtors voted to either accept or reject the Plan.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Under the Plan, as of December 6, 2002, Holdings was merged with and into
Chemicals and all equity interests in Holdings were cancelled and 65,000 shares
of Chemicals' common stock were issued to the holders of Holdings' 13 1/2%
Senior Secured Discount Notes. No dividends were paid by Chemicals during fiscal
2002 or fiscal 2001. During fiscal 2000, Chemicals paid dividends of $2.0
million to its sole shareholder, Holdings.
There is no established public trading market for Chemicals' common stock,
par value $.01 per share. As of December 9, 2002, there were 65,000 shares
outstanding of Chemicals' common stock, which were held of record by two
recordholders. The beneficial owners of these shares are the holders of the
claims represented by Holdings' 13 1/2% Senior Secured Discount Notes. The
identities of the beneficial owners and the number of shares they each own is
not presently known by Chemicals. These 65,000 shares will represent 1.3% of the
outstanding Chemicals' common stock upon our emergence from Chapter 11.
ITEM 6. SELECTED FINANCIAL DATA FOR CHEMICALS
The following table sets forth selected financial data with respect to our
consolidated financial condition and consolidated results of operations and
should be read in conjunction with "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our Consolidated Financial
Statements and related notes in Item 8 of this Form 10-K. Prior to December 6,
2002, all issued and outstanding shares of Chemicals were held by Holdings and,
accordingly, per share data is not presented.
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Revenues........................... $ 628,727 $ 743,565 $1,096,451 $ 739,552 $ 842,990
Gross profit (loss)................ 75,469 (13,845) 140,891 38,158 77,267
Net loss(1)........................ (35,986) (181,710) (63,847) (94,722) (33,669)
Net cash provided by (used in)
operating activities............. 42,268 8,785 48,228 (13,903) 45,873
Net cash used in investing
activities....................... (16,263) (16,892) (28,797) (25,957) (26,622)
Net cash provided by (used in)
financing activities............. (17,341) 17,316 (28,443) 43,274 (15,236)
BALANCE SHEET DATA (AT YEAR END):
Working capital(2)................. $ 33,183 $ 73,638 $ 84,587 $ 92,927 $ 91,997
Total assets....................... 489,648 511,850 677,143 752,106 762,503
Long-term debt (excluding current
maturities)(3)................... 15,079 61,084 791,684 816,927 745,709
Stockholders' equity (deficiency in
assets).......................... (611,477) (563,582) (377,790) (309,590) (220,455)
---------------
(1) During fiscal 2002, we recorded approximately $4.4 million in pre-tax
charges related to the write down of our acrylic fibers production assets.
During fiscal 2001, approximately $7.1 million in pre-tax charges were
recorded in connection with the withdrawal from the traditional commodity
textile business of our acrylic fibers operations, which related to $2
million in severance payments and a write-down of finished goods and stores
inventory to their net realizable value, and $56.8 million of deferred tax
expense was recorded to reflect a full valuation allowance on our U.S.
deferred tax assets. During fiscal 2000, we recorded pre-tax charges of $2
million for costs associated with workforce
26
reductions and a $60 million non-cash charge related to the write down of
our acrylic fibers production assets. During fiscal 1999, we recorded
pre-tax charges of $4 million for costs associated with workforce
reductions, $6.8 million non-cash charge related to early retirement
programs and benefit changes and a $26.4 million non-cash charge related to
the write down of our methanol production assets. During fiscal 1998, we
recorded a pre-tax charge of $6 million for costs associated with workforce
reductions.
(2) Working capital at September 30, 2002 and 2001 excludes pre-petition
liabilities. See Note 4 of the Notes to the Consolidated Financial
Statements included in this Form 10-K.
(3) Excludes long-term debt of $418.4 million and $295.0 million, classified as
pre-petition liabilities -- subject to compromise and pre-petition
liabilities -- not subject to compromise, respectively, on the Consolidated
Balance Sheets at September 30, 2002 and 2001.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in understanding our
historical financial position and results of operations for each of the three
years ended September 30, 2002 and should be read in conjunction with our
financial statements appearing elsewhere in this report. For the period July 16,
2001 to the present, we have operated as debtors-in-possession under Chapter 11
of the Bankruptcy Code. In addition, on December 6, 2002, Sterling Chemicals
Holdings, Inc. ("Holdings") was merged into Sterling Chemicals, Inc.
("Chemicals").
OVERVIEW
CHAPTER 11 PROCEEDINGS
On July 16, 2001 (the "Petition Date"), Holdings, Chemicals and most of
their U.S. subsidiaries (collectively, the "Debtors") filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy
Code") in the U.S. Bankruptcy Court for the Southern District of Texas (the
"Bankruptcy Court") and began operating their businesses as
debtors-in-possession pursuant to the Bankruptcy Code. None of our foreign
subsidiaries, including our Canadian subsidiaries, were included in the Chapter
11 filings. The accompanying consolidated financial statements have been
presented in conformity with the AICPA's Statement of Position 90-7, "Financial
Reporting By Entities In Reorganization Under the Bankruptcy Code" ("SOP 90-7").
The statement requires a segregation of liabilities subject to compromise as of
the Petition Date and identification of all transactions and events that are
directly associated with the reorganization of the Debtors.
Effective July 19, 2001, the Debtors (excluding Holdings) entered into a
Revolving Credit Agreement with a group of lenders led by The CIT Group/Business
Credit, Inc. to provide up to $195 million in debtor-in-possession financing
(the "DIP Financing"). By interim order dated July 18, 2001 and final order
dated September 14, 2001, the Bankruptcy Court approved up to $155 million in
lending commitments under the DIP Financing (the "Base Facility"), which was
later increased to $195 million through the entry of a priming order by the
Bankruptcy Court on November 2, 2001 (the "Priming Facility"). In separate
actions, the indenture trustee for Chemicals' 12 3/8% Senior Secured Notes
appealed both the final order for the Base Facility and the priming order for
the Priming Facility to the United States District Court. After numerous
proceedings before the United States District Court and the Bankruptcy Court,
the United States District Court ultimately upheld the final order for the Base
Facility in its original form and upheld the priming order for the Priming
Facility in a modified form. The indenture trustee appealed these decisions by
the United States District Court to the United States Court of Appeals for the
5th Circuit. The 5th Circuit consolidated all of the pending appeals. By
agreement of the indenture trustee, the consolidated appeal has been held in
abeyance pending the effectiveness of the Plan. Under the Plan, the indenture
trustee will file a voluntary dismissal of the consolidated appeal upon the
effective date of the Plan. In the event that the Plan does not become effective
on or before January 1, 2003, in the absence of an agreement or order holding
the consolidated appeal in abeyance for a longer period, the indenture trustee
will be free to further pursue the consolidated appeal.
27
At September 30, 2002, the total credit available under the DIP Financing
was limited to $139.1 million due to borrowing base restrictions under the
current assets revolver portion of the DIP Financing. At September 30, 2002,
$57.2 million was drawn under the fixed assets revolver portion of the DIP
Financing and there were no borrowings outstanding under the current assets
revolver. In addition, approximately $3.6 million of letters of credit were
outstanding under the current assets revolver leaving, at September 30, 2002,
unused borrowing capacity under the DIP Financing of approximately $78.3
million.
As of July 11, 2001, our principal Canadian subsidiary, Sterling Pulp
Chemicals, Ltd. ("Sterling Pulp"), entered into a financing agreement with CIT
Business Credit Canada, Inc. ("CIT Canada") to provide up to the Canadian dollar
equivalent of U.S. $30 million (the "Canadian Financing Agreement"). The initial
advance under this facility, approximately U.S. $20 million, was used by
Sterling Pulp to discharge a portion of an intercompany debt and was ultimately
transferred to the Debtors through an intercompany loan. The intercompany loan
was approved by the Bankruptcy Court's interim order entered on July 18, 2001
and final order entered on September 14, 2001, which is a subject of the appeal
of the final order discussed above. Under the Plan, the intercompany loan will
be extinguished upon our emergence from Chapter 11. The initial term of the
Canadian Financing Agreement extends to July 2004. CIT Canada has been notified
of the expected termination of the Canadian Financing Agreement that will occur
concurrent with the sale of our pulp chemicals business to Superior. All
outstanding balances under the Canadian Financing Agreement will be paid from
the proceeds of the sale. At September 30, 2002, $5.2 million was drawn under
the Canadian Financing Agreement.
The filing of the Chapter 11 petitions was driven by the Debtors' inability
to meet their funded debt obligations over the long-term, largely brought about
by weak demand for petrochemicals products caused by declines in general
worldwide economic conditions, the relative strength of the U.S. dollar (which
caused the Debtors' export sales to be at a competitive disadvantage) and higher
raw material and energy costs. As a result of these conditions, the Debtors
incurred significant operating losses. Chapter 11 is designed to permit debtors
to preserve cash and to give debtors the opportunity to restructure their debt.
During the pendency of the Chapter 11 cases, with approval of the Bankruptcy
Court, the Debtors assumed favorable pre-petition contracts and leases, rejected
unfavorable pre-petition contracts and leases and entered into purchase and sale
agreements to otherwise dispose of assets. Most of these actions will be
consummated on or before the effective date of the Debtors' plan of
reorganization (the "Plan").
The consummation of the Plan is the primary objective of the Debtors. On
May 14, 2002, the Debtors filed the Plan with the Bankruptcy Court, along with
an accompanying Disclosure Statement. As a result of negotiations among the key
creditor constituencies in the Chapter 11 cases, including Resurgence Asset
Management, L.L.C. ("Resurgence"), the single largest unsecured creditor and a
proposed equity investor in the reorganized company, a revised Plan and
Disclosure Statement were filed with the Bankruptcy Court on September 13, 2002.
The Plan and the Disclosure Statement were further revised on October 7, 2002
and October 11, 2002, in connection with the hearing in the Bankruptcy Court to
consider the adequacy of the Disclosure Statement. On October 11, 2002, the
Bankruptcy Court issued an order approving the Disclosure Statement and
authorizing the Debtors to commence the process of soliciting votes to accept or
reject the Plan and established a confirmation objection and voting deadline of
November 13, 2002. The approval of the Disclosure Statement and the
authorization to commence the solicitation of votes was made subject to the
conduct of an alternative plan process. As part of that process, alternative
plan proposals were required to be submitted by no later than October 28, 2002.
However, no such proposals were received by the deadline. The Plan was approved
by a large percentage of the votes cast and, on November 20, 2002, the Plan was
confirmed by the Bankruptcy Court.
The Plan provides for the sale of the Debtors' pulp chemicals business to
Superior Propane Inc. ("Superior"), for the transfer of the Debtors' acrylic
fibers facility pursuant to a management buyout for little or no consideration,
effective upon consummation of the Plan and for the continuation of the Debtors'
core petrochemicals business, as restructured under the Plan. A portion of the
net proceeds from the sale of the pulp chemicals business, $80 million, will
remain with the Debtors and will be used to fund the Debtors' obligations under
the Plan and to support future operations of the restructured petrochemicals
business. The remaining net proceeds will be allocated to the holders of the
12 3/8% Notes, who will also
28
receive approximately $93 million in secured notes in satisfaction of their
claims. As part of the Plan, on December 6, 2002, Holdings was merged into
Chemicals. Holdings' classes of equity interests were cancelled, and the holders
of Holdings' 13 1/2% Senior Secured Discount Notes were issued 65,000 shares of
common stock of Chemicals. On the effective date of the Plan, these shares will
constitute 1.3% of the new common equity interests in Chemicals. Unsecured
creditors and stockholders of Holdings will not receive any distribution under
the Plan due to their structural subordination and the absence of assets at
Holdings. Unsecured creditors of the Debtors (other than unsecured creditors of
Holdings), which include holders of Chemicals' 11 1/4% Senior Subordinated Notes
and 11 1/4% Senior Subordinated Notes, will receive a pro rata share of 11.7% of
the new Chemicals' shares of common stock to be issued pursuant to the Plan,
thereby participating in the common equity ownership of the restructured
petrochemicals business, along with Resurgence and its affiliated client
accounts (the "Investor"). The Investor has agreed to provide equity funding of
$30 million in exchange for certain new preferred equity interests in the
reorganized company and to underwrite an additional $30 million of equity
funding through a rights offering for common equity interests in the reorganized
company. All, or a portion of, certain unsecured claims will be paid if
contracts associated with these claims are assumed pursuant to the Plan.
Following the satisfaction or waiver of certain conditions, we expect the Plan
to become effective on or before December 31, 2002, at which time the Debtors'
will emerge from Chapter 11.
The Debtors have received an exit financing commitment from The CIT
Group/Business Credit, Inc. for a $100 million secured revolving credit facility
for the restructured petrochemicals business (the "Revolver"). We are in the
process of finalizing this agreement and it is expected to close
contemporaneously with our emergence from Chapter 11. The DIP Financing will be
retired upon our emergence from Chapter 11.
CERTAIN BANKRUPTCY IMPLICATIONS
The Debtors have continued to operate their businesses and manage their
properties in the ordinary course without prior approval from the Bankruptcy
Court. Transactions outside of the ordinary course of business, including
certain types of capital expenditures, certain sales of assets and certain
requests for additional financing, require approval by the Bankruptcy Court.
Emergence from Chapter 11 in accordance with the Plan is dependent upon
several factors, including:
- consummation of the sale of the Debtors' pulp chemicals business to
Superior;
- transfer of the acrylic fibers facility pursuant to a management buyout;
- receipt of investment funds from Resurgence and
- finalization of the new Revolver.
While we can provide no assurances, we believe that we will satisfactorily
complete these items and emerge from Chapter 11.
The ability of the Debtors to continue as a going concern is dependent upon
the Debtors' emergence from Chapter 11 with the capital structure contemplated
under the Plan. As the Debtors can give no assurance that they will accomplish
any of the foregoing, there is substantial doubt about Chemicals' and the
Debtors' ability to continue as a going concern. The accompanying financial
statements do not purport to reflect or provide for the consequence of the
bankruptcy proceedings and do not include any adjustments that might result from
the outcome of the going concern uncertainty.
ADOPTION OF FRESH START ACCOUNTING
Upon emerging from Chapter 11, the Debtors will implement fresh start
accounting under the provisions of SOP 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code." Under SOP 90-7, the reorganization
value of the Debtors will be allocated to its assets and liabilities, its
accumulated deficit will be eliminated, and new equity will be issued according
to the Plan. In addition, changes in accounting principles that become effective
within the twelve months following the adoption of
29
fresh start accounting will be adopted. We are still evaluating the impact of
adopting fresh start accounting. However, we anticipate that the adoption of
fresh start accounting will have a material effect on our financial statements
because of the revised valuation of the reorganized company, the allocation of
reorganization value to the assets and liabilities of the reorganized company,
the disposition of our pulp chemicals and acrylic fibers businesses and the
potential adoption of new accounting standards upon our emergence from Chapter
11.
The Plan contemplates the infusion of $60 million of new equity capital in
exchange for 87% of the equity of the reorganized company. Based upon this cash
transaction, we anticipate that the estimated equity value for the reorganized
company at the effective date of the Plan will be approximately $69 million.
MARKET CONDITIONS
The primary markets in which we compete, especially styrene and
acrylonitrile, are cyclical and are sensitive to factors such as:
- changes in the balance between supply and demand;
- the price of raw materials;
- currency exchange rates; and
- the level of general worldwide economic activity.
Styrene prices are cyclical and sensitive to overall supply relative to
demand and the level of general business activity. As is the case with other
petrochemicals, styrene from time to time experiences periods of strong demand
resulting in tight supply and high prices and margins. This tight balance in
supply and demand often results in new capacity additions. In most cases,
incremental capacity comes in the form of large new plants or major expansions
of existing facilities. As this new capacity comes on line, it often exceeds
current demand growth and results in a decline in prices and margins. Following
a period of strong demand growth and high utilization rates from 1994 to 1996,
several major producers announced new capacity increases in 1997 and 1998,
particularly in the Far East. At the time of this announced new capacity, there
was a general slowdown in the economic growth rate in the Far East, prompting
petrochemicals customers to begin utilizing their available inventories and
decrease purchases of additional product. As a result, our average styrene
prices declined from fiscal 1997 through fiscal 1999, as the previously
announced new capacity came on line at the same time that economic events in
various Asian countries significantly reduced demand growth for styrene.
During fiscal 2000, styrene prices and margins increased significantly from
levels experienced in fiscal 1999. These improvements were driven by a
combination of stronger market demand, operating problems experienced at several
of our competitors and generally low inventory levels worldwide. Styrene prices
and margins peaked in April of 2000 at a published spot price of $0.48 per pound
and decreased over the second half of 2000.
During fiscal 2001, U.S. and world economies experienced a general slowdown
which negatively impacted demand for most petrochemicals. Raw material and
energy costs spiked upward during the first half of fiscal 2001, increasing
significantly from the prior year, primarily due to the sharp increase in
natural gas prices. As a result, U.S. Gulf Coast petrochemicals producers
experienced significant margin erosion for most of their products. Due to these
conditions, many U.S. Gulf Coast petrochemicals producers, including us, reduced
production levels. During the second half of fiscal 2001, raw material and
energy costs began to moderate, although demand remained weak due to the
continued economic slowdown.
Demand for styrene, relative to supply, increased late in the second
quarter of fiscal 2002 due to a variety of factors, including economic
improvements in the United States manufacturing sector, global restocking of low
inventory levels and styrene plant shutdowns attributable to scheduled
maintenance and operating problems at several of our competitors. These factors
led to an increase in spot prices for styrene
30
reported on a month-end, industry-wide basis, from $0.17 per pound in January
2002 to as high as $0.40 per pound in March 2002. Thereafter, reported month-end
spot prices for styrene ranged from $0.26 per pound to $0.34 per pound, with
September 2002 spot prices reported at $0.29-0.30 per pound. Styrene cash
margins for spot sales turned positive in February 2002 and continued positive
during the remainder of fiscal 2002. Styrene cash margins for spot sales are
expected to decline, but still remain positive, in the first quarter of fiscal
2003 as plants in North America that were down for maintenance repairs during
the previous quarter resume operations. We cannot predict future increases or
decreases in styrene prices and margins.
The acrylonitrile market exhibits similar characteristics to those of
styrene regarding capacity utilization, selling prices and profit margins.
Moreover, as a high percentage of our acrylonitrile sales are made in the export
market, demand for our acrylonitrile is significantly influenced by export
customers, particularly those that supply acrylic fibers to customers in China.
During 1996, strong demand for acrylic fibers and ABS resins, particularly in
China, increased demand for acrylonitrile, resulting in high prices and margins.
High utilization rates and prices prompted many major producers to announce new
capacity increases and approximately 1.5 billion pounds of capacity increases
came on line between 1996 and 2000. As new acrylonitrile capacity in the United
States and Asia came on line, demand growth in Asian markets weakened, causing
our acrylonitrile prices and margins to decrease significantly from 1996 through
1999. Beginning in early fiscal 2000, acrylonitrile prices increased
significantly due to improved market demand, operating problems experienced at
several of our competitors and generally low inventory levels.
Due to the startup of new acrylonitrile plants in the U.S. and Taiwan, a
general slowdown of U.S. and world economies, along with higher raw material and
energy costs described above, acrylonitrile prices and margins weakened
significantly in fiscal 2001. As a result, we rescheduled maintenance turnaround
work at our Texas City acrylonitrile facility, performing this work during the
second quarter of fiscal 2001 rather than later in the year. The adverse
economic conditions that made it commercially impracticable to operate our
acrylonitrile and other nitriles production units, and that served as the basis
for our decision to advance the timing of the turnaround, persisted beyond the
completion of this maintenance turn-around work. Consequently, we elected to
postpone restarting our acrylonitrile facilities and other nitriles production
units until it is commercially practicable to operate these facilities. Our
other nitriles production units include the sodium cyanide, TBA and DSIDA
production units, all of which are dependent on the acrylonitrile facilities for
feedstocks. Market conditions for acrylonitrile improved during the second half
of fiscal 2002 and, while the additional supply of acrylonitrile may negatively
impact the market, the restart of our acrylonitrile facilities and other
nitriles production units, other than TBA and DSIDA, is projected for the second
quarter of fiscal 2003, although that restart is subject to a number of factors,
the occurrence of which cannot be assured. The DSIDA production unit is
projected for restart during the third quarter of fiscal 2003, subject to
certain conditions, including the restart of the acrylonitrile unit. However, we
are currently litigating in Bankruptcy Court the assumption of the contracts
governing DSIDA production and related cure costs. Until the litigation is
completed, it is unknown whether the contracts will be assumed and the DSIDA
unit started. Our conversion agreement with Flexsys America L.P. ("Flexsys") for
the production of TBA terminated on December 31, 2001. At this time, we are
unable to operate the unit profitably as a producer of TBA, and we are unable to
identify an alternate product that can be produced with the equipment.
The sodium chlorate market has also historically experienced cycles in
capacity utilization, selling prices and profit margins, although not to the
extremes seen in the petrochemicals markets. Since 1990, North American demand
for sodium chlorate has grown at an average annual rate of approximately 7%, as
pulp mills have accelerated substitution of chlorine dioxide for elemental
chlorine in bleaching applications. In 1999, demand for sodium chlorate did not
increase at historical rates as a result of weak market conditions and lower
operating rates in the pulp and paper industry. In addition, new production
capacity was added while implementation of the Cluster Rules was delayed. During
fiscal 2000, 2001 and 2002, average sodium chlorate prices increased due to
increased operating rates at pulp mills and the continued conversion to
elemental chlorine free bleaching at pulp mills. The industry average market
price (as reported by Chemical Week Associates) increased by approximately 10%
from fiscal 2000 to fiscal 2001
31
and increased approximately 4% from fiscal 2001 to fiscal 2002. We cannot
predict future increases or decreases in sodium chlorate prices and margins. As
part of the Plan, our pulp chemicals business will be sold to Superior
concurrent with our emergence from Chapter 11.
We market a significant portion of our volumes of petrochemicals and
generate a significant portion of our revenues under our conversion and
long-term agreements. Under our conversion agreements, the customer furnishes
some or all of the raw materials, which we process into petrochemicals in
exchange for a fee designed to cover our fixed and variable costs of production.
These conversion agreements are intended to help us maintain lower levels of
working capital and, in some cases, gain access to certain improvements in
manufacturing process technology. Our petrochemicals conversion agreements are
intended to:
- optimize capacity utilization rates;
- lower our selling, general and administrative expenses;
- reduce our working capital requirements; and
- insulate our operations to some extent from the effects of declining
markets and changes in raw materials prices.
LIQUIDITY AND CAPITAL RESOURCES
DIP FINANCING AND CANADIAN FINANCING AGREEMENT
Effective July 19, 2001, the Debtors (excluding Holdings) entered into the
DIP Financing. By interim order dated July 18, 2001 and final order dated
September 14, 2001, the Bankruptcy Court approved the Base Facility, which was
later increased under the Priming Facility. In separate actions, the indenture
trustee for the 12 3/8% Notes appealed both the final order for the Base
Facility and the priming order for the Priming Facility to the United States
District Court. After numerous proceedings before the United States District
Court and the Bankruptcy Court, the United States District Court ultimately
upheld the final order for the Base Facility in its original form and upheld the
priming order for the Priming Facility in a modified form. The indenture trustee
appealed these decisions by the United States District Court to the United
States Court of Appeals for the 5th Circuit. The 5th Circuit consolidated all of
the pending appeals and, by agreement of the indenture trustee, the consolidated
appeal is being held in abeyance pending the effectiveness of the Plan. Under
the Plan, the indenture trustee will file a voluntary dismissal of the
consolidated appeal upon the effectiveness of the Plan. In the event that the
Plan does not become effective on or before January 1, 2003, the indenture
trustee will be then be free to further pursue the consolidated appeal if it so
desires.
Under the DIP Financing, the Debtors (excluding Holdings) are co-borrowers
and are jointly and severally liable for any indebtedness thereunder. The Base
Facility consists of:
- a $70 million fixed assets revolving credit facility secured by:
- first priority liens on all of the capital stock of the co-borrowers
(other than Chemicals), all of our U.S. production facilities and
related assets and 35% of the capital stock of certain of our
subsidiaries incorporated outside the United States; and
- second priority liens on all accounts receivable, inventory and other
specified assets of Chemicals and the other co-borrowers and 65% of the
capital stock of certain of our subsidiaries incorporated outside the
United States; and
- an $85 million current assets revolving credit facility secured by:
- a first priority lien on all accounts receivable, inventory and other
specified assets of Chemicals and the other co-borrowers;
- a second priority lien on 35% of the capital stock of certain of our
subsidiaries incorporated outside the United States; and
32
- third priority liens on the remaining 65% of that stock, all of the
capital stock of the co-borrowers (other than Chemicals) and all of our
U.S. production facilities and related assets.
Upon entry of the priming order, the maximum availability under the current
assets revolving credit facility was increased to $125 million. The monthly
borrowing base was revised to consist of 85% of eligible accounts receivable,
the lesser of $10 million or 33% of specified estimated future royalty payments
related to the Debtors' chlorine dioxide technology and 65% of eligible
inventory, with an inventory cap of $62.5 million, and the amount by which the
borrowing base for the current assets revolver was required to exceed
outstanding borrowings was changed to $6 million. During October 2002, an
amendment to the DIP Financing was effected, resulting in abolishment of the
minimum EBITDA covenant unless excess availability (as defined in the amendment)
falls below $25.0 million for a specified period. In addition, the amount by
which the borrowing base for the current assets revolver must exceed borrowings
was increased to $12 million.
If the priming order remains effective and the total commitments under the
current assets revolver are increased to $125 million, the incremental $40
million is secured by first priority liens on all of our U.S. production
facilities and related assets and all of the capital stock of the co-borrowers
(other than Chemicals) to secure up to $40 million under the current assets
revolver, as well as all of the same collateral securing the initial $85 million
current assets revolver. Consequently, after giving effect to the priming order,
the DIP Financing consists of:
- a $70 million fixed assets revolving credit facility secured by:
- second priority liens on all of our United States production facilities
and related assets, all of the capital stock of the co-borrowers (other
than Chemicals), all accounts receivable, inventory and other specified
assets of Chemicals and the other co-borrowers and 35% of the capital
stock of certain of our subsidiaries incorporated outside the United
States; and
- a third priority lien on the remaining 65% of that stock; and
- a $125 million current assets revolving credit facility:
- $40 million of which is secured by first priority liens on all of our
U.S. production facilities and related assets, all of the capital stock
of the co-borrowers (other than Chemicals) and 35% of the capital stock
of certain of our subsidiaries incorporated outside the United States
and a second priority lien on the remaining 65% of that stock; and
- all of which is secured by a first priority lien on all accounts
receivable, inventory and other specified assets of Chemicals and the
other co-borrowers, third priority liens on 35% of the capital stock of
certain of our subsidiaries incorporated outside the United States and
fourth priority liens on the remaining 65% of that stock, all of the
capital stock of the co-borrowers (other than Chemicals) and all of our
U.S. production facilities and related assets.
At September 30, 2002, the total credit available under the DIP Financing
was $139.1 million due to the current assets revolver portion of the DIP
Financing borrowing base limitations discussed above. At September 30, 2002,
$57.2 million was drawn under the fixed assets revolver portion of the DIP
Financing and there were no borrowings outstanding under the current assets
revolver. In addition, approximately $3.6 million of letters of credit were
outstanding, leaving at September 30, 2002, unused borrowing capacity under the
DIP Financing of approximately $78.3 million.
As of July 11, 2001, our principal Canadian subsidiary, Sterling Pulp,
entered into a financing agreement with CIT Canada to provide up to the Canadian
dollar equivalent of U.S. $30 million (the "Canadian Financing Agreement"). The
initial advance under this facility, approximately U.S. $20 million, was used by
Sterling Pulp to discharge a portion of an intercompany debt and was ultimately
transferred to the Debtors through an intercompany loan. The intercompany loan
was approved by the Bankruptcy Court's interim order entered on July 18, 2001
and final order entered on September 14, 2001, which is a subject of the appeal
of the final order discussed above. Under the Plan, the intercompany loan will
be extinguished upon our emergence from Chapter 11. The initial term of the
Canadian Financing Agreement
33
extends to July 2004. CIT Canada has been notified of the expected termination
of the Canadian Financing Agreement that will occur concurrent with the sale of
the pulp chemicals business to Superior. All outstanding balances under the
Canadian Financing Agreement will be paid from the proceeds of the sale. At
September 30, 2002, $5.2 million was drawn under the Canadian Financing
Agreement.
The DIP Financing and the Canadian Financing Agreement contain numerous
covenants, including, but not limited to, restrictions on the ability to incur
indebtedness, create liens and sell assets, as well as certain financial
maintenance covenants.
NEW EXIT FINANCING
The Debtors have received an exit financing commitment from The CIT
Group/Business Credit, Inc. for a $100 million secured revolving credit facility
for the restructured petrochemicals business (the "Revolver"). We are in the
process of finalizing this agreement and it is expected to close
contemporaneously with our emergence from Chapter 11. The DIP Financing will be
retired upon our emergence from Chapter 11.
The Revolver is expected to have an initial term of 57 months from the
closing date or 90 days prior to the expiration of the new notes to be issued to
the holders of Chemicals' 12 3/8% Senior Secured Notes. The Revolver is expected
to provide up to $100 million in borrowings, subject to satisfaction of certain
funding conditions, and to be secured by our accounts receivable and inventory.
Borrowings under the Revolver are expected to be limited to 85% of our eligible
accounts receivable plus the lesser of 65% of eligible inventory or $50 million.
Any borrowings made under the Revolver are expected to bear interest at an
annual rate of the Prime Rate plus 0.75% or, at our option, LIBOR plus 2.75%.
Additionally, a line of credit fee of 0.50% is expected to be payable monthly on
any unused portion of the Revolver. We expect the new Revolver to contain
numerous covenants, including, but not limited to, restrictions on the ability
to incur indebtedness, create liens and sell assets, as well as certain
financial maintenance covenants.
If we emerge from Chapter 11 by December 31, 2002, it is anticipated that
we will have between $50 and $70 million of cash on hand. We believe that credit
available under the Revolver, when added to cash on hand and cash flow from
operations, will be sufficient to meet our liquidity needs for the reasonably
foreseeable future upon our emergence from Chapter 11, although we can give no
assurances to that effect.
OTHER DOMESTIC BORROWINGS
As of September 30, 2002, other domestic borrowings consisted of Chemicals'
11 1/4% Senior Subordinated Notes due 2007 (the "11 1/4% Notes"), 11 3/4% Senior
Subordinated Notes due 2006 (the "11 3/4% Notes") and the 12 3/8% Notes
The 12 3/8% Notes are senior secured obligations of Chemicals and rank
equally in right of payment with all other existing and future senior
indebtedness of Chemicals and senior in right of payment to all existing and
future subordinated indebtedness of Chemicals. The 12 3/8% Notes are fully and
unconditionally guaranteed by most of Chemicals' existing direct and indirect
U.S. subsidiaries on a joint and several basis. Each subsidiary's guarantee
ranks equally in right of payment with all of that subsidiary's existing and
future senior indebtedness and senior in right of payment to all existing and
future subordinated indebtedness of that subsidiary. The 12 3/8% Notes and the
subsidiary guarantees are secured by:
- a second priority lien on all of our U.S. production facilities and
related assets;
- a second priority pledge of all of the capital stock of each subsidiary
guarantor; and
- a first priority pledge of 65% of the stock of certain of our
subsidiaries incorporated outside of the U.S.
As a result of the priming order, the second priority liens held by the
12 3/8% Notes on all of our U.S. production facilities and related assets and
the capital stock of each subsidiary guarantor became
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third priority liens. The priming order does not affect the priority of the
pledge held by the 12 3/8% Notes on 65% of the stock of certain of our
subsidiaries incorporated outside of the United States. As discussed above, the
priming order was appealed by the indenture trustee for the 12 3/8% Notes but is
currently being held in abeyance.
The indentures governing the 12 3/8% Notes, the 11 1/4% Notes and the
11 1/4% Notes contain numerous covenants, including, but not limited to,
restrictions on our ability to incur indebtedness, pay dividends, create liens,
sell assets, engage in mergers and acquisitions and refinance existing
indebtedness. Upon the filing of the Chapter 11 cases by the Debtors, an Event
of Default occurred under each of the indentures and all of the indebtedness was
accelerated and became immediately due and payable. During the pendency of the
Chapter 11 cases, the Debtors have not, for the most part, been subject to the
restrictions contained in any of the indentures. The 12 3/8% Notes, the 11 3/4%
Notes and the 11 1/4% Notes will be cancelled by the Plan and the indebtedness
owed under the indentures will be satisfied and discharged by the terms of the
Plan.
SASKATOON FACILITY
In July 1997, Sterling Pulp Chemicals (Sask) Ltd. ("Sterling Sask"), our
Canadian subsidiary that operates our Saskatoon facility, entered into a credit
agreement with JP Morgan Chase of Canada, individually and as administrative
agent, and certain other financial institutions (the "Saskatoon Credit
Agreement"). The indebtedness under the Saskatoon Credit Agreement was secured
by substantially all of the assets of this subsidiary, including the Saskatoon
facility. The Saskatoon Credit Agreement required that certain amounts of Excess
Cash Flow (as defined in the Saskatoon Credit Agreement) be used to prepay
amounts outstanding under the term portion of the credit facility. In addition,
the Saskatoon Credit Agreement provided a revolving credit facility of Cdn. $8
million to be used by Sterling Sask solely for its general corporate purposes.
The Saskatoon Credit Agreement contained provisions which restricted the
payment of advances, loans and dividends from Sterling Sask to us. The most
restrictive of these covenants limited such payments during fiscal 2001 to
approximately $1 million, plus any amounts due to us from Sterling Sask under
our intercompany tax sharing agreement. In addition, because of its designation
as an "Unrestricted Subsidiary" under the DIP Financing and the indentures for
the 12 3/8% Notes, the 11 3/4% Notes and the 11 1/4% Notes, Sterling Sask's
results are not considered in determining compliance with the covenants
contained therein.
An Event of Default occurred under the Saskatoon Credit Agreement as a
result of the Chapter 11 filings by the Debtors. However, the lenders under the
Saskatoon Credit Agreement executed a forbearance agreement under which they
agreed to not exercise their remedies under that agreement prior to December 31,
2001, in exchange for certain concessions from Sterling Sask. On January 2,
2002, Sterling Sask entered into a waiver and amending agreement (the "Waiver
Agreement"), effective December 18, 2001, with its lenders. The Waiver Agreement
waived the existing defaults, rescinded the acceleration of the amounts
outstanding under the Saskatoon Credit Agreement and reinstated the commitments
thereunder. The Waiver Agreement provided for a reduction of the revolving
credit facility commitment to Cdn $4.0 million and changed the expiration date
on the Tranche A term loan from June 30, 2003 to December 31, 2002 and on the
Tranche B term loan from June 30, 2005 to June 30, 2003. During the first nine
months of fiscal 2002, payments of approximately $14.2 million were made
pursuant to this obligation. The Waiver Agreement also set a minimum discount
rate and Eurodollar rate margin of 2.50% over the Base Rate or LIBOR,
respectively, for the remaining term of the facility. Sterling Sask never drew
on the revolving credit facility and, as of September 30, 2002, had
approximately $9.7 million in cash and cash equivalents on hand.
On July 24, 2002, Sterling Sask entered into a new credit agreement with a
group of lenders led by Bank of Montreal to provide up to Cdn. $8 million in
revolving advances ("Facility A"), and Cdn. $60 million in term loans ("Facility
B") (collectively, the "Saskatoon Refinancing Agreement"). An initial borrowing
of approximately Cdn. $25 million, from Facility B, was used to repay all
amounts
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outstanding under the Saskatoon Credit Agreement. The remaining Cdn. $35 million
can be borrowed at any time prior to September 2003, subject to certain funding
conditions, and up to Cdn. $30 million may be used to supplement the Debtors'
liquidity during the Chapter 11 cases. At September 30, 2002, $15.8 million was
outstanding under the Saskatoon Refinancing Agreement.
Borrowings under Facility B are required to be repaid on or before July 24,
2006 and borrowings under Facility A are required to be repaid on or before July
24, 2003. Available credit under Facility A is generally subject to a borrowing
limit equal to the lesser of Cdn. $8 million and the amount determined as
follows: 75% of eligible Canadian accounts receivable plus 60% of eligible U.S.
accounts receivable, plus the lesser of $2 million and 50% of the value of
eligible inventory. Borrowings under Facility A generally bear interest at an
annual rate of Prime plus 0.50% to 0.75% depending on the option selected by
Sterling Sask. Borrowings under Facility B generally bear annual interest at
Bankers Acceptance rates plus 2.25% to 2.50%.
The Saskatoon Refinancing Agreement contains numerous covenants, including,
but not limited to, restrictions on the ability of Sterling Sask to incur
indebtedness, create liens and sell assets, as well as maintenance of certain
financial covenant ratios. As of December 13, 2002, none of these covenants
restricted our ability to borrow or use proceeds under the Saskatoon Refinancing
Agreement. The Saskatoon Refinancing Agreement will be paid in full and
terminated upon the sale of the pulp chemicals business to Superior upon our
emergence from Chapter 11.
We believe the credit available under the Saskatoon Refinancing Agreement,
when added to internally generated funds and other sources of capital, will be
sufficient to meet Sterling Sask's liquidity needs for the reasonably
foreseeable future, although we can give no assurances to that effect.
KEY EMPLOYEES
We believe that our success depends to a significant extent upon the
efforts and abilities of our executive officers and senior management. In
addition, we will continue to depend upon the retention of our key sales and
purchasing personnel to maintain customer and supplier relationships. After the
Debtors filed for protection under Chapter 11 on July 16, 2001, it became
difficult to retain our key employees or attract qualified replacements. On
August 6, 2001, the Debtors filed a motion with the Bankruptcy Court seeking
authorization to continue existing and implement additional retention and
severance plans to ameliorate the effects of the Chapter 11 filings on our key
employees. This motion was approved on October 31, 2001. Benefits totaling
approximately $4.3 million were paid during the reorganization process,
including approximately $0.8 million paid pursuant to these plans during fiscal
2002. Approximately $2.8 million of these payments were accrued as of September
30, 2002.
WORKING CAPITAL
Working capital at September 30, 2002 was $33 million, a decrease of
approximately $40 million from September 30, 2001. This was primarily due to
increases in accounts payable and current portion of long-term debt. Current
portion of long-term debt increased by $30 million primarily due to the
reclassification of the DIP Financing to current liabilities in the fourth
quarter of fiscal 2002 due to the termination date contained in the DIP
Financing of July 2003. This was partially offset by the repayment of the prior
Saskatoon Credit Agreement.
CASH FLOW
Net cash provided by our operations was $42 million in fiscal 2002, an
increase of approximately $33 million compared to the net cash provided by our
operations in fiscal 2001. This increase resulted primarily from a reduction in
net losses caused by a general improvement in styrene market conditions between
fiscal 2001 and fiscal 2002. Net cash flow used in our investing activities was
$16 million in fiscal 2002, compared to $17 million in fiscal 2001. Net cash
flow used in our financing activities was $17 million in fiscal 2002, compared
to net cash provided by operations of $17 million in fiscal 2001.
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CAPITAL EXPENDITURES
Our capital expenditures were approximately $16 million in fiscal 2002, $17
million in fiscal 2001 and $29 million in fiscal 2000. Our capital expenditures
in fiscal 2002 and fiscal 2001 were primarily related to routine safety,
environmental and replacement capital. Our capital expenditures in fiscal 2000
were primarily related to the DSIDA project, a wastewater collection disposal
project and routine safety, environmental and replacement capital.
Capital expenditures are expected to be approximately $30 to $35 million in
fiscal 2003, with about $20 to $25 million dedicated to our petrochemicals
business, and approximately $10 million dedicated to our pulp chemicals
business. These capital expenditures will primarily be for routine safety,
environmental and replacement capital. As part of the Plan, our pulp chemicals
business will be sold to Superior concurrent with our emergence from Chapter 11.
Our capital expenditures for environmentally-related prevention,
containment and process improvements were $2 million for both fiscal 2002 and
fiscal 2001. We anticipate spending approximately $3 to $8 million on these
types of expenditures during fiscal 2003, the majority of which will be spent at
our Texas City petrochemical facility. During fiscal 2002 and fiscal 2001, we
did not incur any other infrequent or non-recurring material environmental
expenditures which were required under existing environmental regulations. See
"Certain Known Events, Trends, Uncertainties and Risk Factors."
CRITICAL ACCOUNTING POLICIES, USE OF ESTIMATES AND ASSUMPTIONS
In response to the Securities and Exchange Commission's Release No.
33-8098, "Disclosure in Management's Discussion and Analysis about the
Application of Critical Accounting Policies," we have identified critical
accounting policies based upon the significance of the accounting policy to our
overall financial statement presentation, as well as our use of estimates and
subjective assessments. We have concluded our critical accounting policies are
as follows:
IMPAIRMENT OF LONG-LIVED ASSETS
Our long-lived assets are comprised principally of property and equipment.
We review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be realizable. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset are compared to the asset's carrying amount to determine if an
impairment of such asset is necessary. The effect of any impairment would be to
expense the difference between the fair value of such asset and its carrying
value.
As discussed previously, we produce various petrochemicals products at our
Texas City location. One of these products, acrylonitrile, has not been produced
since the second quarter of fiscal 2001. The restart of the acrylonitrile
facility is scheduled for the second quarter of fiscal 2003. Accordingly, we
reviewed our acrylonitrile and related units for impairment as of September 30,
2002, due to the continued shutdown of the units. We determined that the
undiscounted sum of the expected future cash flows from the assets related to
the acrylonitrile and related units exceeded the $30 million recorded
approximate value of those assets. Therefore, in accordance with GAAP, we did
not recognize an impairment in either fiscal 2002 or fiscal 2001.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is primarily
determined on the first-in, first-out basis, except for stores and supplies,
which are valued at average cost. We enter into agreements with other companies
to exchange chemical inventories in order to minimize working capital
requirements and to facilitate distribution logistics. Balances related to
quantities due to or payable by us in connection with these exchange agreements
are included in inventory.
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REVENUE RECOGNITION
We recognize revenue from sales in the open market, raw material conversion
agreements and long-term supply contracts when the products are shipped. In
addition, we have entered into profit sharing arrangements with respect to some
of our petrochemicals products. These revenues are estimated and accrued
monthly. Deferred credits are amortized over the life of the contracts which
gave rise to them. We also generate revenues from the construction and sale of
chlorine dioxide generators, which are recognized using the percentage of
completion method. We also receive prepaid royalties, which are recognized over
a period, which is typically ten years. In addition, we generate revenues from
the sale of acrylic fibers manufacturing technology to producers worldwide,
which are recognized when earned. We classify shipping and handling costs
associated with product delivered to customers as cost of goods sold.
REORGANIZATION EXPENSES
Reorganization expenses include all costs and expenses directly
attributable to our Chapter 11 proceedings. We are required to pay all costs and
expenses associated with the Chapter 11 proceedings that are approved by the
Bankruptcy Court, including the professional fees of: the secured lenders
providing the DIP Financing, the 12 3/8% Notes, the unsecured creditors, the
Investor and the Debtors.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations be accounted for
under the purchase method and requires separate identification and recognition
of intangible assets, other than goodwill. The statement applies to all business
combinations initiated after June 30, 2001 and also applies to all entities
emerging from bankruptcy. SFAS No. 142, which was effective for fiscal periods
beginning after December 15, 2001, requires that an intangible asset that is
acquired shall be initially recognized and measured based on its fair value. The
statement also provides that goodwill should not be amortized, but shall be
tested for impairment annually, or more frequently if circumstances indicate
potential impairment, through a comparison of fair value to its carrying amount.
SFAS No. 141 will have an impact on our financial statements upon our emergence
from Chapter 11 pursuant to the application of fresh start accounting. However,
we do not believe that the adoption of SFAS No. 142 will have a significant
impact on our financial statements.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which must be
applied to fiscal years beginning after June 15, 2002, addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. We do not
believe that the adoption of SFAS No. 143 will have a significant impact on our
financial statements.
In August 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of. SFAS 144 is effective for
fiscal years beginning after December 15, 2001, with early adoption permitted.
The adoption of SFAS No. 144 is not expected to have a significant impact on our
financial statements.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 eliminates Statement
No. 4 and as a result, gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria in APB Opinion
No. 30. SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under changed
conditions. The provisions of this Statement related to the rescission of SFAS
No. 4 apply to fiscal years beginning after May 15, 2002. The
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provisions of this Statement related to SFAS No. 13 apply to transactions
occurring after May 15, 2002. All other provisions of this Statement are
effective for financial statements issued on or after May 15, 2002. The adoption
of SFAS No. 145 has not had a significant impact on our financial statements but
could affect our financial statements after our emergence from Chapter 11.
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 have not yet
adopted SFAS No. 146 nor determined the effect of the adoption of SFAS No. 146
on our financial position or results of operations.
CERTAIN KNOWN EVENTS, TRENDS, UNCERTAINTIES AND RISK FACTORS
WE ARE HIGHLY LEVERAGED AND HAVE SUBSTANTIAL DEBT OBLIGATIONS
We are currently in default under many of our pre-petition debt
obligations. During the pendency of our bankruptcy proceedings, the Debtors may
obtain post-petition debt financing only with the approval of the Bankruptcy
Court and have already obtained approval for the DIP Financing discussed above.
As of December 9, 2002, there were $38.8 million cash borrowings outstanding
under the DIP Financing and letters of credit in the aggregate amount of $3.6
million were issued under the DIP Financing, leaving unused borrowing capacity
under the DIP Financing, after giving affect to the priming order, of
approximately $77.6 million. Unless amended, the DIP Financing matures on the
earlier of July 19, 2003, or the effective date of the Plan.
Upon our emergence from Chapter 11, we will continue to have debt service
obligations with respect to new indebtedness created by the Plan and our exit
financing. Thus we would continue to be particularly susceptible to adverse
changes in our industry, the economy and the financial markets. In addition, our
ability to obtain additional debt financing after emergence will be limited by
restrictive covenants under the terms of our new credit agreement and the
indenture from our new notes. Those limits on financing will restrict our
ability to service our debt obligations through additional debt financing if
cash flow from operations is insufficient to service such obligations.
WE HAVE LIMITED LIQUIDITY, WHICH MAY PROVE INADEQUATE DURING OUR
REORGANIZATION PROCESS
The Debtors are currently funding their liquidity needs out of operating
cash flow and from borrowings under the DIP Financing. The DIP Financing is
limited in amount and is also subject to numerous funding conditions, including
borrowing base requirements, which are largely beyond the control of the
Debtors. The ability of the Debtors to obtain additional financing during the
reorganization process is severely limited by a variety of factors, including
the debt incurrence restrictions imposed by the DIP Financing, numerous
procedural requirements and uncertainties relating to the bankruptcy
proceedings, including any continuing challenge to the priming order, and the
Debtors' current financial condition and prospects. Accordingly, if the Plan
does not become effective within a reasonable period of time, no assurances can
be given that the Debtors' existing sources of liquidity will be adequate to
fund their liquidity needs throughout the remainder of the reorganization
process or, if additional sources of liquidity become necessary during the
reorganization process, that they would be available to the Debtors or adequate.
Any liquidity shortages during the remainder of the reorganization process would
likely have a material adverse effect on the Debtors' business and financial
condition as well as their ability to successfully restructure and emerge from
bankruptcy.
THE CYCLICALITY OF THE MARKETS FOR OUR PRODUCTS MAKE IT MORE DIFFICULT FOR US
TO SUCCESSFULLY RESTUCTURE AND EMERGE FROM BANKRUPTCY
The industries in which we participate are cyclical and depressed market
conditions for our major products can negatively affect our business and make it
difficult for us to restructure successfully. Demand for our petrochemicals and
pulp products are cyclical and are influenced by, among other things, the health
of the global economy and changes in overall supply relative to demand. An
economic slowdown or a prolonged downturn in our petrochemicals markets will
impact both the sales volumes and sales prices of
39
our products and could have a material adverse effect on our financial results.
As prices decline, our profit margins generally decrease, which adversely
affects our business and our cash flows. Large global capacity additions of
styrene and acrylonitrile were completed between 1997 and 2001. For styrene,
approximately eight billion pounds of net new capacity was added and, for
acrylonitrile, approximately three billion pounds of net new capacity was added.
Further, reduced operating rates at North American pulp mills have reduced the
rate of demand growth in North America for our pulp chemicals products and
services. The resulting impact on prices and margins negatively impacted our
pulp chemicals' results in fiscal 1998, 1999 and 2001 and could negatively
impact our results in the future. As part of the Plan, our pulp chemicals
business will be sold to Superior concurrent with our emergence from Chapter 11.
THE PETROCHEMICALS, ACRYLIC FIBERS AND PULP CHEMICALS INDUSTRIES ARE HIGHLY
COMPETITIVE
Many of our competitors, particularly in the petrochemicals industry, are
larger and have substantially greater financial resources than we have. We
compete with some of the world's largest chemical companies, many of whom, in
contrast to us, supply much of their own raw materials requirements. In
addition, a significant portion of our petrochemicals business is based upon
widely available technology. The entrance of new competitors into the industry
or the addition by existing competitors of new capacity may reduce our ability
to maintain profit margins or preserve our market share, even during periods of
increased demand for our petrochemical products.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY DEREGULATION OF ELECTRIC POWER OR IF
WE ARE UNABLE TO OBTAIN RAW MATERIALS AND ENERGY RESOURCES FROM THIRD-PARTY
SUPPLIERS AT REASONABLE PRICES OR ON ACCEPTABLE TERMS
For most of our products, the combined cost of raw materials and energy
resources, including utilities in the case of pulp chemicals, is far greater
than all other costs of production combined. Therefore, an adequate supply of
raw materials at reasonable prices and on acceptable terms is critical to the
success of our business. If we are unable to obtain raw materials at reasonable
prices and on acceptable terms, our results of operations would be negatively
impacted. Most of the raw materials we use are supplied by others and many of
them are subject to wide price fluctuations for a variety of reasons beyond our
control. For example, changes in the availability of these products may result
from major capacity additions or significant facility operating problems. The
current trend towards deregulation of electric power makes our short-term future
cost for electric power uncertain. Electricity is the largest cost of
manufacturing sodium chlorate. In addition, natural gas is a significant cost of
production for some of our petrochemicals and pulp chemicals, as well as for our
suppliers of raw materials. Significant increases in natural gas prices may
increase our total costs of production and we may not be able to recover this
increase in costs through higher selling prices. We can give no assurances that
we will continue to be able to secure adequate supplies of electric power or any
of our raw materials or energy resources at reasonable prices or on acceptable
terms. As part of the Plan, our pulp chemicals business will be sold to Superior
concurrent with our emergence from Chapter 11.
OUR INDUSTRY IS SUBJECT TO EXTENSIVE ENVIRONMENTAL REGULATION, WHICH CREATES
UNCERTAINTY REGARDING FUTURE ENVIRONMENTAL EXPENDITURES AND LIABILITIES
Our operations involve the handling, production, transportation, treatment
and disposal of materials that are classified as hazardous or toxic waste and
that are extensively regulated by environmental and health and safety laws,
regulations and permit requirements. These regulations, and the potential for
further expanded regulations may increase our costs and thereby negatively
affect our business. 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 and the potential for further expanded
regulation may increase our costs and thereby negatively affect our business.
Changing and increasingly strict environmental requirements can affect the
manufacturing, handling, processing, distribution and use of our products and,
if so affected, our business and operations may be materially and adversely
affected. In
40
addition, changes in these requirements may cause us to incur substantial costs
in upgrading or redesigning our facilities and processes, including our waste
treatment, storage, disposal and other waste handling practices and equipment.
For these reasons, we are uncertain as to the amount of our future environmental
expenditures and liabilities. The Texas Commission for Environmental Quality
("TCEQ") enacted new regulations requiring significant reductions of nitrogen
oxide which apply to our Texas City facility. The TCEQ also proposed similar
regulations requiring the reduction of particulate matter which apply to our
Texas City facility. The nitrogen oxide regulations covering the
Houston/Galveston Area State Implementation Plan were approved by the United
States. Environmental Protection Agency on October 15, 2001. Under these
regulations, we are required to reduce emissions of nitrogen oxide at our Texas
City facility by up to approximately 90%, which we estimate would require
Chemicals to make between $25 million and $30 million in capital improvements at
our Texas City facilities. The majority of these capital expenditures are
expected to be incurred from fiscal 2003 through fiscal 2007.
WE ARE SUBJECT TO MANY OPERATING RISKS, SOME OF WHICH MAY NOT BE COVERED BY
INSURANCE
A business risk inherent in all 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 attempt to operate our
facilities responsibly and in compliance in all material respects with all
applicable environmental and health and safety requirements, we may face
expenses and liabilities as a result of our past or future operations. Some risk
of environmental costs and liabilities is inherent in our operations and
products, as it is with other companies engaged in similar businesses, and we
maintain insurance at levels that are typical for our industry's insurance
coverages.
CURRENT AND FUTURE LEGAL PROCEEDINGS MAY HAVE UNFAVORABLE OUTCOMES
We are currently a party to several legal proceedings and additional legal
proceedings could be filed against us in the future. We are not able to predict
the final outcome of the current proceedings and we cannot guarantee that the
ultimate resolution of current or future proceedings will not have a material
adverse effect on us. Legal proceedings in which claims against the Debtors that
existed prior to the filing of Chapter 11 cases are asserted are subject to the
automatic stay, and any such claims would be payable from assets of the Debtors
only pursuant to a confirmed plan of reorganization or order of the Bankruptcy
Court. For more information, see Note 9 of the Notes to Consolidated Financial
Statement included in this Form 10-K.
WE DEPEND UPON THE CONTINUED OPERATION OF OUR TEXAS CITY FACILITY
All of the petrochemicals we manufacture, including all of our styrene,
acrylonitrile and acetic acid, are produced at our Texas City facility.
Significant unscheduled downtime at our Texas City facility could have a
material adverse effect on our results. Unanticipated downtime can occur for a
variety of reasons, including equipment breakdowns, interruptions in the supply
of raw materials, power failures, sabotage, natural forces or other normal
hazards associated with the production of petrochemicals. Although we maintain
business interruption insurance, we cannot guarantee that a significant
interruption in the operation of our Texas City facility would be covered by
this insurance or would not otherwise have a material adverse effect on us.
WE DEPEND UPON OUR LONG-TERM CONTRACTS AND SIGNIFICANT CUSTOMERS
We sell significant portions of our acrylonitrile and styrene production
and all of our acetic acid, plasticizers and DSIDA production under long-term
contracts. These contracts are intended to provide stability in the event that
the demand for or prices of these products decline significantly, but also limit
our ability to take full advantage of attractive market conditions during
periods of higher prices for these products. The loss of one or more of these
contracts, or a material reduction in the amount of product purchased under one
or more of these contracts, could have a material adverse effect on us. The
DSIDA production unit is projected for restart during the third quarter of
fiscal 2003, subject to certain conditions, including the restart of our
acrylonitrile unit, and as such, there can be no assurances. However, we are
41
currently litigating in Bankruptcy Court the assumption of the contracts
governing DSIDA production and related cure costs. Until the litigation is
completed, it is unknown whether the contracts will be assumed and the DSIDA
unit started. Under the modifications to the BP acrylonitrile agreements, if we
and BP do not enter into an expanded acrylonitrile relationship, and we have not
restarted our acrylonitrile facilities by August 31, 2003, all of the BP
acrylonitrile agreements that are executory in nature will automatically
terminate, we will transfer our interest in ANEXCO to BP for nominal
consideration and, if we have elected to permanently shut down our acrylonitrile
facility, we will sell all of our BP-supplied acrylonitrile catalyst to BP for
nominal consideration. We are currently in negotiations with DuPont regarding
modifications to our existing sodium cyanide supply arrangements. If we are not
able to finalize these negotiations and execute a definitive agreement with
DuPont incorporating these modifications on or before December 15, 2002, our
sodium cyanide arrangements with DuPont will terminate without liability to
either party and the sodium cyanide unit will be dismantled.
WE FACE RISKS RELATED TO OUR FOREIGN OPERATIONS THAT MAY NEGATIVELY AFFECT OUR
BUSINESS
Approximately 36% of our fiscal 2002 revenues were derived from our
Canadian-based pulp chemicals business and approximately 34% were derived from
export sales of our products. Our international operations and exports to
foreign markets make us subject to a number of special risks such as:
- currency exchange rate fluctuations;
- foreign economic conditions;
- trade barriers;
- exchange controls;
- national and regional labor strikes;
- political risks and risks of increases in duties;
- taxes;
- governmental royalties; and
- changes in laws and policies governing operations of foreign-based
companies.
The occurrence of any one or a combination of these factors may increase
our costs or have other negative effects on our business. In addition, earnings
of foreign subsidiaries and intercompany payments are subject to foreign income
tax rules that may reduce cash flow available to meet our required debt service
and other obligations.
RESTRICTIONS ON ABILITY TO MOVE FUNDS BETWEEN DEBTORS AND OTHER SUBSIDIARIES
MAY NEGATIVELY AFFECT LIQUIDITY
As a result of the provisions contained in the DIP Financing, the Canadian
Financing Agreement and the Saskatoon Credit Agreement, our ability to transfer
funds between the Debtors and our subsidiaries not in bankruptcy is severely
limited. These restrictions could negatively affect our liquidity and that of
our non-debtor subsidiaries.
FUTURE PROBLEMS WITH LABOR RELATIONS MAY NEGATIVELY AFFECT OUR BUSINESS
Approximately 40% of our employees are covered under various union
contracts. Approximately 43% of our employees at our Texas City facility are
covered by one union contract which is subject to renegotiation in April 2004.
Approximately 76% of our employees at our Saskatoon facility are covered by
one union contract which is subject to renegotiation in September 2004.
Approximately 74% of our employees at our Vancouver facility are covered by a
union contract, which is subject to renegotiation in November 2003.
Approximately 74% of our Buckingham employees are members of either an
operations and maintenance
42
workers union, the contract with which is currently being negotiated, or an
office and lab workers union, the contract with which expires in March 2003. Our
Canadian union contracts are not affected by the Chapter 11 cases.
Although we believe our relationship with our employees is generally good,
a strike by one or more of the unions representing our employees could have a
material adverse effect on our financial condition, results of operations or
cash flows.
As part of the Plan, our pulp chemicals business will be sold to Superior
concurrent with our emergence from Chapter 11.
RESULTS OF OPERATIONS
The following table sets forth revenues, gross profit (loss) and operating
income (loss) for our segments for the years ended September 30, 2002, 2001 and
2000.
YEAR ENDED SEPTEMBER 30,
--------------------------
2002 2001 2000
------ ------ --------
(DOLLARS IN MILLIONS)
REVENUES:
Petrochemicals.............................................. $401 $515 $ 870
Pulp Chemicals.............................................. 228 229 226
---- ---- ------
$629 $744 $1,096
==== ==== ======
GROSS PROFIT (LOSS):
Petrochemicals.............................................. $ 24 $(65) $ 93
Pulp Chemicals.............................................. 51 51 48
---- ---- ------
$ 75 $(14) $ 141
==== ==== ======
OPERATING INCOME (LOSS):
Petrochemicals.............................................. $ (9) $(88) $ 5
Pulp Chemicals.............................................. 41 42 35
---- ---- ------
$ 32 $(46) $ 40
==== ==== ======
COMPARISON OF FISCAL 2002 TO FISCAL 2001
Our revenues were approximately $629 million in fiscal 2002, a decrease of
15% from the approximately $744 million in revenues we recorded in fiscal 2001.
This decrease in revenues resulted primarily from lower acrylonitrile and
acrylic fiber sales volumes. We recorded a net loss of approximately $36 million
for fiscal 2002, compared to a net loss of approximately $182 million for fiscal
2001. This decrease in net loss was primarily due to improved styrene gross
profit and lower interest costs, as we did not accrue interest on our unsecured
and undersecured funded indebtedness as it is generally disallowed by the
Bankruptcy Code. This was partially offset by an increase in reorganization
items recorded during fiscal 2002 compared to fiscal 2001.
Revenues, Gross Profit (Loss) and Operating Income (Loss)
Petrochemicals. Revenues from our petrochemicals operations were
approximately $401 million in fiscal 2002, a decrease of approximately 22% from
the $515 million in revenues we recorded in fiscal 2001. This decrease in
revenues was caused primarily by decreases in acrylonitrile and acrylic fibers
sales volumes. Our petrochemicals operations recorded an operating loss of
approximately $9 million for fiscal 2002, compared to an operating loss of
approximately $88 million for fiscal 2001. This improvement resulted primarily
from an increase in styrene sales margins along with our withdrawal from the
traditional commodity textile fibers business during fiscal 2001.
43
Revenues from our styrene operations were approximately $274 million in
fiscal 2002, an increase of approximately 7% from the approximately $257 million
in revenues from these operations during fiscal 2001. Sales prices for styrene
during fiscal 2002 decreased approximately 4% from those realized during fiscal
2001. However, our total sales volumes for styrene in fiscal 2002 increased
approximately 8% from those realized during fiscal 2001. The increase in styrene
sales volumes, combined with decreases in raw material and energy costs,
resulted in a significant increase in gross margin realized in fiscal 2002
compared to fiscal 2001. During fiscal 2002, prices for benzene, one of the
primary raw materials for styrene, were approximately 4% lower than the prices
we paid for benzene in fiscal 2001 and prices for ethylene, the other primary
raw material for styrene, were approximately 28% lower than the prices we paid
for ethylene in fiscal 2001. Average costs for natural gas, another major
component in the cost of manufacturing styrene, decreased 42% during fiscal 2002
compared to average costs during fiscal 2001.
Revenues from our acrylonitrile and derivatives operations were
approximately $7 million in fiscal 2002, a decrease of approximately 92% from
the approximately $87 million in revenues from these operations in fiscal 2001.
Total sales volumes of our acrylonitrile decreased approximately 90% in fiscal
2002 compared to fiscal 2001 due to our continued shutdown of our acrylonitrile
facility during fiscal 2002 due to unfavorable market conditions. We did not
purchase propylene and ammonia, the primary raw materials for acrylonitrile, in
fiscal 2002 due to the continued shutdown.
Revenues from our acrylic fibers operations were approximately $19 million
in fiscal 2002, a decrease of approximately 60% from the approximately $47
million in revenues from these operations during fiscal 2001. Sales volumes of
our acrylic fibers during fiscal 2002 decreased approximately 74% from those
experienced in fiscal 2001. These decreases in revenues and sales volumes
resulted primarily from our withdrawal from the traditional commodity textile
business in the third quarter of fiscal 2001, and corresponding significant
reduction in our operations at our acrylic fibers plant. Sales prices for our
acrylic fibers in fiscal 2002 increased approximately 58% from those realized
during fiscal 2001. We continue to produce our specialty textile and technical
fibers products at this facility.
Revenues from our other petrochemicals operations, including acetic acid,
plasticizers and methanol, were $101 million in fiscal 2002, a decrease of
approximately 19% from the $124 million in revenues from these operations during
fiscal 2001. Our other petrochemicals operations reported an increase in
operating earnings for fiscal 2002 compared to those realized during fiscal
2001.
Pulp Chemicals. Revenues from our pulp chemicals operations were
approximately $228 million in fiscal 2002, a slight decrease from the
approximately $229 million in revenues from these operations during fiscal 2001.
A reduction in chlorine dioxide generator royalties was partially offset by an
increase in sodium chlorate revenue. Sales prices of our sodium chlorate
increased approximately 4% during fiscal 2002 compared to fiscal 2001, while
sodium chlorate sales volumes decreased slightly during this same period. Our
pulp chemicals operations recorded operating income of approximately $41 million
in fiscal 2002 compared to operating income of approximately $42 million during
fiscal 2001.
Other Expense (Income)
We generated other income of approximately $2 million in fiscal 2002 due to
an adjustment of a liability related to certain employee retirement benefit
obligations, compared to the $3 million of other expense incurred in fiscal 2001
which was primarily for professional fees incurred in preparation of our filing
for reorganization under Chapter 11.
Reorganization Items
Reorganization items incurred during fiscal 2002 were approximately $17
million compared to approximately $5.4 million incurred during fiscal 2001.
These costs were primarily for professional fees incurred after our filing for
reorganization under Chapter 11.
44
Interest and Debt Related Expenses
Interest and debt related expenses were approximately $53 million in fiscal
2002 compared to approximately $93 million in fiscal 2001. This reduction was
due to the fact that, after our Chapter 11 filings, interest on liabilities
subject to compromise was not accrued. The contractual interest expense not
accrued during fiscal 2002 and fiscal 2001, due to our Chapter 11 filings, was
approximately $49 million and $10 million, respectively.
Provision for Income Taxes
Provision for income taxes decreased approximately $28 million to $15
million during fiscal 2002 compared to fiscal 2001. This decrease was the result
of an increase in the valuation allowance related to certain deferred tax assets
during fiscal 2001. As of September 30, 2002, we had an available U.S. federal
income tax net operating loss carryforward ("U.S. NOL") of approximately $351
million, which expires during 2018-22. In assessing the value of the deferred
tax assets, we consider whether it is more likely than not that all of the
deferred tax assets will be realized. We will undergo an ownership change for
U.S. federal income tax purposes in connection with consummation of the Plan. As
a result of that ownership change, our ability to use our U.S. NOLs will be
severely limited. Moreover, we expect that we will recognize a significant
amount of cancellation of indebtedness ("COD") income for U.S. federal income
tax purposes upon consummation of the Plan. Although this COD income will be
excluded from our gross income because we are in bankruptcy, we will be required
to reduce our U.S. NOLs (and possibly certain other tax attributes) for our
taxable year that begins after the year in which the Plan is consummated. As we
expect that the amount of COD income recognized upon consummation of the Plan
will exceed the amount of our U.S. NOLs, we expect that our U.S. NOLs will be
completely eliminated for the taxable year that begins after our taxable year in
which the Plan is consummated. Based on the foregoing, we were not able to
conclude that it was more likely than not that we would be able to realize the
future benefit of our U.S. deferred tax assets. Consequently, benefit was not
provided for these U.S. NOLs at September 30, 2002.
COMPARISON OF FISCAL 2001 TO FISCAL 2000
Our revenues were approximately $744 million in fiscal 2001, a decrease of
32% from the approximately $1.1 million in revenues we recorded in fiscal 2000.
This decrease in revenues resulted primarily from lower styrene and
acrylonitrile sales volumes and sales prices. We recorded a net loss of
approximately $182 million for fiscal 2001, compared to a net loss of
approximately $64 million for fiscal 2000. This increase in net loss was
primarily due to the level of net loss from our styrene and acrylonitrile
operations, along with the additional valuation allowance taken for our deferred
tax assets; partially offset by the absence of a $60 million impairment charge
related to our acrylic fiber long-lived assets in fiscal 2000.
Revenues, Gross Profit (Loss) and Operating Income (Loss)
Petrochemicals. Revenues from our petrochemicals operations were
approximately $515 million in fiscal 2001, a decrease of approximately 41% from
the $870 million in revenues received in fiscal 2000. This decrease in revenues
was caused primarily by decreases in styrene and acrylonitrile sales volumes and
prices and decreased methanol sales volumes in fiscal 2001. Our petrochemicals
operations recorded an operating loss of approximately $89 million for fiscal
2001, whereas these operations recorded operating income of approximately $5
million for fiscal 2000. This difference resulted primarily from lower styrene
and acrylonitrile sales volumes and prices, as well as higher energy costs ;
partially offset by the absence of a $60 million impairment charge related to
our acrylic fiber long-lived assets in fiscal 2000.
Revenues from our styrene operations were approximately $257 million in
fiscal 2001, a decrease of approximately 48% from the approximately $492 million
in revenues from these operations during fiscal 2000. Sales prices for styrene
during fiscal 2001 decreased approximately 24% from those realized during fiscal
2000. In addition, our total sales volumes for styrene in fiscal 2001 decreased
approximately 31%
45
from those realized during fiscal 2000. These decreases in sales prices and
sales volumes resulted primarily from a continued slowdown in demand
attributable, to a large extent, to a slowdown in general worldwide economic
activity. During fiscal 2001, prices for benzene, one of the primary raw
materials for styrene, were approximately 9% lower than the prices we paid for
benzene in fiscal 2000 and prices for ethylene, the other primary raw material
for styrene, were approximately 8% lower than the prices we paid for ethylene in
fiscal 2000. Average costs for natural gas during fiscal 2001 increased 78%
compared to average costs during fiscal 2000. Margins on our styrene sales
during fiscal 2001 decreased from those realized during fiscal 2000, primarily
as a result of the decrease in sales prices and volumes and the increase in
energy costs, partially offset by the decreases in the costs of benzene and
ethylene.
Revenues from our acrylonitrile and derivatives operations were
approximately $87 million in fiscal 2001, a decrease of approximately 47% from
the approximately $164 million in revenues from those operations in fiscal 2000.
Total sales volumes of our acrylonitrile decreased approximately 61% in fiscal
2001 compared to fiscal 2000 due to our continued shutdown of our acrylonitrile
facility for most of fiscal 2001 due to unfavorable market conditions. Direct
sales prices for acrylonitrile in fiscal 2001 decreased approximately 10% from
those realized in fiscal 2000. During fiscal 2001, prices for propylene, one of
the primary raw materials for acrylonitrile, were approximately 4% higher than
the prices we paid for propylene during fiscal 2000 and prices for ammonia, the
other primary raw material for acrylonitrile, were approximately 28% higher than
the prices we paid for ammonia in fiscal 2000. Margins on our acrylonitrile
sales in fiscal 2001 decreased from those realized in fiscal 2000, primarily as
a result of higher raw materials costs and lower operating rates.
Revenues from our acrylic fibers operations were approximately $47 million
in fiscal 2001, a decrease of approximately 35% from the approximately $73
million in revenues from these operations during fiscal 2000. Sales volumes of
our acrylic fibers during fiscal 2001 decreased approximately 42% from those
experienced in fiscal 2000. Sales prices for our acrylic fibers in fiscal 2001
increased approximately 14% from those realized during fiscal 2000. These
decreases in revenues and sales volumes resulted primarily from our withdrawal
from the traditional commodity textile business in the third quarter of fiscal
2001 and corresponding significant reduction in our operations at our acrylic
fibers plant. We continue to produce our specialty and technical fibers products
at this facility.
Revenues from our other petrochemicals operations, including acetic acid,
plasticizers, and methanol, were $124 million in fiscal 2001, a decrease from
the $141 million in revenues from these operations during fiscal 2000. Our other
petrochemicals operations reported an increase in operating earnings for fiscal
2001 compared to that realized during fiscal 2000, primarily due to the positive
impact of our methanol plant shutdown and the benefit of our methanol
requirements contract. Also favorably impacting operating income during fiscal
2001 were net proceeds of $3 million recorded in connection with a dispute
related to the construction of our methanol facility, the proceeds of which were
received in April of 2001.
Pulp Chemicals. Revenues from our pulp chemicals operations were
approximately $229 million in fiscal 2001, an increase of approximately 1% from
the approximately $226 million in revenues from these operations during fiscal
2000. An increase in sodium chlorate revenue was partially offset by a reduction
in chlorine dioxide generator royalties. Sales prices of our sodium chlorate
increased approximately 6% during fiscal 2001 compared to fiscal 2000, while
sodium chlorate sales volumes increased approximately 2% during this period. Our
pulp chemicals operations recorded operating income of approximately $42 million
in fiscal 2001 compared to operating income of approximately $35 million during
fiscal 2000. These increases in revenues, sales prices, sales volumes and
operating income resulted primarily from the continued conversion to elemental
chlorine free bleaching at pulp mills.
Selling, General and Administrative ("SG&A") Expenses
Our SG&A expenses in fiscal 2001 were approximately $24 million, compared
to approximately $39 million in fiscal 2000. This decrease was primarily the
result of the accrual in fiscal 2000 of variable compensation related to our
fiscal 2000 financial performance with no corresponding accruals in fiscal 2001,
cost reductions in our acrylic fibers business and general cost containment
efforts.
46
Other Expense
We incurred other expense of approximately $3 million in fiscal 2001, which
was primarily for professional fees incurred in preparation of our filing for
reorganization under Chapter 11, compared to the $2 million incurred in fiscal
2000 related to the workforce reductions in our acrylic fibers operations.
Reorganization Items
Reorganization items incurred during fiscal 2001 were approximately $5
million, which was primarily for professional fees incurred after our filing for
reorganization under Chapter 11.
Interest and Debt Related Expenses
Interest and debt related expenses were approximately $93 million in fiscal
2001 compared to $100 million in fiscal 2000. This reduction was due to the fact
that, after our Chapter 11 filings, interest on liabilities subject to
compromise was not accrued. The contractual interest expense not accrued during
fiscal 2001 due to our Chapter 11 filings was approximately $10 million.
Provision for Income Taxes
Provision for income taxes increased approximately $38 million to $43
million during fiscal 2001 compared to fiscal 2000. This increase was the result
of increasing the valuation allowance related to certain deferred tax assets. In
fiscal 2001, based on the uncertainty as to the effect of our Chapter 11 filings
on the utilization of our U.S. NOLs and the future realization of other net
deferred tax assets, we were not able to conclude that it was more likely than
not that we would be able to realize the future benefit of our U.S. deferred tax
assets. Accordingly, an additional valuation allowance of $92 million was
recorded during fiscal 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about our market sensitive financial
instruments and constitutes a "forward-looking statement." The table excludes
pre-petition debt of the Debtors due to the uncertainty related to the ultimate
resolution of these liabilities during our Chapter 11 proceedings. Our major
financial market risk exposure is changing interest rates, primarily in the U.S.
Interest rate swaps may be used to adjust interest rate exposure, when
appropriate, based upon market conditions. A portion of our borrowings and
transactions are denominated in foreign currencies which exposes us to market
risk associated with exchange rate movements. All items described below are
stated in U.S. dollars.
FAIR VALUE
EXPECTED MATURITY DATES SEPTEMBER 30,
(IN THOUSANDS) 2003 2004 2005 2006 2007 THEREAFTER TOTAL 2002
----------------------- ------- ------ ------ ------ ------ ---------- ------- -------------
DEBT
United States $
denominated............. $57,242 $ -- $ -- $ -- $ -- $ -- $57,242 $57,242
Average interest
rates -- variable..... (a)
Canadian $ denominated.... $ 5,908 $1,625 $1,625 $1,625 $1,625 $8,579 $20,987 $20,987
Average interest
rates -- variable..... (b)(c) (b)(c) (b) (b) (b) (b)
DERIVATIVE POWER CONTRACTS
Power Purchase
Agreement(d)............ $ 200 $ -- $ -- $ -- $ -- $ -- $ 200 $ 200
---------------
(a) Borrowings under our fixed assets revolver bear interest, at our option, at
an annual rate of either the "LIBOR Rate" plus 3.75% or the "Alternate Base
Rate" plus 2.25%. Borrowings under our current assets revolver bear
interest, at our option, at an annual rate of either the LIBOR Rate plus
3.50% or
47
the Alternate Base Rate plus 2.00%. The "Alternate Base Rate" is equal to
the greater of the "Base Rate" as announced from time to time by The Chase
Manhattan Bank in New York, New York or the "Federal Funds Effective Rate"
plus 1/2%. At September 30, 2002, the weighted average interest rate in
effect for our fixed assets revolver was 6.0% and there were no amounts
outstanding under our current assets revolver.
(b) Borrowings under the Saskatoon revolver ("Facility A"), which are
denominated in Canadian dollars, generally bear interest at Prime rates
plus 0.50% to 0.75% depending on the option selected by Sterling Sask.
There were no borrowings under Facility A at September 30, 2002. Borrowings
under the Saskatoon term loan ("Facility B"), which are denominated in
Canadian dollars, generally bear interest at Bankers Acceptance rates plus
2.25% to 2.50%. At September 30, 2002, the interest rate in effect for
Facility B was 5.27%.
(c) Borrowings under the revolving loan of the Canadian Financing Agreement
bear interest at the Canadian Imperial Bank of Commerce Rate (CIBC) "Bank
Rate" plus 2.00% per annum on Canadian Dollar loans and CIBC "Base Rate"
plus 2.00% per annum on American Dollar loans. At September 30, 2002, the
interest rates in effect were 6.50% and 7.25% on the Canadian and American
dollar loans. Borrowings under the Canadian dollar term loan of the
Canadian Facility bears interest at the "Bank Rate" plus 2.50% per annum.
At September 30, 2002, the interest rate in effect was 7.0%.
(d) Our Canadian subsidiaries periodically enter fixed price agreements for a
portion of their electrical energy requirements. We have an agreement
relating to the supply of a portion of the electrical energy at one of our
Canadian sodium chlorate production facilities. This agreement, which was
previously designated as a normal purchase under SFAS No. 133, does not
meet the criteria of a normal purchase based on guidance issued by the
Derivatives Implementation Group and cleared by the Financial Accounting
Standards Board in June 2001. All purchases under this agreement, which
expires on December 31, 2002, are used in the ordinary course of business.
However, effective July 1, 2001, this agreement is required to be
marked-to-market. At September 30, 2002, the value of this agreement was a
gain of approximately $0.2 million based on current market prices and
quantities to be delivered.
48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
STERLING CHEMICALS, INC.
Sterling Chemicals, Inc. Consolidated Statements of
Operations for the years ended September 30, 2002, 2001
and 2000.................................................. 50
Sterling Chemicals, Inc. Consolidated Balance Sheets as of
September 30, 2002 and 2001............................... 51
Sterling Chemicals, Inc. Consolidated Statements of Changes
in Stockholder's Equity (Deficiency in Assets) for the
years ended September 30, 2002, 2001 and 2000............. 52
Sterling Chemicals, Inc. Consolidated Statements of Cash
Flows for the years ended September 30, 2002, 2001 and
2000...................................................... 53
Notes to Consolidated Financial Statements.................. 54
Independent Auditors' Report................................ 90
STERLING CHEMICALS GUARANTORS
Sterling Chemicals Guarantors Combined Statements of
Operations for the years ended September 30, 2002, 2001
and 2000.................................................. 91
Sterling Chemicals Guarantors Combined Balance Sheets as of
September 30, 2002 and 2001............................... 92
Sterling Chemicals Guarantors Combined Statements of Changes
in Stockholder's Equity (Deficiency in Assets) for the
years ended September 30, 2002, 2001 and 2000............. 93
Sterling Chemicals Guarantors Combined Statements of Cash
Flows for the years ended September 30, 2002, 2001 and
2000...................................................... 94
Notes to Combined Financial Statements...................... 95
Independent Auditors' Report................................ 120
49
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
---------------------------------
2002 2001 2000
-------- --------- ----------
(DOLLARS IN THOUSANDS)
Revenues................................................... $628,727 $ 743,565 $1,096,451
Cost of goods sold......................................... 553,258 757,410 955,560
-------- --------- ----------
Gross profit (loss)........................................ 75,469 (13,845) 140,891
Selling, general and administrative expenses............... 24,059 23,573 38,901
Impairment of assets....................................... 4,444 -- 60,000
Other expense (income)..................................... (1,925) 2,960 1,554
Reorganization items....................................... 17,022 5,422 --
Interest and debt related expenses(1)...................... 52,987 93,223 99,723
-------- --------- ----------
Loss before income taxes................................... (21,118) (139,023) (59,287)
Provision for income taxes................................. 14,868 42,687 4,560
-------- --------- ----------
Net loss................................................... $(35,986) $(181,710) $ (63,847)
======== ========= ==========
---------------
(1) Contractual interest for the years ended September 30, 2002 and 2001 totaled
$102,275 and $103,470, respectively.
The accompanying notes are an integral part of the consolidated financial
statements.
50
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
-----------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 23,276 $ 14,459
Accounts receivable, net.................................. 107,968 103,933
Inventories, net.......................................... 50,871 48,318
Prepaid expenses.......................................... 5,086 3,349
--------- ---------
Total current assets................................. 187,201 170,059
Property, plant and equipment, net.......................... 255,836 284,944
Other assets, net........................................... 46,611 56,847
--------- ---------
Total assets......................................... $ 489,648 $ 511,850
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable.......................................... $ 51,424 $ 27,436
Accrued liabilities....................................... 39,444 35,725
Current portion of long-term debt......................... 63,150 33,260
--------- ---------
Total current liabilities............................ 154,018 96,421
Pre-petition liabilities -- subject to compromise........... 520,938 561,692
Pre-petition liabilities -- not subject to compromise....... 362,836 325,655
Long-term debt.............................................. 15,079 61,084
Deferred income tax liability............................... 14,115 14,504
Deferred credits and other liabilities...................... 34,139 15,787
Common stock held by ESOP................................... -- 289
Commitments and contingencies (Note 9)
Stockholder's equity (deficiency in assets):
Common stock, $.01 par value.............................. -- --
Additional paid-in capital................................ (141,786) (141,786)
Accumulated deficit....................................... (419,437) (383,740)
Accumulated other comprehensive loss...................... (50,254) (38,053)
Deferred compensation..................................... -- (3)
--------- ---------
Total stockholder's equity (deficiency in assets).... (611,477) (563,582)
--------- ---------
Total liabilities and stockholder's equity
(deficiency in assets).............................. $ 489,648 $ 511,850
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
51
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
--------------- PAID-IN ACCUMULATED COMPREHENSIVE DEFERRED
SHARES AMOUNT CAPITAL DEFICIT LOSS COMPENSATION TOTAL
------ ------ ---------- ----------- ------------- ------------ ---------
(AMOUNTS IN THOUSANDS)
Balance, September 30, 1999...... 1 -- $(139,786) $(140,978) $(28,768) $(58) $(309,590)
Comprehensive loss:
Net loss......................... -- -- -- (63,847) -- --
Other comprehensive loss, net of
tax:
Translation adjustment......... -- -- -- -- (2,015) --
Pension adjustment............. -- -- -- -- 47 --
Comprehensive loss......... (65,815)
Dividends paid to Holdings....... -- -- (2,000) -- -- -- (2,000)
Revaluation of ESOP shares to
independently appraised market
value.......................... -- -- -- (431) -- -- (431)
Amortization of deferred
compensation................... -- -- -- -- -- 46 46
---- ----- --------- --------- -------- ---- ---------
Balance, September 30, 2000...... 1 -- (141,786) (205,256) (30,736) (12) (377,790)
Comprehensive loss:
Net loss......................... -- -- -- (181,710) -- --
Other comprehensive loss, net of
tax:
Translation adjustment......... -- -- -- -- (4,053) --
Pension adjustment............. -- -- -- -- (3,264) --
Comprehensive loss......... (189,027)
Revaluation of ESOP shares to
independently appraised market
value.......................... -- -- -- 3,226 -- -- 3,226
Amortization of deferred
compensation................... -- -- -- -- -- 9 9
---- ----- --------- --------- -------- ---- ---------
Balance, September 30, 2001...... 1 -- (141,786) (383,740) (38,053) (3) (563,582)
Comprehensive loss:
Net loss......................... -- -- -- (35,986) -- --
Other comprehensive loss, net of
tax:
Translation adjustment......... -- -- -- -- (516) --
Pension adjustment............. -- -- -- -- (11,685) --
Comprehensive loss......... (48,187)
Revaluation of ESOP shares to
independently appraised market
value.......................... -- -- -- 289 -- -- 289
Amortization of deferred
compensation................... -- -- -- -- -- 3 3
---- ----- --------- --------- -------- ---- ---------
Balance, September 30, 2002...... 1 $ -- $(141,786) $(419,437) $(50,254) $ -- $(611,477)
==== ===== ========= ========= ======== ==== =========
The accompanying notes are an integral part of the consolidated financial
statements.
52
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
-------------------------------
2002 2001 2000
-------- --------- --------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net loss.................................................. $(35,986) $(181,710) $(63,847)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 45,597 53,118 58,510
Interest amortization................................... 4,805 4,047 6,057
Deferred tax expense (benefit).......................... (736) 36,378 (257)
Impairment of assets.................................... 4,444 -- 60,000
Inventory valuation reserve............................. -- 8,183 --
Other................................................... 109 2,052 726
Change in assets/liabilities(1)
Accounts receivable..................................... (4,035) 55,741 (20,347)
Inventories............................................. (2,553) 28,284 (13,475)
Prepaid expenses........................................ (1,737) (2,383) 4,967
Other assets............................................ 1,987 (2,678) 4,096
Accounts payable........................................ 23,988 (13,736) 10,791
Accrued liabilities..................................... 3,719 8,219 12,864
Other liabilities....................................... 2,666 13,270 (11,857)
-------- --------- --------
Net cash provided by operating activities............. 42,268 8,785 48,228
-------- --------- --------
Cash flows from investing activities:
Capital expenditures...................................... (16,263) (16,892) (28,797)
-------- --------- --------
Net cash used in investing activities....................... (16,263) (16,892) (28,797)
-------- --------- --------
Cash flows from financing activities:
Payment on Saskatoon Credit Agreement..................... (32,054) (2,850) (9,141)
Borrowings under Saskatoon Refinancing Agreement.......... 15,753 -- --
Net changes in Prior Revolvers............................ -- (37,206) (17,279)
Net borrowings under DIP Facility......................... 14,972 42,270 --
Borrowings under (payments on) Canadian Financing
Agreement............................................... (14,769) 20,003 --
Debt issuance costs....................................... (1,226) (4,901) --
Dividends paid to parent.................................. -- -- (2,000)
Other..................................................... (17) -- (23)
-------- --------- --------
Net cash provided by (used in) financing activities..... (17,341) 17,316 (28,443)
Effect of United States/Canadian exchange rate on cash...... 153 (490) (147)
-------- --------- --------
Net increase (decrease) in cash and cash equivalents.... 8,817 8,719 (9,159)
Cash and cash equivalents -- beginning of period............ 14,459 5,740 14,899
-------- --------- --------
Cash and cash equivalents -- end of year.................... $ 23,276 $ 14,459 $ 5,740
======== ========= ========
Supplement disclosures of cash flow information:
Interest paid, net of interest income received............ $ (7,814) $ (63,095) $(96,139)
Income taxes paid......................................... (4,547) (1,961) (1,194)
Cash paid for reorganization items........................ (11,729) (11) --
---------------
(1) Change in assets/liabilities adjusted for reclasses to pre-petition
liabilities during 2001.
The accompanying notes are an integral part of the consolidated financial
statements.
53
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sterling Chemicals, Inc. ("Chemicals" and, together with its subsidiaries,
unless otherwise indicated, are collectively referred to as "we," "our," "ours"
and "us") through its subsidiaries owns or operates facilities for the
manufacture of eight commodity petrochemicals at our Texas City, Texas plant.
Additionally, we manufacture chemicals for use primarily in the pulp and paper
industry at five plants in Canada and a plant in Valdosta, Georgia and
manufacture acrylic fibers at our plant in Santa Rosa County, Florida. At our
Texas City plant, we have production capacity for styrene, acrylonitrile, acetic
acid, plasticizers, methanol, disodium iminodiacetic acid ("DSIDA"), tertiary
butylamine ("TBA") and sodium cyanide. We generally sell our petrochemicals
products to customers for use in the manufacture of other chemicals and
products, which in turn are used in the production of a wide array of consumer
goods and industrial products. We produce specialty textiles and technical
fibers at our Santa Rosa plant, as well as licensing our acrylic fibers
manufacturing technology to producers worldwide. Sodium chlorate is produced at
our five plants in Canada and our Valdosta plant. Sodium chlorite is produced at
one of our Canadian locations. In addition, chlor-alkali and calcium
hypochlorite are produced at one of our Canadian locations. We also license,
engineer and oversee construction of large-scale chlorine dioxide generators for
the pulp and paper industry as part of the pulp chemicals business. These
generators convert sodium chlorate into chlorine dioxide at pulp mills.
As part of the Plan (defined below), on December 6, 2002, Sterling
Chemicals Holdings, Inc. ("Holdings"), the sole shareholder of all of the
outstanding common stock of Chemicals, was merged into Chemicals. Holdings'
classes of equity interests were cancelled, and the holders of Holdings' 13 1/2%
Senior Secured Discount Notes were issued 65,000 shares of new common equity of
Chemicals. On the effective date of the Plan, these shares will constitute 1.3%
of the new common equity interests in Chemicals. Unsecured creditors and
stockholders of Holdings will not receive any distribution under the Plan due to
their structural subordination and the absence of assets at Holdings. See Note 2
for the pro forma impact of the merger.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on
the going concern basis of accounting, which contemplates the continuity of
operations, the realization of assets and the satisfaction of liabilities in the
ordinary course of business. On July 16, 2001 (the "Petition Date"), Holdings,
Chemicals and most of their U.S. subsidiaries (collectively, the "Debtors")
filed voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code (the "Bankruptcy Code") in the U.S. Bankruptcy Court for the
Southern District of Texas (the "Bankruptcy Court") and began operating their
businesses as debtors-in-possession pursuant to the Bankruptcy Code. None of our
foreign subsidiaries, including our Canadian subsidiaries, were included in the
Chapter 11 filings. The accompanying consolidated financial statements have been
presented in conformity with the AICPA's Statement of Position 90-7, "Financial
Reporting By Entities In Reorganization Under the Bankruptcy Code" ("SOP 90-7").
The statement requires a segregation of liabilities subject to compromise as of
the Petition Date and identification of all transactions and events that are
directly associated with the reorganization of the Debtors.
The filing of the Chapter 11 petitions was driven by the Debtors' inability
to meet their funded debt obligations over the long-term, largely brought about
by weak demand for petrochemicals products caused by declines in general
worldwide economic conditions, the relative strength of the U.S. dollar (which
caused the Debtors' export sales to be at a competitive disadvantage) and higher
raw material and energy costs. As a result of these conditions, the Debtors
incurred significant operating losses. Chapter 11 is designed to permit debtors
to preserve cash and to give debtors the opportunity to restructure their debt.
54
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the pendency of the Chapter 11 cases, with approval of the Bankruptcy
Court, the Debtors assumed favorable pre-petition contracts and leases, rejected
unfavorable pre-petition contracts and leases and have entered into purchase and
sale agreements to otherwise dispose of assets. Most of these actions will be
consummated on or before the effective date of the Debtors' plan of
reorganization (the "Plan").
The consummation of the Plan is the primary objective of the Debtors. On
May 14, 2002, the Debtors filed the Plan with the Bankruptcy Court, along with
an accompanying Disclosure Statement. As a result of negotiations among the key
creditor constituencies in the Chapter 11 cases, including Resurgence Asset
Management, L.L.C. ("Resurgence"), the single largest unsecured creditor and a
proposed equity investor in the reorganized company, a revised Plan and
Disclosure Statement were filed with the Bankruptcy Court on September 13, 2002.
The Plan and the Disclosure Statement were further revised on October 7, 2002
and October 11, 2002, in connection with the hearing in the Bankruptcy Court to
consider the adequacy of the Disclosure Statement. On October 11, 2002, the
Bankruptcy Court issued an order approving the Disclosure Statement and
authorizing the Debtors to commence the process of soliciting votes to accept or
reject the Plan and established a confirmation objection and voting deadline of
November 13, 2002. The approval of the Disclosure Statement and the
authorization to commence the solicitation of votes was made subject to the
conduct of an alternative plan process. As part of that process, alternative
plan proposals were required to be submitted by no later than October 28, 2002.
However, no such proposals were received by the deadline. The Plan was approved
by a large percentage of the votes cast and, on November 20, 2002, the Plan was
confirmed by the Bankruptcy Court.
The Plan provides for the sale of the Debtors' pulp chemicals business to
Superior Propane Inc. ("Superior"), for the transfer of the Debtors' acrylic
fibers business pursuant to a management buyout for little or no consideration,
effective upon consummation of the Plan, and for the continuation of the
Debtors' core petrochemicals business, as restructured under the Plan. A portion
of the net proceeds from the sale of the pulp chemicals business, $80 million,
will remain with the Debtors and will be used to fund the Debtors' obligations
under the Plan and to support future operations of the restructured
petrochemicals business. The remaining net proceeds will be allocated to the
holders of the 12 3/8% Senior Secured Notes (the "12 3/8% Notes"), who will also
receive approximately $93 million in secured notes in satisfaction of their
claims. The holders of Holdings' 13 1/2% Senior Secured Discount Notes were
issued 65,000 shares of new common equity of Chemicals. Unsecured creditors of
the Debtors (other than unsecured creditors of Holdings), which include holders
of Chemicals' 11 1/4% Senior Subordinated Notes and 11 3/4% Senior Subordinated
Notes, will receive a pro rata share of 11.7% of the new Chemicals' shares to be
issued pursuant to the Plan, thereby participating in the common equity
ownership of the restructured petrochemicals business, along with Resurgence and
its affiliated client accounts (the "Investor"). The Investor has agreed to
provide equity funding of $30 million in exchange for certain new preferred
equity interests in the reorganized company and to underwrite an additional $30
million of equity funding through a rights offering for common equity interests
in the reorganized company. All, or a portion of, certain unsecured claims will
be paid if contracts associated with these claims are assumed pursuant to the
Plan. Following the satisfaction or waiver of certain conditions, we expect the
Plan to become effective on or before December 31, 2002, at which time the
Debtors will emerge from Chapter 11.
The Debtors have received an exit financing commitment from The CIT
Group/Business Credit, Inc. for a $100 million secured revolving credit facility
for the restructured petrochemicals business (the "Revolver"). We are in the
process of finalizing this agreement and it is expected to close
contemporaneously with our emergence from Chapter 11. The DIP Financing (as
described in Note 5) will be retired upon our emergence from Chapter 11.
Reorganization items reflected in the Statement of Operations for fiscal
2002 and fiscal 2001 are composed primarily of professional fees directly
related to the bankruptcy cases.
55
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Emergence from Chapter 11 in accordance with the Plan is dependent upon
several factors, including:
- consummation of the sale of the Debtors' pulp chemicals business to
Superior,
- transfer of the Debtors' acrylic fibers facility pursuant to a management
buyout,
- receipt of investments funds from Resurgence and
- finalization of the Revolver.
While we can provide no assurances, we believe that we will satisfactorily
complete these items and emerge from Chapter 11.
The ability of the Debtors to continue as a going concern is dependent upon
the Debtors' emergence from Chapter 11 with the capital structure contemplated
under the Plan. As the Debtors' can give no assurance that they will accomplish
any of the foregoing, there is substantial doubt about Chemicals' and the
Debtors' ability to continue as a going concern. The accompanying financial
statements do not purport to reflect or provide for the consequence of the
bankruptcy proceedings and do not include any adjustments that might result from
the outcome of the going concern uncertainty.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all of our
wholly-owned and majority-owned subsidiaries, with all significant intercompany
accounts and transactions having been eliminated. Our 50% equity investments in
a cogeneration joint venture and an acrylonitrile marketing joint venture are
accounted for under the equity method, with our share of the operating results
of the joint ventures recorded in the Statement of Operations.
CASH AND CASH EQUIVALENTS
We consider all investments having a remaining maturity of three months or
less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is primarily
determined on the first-in, first-out basis, except for stores and supplies,
which are valued at average cost.
We enter into agreements with other companies to exchange chemical
inventories in order to minimize working capital requirements and to facilitate
distribution logistics. Balances related to quantities due to or payable by us
are included in inventory.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Major renewals and
improvements which extend the useful lives of equipment are capitalized. Major
planned maintenance expenses are accrued for during the periods prior to the
maintenance, while routine repair and maintenance expenses are charged to
operations as incurred. Disposals are removed at carrying cost less accumulated
depreciation with any resulting gain or loss reflected in operations.
Depreciation is provided using the straight-line method over estimated useful
lives ranging from 5 to 25 years, with the predominant life of plant and
equipment being 15 years. We capitalize interest costs which are incurred as
part of the cost of constructing major facilities and equipment. The amount of
interest capitalized for fiscal 2002, 2001 and 2000 was $0.3 million, $0.5
million and $2.2 million, respectively.
56
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
Impairment tests of long-lived assets are made when conditions indicate
their carrying cost may not be recoverable. Such impairment tests are based on a
comparison of undiscounted future cash flows or the market value of similar
assets to the carrying cost of the asset. If an impairment is indicated, the
asset value is written down to its estimated fair value. We incurred an
impairment loss of $4.4 million in fiscal 2002 and $60 million in fiscal 2000
related to our acrylic fibers business.
PATENTS AND ROYALTIES
The costs of patents are amortized on a straight-line basis over their
estimated useful lives, which approximate ten years. We capitalized the value of
our chlorine dioxide generator technology acquired in fiscal 1992 based on the
net present value of all estimated remaining royalty payments associated with
this technology. The resulting intangible amount is included in other assets and
is amortized over the average life for these royalty payments of ten years.
DEBT ISSUE COSTS
Debt issue costs relating to long-term debt are amortized over the term of
the related debt instrument using the straight line method, which is materially
consistent with the effective interest method, and are included in other assets.
Debt issue costs for debt subject to compromise are included as a valuation of
the related debt. When the debt subject to compromise becomes an allowed claim,
and if the allowed claim differs from the net carrying amount of the debt
subject to compromise, the recorded amount will be adjusted to the amount of the
allowed claim, with the difference reflected in reorganization items. Debt issue
costs expensed as interest and debt-related expense during fiscal 2002, 2001 and
2000 were $4.8 million, $6.9 million and $5.1 million, respectively.
INCOME TAXES
Deferred income taxes are recorded to reflect the tax effect of the
temporary differences between the financial reporting basis and the tax basis of
our assets and liabilities at enacted rates.
REVENUE RECOGNITION
We generate revenues through sales in the open market, raw material
conversion agreements and long-term supply contracts. In addition, we have
entered into profit sharing arrangements with respect to some of our
petrochemicals products. We recognize revenue from sales in the open market, raw
material conversion agreements and long-term supply contracts when the products
are shipped. Revenues from profit sharing arrangements are estimated and accrued
monthly. Deferred credits are amortized over the life of the contracts which
gave rise to them. We also generate revenues from the construction and sale of
chlorine dioxide generators, which are recognized using the percentage of
completion method. We also receive prepaid royalties, which are recognized over
a period, which is typically ten years. In addition, we generate revenues from
the sale of acrylic fibers manufacturing technology to producers worldwide,
which are recognized when earned. We classify shipping and handling costs
associated with product delivered to customers as cost of goods sold.
FOREIGN CURRENCY TRANSLATION
Our Canadian subsidiaries use the Canadian dollar as their functional
currency. For financial reporting purposes, assets and liabilities of these
subsidiaries denominated in Canadian dollars are translated into United States
dollars at year-end exchange rates and revenues and expenses are translated at
the average
57
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
monthly exchange rates. Translation adjustments are included in accumulated
other comprehensive income, while transaction gains and losses are included in
operations when incurred.
LOSS PER SHARE
All issued and outstanding shares of Chemicals were previously held by
Holdings and, accordingly, loss per share is not presented.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS):
CUMULATIVE
TRANSLATION
ADJUSTMENT PENSION ADJUSTMENT TOTAL
----------- ------------------ --------
Balance, September 30, 1999................... (28,587) (181) (28,768)
Changes....................................... (2,015) 47 (1,968)
-------- -------- --------
Balance, September 30, 2000................... (30,602) (134) (30,736)
Changes....................................... (4,053) (3,264) (7,317)
-------- -------- --------
Balance, September 30, 2001................... (34,655) (3,398) (38,053)
Changes....................................... (517) (11,684) (12,201)
-------- -------- --------
Balance, September 30, 2002................... $(35,172) $(15,082) $(50,254)
======== ======== ========
There is no tax expense or benefit associated with the cumulative
translation adjustment amounts above. The pension adjustment amounts are net of
tax provision (benefit) of zero, zero and $24,000 for the fiscal years ended
September 30, 2002, 2001 and 2000, respectively.
ENVIRONMENTAL COSTS
Environmental costs are expensed as incurred unless the expenditures extend
the economic useful life of the relevant assets. Costs that extend the economic
life of assets are capitalized and depreciated over the remaining life of those
assets. Liabilities are recorded when environmental assessments or remedial
efforts are probable and the cost can be reasonably estimated.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In preparing disclosures about the fair value of financial instruments, we
have assumed that the carrying amount approximates fair value for cash and cash
equivalents, accounts receivable, accounts payable and certain accrued
liabilities due to the short maturities of these instruments. The fair values of
long-term debt instruments are estimated based upon quoted market values (if
applicable) or on the current interest rates available to us for debt with
similar terms and remaining maturities. The fair value of pre-petition
liabilities subject to compromise and pre-petition liabilities not subject to
compromise is not possible to determine given the uncertainty of the impact of
the bankruptcy proceedings. Considerable judgment is required in developing
these estimates and, accordingly, no assurance can be given that the estimated
values presented herein are indicative of the amounts that would be realized in
a free market exchange.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
58
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reported periods. Significant estimates
include impairment of long-lived assets, allowance for doubtful accounts,
inventories, revenue recognition, environmental reserves, provision for income
taxes and litigation reserves.
RECLASSIFICATION
Certain amounts reported in the financial statements for the prior periods
have been reclassified to conform with the current financial statement
presentation with no effect on net loss or stockholders' equity (deficiency in
assets).
2. PRO FORMA IMPACT OF MERGER (UNAUDITED)
As previously discussed, Holdings was merged into Chemicals on December 6,
2002. With the exception of the additional interest expense related to Holdings'
13 1/2% Senior Secured Discount Notes, which has not been recorded since the
bankruptcy filing in July 2001, Chemicals' results of operations and statements
of cash flows are essentially the same as Holdings'. For the year ended
September 30, 2002, Holdings' net loss was $36.2 million and Chemicals' was
$36.0 million. Accordingly, we have not prepared those pro forma statements for
the year ended September 30, 2002. However, we have prepared a condensed pro
forma balance sheet presenting the impact of the merger as if it took place on
September 30, 2002 as follows:
CHEMICALS, CHEMICALS,
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Total current assets.............................. 187,201 (3,472)(1) 183,729
Other assets...................................... 302,447 -- 302,447
--------- ------- ---------
Total assets................................. $ 489,648 (3,472) $ 486,176
========= ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Total current liabilities......................... 154,018 -- 154,018
Pre-petition liabilities.......................... 883,774 -- 883,774
Other liabilities................................. 63,333 -- 63,333
Stockholders' equity (deficiency in assets):
Common stock.................................... -- 1(2) 1
Additional paid-in capital...................... (141,786) (3,473)(1) (145,259)
Accumulated deficit............................. (419,437) -- (419,437)
Accumulated other comprehensive loss............ (50,254) -- (50,254)
--------- ------- ---------
Total stockholders' equity (deficiency in
assets)......................................... (611,477) (3,472) (614,949)
--------- ------- ---------
Total liabilities and stockholders' equity...... $ 489,648 (3,472) $ 486,176
========= ======= =========
---------------
(1) Primarily intercompany eliminations pertaining to SG&A expense
(2) In connection with the merger, Chemicals' issued 65,000 shares of $.01 par
value common stock
59
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
SEPTEMBER 30,
-----------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)
Inventories:
Finished products......................................... $ 24,846 $ 25,660
Raw materials............................................. 11,274 9,006
--------- ---------
Inventories at cost......................................... 36,120 34,666
Inventories under exchange agreements..................... 1,613 749
Stores and supplies....................................... 13,138 12,903
--------- ---------
$ 50,871 $ 48,318
========= =========
Land...................................................... $ 8,819 $ 10,153
Buildings................................................. 127,834 56,368
Plant and equipment....................................... 668,710 731,546
Construction in progress.................................. 12,096 12,491
Less: accumulated depreciation............................ (561,623) (525,614)
--------- ---------
$ 255,836 $ 284,944
========= =========
Other assets, net:
Patents and technology, net............................... $ 838 $ 10,061
Deferred catalyst......................................... 12,472 12,484
Intangible pension asset.................................. 5,232 4,496
Investment in Joint Venture............................... 5,379 4,955
Prepaid retiree medical................................... 3,000 3,000
Capitalized asbestos removal.............................. 2,883 3,020
Debt issue costs, net..................................... 9,556 18,987
Other..................................................... 7,251 --
--------- ---------
$ 46,611 $ 57,003
========= =========
Accrued liabilities:
Repairs................................................... $ 5,198 $ 14,704
Employee compensation and benefits........................ 11,935 1,751
Property taxes............................................ 4,750 1,748
Other..................................................... 17,561 17,522
--------- ---------
$ 39,444 $ 35,725
========= =========
Deferred credits and other liabilities:
Deferred revenue.......................................... $ 5,115 $ 5,836
Accrued postretirement, pension and post employment
benefits............................................... 24,856 6,502
Other..................................................... 4,168 3,449
--------- ---------
$ 34,139 $ 15,787
========= =========
60
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PRE-PETITION LIABILITIES
LIABILITIES SUBJECT TO COMPROMISE
The principal categories of claims classified as liabilities subject to
compromise under reorganization proceedings are identified below. All amounts
below may be subject to future adjustment depending on Bankruptcy Court action
and further developments with respect to disputed claims or other events,
including the reconciliation of claims filed with the Bankruptcy Court to
amounts recorded in the accompanying consolidated financial statements.
Additional pre-petition claims may arise from rejection of additional executory
contracts or unexpired leases by the Debtors. Under a confirmed plan of
reorganization, all pre-petition claims subject to compromise may be paid and
discharged at amounts substantially less than their allowed amounts.
On a consolidated basis, recorded liabilities subject to compromise under
Chapter 11 proceedings as of September 30, 2002 and 2001, consisted of the
following:
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------- -------------
(DOLLARS IN THOUSANDS)
Accrued litigation......................................... $ 3,454 $ 3,454
Trade accounts payable..................................... 21,283 34,486
Accrued interest........................................... 18,421 19,201
Debt:(1)
11 1/4% Notes............................................ 149,500 149,500
11 3/4% Notes............................................ 268,885 268,885
Employee benefits.......................................... 53,497 64,853
Accrued taxes.............................................. 49 4,811
Other...................................................... 5,849 16,502
-------- --------
Total liabilities subject to compromise.................... $520,938 $561,692
======== ========
---------------
(1) Debt liabilities are presented net of unamortized debt issue costs of $6.6
million as of September 30, 2002 and 2001.
During fiscal 2002, certain pre-petition liabilities subject to compromise
were paid pursuant to Bankruptcy Court approval. As a result of the bankruptcy
filing, principal and interest payments may not be made on pre-petition debt
without Bankruptcy Court approval. The total interest on pre-petition debt that
was not paid nor charged to earnings was $10.2 million for the period from July
16, 2001 to September 30, 2001 and $49.2 million for fiscal 2002. Such interest
is not being accrued since management believes it is not probable that it will
be treated as an allowed claim. The Bankruptcy Code generally disallows the
payment of post-petition interest that accrues with respect to unsecured or
undersecured claims.
LIABILITIES NOT SUBJECT TO COMPROMISE
The principal categories of claims classified as liabilities not subject to
compromise under reorganization proceedings are identified below. Management
believes all amounts below are fully secured liabilities that are not expected
to be compromised.
61
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On a consolidated basis, recorded liabilities subject to compromise under
Chapter 11 proceedings as of September 30, 2002 and 2001, consisted of the
following:
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------- -------------
(DOLLARS IN THOUSANDS)
12 3/8% Notes.............................................. $295,000 $295,000
Accrued interest on 12 3/8% Notes.......................... 67,426 25,983
Employee benefits.......................................... 410 4,672
-------- --------
Total liabilities not subject to compromise................ $362,836 $325,655
======== ========
5. LONG-TERM DEBT
This note contains information regarding our debt as of September 30, 2002
and 2001. As a result of the filing of the Chapter 11 cases previously
described, no payments have been made by the Debtors on long-term pre-petition
debt.
Borrowings consisted of the following:
SEPTEMBER 30,
-----------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)
DOMESTIC BORROWINGS
DIP Financing............................................... $ 57,242 $ 42,270
Other Domestic Borrowings:
11 1/4% notes............................................. 150,000 150,000
11 3/4% notes............................................. 275,000 275,000
12 3/8% notes............................................. 295,000 295,000
--------- ---------
Total domestic borrowings:.................................. 777,242 762,270
CANADIAN BORROWINGS
Canadian Financing Agreement................................ 5,234 20,003
Saskatoon Refinancing Agreement............................. 15,753 --
Saskatoon Credit Agreement.................................. -- 32,054
--------- ---------
Total Canadian borrowings................................. 20,987 52,057
--------- ---------
Total borrowings.......................................... 798,229 814,327
Less: Current portion not subject to compromise............. (63,150) (33,260)
Less: Borrowings subject to compromise (see Note 4)......... (425,000) (424,983)
Less: Borrowings not subject to compromise (see Note 4)..... (295,000) (295,000)
--------- ---------
Long-term debt............................................ $ 15,079 $ 61,084
========= =========
Upon the filing of the Chapter 11 cases by the Debtors, an Event of Default
occurred under the Prior Credit Agreement (as defined below) and each of the
indentures governing our outstanding notes, and all of this indebtedness was
accelerated and became immediately due and payable. The Prior Revolvers (as
defined below) were completely paid off with the proceeds of the initial draw
under the DIP Financing (as defined below). During the pendency of the Chapter
11 cases, the Debtors are not, for the most part, subject to the restrictions
contained in the Prior Credit Agreement or any of the indentures. However, the
Debtors are subject to the restrictions contained in the DIP Financing, Sterling
Pulp Chemicals, Ltd.
62
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("Sterling Pulp") are subject to restrictions contained in both the DIP
Financing and the Canadian Financing Agreement (as defined below) and our
Saskatoon subsidiary will be subject to the restrictions contained in the
Saskatoon Refinancing Agreement (as defined below).
Effective July 19, 2001, the Debtors (excluding Holdings) entered into a
Revolving Credit Agreement with a group of lenders led by The CIT Group/Business
Credit, Inc. to provide up to $195 million in debtor-in-possession financing
(the "DIP Financing"). By interim order dated July 18, 2001 and final order
dated September 14, 2001, the Bankruptcy Court approved up to $155 million in
lending commitments under the DIP Financing (the "Base Facility"), which was
later increased to $195 million through the entry of a priming order by the
Bankruptcy Court on November 2, 2001 (the "Priming Facility"). In separate
actions, the indenture trustee for the 12 3/8% Notes appealed both the final
order for the Base Facility and the priming order for the Priming Facility to
the United States District Court. After numerous proceedings before the United
States District Court and the Bankruptcy Court, the United States District Court
ultimately upheld the final order for the Base Facility in its original form and
upheld the priming order for the Priming Facility in a modified form. The
indenture trustee appealed these decisions by the United States District Court
to the United States Court of Appeals for the 5th Circuit. The 5th Circuit
consolidated all of the pending appeals and, by agreement of the indenture
trustee, the consolidated appeal is being held in abeyance pending the
effectiveness of the Plan. Under the Plan, the indenture trustee will file a
voluntary dismissal of the consolidated appeal upon the effectiveness of the
Plan. In the event that the Plan does not become effective on or before January
1, 2003, the indenture trustee will be then be free to further pursue the
consolidated appeal if it so desires.
Under the DIP Financing, the Debtors (excluding Holdings) are co-borrowers
and are jointly and severally liable for any indebtedness thereunder. The Base
Facility consists of:
- a $70 million fixed assets revolving credit facility secured by:
- first priority liens on all of the capital stock of the co-borrowers
(other than Chemicals), all of our United States production facilities
and related assets and 35% of the capital stock of certain of our
subsidiaries incorporated outside the United States; and
- second priority liens on all accounts receivable, inventory and other
specified assets of Chemicals and the other co-borrowers and 65% of the
capital stock of certain of our subsidiaries incorporated outside the
United States; and
- an $85 million current assets revolving credit facility secured by:
- a first priority lien on all accounts receivable, inventory and other
specified assets of Chemicals and the other co-borrowers;
- a second priority lien on 35% of the capital stock of certain of our
subsidiaries incorporated outside the United States; and
- third priority liens on the remaining 65% of that stock, all of the
capital stock of the co-borrowers (other than Chemicals) and all of our
United States production facilities and related assets.
Upon entry of the priming order, the maximum availability under the current
assets revolving credit facility was increased to $125 million. The monthly
borrowing base was revised to consist of 85% of eligible accounts receivable,
the lesser of $10 million or 33% of specified estimated future royalty payments
related to the Debtors' chlorine dioxide generator technology and 65% of
eligible inventory, with an inventory cap of $62.5 million, and the amount by
which the borrowing base for the current assets revolver is required to exceed
outstanding borrowings was changed to $6 million. During October 2002, an
amendment to the DIP Financing was effected, resulting in abolishment of the
minimum EBITDA
63
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
covenant unless excess availability (as defined in the amendment) falls below
$25.0 million. In addition, the amount by which the borrowing base for the
current assets revolver must exceed borrowings was increased to $12 million at
all times.
If the priming order remains effective and the total commitments under the
current assets revolver are increased to $125 million, the incremental $40
million is secured by first priority liens on all of our U.S. production
facilities and related assets and all of the capital stock of the co-borrowers
(other than Chemicals) to secure up to $40 million under the current assets
revolver, as well as all of the same collateral securing the initial $85 million
current assets revolver. Consequently, after giving effect to the priming order,
the DIP Financing consists of:
- a $70 million fixed assets revolving credit facility secured by:
- second priority liens on all of our U.S. production facilities and
related assets, all of the capital stock of the co-borrowers (other than
Chemicals), all accounts receivable, inventory and other specified
assets of Chemicals and the other co-borrowers and 35% of the capital
stock of certain of our subsidiaries incorporated outside the United
States; and
- a third priority lien on the remaining 65% of that stock; and
- a $125 million current assets revolving credit facility:
- $40 million of which is secured by first priority liens on all of our
U.S. production facilities and related assets, all of the capital stock
of the co-borrowers (other than Chemicals) and 35% of the capital stock
of certain of our subsidiaries incorporated outside the United States
and a second priority lien on the remaining 65% of that stock; and
- all of which is secured by a first priority lien on all accounts
receivable, inventory and other specified assets of Chemicals and the
other co-borrowers, third priority liens on 35% of the capital stock of
certain of our subsidiaries incorporated outside the United States and
fourth priority liens on the remaining 65% of that stock, all of the
capital stock of the co-borrowers (other than Chemicals) and all of our
U.S. production facilities and related assets.
Borrowings under the fixed assets revolving credit facility bear interest,
at Chemicals' option, at an annual rate of either the "LIBOR Rate" (as defined
in the DIP Financing) plus 3.75% or the "Alternate Base Rate" (as defined in the
DIP Financing) plus 2.25%. Borrowings under the current assets revolving credit
facility bear interest, at Chemicals' option, at an annual rate of either the
LIBOR Rate plus 3.50% or the Alternate Base Rate plus 2.00%. At September 30,
2002, the weighted-average interest rate in effect was 6.0%. The DIP Financing
also requires Chemicals and the co-borrowers to pay an aggregate commitment fee
ranging from 0.75% to 1.25% on the unused portion of the commitment for the
fixed assets revolving credit facility, depending on the amount drawn, and an
aggregate commitment fee of 0.5% on the unused portion of the commitment for the
current assets revolving credit facility.
At September 30, 2002, the total credit available under the DIP Financing
was $139.1 million due to the current assets revolver portion of the DIP
Financing borrowing base limitations discussed above. At September 30, 2002,
$57.2 million was drawn under the fixed assets revolver portion of the DIP
Financing and there were no borrowings outstanding under the current assets
revolver. In addition, approximately $3.6 million of letters of credit were
outstanding under the current assets revolver, leaving at September 30, 2002,
unused borrowing capacity under the DIP Financing of approximately $78.3
million.
As of July 11, 2001, our principal Canadian subsidiary, Sterling Pulp
entered into a financing agreement with CIT Business Credit Canada, Inc. ("CIT
Canada") to provide up to the Canadian dollar equivalent of U.S. $30 million
(the "Canadian Financing Agreement"). The initial advance under this
64
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
facility, approximately U.S. $20 million, was used by Sterling Pulp to discharge
a portion of an intercompany debt and was ultimately transferred to the Debtors
through an intercompany loan. The intercompany loan was approved by the
Bankruptcy Court's interim order entered on July 18, 2001 and final order
entered on September 14, 2001, which is a subject of the appeal of the final
order discussed above. Under the Plan, the intercompany loan will be
extinguished upon our emergence from Chapter 11. The initial term of the
Canadian Financing Agreement extends to July 2004. CIT Canada has been notified
of the expected termination of the Canadian Financing Agreement that will occur
concurrent with the sale of our pulp chemicals business to Superior. All
outstanding balances under the Canadian Financing Agreement will be paid from
the proceeds of the sale.
At September 30, 2002, $5.2 million was drawn under the Canadian Financing
Agreement. Borrowings under the Canadian Financing Agreement bear interest at
the CIBC Bank Rate (as defined in the Canadian Financing Agreement) plus between
2.0% and 2.5%, or at the LIBOR Rate plus 3.5%.
The DIP Financing and the Canadian Financing Agreement contain numerous
covenants, including, but not limited to, restrictions on the ability to incur
indebtedness, create liens and sell assets, as well as maintenance of certain
financial covenants.
On July 23, 1999, Chemicals completed a private offering of $295,000,000 of
its 12 3/8% Senior Secured Notes due 2006. On November 5, 1999, Chemicals
completed a registered exchange offer pursuant to which all of these notes were
exchanged for publicly registered 12 3/8% Notes with substantially similar terms
(the "12 3/8% Notes"). The 12 3/8% Notes are senior secured obligations of
Chemicals and rank equally in right of payment with all other existing and
future senior indebtedness of Chemicals and senior in right of payment to all
existing and future subordinated indebtedness of Chemicals. The 12 3/8% Notes
are guaranteed by all of Chemicals' existing direct and indirect United States
subsidiaries (other than Sterling Chemicals Acquisitions, Inc.) on a joint and
several basis. Each subsidiary's guarantee ranks equally in right of payment
with all of that subsidiary's existing and future senior indebtedness and senior
in right of payment to all existing and future subordinated indebtedness of that
subsidiary. The 12 3/8% Notes and the subsidiary guarantees are secured by:
- a second priority lien on all of our United States production facilities
and related assets;
- a second priority pledge of all of the capital stock of each subsidiary
guarantor; and
- a first priority pledge of 65% of the stock of certain of the Company's
subsidiaries incorporated outside of the United States.
As a result of the priming order, the second priority liens held by the 12 3/8%
Notes on all of our United States production facilities and related assets and
the capital stock of each subsidiary guarantor became third priority liens. The
priming order does not affect the priority of the pledge held by the 12 3/8%
Notes of 65% of the stock of certain of our subsidiaries incorporated outside of
the United States.
The 12 3/8% Notes bear interest at the annual rate of 12 3/8%, payable
semi-annually on January 15 and July 15 of each year commencing January 15,
2000. During the pendency of the Chapter 11 cases, interest may accrue to the
extent permitted by the Bankruptcy Code but is not payable unless ordered by the
Bankruptcy Court. Without regard to the Chapter 11 filings, and except as
otherwise provided below, the 12 3/8% Notes may not be redeemed by Chemicals
prior to July 15, 2003. From that date until July 15, 2004, the 12 3/8% Notes
may be redeemed at a premium of the principal amount thereof at maturity of
106.188% and, from July 15, 2004 until July 15, 2005, the 12 3/8% Notes may be
redeemed at a premium of the principal amount thereof at maturity of 103.094%.
Thereafter, Chemicals may redeem the 12 3/8% Notes at their face value plus
accrued and unpaid interest. Prior to July 15, 2002, Chemicals may redeem in the
aggregate up to 35% of the original principal amount of the 12 3/8% Notes with
the proceeds of one
65
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or more specified Public Equity Offerings. Such redemptions may be made at a
redemption price of 112.375% of the face value of the 12 3/8% Notes plus accrued
and unpaid interest to the redemption date. After such redemption, at least
$191.75 million aggregate principal amount of the 12 3/8% Notes must remain
outstanding. No redemptions will be made during the pendency of the Chapter 11
cases and these notes will be extinguished upon our emergence from Chapter 11.
On July 23, 1999, Chemicals also established two secured revolving credit
facilities providing up to $155,000,000 in revolving credit loans (the "Prior
Revolvers") under a single Revolving Credit Agreement (the "Prior Credit
Agreement"). Under the Prior Credit Agreement, Chemicals and each of its direct
and indirect United States subsidiaries (other than Sterling Chemicals
Acquisitions, Inc.) were co-borrowers and were jointly and severally liable for
any indebtedness thereunder. The Prior Revolvers consisted of (i) an $85,000,000
revolving credit facility secured by a first priority lien on all accounts
receivable, inventory and other specified assets of Chemicals and the other
co-borrowers and (ii) a $70,000,000 revolving credit facility secured by a first
priority lien on all of our United States production facilities and related
assets, all of the capital stock of Chemicals and all of the capital stock of
each co-borrower and a second priority lien on all accounts receivable,
inventory and other specified assets of Chemicals and the other co-borrowers. As
mentioned above, the initial draw under the DIP Financing was used to repay all
amounts under the Prior Revolvers.
As part of our recapitalization in August 1996, Chemicals issued $275.0
million of its 11 3/4% Senior Subordinated Notes due 2006 (the "11 3/4% Notes")
and Holdings issued 191,751 Units, with each Unit consisting of one 13 1/2%
Senior Secured Discount Note due 2008 (collectively, the "13 1/2% Notes") and
one warrant to purchase three shares of the common stock, par value $0.01 per
share, of Holdings ("Holdings Common Stock") for $0.01 per share. Holdings
received $100 million in initial proceeds upon issuing $191.8 million of 13 1/2%
Notes under the Units offering. On April 7, 1997, Chemicals issued $150.0
million of its 11 1/4% Senior Subordinated Notes due 2007 (the "11 1/4% Notes").
The 11 3/4% Notes are unsecured senior subordinated obligations of
Chemicals, ranking subordinate in right of payment to all existing and future
senior debt of Chemicals, but pari passu with the 11 1/4% Notes and all future
senior subordinated indebtedness. The 11 3/4% Notes bear interest at the annual
rate of 11 3/4%, payable semi-annually on February 15 and August 15 of each year
commencing February 15, 1997. However, no interest has been or will be paid
during the pendency of the Chapter 11 cases. As we believe that this liability
is subject to compromise, interest expense has not been recorded since the
Petition Date. The 11 3/4% Notes were not redeemable by Chemicals prior to
August 15, 2001. Under the indenture for the 11 3/4% Notes, from that date
through August 15, 2004, the 11 3/4% Notes may be redeemed at a premium of the
principal amount thereof at maturity varying between 105.875% and 101.958% and,
after August 15, 2004, Chemicals may redeem the 11 3/4% Notes at their face
value plus accrued and unpaid interest. However, notwithstanding the foregoing,
no redemptions may be made during the pendency of the Chapter 11 cases and these
notes will be extinguished upon our emergence from Chapter 11.
The 11 1/4% Notes are unsecured senior subordinated obligations of
Chemicals, ranking subordinate in right of payment to all existing and future
senior debt of Chemicals, but pari passu with the 11 3/4 % Notes and all future
senior subordinated indebtedness of Chemicals. The 11 1/4% Notes bear interest
at the annual rate of 11 1/4%, payable semi-annually on April 1 and October 1 of
each year commencing October 1, 1997. However, no interest has been or will be
paid during the pendency of the Chapter 11 cases. As we believe that this
liability is subject to compromise, interest expense has not been recorded since
the Petition Date. Under the indenture for the 11 1/4% Notes, the 11 1/4% Notes
may not be redeemed by Chemicals prior to April 1, 2002 and, from that date
through April 1, 2005, the 11 1/4% Notes may be redeemed at a premium of the
principal amount thereof at maturity varying between 105.625% and 101.875%.
After April 1, 2005, Chemicals may redeem the 11 1/4% Notes at their face value
plus accrued and unpaid interest. However,
66
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
notwithstanding the foregoing, no redemptions may be made during the pendency of
the Chapter 11 cases and these notes will be extinguished upon our emergence
from Chapter 11.
In July 1997, Sterling Pulp Chemicals (Sask) Ltd. ("Sterling Sask"), our
Canadian subsidiary that operates our Saskatoon facility, entered into a credit
agreement with The Chase Manhattan Bank of Canada, individually and as
administrative agent, and certain other financial institutions (the "Saskatoon
Credit Agreement"). The indebtedness under the Saskatoon Credit Agreement was
secured by substantially all of the assets of Sterling Sask, including the
Saskatoon facility. The Saskatoon Credit Agreement required that certain amounts
of "Excess Cash Flow" be used to prepay amounts outstanding under the term
portion of the credit facility. The Saskatoon Credit Agreement originally
included a revolving credit facility of Cdn. $8 million to be used by Sterling
Sask solely for its general corporate purposes.
The Saskatoon Credit Agreement contained provisions which restricted the
payment of advances, loans and dividends from Sterling Sask to us. The most
restrictive of these covenants limited such payments during fiscal 2001 to
approximately $1 million, plus any amounts due to us from Sterling Sask under
our intercompany tax sharing agreement. In addition, because of its designation
as an "Unrestricted Subsidiary" under the DIP Financing and the indentures for
the 12 3/8% Notes, the 11 3/4% Notes and the 11 1/4% Notes, Sterling Sask's
results are not considered in determining compliance with the covenants
contained therein.
An Event of Default occurred under the Saskatoon Credit Agreement as a
result of the Chapter 11 filings by the Debtors. However, the lenders under the
Saskatoon Credit Agreement executed a forbearance agreement under which they
agreed to not exercise their remedies under that agreement prior to December 31,
2001 in exchange for certain concessions from Sterling Sask. On January 2, 2002,
Sterling Sask entered into a waiver and amending agreement (the "Waiver
Agreement"), effective December 18, 2001, with its lenders. The Waiver Agreement
waived the existing defaults, rescinded the acceleration of the amounts
outstanding under the Saskatoon Credit Agreement and reinstated the commitments
thereunder. The Waiver Agreement provided for a reduction of the revolving
credit facility commitment to Cdn $4.0 million and changed the expiration date
on the Tranche A term loan from June 30, 2003 to December 31, 2002 and on the
Tranche B term loan from June 30, 2005 to June 30, 2003. During the first nine
months of fiscal 2002, payments of approximately $14.2 million were made
pursuant to this obligation. The Waiver Agreement also set a minimum discount
rate and Eurodollar rate margin of 2.50% over the Base Rate or LIBOR,
respectively, for the remaining term of the facility. Sterling Sask never drew
on the revolving credit facility and, as of September 30, 2002, had
approximately $9.7 million in cash and cash equivalents on hand.
On July 24, 2002, Sterling Sask entered into a new credit agreement with a
group of lenders led by Bank of Montreal to provide up to Cdn. $8 million in
revolving advances ("Facility A"), and Cdn. $60 million in term loans ("Facility
B") (collectively, the "Saskatoon Refinancing Agreement"). An initial borrowing
of approximately Cdn. $25 million, from Facility B, was used to repay all
amounts outstanding under the Saskatoon Credit Agreement. The remaining Cdn. $35
million can be borrowed at any time prior to September 2003, subject to certain
funding conditions, and up to Cdn. $30 million may be used to supplement the
Debtors' liquidity during the Chapter 11 cases. At September 30, 2002, $15.8
million was outstanding under the Saskatoon Refinancing Agreements.
Borrowings under Facility B are required to be repaid on or before July 24,
2006 and borrowings under Facility A are required to be repaid on or before July
24, 2003. Available credit under Facility A is generally subject to a borrowing
limit equal to the lesser of Cdn. $8 million and the amount determined as
follows: 75% of eligible Canadian accounts receivable plus 60% of eligible
United States accounts receivable, plus the lesser of $2 million and 50% of the
value of eligible inventory. Borrowings under
67
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Facility A generally bear interest at Prime rates plus 0.50% to 0.75% depending
on the option selected by Sterling Sask. Borrowings under Facility B generally
bear interest at Bankers Acceptance rates plus 2.25% to 2.50%.
The Saskatoon Refinancing Agreement contains numerous covenants, including,
but not limited to, restrictions on the ability of Sterling Sask to incur
indebtedness, create liens and sell assets, as well as maintenance of certain
financial covenant ratios. As of December 13, 2002, none of these covenants
restricted our ability to borrow or use proceeds under the Saskatoon Refinancing
Agreement.
DEBT MATURITIES
The estimated remaining principal payments on the outstanding debt of our
non-Debtor subsidiaries are as follow:
YEAR ENDING SEPTEMBER 30, PRINCIPAL PAYMENTS
------------------------- ------------------
(DOLLARS IN THOUSANDS)
2003........................................................ $ 5,908
2004........................................................ 1,625
2005........................................................ 1,625
2006........................................................ 1,625
2007........................................................ 1,625
Thereafter.................................................. 8,579
-------
Total.................................................. $20,987
=======
68
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. CONDENSED COMBINED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY
The following condensed combined financial statements are presented in
accordance with SOP 90-7:
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2002
-----------------------------------------------------------
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION COMBINED
PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS
-------------- --------------- ------------ ---------
(DOLLARS IN THOUSANDS)
Revenues................................... $ 452,961 $178,853 $(3,087) $ 628,727
Cost of goods sold......................... 415,226 141,139 (3,107) 553,258
--------- -------- ------- ---------
Gross profit............................... 37,735 37,714 20 75,469
Selling, general and administrative
expenses................................. 17,335 6,724 -- 24,059
Impairment of assets....................... 4,444 -- -- 4,444
Other income............................... (1,925) -- -- (1,925)
Reorganization items....................... 17,022 -- -- 17,022
Interest and debt related expenses, net.... 50,166 2,821 -- 52,987
--------- -------- ------- ---------
Income (loss) before income taxes.......... (49,307) 28,169 20 (21,118)
Provision for income taxes................. 4,211 10,657 -- 14,868
--------- -------- ------- ---------
Net income (loss).......................... $ (53,518) $ 17,512 $ 20 $ (35,986)
========= ======== ======= =========
YEAR ENDED SEPTEMBER 30, 2001
-----------------------------------------------------------
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION COMBINED
PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS
-------------- --------------- ------------ ---------
(DOLLARS IN THOUSANDS)
Revenues................................... $ 569,519 $175,640 $(1,594) $ 743,565
Cost of goods sold......................... 617,774 141,487 (1,851) 757,410
--------- -------- ------- ---------
Gross profit (loss)........................ (48,255) 34,153 257 (13,845)
Selling, general and administrative
expenses................................. 17,285 6,288 -- 23,573
Other expense.............................. 2,960 -- -- 2,960
Reorganization items....................... 5,422 -- -- 5,422
Interest and debt related expenses, net.... 87,528 5,695 -- 93,223
--------- -------- ------- ---------
Income (loss) before income taxes.......... (161,450) 22,170 257 (139,023)
Provision for income taxes................. 34,660 8,027 -- 42,687
--------- -------- ------- ---------
Net income (loss).......................... $(196,110) $ 14,143 $ 257 $(181,710)
========= ======== ======= =========
69
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONDENSED COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 2002
-----------------------------------------------------------
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION COMBINED
PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS
-------------- --------------- ------------ ---------
ASSETS
Cash and cash equivalents.................. $ 10,035 $ 13,241 $ -- $ 23,276
Accounts receivable, net................... 82,610 27,891 (2,533) 107,968
Inventories, net........................... 42,687 8,184 -- 50,871
Prepaid expenses........................... 3,830 1,256 -- 5,086
Property, plant and equipment, net......... 158,143 97,693 -- 255,836
Other assets, net.......................... 74,621 23,043 (51,053) 46,611
--------- -------- -------- ---------
Total Assets.......................... $ 371,926 $171,308 $(53,586) $ 489,648
========= ======== ======== =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
Current liabilities........................ $ 144,590 $ 31,438 $(22,010) $ 154,018
Pre-petition liabilities subject to
compromise............................... 520,938 -- -- 520,938
Pre-petition liabilities not subject to
compromise............................... 362,836 -- -- 362,836
Long-term debt............................. -- 15,079 -- 15,079
Non-current liabilities.................... 28,586 19,668 -- 48,254
Stockholder's equity (deficiency in
assets).................................. (685,024) 105,123 (31,576) (611,477)
--------- -------- -------- ---------
Total Liabilities and Stockholder's Equity
(Deficiency in Assets)................... $ 371,926 $171,308 $(53,586) $ 489,648
========= ======== ======== =========
SEPTEMBER 30, 2001
-----------------------------------------------------------
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION COMBINED
PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS
-------------- --------------- ------------ ---------
ASSETS
Cash and cash equivalents.................. $ 2,604 $ 11,855 $ -- $ 14,459
Accounts receivable, net................... 77,322 26,018 593 103,933
Inventories, net........................... 37,535 10,844 (61) 48,318
Prepaid expenses........................... 2,318 1,031 -- 3,349
Property, plant and equipment, net......... 181,446 103,498 -- 284,944
Other assets, net.......................... 91,107 26,620 (60,880) 56,847
--------- -------- -------- ---------
Total Assets.......................... $ 392,332 $179,866 $(60,348) $ 511,850
========= ======== ======== =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
Current liabilities........................ $ 73,143 $ 51,780 $(28,502) $ 96,421
Pre-petition liabilities subject to
compromise............................... 561,692 -- -- 561,692
Pre-petition liabilities not subject to
compromise............................... 325,655 -- -- 325,655
Long-term debt............................. 42,287 18,797 -- 61,084
Non-current liabilities.................... 9,671 20,909 -- 30,580
Stockholder's equity (deficiency in
assets).................................. (620,116) 88,380 (31,846) (563,582)
--------- -------- -------- ---------
Total Liabilities and Stockholder's Equity
(Deficiency in Assets)................... $ 392,332 $179,866 $(60,348) $ 511,850
========= ======== ======== =========
70
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, 2002
-------------------------------------------
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION COMBINED
PROCEEDINGS PROCEEDINGS TOTALS
-------------- --------------- --------
Net cash provided by operating activities.............. $ 23 $ 42,245 $ 42,268
Cash flows from investing activities:
Capital expenditures................................. (7,513) (8,750) (16,263)
Cash flows from financing activities:
Net borrowings under DIP Financing................... 14,972 -- 14,972
Net repayments of long-term debt..................... -- (31,070) (31,070)
Debt issuance costs.................................. -- (1,226) (1,226)
Other................................................ (51) 34 (17)
------- -------- --------
Net cash provided by (used in) financing activities.... 14,921 (32,262) (17,341)
Effect of exchange rate changes on cash................ -- 153 153
------- -------- --------
Net increase in cash and cash equivalents.............. 7,431 1,386 8,817
Cash and cash equivalents at:
Beginning of year.................................... 2,604 11,855 14,459
------- -------- --------
End of year.......................................... $10,035 $ 13,241 $ 23,276
======= ======== ========
YEAR ENDED SEPTEMBER 30, 2001
-------------------------------------------
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION COMBINED
PROCEEDINGS PROCEEDINGS TOTALS
-------------- --------------- --------
Net cash provided by (used in) operating activities.... $ (7,236) $ 16,021 $ 8,785
Cash flows from investing activities:
Capital expenditures................................. (10,517) (6,375) (16,892)
Cash flows from financing activities:
Proceeds from financing.............................. 42,270 20,003 62,273
Repayments of long-term debt......................... (37,206) (2,850) (40,056)
Intercompany loan activity........................... 19,409 (19,409) --
Debt issuance costs.................................. (3,789) (1,112) (4,901)
-------- -------- --------
Net cash provided by financing activities.............. 20,684 (3,368) 17,316
Effect of exchange rate changes on cash................ -- (490) (490)
-------- -------- --------
Net increase in cash and cash equivalents.............. 2,931 5,788 8,719
Cash and cash equivalents at:
Beginning of year.................................... (327) 6,067 5,740
-------- -------- --------
End of year.......................................... $ 2,604 $ 11,855 $ 14,459
======== ======== ========
71
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
A reconciliation of federal statutory income taxes to our effective tax
provision (benefit) before extraordinary items is as follows:
YEAR ENDED SEPTEMBER 30,
-----------------------------
2002 2001 2000
------- -------- --------
(DOLLARS IN THOUSANDS)
Benefit for income taxes at statutory rates........... $(7,391) $(48,658) $(20,750)
Taxable foreign dividends............................. 4,077 4,423 2,889
Change in valuation allowance......................... 13,294 91,747 23,700
Non-deductible expenses............................... 14 (34) 182
State and foreign income taxes........................ 5,207 (94) (1,437)
Other................................................. (333) (4,697) (24)
------- -------- --------
Effective tax provision............................... $14,868 $ 42,687 $ 4,560
======= ======== ========
The provision for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30,
--------------------------
2002 2001 2000
------- ------- ------
(DOLLARS IN THOUSANDS)
Current federal.......................................... $ -- $ -- $ --
Deferred federal......................................... -- 34,659 --
Current foreign.......................................... 12,282 3,290 3,328
Deferred foreign......................................... (736) 1,719 (257)
Provincial and state income taxes........................ 3,322 3,019 1,489
------- ------- ------
Total tax provision...................................... $14,868 $42,687 $4,560
======= ======= ======
The components of our deferred income tax assets and liabilities are
summarized below:
YEAR ENDED SEPTEMBER 30,
-------------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Accrued liabilities......................................... $ 9,844 $ 10,412
Accrued postretirement cost................................. 13,476 13,977
Tax loss and credit carry forwards.......................... 122,917 111,794
Other....................................................... 16,245 17,205
--------- ---------
Total deferred tax assets................................... 162,482 153,388
--------- ---------
72
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED SEPTEMBER 30,
-------------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)
Deferred tax liabilities:
Property, plant and equipment............................... $ (39,253) $ (44,752)
Other....................................................... (4,564) (3,653)
--------- ---------
Total deferred tax liabilities.............................. (43,817) (48,405)
Valuation allowance......................................... (132,780) (119,487)
--------- ---------
Net deferred tax liabilities................................ (14,115) (14,504)
Less: current deferred tax assets........................... -- --
--------- ---------
Long-term deferred tax liabilities.......................... $ (14,115) $ (14,504)
========= =========
We have approximately $351 million in United States net operating loss
carryforwards ("US NOLs") which will expire during fiscal 2018-2022. In
assessing the value of the deferred tax assets, we consider whether it is more
likely than not that all of the deferred tax assets will be realized. We will
undergo an ownership change for United States federal income tax purposes in
connection with consummation of the Plan. As a result of that ownership change,
our ability to use our U.S. NOLs will be severely limited. Moreover, we expect
that we will recognize a significant amount of cancellation of indebtedness
("COD") income for United States federal income tax purposes upon consummation
of the Plan. Although this COD income will be excluded from our gross income
because we are in bankruptcy, we will be required to reduce our U.S. NOLs (and
possibly certain other tax attributes) for our taxable year that begins after
the year in which the Plan is consummated. As we expect that the amount of COD
income recognized upon consummation of the Plan will exceed the amount of our
U.S. NOLs, we expect that our U.S. NOLs will be completely eliminated for the
taxable year that begins after our taxable year in which the Plan is
consummated. Based on the forgoing, we were not able to conclude that it was
more likely than not that we would be able to realize the future benefit of our
U.S. deferred tax assets. Consequently, benefit was not provided for these U.S.
NOLs at September 30, 2002.
8. EMPLOYEE BENEFITS
The Debtors have received approval from the Bankruptcy Court to pay or
otherwise honor certain of their pre-petition obligations, including employee
wages and salaries, benefits and other employee obligations and to implement
certain additional employee plans. Moreover, under the Plan, all of the Debtors'
employee compensation and benefit programs, with the exception of stock-based
employee incentive plans and employee stock ownership plans, will be assumed and
will continue in effect, subject to the Debtors' rights of termination
thereunder. Employee interests in our qualified retirement benefit plans and our
savings and investment plan are held in trust and protected by law.
We have established the following benefit plans:
RETIREMENT BENEFIT PLANS
We have non-contributory pension plans in the United States and employer
and employee contributory plans in Canada which cover all salaried and wage
employees. The benefits under these plans are based primarily on years of
service and employees' pay near retirement. For our employees who were employed
as of September 30, 1986, and who were previously employed by Monsanto, we
recognize their Monsanto pension years of service for purposes of determining
benefits under our plans. For our employees who were employed on August 21,
1992, and who were previously employed by Tenneco, we recognize
73
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
their Tenneco pension years of service for purposes of determining benefits
under our plans. For our employees who were employed as of January 31, 1997, and
who (i) were previously employed by Cytec Industries Inc. and (ii) elected to
retire on or before January 31, 1999, we supplement the standard pension payable
such that the employee's total combined pension from us and from the Cytec
Nonbargaining Employees' Retirement Plan equals the amount the employee would
have received had he or she remained an employee of Cytec until retirement. The
estimated liability for such supplements as of September 30, 2002 and 2001 is
immaterial. Our funding policy is consistent with the funding requirements of
federal law and regulations. Plan assets consist principally of common stocks
and government and corporate securities. Chemicals' retirement benefit plans
will remain in effect upon our emergence from Chapter 11.
Information concerning the pension obligation, plan assets, amounts
recognized in our financial statements and underlying actuarial assumptions is
stated below.
SEPTEMBER 30,
-----------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year................... $124,437 $117,541
Currency rate conversion.................................. (95) (855)
Service cost.............................................. 4,681 4,309
Interest cost............................................. 8,795 8,503
Plan amendments........................................... -- 195
Other..................................................... 422 --
Plan curtailment.......................................... -- (957)
Actuarial loss (gain)..................................... 5,793 3,324
Benefits paid............................................. (7,721) (7,623)
-------- --------
Benefit obligation at end of year......................... $136,312 $124,437
======== ========
Change in plan assets:
Fair value at beginning of year........................... $ 90,566 $110,610
Currency rate conversion.................................. (73) (865)
Actual return (loss) on plan assets....................... (7,219) (15,441)
Employer contributions.................................... 6,329 3,885
Benefits paid............................................. (7,721) (7,623)
-------- --------
Fair value at end of year................................. $ 81,882 $ 90,566
======== ========
Development of net amount recognized:
Funded status............................................. $(54,430) $(33,870)
Unrecognized cost:
Actuarial loss (gain).................................. 36,201 15,361
Prior service cost..................................... 5,189 6,031
Transition liability................................... 251 605
-------- --------
Net amount recognized..................................... $(12,789) $(11,873)
======== ========
74
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30,
-----------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)
Amounts recognized in the statement of financial position:
Prepaid pension cost...................................... $ 104 $ 353
Accrued pension cost...................................... (33,314) (20,120)
Intangible asset.......................................... 5,232 4,496
Accumulated other comprehensive income (pre-tax).......... 15,189 3,398
-------- --------
Net amount recognized..................................... $(12,789) $(11,873)
======== ========
All plans have projected benefit obligations in excess of plan assets at
September 30, 2002. For plans with accumulated benefit obligations in excess of
plan assets, the accumulated benefit obligation and fair value of plan assets
were $100.5 million and $68.1 million, respectively, at September 30, 2002.
Net periodic pension costs consist of the following components:
SEPTEMBER 30,
---------------------------
2002 2001 2000
------- ------- -------
(DOLLARS IN THOUSANDS)
Components of net pension costs:
Service cost-benefits earned during the year.......... $ 4,681 $ 4,309 $ 4,498
Interest on prior year's projected benefit
obligation......................................... 8,795 8,503 8,446
Expected return on plan assets........................ (7,893) (9,373) (8,537)
Net amortization:
Actuarial loss (gain).............................. 390 (206) 7
Prior service cost................................. 819 805 809
Transition liability............................... 354 373 375
Settlement/curtailment loss (gain).................... 21 (863) --
------- ------- -------
Net pension costs..................................... $ 7,167 $ 3,548 $ 5,598
======= ======= =======
Weighted-average assumptions:
Discount Rate......................................... 6.79% 7.25% 7.50%
Rates of increase in salary compensation level........ 4.92% 5.37% 5.38%
Expected long-term rate of return on plan assets...... 8.72% 8.51% 8.76%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
We provide certain health care benefits and life insurance benefits for
retired employees. Substantially all of our employees become eligible for these
benefits at early retirement age. We accrue the cost of these benefits during
the period in which the employee renders the necessary service.
Health care benefits are currently provided to employees who retire from us
with ten or more years of credited service, except for Canadian employees
covered by collective bargaining agreements. Some of our employees are eligible
for postretirement life insurance. Postretirement health care benefits for
United States plans are contributory. Benefit provisions for most hourly and
some salaried employees are subject to collective bargaining. In general,
retiree health care benefits are paid as covered expenses are incurred. For
United States employees, postretirement medical plan deductibles are assumed to
increase at the same rate as long-term health care costs.
75
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information concerning the plan obligation, the funded status, amounts
recognized in our financial statements and underlying actuarial assumptions are
stated below.
SEPTEMBER 30,
-----------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year................... $ 44,946 $ 40,062
Service cost.............................................. 599 576
Interest cost............................................. 3,323 3,108
Plan amendments, curtailments and special termination
benefit................................................ -- (447)
Actuarial loss............................................ 1,306 4,227
Benefits paid............................................. (2,996) (2,580)
-------- --------
Benefit obligation at end of year......................... $ 47,178 $ 44,946
======== ========
Funded plan assets.......................................... $ 3,000 $ 3,000
======== ========
Development of net amount recognized:
Funded status............................................. $(44,178) $(41,946)
Unrecognized cost:
Actuarial loss......................................... 8,954 8,131
Prior service cost..................................... (4,156) (4,619)
-------- --------
Net amount recognized..................................... $(39,380) $(38,434)
======== ========
Amounts recognized in the statement of financial position:
Prepaid OPEB cost......................................... $ 3,000 $ 3,000
Accrued OPEB liability.................................... (42,380) (41,434)
-------- --------
Net amount recognized..................................... $(39,380) $(38,434)
======== ========
Net periodic plan costs consist of the following components:
SEPTEMBER 30,
-------------------------------
2002 2001 2000
------ ------------- ------
(DOLLARS IN THOUSANDS)
Components of net plan costs:
Service cost......................................... $ 599 $ 576 $ 751
Interest cost........................................ 3,323 3,108 2,759
Net amortization:
Actuarial loss.................................... 483 625 268
Prior service cost................................ (463) (486) (496)
Curtailment and special termination benefits......... -- (457) --
------ ------ ------
Net plan costs....................................... $3,942 $3,366 $3,282
====== ====== ======
Weighted-average assumptions:
Discount Rate........................................ 6.75% 7.25% 7.50%
76
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average annual assumed health care trend rate is assumed to be
7.5% for 2002. The rate is assumed to decrease gradually to 5.8% in 2027 and
remain level thereafter. Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plans. A one percentage point
change in assumed health care trend rates would have the following effects:
1% INCREASE 1% DECREASE
----------- -----------
(DOLLARS IN THOUSANDS)
Effect on total of service and interest cost components..... $ 219 $ (190)
Effect on post-retirement benefit obligation................ 2,264 (1,965)
During fiscal 2001, we recorded a curtailment gain of $2.0 million due to
our staffing reductions at our acrylic fibers facility associated with a
significant reduction in operations at that facility.
EMPLOYEE STOCK OWNERSHIP TRUST
In connection with our recapitalization in August 1996, an Employee Stock
Ownership Trust (the "ESOT") was established which covers substantially all
United States employees. Allocations of shares of common stock were made
annually to participants. The ESOT primarily invested in shares of Holdings
Common Stock and, in fiscal 1996, borrowed $6.5 million from Chemicals (the
"ESOP Loan") to purchase approximately 542,000 shares of Holdings Common Stock.
In addition, during fiscal 1999, the ESOT purchased 14,000 shares of Holdings
Common Stock. In fiscal 2000, 163,000 ESOT shares were allocated to employees.
We recorded $0.9 million of expense related to the ESOT in fiscal 2000. There
were no shares allocated to employees and there was no expense recorded in
fiscal 2002 or fiscal 2001. The shares of Holdings Common Stock purchased by the
ESOT in August of 1996 were pledged as security for the ESOP Loan. As of
September 30, 2002, the ESOP Loan had been repaid in full and all shares of
Holdings Common Stock held by the ESOT had been released and allocated to the
ESOT participants' accounts. No additional allocations are contemplated at this
time. We have terminated our ESOP and the ESOT and all shares of our common
stock held by the ESOT have been cancelled.
SAVINGS AND INVESTMENT PLAN
Our Sixth Amended and Restated Savings and Investment Plan covers
substantially all United States employees, including executive officers. This
Plan is qualified under Section 401(k) of the Internal Revenue Code. Each
participant has the option to defer taxation of a portion of his or her earnings
by directing us to contribute a percentage of such earnings to the Plan. A
participant may direct up to a maximum of 20% of eligible earnings to this Plan,
subject to certain limitations set forth in the Internal Revenue Code. A
participant's contributions become distributable upon the termination of his or
her employment. We did not make any contribution to this plan in fiscal 2000.
Beginning October 1, 2000, we began matching 50% of a participant's
contributions, to the extent such contributions do not exceed 7% of such
participant's base compensation (excluding bonuses, profit sharing and similar
types of compensation). Such contributions amounted to $0.9 million in fiscal
2002 and $1.1 million in fiscal 2001.
EMPLOYEE SAVINGS PLAN
We introduced an employee savings plan for all eligible full-time Canadian
employees effective as of October 1, 2000. Each participant has the option to
contribute a percentage of his or her earnings to the Canadian savings plan,
with no limit on the maximum percentage contributed. Beginning October 1, 2000,
we began matching 100% of a participant's contributions, to the extent such
contributions do not exceed 3.5% of such participant's base compensation
(excluding bonuses, profit sharing and similar types of compensation). Such
contributions amounted to $0.3 million in fiscal 2002 and $0.2 million in fiscal
2001.
77
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROFIT SHARING AND BONUS PLANS
In January 1997, Holdings' Board of Directors, upon recommendation of its
Compensation Committee, approved the establishment of a Profit Sharing Plan that
is designed to benefit all qualified employees and a Bonus Plan that is designed
to provide certain of our exempt salaried employees with the opportunity to earn
bonuses depending, among other things, on our annual financial performance. We
incurred $3.7 million and $7.4 million of expenses related to the Profit Sharing
Plan and Bonus Plan, respectively, in fiscal 2000. No expenses for profit
sharing or bonuses were incurred in fiscal 2002 or fiscal 2001.
OMNIBUS STOCK AWARDS AND INCENTIVE PLAN
In April 1997, Holdings' Board of Directors approved the establishment of
our Omnibus Stock Awards and Incentive Plan (as amended, the "Omnibus Plan").
Under the Omnibus Plan, Holdings could grant key employees incentive and
nonqualified stock options, SARs, restricted stock awards, performance awards
and phantom stock awards. Holdings' Board of Directors approved an amendment to
the Omnibus Plan which increased the total number of shares available for
issuance under the Omnibus Plan to 2,000,000, which was ratified and approved by
Holdings' stockholders at their annual meeting held on January 24, 2001. The
terms and amounts of the awards (including vesting schedule) were determined by
the Compensation Committee of Holdings' Board of Directors. Generally,
outstanding stock options become exercisable (vest) in equal annual installments
beginning a year from date of grant and ending five years from date of grant. In
the event of a specified change of control of Holdings or a qualified public
offering of Holdings Common Stock, all awards immediately vest and became
exercisable. During fiscal 2001, Holdings granted options to purchase 515,000
shares of our common stock for prices ranging between $0.50 and $6.00 per share
(all of which were completely vested upon their grant). No options were granted
during fiscal 2002. Pursuant to the Plan, all outstanding options will be
cancelled concurrent with our emergence from Chapter 11.
AMENDED AND RESTATED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
In April 1997, Holdings' Board of Directors approved the establishment of a
1997 Nonqualified Stock Option Plan for Non-Employee Directors. Under this plan,
each eligible director who was serving on Holdings' Board of Directors on each
subsequent October 1st was automatically granted an option to acquire 1,000
shares of Holdings Common Stock (2,000 shares for the Vice-Chairman). Effective
as of April 26, 2000, the 1997 Nonqualified Stock Option Plan was amended and
restated as the Amended and Restated Stock Plan for Non-Employee Directors.
Under the Amended and Restated Stock Plan, each of Holdings' non-employee
directors received $15,000 in shares of Holdings' Common Stock and options to
purchase 2,000 shares of Holdings' Common Stock on October 1, 2000. This grant
of shares was valued at the average market price for a share of Holdings' Common
Stock during the 90-day period ending on the date of grant. Under both the 1997
Nonqualified Stock Option Plan and the Amended and Restated Stock Plan, each of
Holdings' non-employee directors were eligible to participate and each had the
ability to elect not to participate. All options issued under these plans
expired ten years from the date of grant, were granted with an exercise price at
or above the fair market value of a share of Holdings Common Stock on the date
of grant (as determined by Holdings' Board of Directors) and vested and became
exercisable immediately. On March 7, 2001, Holdings' Board of Directors elected
to terminate this plan with respect to future grants. All outstanding grants
were rejected in the Chapter 11 proceedings.
78
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
KEY EMPLOYEE PROTECTION PLAN
On January 26, 2000, Holdings' Board approved our Key Employee Protection
Plan, which has subsequently been amended several times. This plan was
established by Holdings' Board to help us retain certain of our employees and
motivate them to continue to exert their best efforts on our behalf during
periods when we may be susceptible to a change of control and to assure their
continued dedication and objectivity during those periods. This plan, as
amended, was approved by the Bankruptcy Court in our bankruptcy proceedings on
October 31, 2001. A select group of management or highly compensated employees
has been designated as participants under the plan and their respective
applicable multipliers and other variables for determining benefits have been
established. Our Compensation Committee is authorized to designate additional
management or highly compensated employees as participants under our Key
Employee Protection Plan and set their applicable multipliers. Our Compensation
Committee may also terminate any participant's participation under this plan on
60 days' notice if it determines that the participant is no longer one of our
key employees.
RETENTION BONUS PLAN
On July 13, 2001, Holdings' Board approved our Retention Bonus Plan, which
was subsequently amended. This plan was established by our Board to help us
retain our employees whose resignations would cause significant disruption to
our operations and whose skills would be particularly difficult and costly to
replace, to improve their morale during the pendency of our bankruptcy
proceedings and to help provide incentive to these employees to work diligently
toward the resolution of our bankruptcy proceedings. The plan, as amended, was
approved by the Bankruptcy Court in our bankruptcy proceedings on October 31,
2001. A select group of management or highly compensated employees were
designated as participants under the plan and their respective benefits were
established. Each participant in the plan was entitled to payments under the
plan on specified dates, unless the participant's employment with us terminated
prior to that payment date for any reason other than a termination by the
participant for "Good Reason" or a termination by us for any reason other than
"Misconduct" or "Disability." Payments under the plan were based on specified
percentages of the participant's annual compensation, including payments under
our Supplemental Pay Plan. Each participant who became entitled to payments
under the plan was paid 25% of the total amount payable to that participant on
April 15, 2002, an additional 25% on October 15, 2002 and the final 50% was paid
on November 20, 2002. Approximately $0.8 million was paid during fiscal 2002
pursuant to this Plan. Approximately $2.1 million and $0.6 million was expensed
during fiscal 2002 and fiscal 2001, respectively, pursuant to this Plan. At
September 30, 2002, approximately $2.0 million was recorded as a liability
pursuant to the Plan.
SEVERANCE PLAN
On March 8, 2001, Holdings' Board approved our Severance Pay Plan, which
has subsequently been amended. This plan covers all of our non-unionized United
States employees and was established by Holdings' Board to help us retain these
employees by assuring them that they will receive some compensation in the event
that their employment is adversely affected in specified ways in connection with
a change of control. This plan, as amended, was approved by the Bankruptcy Court
in our bankruptcy proceedings on October 31, 2001. Under our Severance Pay Plan,
any participant that terminates his or her employment for "Good Reason" or is
terminated by us for any reason other than "Misconduct" or "Disability" during
the period commencing 180 days prior to the date on which a specified change of
control occurs and ending 180 days after such change of control is entitled to
benefits under the plan. If a participant becomes entitled to benefits under the
plan, we are required to provide the participant with a lump sum cash payment in
an amount equivalent to two weeks of such participant's base salary for each
credited year of service, with a minimum payment of six months' base salary and
a maximum payment of
79
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
one year's base salary. The amount of this lump sum payment is reduced, however,
by the amount of any other separation, severance or termination payments made by
us to the participant under any other plan or agreement, including our Key
Employee Protection Plan, or pursuant to law. In addition, a pro rata portion of
any lump sum amount paid to a participant under the plan must be repaid by the
participant if the participant is rehired by us or our successor within 90 days
after the participant's termination date.
In addition to the lump sum payment, for a period of six months after the
participant's termination date, the COBRA premium required to be paid by such
participant for coverage under our medical and dental plans may not be increased
beyond that required to be paid by active employees for similar coverage under
those plans, as long as the participant makes a timely COBRA election and pays
the regular employee premiums required under those plans and otherwise continues
to be eligible for coverage under those plans.
We may terminate or amend our Severance Pay Plan at any time and for any
reason but no termination or amendment of the plan may be effective with respect
to any participant if the termination or amendment is related to, in
anticipation of or during the pendency of a change of control, is for the
purpose of encouraging or facilitating a change of control or is made within 180
days prior to any change of control. Finally, no termination or amendment of our
Severance Pay Plan can affect the rights or benefits of any participant that are
accrued under the plan at the time of termination or amendment or that accrue
thereafter on account of a change of control that occurred prior to the
termination or amendment or within 180 days after such termination or amendment.
SUPPLEMENTAL BONUS PLAN
On July 13, 2001, Holdings' Board approved our Supplemental Bonus Plan,
which was subsequently amended. The plan is designed to help us retain certain
of our employees during the pendency of our bankruptcy proceedings and provide
us with the ability to reward our employees who have made extraordinary
contributions and personal sacrifices in connection with our bankruptcy
proceedings. Our Supplemental Bonus Plan, as amended, was approved by the
Bankruptcy Court in our bankruptcy proceedings on October 31, 2001. Holdings'
Board had the ability to designate employees as participants under the plan and
determine the amount payable to those participants, subject to an overall limit
of $1.4 million in payments under the plan. However, Holdings' Board was not
permitted to designate any of our employees as a participant under the plan if
that employee was a participant under our Retention Bonus Plan, and no
participant under our Retention Bonus Plan may receive any payment under our
Supplemental Bonus Plan. Each participant in the plan received the amount
designated by Holdings' Board on November 20, 2002. Approximately $0.8 million
was expensed during fiscal 2002 pursuant to this Plan. At September 30, 2002,
approximately $0.8 million was recorded as a liability pursuant to the Plan.
SUPPLEMENTAL PAY PLAN
On March 8, 2001, Holdings' Board approved our Supplemental Pay Plan, which
was approved by the Bankruptcy Court in our bankruptcy proceedings on October
31, 2001. Historically, we have paid our senior level employees below-market
salaries with the opportunity to earn above-market compensation through stock
based incentives and significant bonuses in years when we achieve targeted
levels of EBITDA. Due to our financial difficulties, the opportunity to earn
additional compensation through these programs was significantly reduced, if not
entirely eliminated. As a result, Holdings' Board established this plan to
address their concern that the overall compensation provided to our senior level
employees would always be below-market and, consequently, not adequate to retain
these employees or attract new highly-qualified employees. A select group of
management or highly compensated employees has been designated as participants
under the plan and their respective benefits have been established. Each payment
under the
80
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plan is a specified percentage of the participant's annual base salary for
fiscal 2001 and payments are paid on or before the tenth day after the last day
of each calendar quarter. The participant must be employed by us on the relevant
payment date in order to be eligible to receive that payment under the plan. We
may amend or terminate our Supplemental Pay Plan at any time but any amendment
or termination of the plan can only become effective on a payment date and may
not affect the rights of participants under the plan that have accrued as of
that effective date, including the right to receive supplemental pay on that
payment date.
OUTSTANDING STOCK OPTIONS
A summary of the status of Holdings' outstanding stock options as of
September 30, 2002, 2001 and 2000 and changes during the years then ended is
presented below:
2002 2001 2000
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES (IN EXERCISE SHARES (IN EXERCISE SHARES (IN EXERCISE
THOUSANDS) PRICE THOUSANDS) PRICE THOUSANDS) PRICE
---------- --------- ---------- --------- ---------- ---------
Outstanding at
beginning of
year............... 1,222 $3.90 778 $6.13 682 $6.14
Granted.............. -- $ -- 527 $0.93 123 $6.00
Forfeited............ (191) $6.00 (83) $6.00 (27) $6.00
----- ----- ---
Outstanding at end of
year............... 1,031 $4.09 1,222 $3.90 778 $6.13
===== ===== ===
Options exercisable
at end of year..... 922 1,185 360
===== ===== ===
The range of exercise prices for options outstanding at September 30, 2002,
was $0.50 - 6.00, with all exercisable options having an exercise price range of
$0.50 - $6.00.
All stock options were granted with an exercise price at or above fair
market value of a share of Holdings Common Stock at the grant date. The weighted
average fair value of the stock options granted during fiscal 2001 and fiscal
2000 was $0.5 million and $0.6 million, respectively. The fair value of each
stock option grant was estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
the grants in fiscal 2000; risk free interest rate of 5.8%; no expected dividend
yield of for all years; expected life of ten years for all years; and expected
volatility of 83%. Stock options generally expire ten years from the date of
grant and fully vest after five years. The outstanding stock options at
September 30, 2002 had a weighted-average contractual life of approximately four
years. The Plan will eliminate all outstanding stock options.
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation,"
we utilize the intrinsic value method of accounting for stock-based compensation
and no compensation costs have been recognized for stock option awards described
above. Had compensation cost for all option issuances been determined consistent
with SFAS No. 123, it would not have had a material impact on our net loss and
loss per share for fiscal 2002, 2001 or 2000.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
PRODUCT CONTRACTS
We have certain long-term agreements, which provide for the dedication of
100% of our production of acetic acid, methanol, plasticizers, sodium cyanide,
calcium hypochlorite and DSIDA, each to one customer. We also have various sales
and conversion agreements, which dedicate significant portions of our production
of styrene and acrylonitrile to various customers. Some of these agreements
generally provide for cost recovery plus an agreed margin or element of profit
based upon market price.
All of the Debtors' contracts and agreements continue in effect in
accordance with their terms notwithstanding our Chapter 11 filings, unless
otherwise ordered by the Bankruptcy Court. The Bankruptcy Code provides the
Debtors with the opportunity to reject any pre-petition contracts or agreements
that are burdensome or assume any pre-petition contracts or agreements that are
favorable or otherwise necessary to their business operations.
LEASE COMMITMENTS
We have entered into various long-term operating leases. Future minimum
lease commitments at September 30, 2002, are as follows: fiscal 2003 -- $6.4
million; fiscal 2004 -- $5.2 million; fiscal 2005 -- $4.4 million; fiscal
2006 -- $3.1 million; and thereafter -- $4.9 million.
All of the Debtors' operating leases have continued in effect in accordance
with their terms notwithstanding our Chapter 11 filings, unless otherwise
ordered by the Bankruptcy Court. The Bankruptcy Code provides the Debtors with
the opportunity to reject any pre-petition leases that are burdensome or assume
any pre-petition leases that are favorable or otherwise necessary to their
business operations.
ENVIRONMENTAL AND SAFETY MATTERS
Our operations involve the handling, production, transportation, treatment
and disposal of materials that are classified as hazardous or toxic waste and
that are extensively regulated by environmental, health and safety laws,
regulations and permit requirements. Environmental permits required for our
operations are subject to periodic renewal and can be revoked or modified for
cause or when new or revised environmental requirements are implemented.
Changing and increasingly strict environmental requirements can affect the
manufacturing, handling, processing, distribution and use of our chemical
products and the raw materials used to produce such products and, if so
affected, our business and operations may be materially and adversely affected.
In addition, changes in environmental requirements can cause us to incur
substantial costs in upgrading or redesigning our facilities and processes,
including waste treatment, storage, disposal and other waste handling practices
and equipment.
We conduct environmental management programs designed to maintain
compliance with applicable environmental requirements at all of our facilities.
We routinely conduct inspection and surveillance programs designed to detect and
respond to leaks or spills of regulated hazardous substances and to correct
identified regulatory deficiencies. We believe that our procedures for waste
handling are consistent with industry standards and applicable requirements. In
addition, we believe that our operations are consistent with good industry
practice. We continue to participate in Responsible Care(R) initiatives as a
part of our membership in several trade groups which are partner associations in
the American Chemistry Council in the United States and the Canadian Chemical
Producers Association in Canada. Notwithstanding our efforts and beliefs, a
business risk inherent in 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 our business
operations and facilities are generally operated in compliance with all
applicable environmental and health and safety requirements in all material
respects, we cannot be
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STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sure that past practices or future operations will not result in material claims
or regulatory action, require material environmental expenditures or result in
exposure or injury claims by employees, contractors and their employees and the
public. Some risk of environmental costs and liabilities is inherent in our
operations and products, as it is with other companies engaged in similar
businesses.
Our operating expenditures for environmental matters, mostly waste
management and compliance, were approximately $30 million for fiscal 2002 and
$34 million for fiscal 2001. This reduction is due to the shutdown of our
acrylonitrile and derivative HCN facilities at the Texas City Plant. We also
spent approximately $2 million for environmentally related capital projects in
fiscal 2002 and $2 million for these types of capital projects in fiscal 2001.
The Texas Commission for Environmental Quality ("TCEQ") enacted new
regulations requiring significant reductions of nitrogen oxide which apply to
our Texas City facility. The TCEQ also proposed similar regulations requiring
the reduction of particulate matter which apply to our Texas City facility. The
nitrogen oxide regulations covering the Houston/Galveston Area State
Implementation Plan were approved by the United States Environmental Protection
Agency ("EPA") on October 15, 2001. Under these regulations, we are required to
reduce emissions of nitrogen oxide at our Texas City facility by up to
approximately 90%, which we estimate would require Chemicals to make between $25
million and $30 million in capital improvements at our Texas City facilities.
The majority of these capital expenditures are expected to be incurred from
fiscal 2003 through fiscal 2007.
A significant ban on all chlorine containing compounds could have a
materially adverse effect on our financial condition and results of operations.
British Columbia had a regulation in place requiring elimination of the use of
all chlorine products, including chlorine dioxide, in the bleaching process by
December 31, 2002. However, on July 5, 2002, British Columbia amended the
regulation, which now permits a monthly average discharge of 0.6 kg of AOX per
air dry metric ton, which is similar to the U.S. EPA regulations governing
bleach pulp mills.
Claims for environmental liabilities of the Debtors arising prior to our
Chapter 11 filings have been addressed in the Plan. In general, monetary claims
relating to remedial actions at off-site locations used for disposal prior to
the Chapter 11 filings and penalties resulting from violations of environmental
requirements before that time will be treated as general unsecured claims.
Actions by governmental authorities to determine liability for and the amount of
such penalties will generally not be subject to the automatic stay. We will be
obliged to comply with environmental requirements in the conduct of our business
as a debtor-in-possession, including the potential obligation to conduct
remedial actions at facilities we own or operate, regardless of when the
contamination at those facilities occurred.
On June 11, 2001, we received a notice from the U.S. Department of Justice,
Environment and Natural Resources Division, in which the Department alleged that
on April 1, 1998, an ethylbenzene release at our Texas City facility violated
the general duty clause of the Clean Air Act and invited us to engage in
settlement discussions with respect to the matter. Although we believe that the
April 1, 1998 ethylbenzene release did not constitute a violation of the general
duty clause of the Clean Air Act, and, while admitting no liability, we settled
the Department's claim for $650,000, which is being treated as a general
unsecured claim under the Plan. This settlement was approved by the Bankruptcy
Court on November 20, 2002. Additionally, an EPA bankruptcy claim for
remediation costs associated with the Malone disposal site was withdrawn as part
of the settlement discussed above.
A settlement agreement entered into by the EPA, the Florida Department of
Environmental Protection ("FDEP") and an environmental group potentially applies
to our acrylic fibers facility. This settlement agreement imposes a no-migration
standard for injection wells in underground drinking water zones without regard
to actual risk considerations. We and several similarly situated companies have
been
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STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contesting this settlement. An April 1999 ruling by the United States Court of
Appeals for the 11th Circuit may reduce the likelihood that the no-migration
rule is enforceable, although we can give you no assurances in that regard. In
the event that the no-migration rule becomes enforceable, we may incur material
costs in redesigning our wastewater handling systems. However, in September
2000, the Florida Department of Environmental Protection awarded us a five-year
permit to operate the deepwell injection facilities at our acrylic fibers
facilities. Under this permit, we were granted an "injection into an aquifer"
exemption, subject to monitoring of groundwater. As a result, during the life of
this permit, we would not be subject to this no-migration rule even if it became
enforceable, assuming that this permit is not revised in any material way.
We are presently involved in discussions with the FDEP regarding
allegations that past or present waste handling practices at our acrylic fibers
facility in Santa Rosa, Florida have adversely affected the water quality of
streams on the property. The results of analysis performed by our independent
contractors have been submitted to the FDEP for review. As a proactive measure,
our acrylic fibers facility made significant reductions in the level of certain
spent precipitates disposed of in the existing, on-site landfill. Additionally,
our acrylic fibers facility has requested the consolidation of their EPA HISWA
permit application and their FDEP RCRA Part B permits which would be
administered by the FDEP. At this time we do not know the nature and extent of
remedial actions, if any, that may ultimately be required under future permits.
As part of the Plan, our acrylic fibers business will be transferred to the
existing local management of that business in a management buyout for little or
no consideration concurrent with our emergence from Chapter 11.
LEGAL PROCEEDINGS
As previously discussed, the Debtors filed petitions for reorganization
under Chapter 11 of the Bankruptcy Code on July 16, 2001. As a result of the
commencement of the Chapter 11 cases, an automatic stay was imposed against the
commencement or continuation of legal proceedings against the Debtors outside of
the Bankruptcy Court. The automatic stay will does not apply, however, to
governmental authorities exercising their police or regulatory powers, including
the application of environmental laws. Claimants 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 can object and seek a determination from the
Bankruptcy Court as to the allowability of such claim. Claimants who desire to
liquidate their claims in legal proceedings outside of the Bankruptcy Court are
required to obtain relief from the automatic stay by order of the Bankruptcy
Court. If such relief is granted, the automatic stay remains in effect with
respect to the collection of liquidated claim amounts. As a general rule, all
claims against the Debtors that seek a recovery from assets of the Debtors'
estates have been or will be addressed in the Chapter 11 cases and paid only
pursuant to the terms of a plan of reorganization.
Ethylbenzene Release
On April 1, 1998, a chemical leak occurred when a line failed in the
ethylbenzene unit at our Texas City facility. The released chemicals included
ethylbenzene, benzene, polyethylbenzene and hydrochloric acid. We do not believe
any serious injuries were sustained, although a number of citizens sought
medical examinations at local hospitals after a precautionary alert was given to
neighboring communities. Five lawsuits, and an additional two interventions,
were filed against the Debtors, involving approximately 571
plaintiffs/intervenors who seek an unspecified amount for damages. We believe
that all or substantially all of our future out-of-pocket costs and expenses
relating to these lawsuits, including settlement payments and judgments, will be
covered by our liability insurance policies or indemnification from third
parties. We do not believe that the claims and litigation arising out of this
incident will have a material adverse effect on our business, financial
position, results of operations or cash flows, although we cannot give any
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STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assurances to that effect. Unless otherwise ordered by the Bankruptcy Court, all
of these claims and litigation are subject to the automatic stay and recoveries
(if any) sought thereon from assets of the Debtors will be addressed in the
Chapter 11 cases. To date, the Bankruptcy Court has lifted the automatic stay in
the cases of Bobbie Adams, et al. and Nettie Allen, et al. for the sole purpose
of allowing the plaintiffs to proceed against our liability insurance policies.
Small cash settlements, to be funded by our liability insurance policies, have
been negotiated with the plaintiffs in one of the interventions and in the case
of Ida Goldman, et al., and have been approved by the Bankruptcy Court.
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 automatic stay,
and recoveries sought thereon from assets of the Debtors are required to be
dealt with in the Chapter 11 cases.
On December 19, 2001, we announced that Frank P. Diassi had elected to
terminate his employment with the company. 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 President, in September 2001.
Mr. Diassi has asserted that he had "good reason" to terminate his employment
and is claiming that he is entitled to receive payments under certain of our
employee retention and severance plans. On June 3, 2002, our Compensation
Committee denied Mr. Diassi's claim under the Key Employee Protection Plan and
on July 24, 2002, we denied his claim under the Retention Bonus Plan. On
September 6, 2002, we filed an objection to Mr. Diassi's Proof of Claim in the
Bankruptcy Court. Mr. Diassi subsequently filed a motion in the Bankruptcy Court
to compel arbitration of his claims.
LITIGATION CONTINGENCY
We have made estimates of the reasonably possible range of liability with
regard to our outstanding litigation for which we may incur any liability. These
estimates are based on our judgment using currently available information, as
well as consultation with our insurance carriers and outside legal counsel. A
number of the claims in these litigation matters are covered by our insurance
policies or by third party indemnification. Therefore, we have also made
estimates of our probable recoveries under insurance policies or from
third-party indemnitors based on our judgment, our understanding of our
insurance policies and indemnification arrangements, discussions with our
insurers and indemnitors and consultation with outside legal counsel. Based on
the foregoing, as of September 30, 2002, we had approximately $3.5 million
accrued as our estimate of our contingent liability for these matters and have
also recorded aggregate receivables from our insurers and third-party
indemnitors of approximately $2.5 million. At September 30, 2002, we estimate
that the aggregate reasonably possible range of loss for all litigation
combined, in addition to the amount accrued, is between zero and $13 million.
The timing of probable insurance and indemnity recoveries and payment of
liabilities, if any, are not expected to 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. While we have based our estimates on
our evaluation of available information and the other matters described above,
much of the litigation remains in the discovery stage and it is impossible to
predict with certainty the ultimate outcome. We will adjust our estimates as
necessary as additional information is developed and evaluated. However, we
believe that the final resolution of these contingencies will not 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.
Moreover, such contingencies represent pre-petition claims and, unless otherwise
ordered by the Bankruptcy Court, all of these claims are subject to the
automatic stay and recoveries (if any) sought thereon from the Debtors have been
or will be addressed in the Chapter 11 cases.
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(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION
Our operations are divided into two reportable segments: petrochemicals and
pulp chemicals. The petrochemicals segment is based in the U.S. and manufactures
commodity petrochemicals and acrylic fibers. The pulp chemicals segment is
primarily based in Canada and manufactures chemicals for use primarily in the
pulp and paper industry, and constructs chlorine dioxide generators for use by
pulp mills. Operating segment information for 2002, 2001 and 2000 is presented
below. As part of the Plan, our pulp chemicals business will be sold concurrent
with our emergence from Chapter 11.
YEAR ENDED SEPTEMBER 30,
--------------------------------
2002 2001 2000
-------- -------- ----------
(DOLLARS IN THOUSANDS)
Revenues:
Petrochemicals.................................... $400,765 $515,219 $ 870,130
Pulp chemicals.................................... 227,962 228,346 226,321
-------- -------- ----------
Total............................................... $628,727 $743,565 $1,096,451
======== ======== ==========
Operating income (loss):
Petrochemicals.................................... $ (9,412) $(87,973) $ 5,756
Pulp chemicals.................................... 41,281 42,173 34,680
-------- -------- ----------
Total............................................... $ 31,869 $(45,800) $ 40,436
======== ======== ==========
Depreciation and amortization expenses:
Petrochemicals.................................... $ 26,190 $ 28,759 $ 33,495
Pulp chemicals.................................... 23,851 24,359 25,015
-------- -------- ----------
Total............................................... $ 50,041 $ 53,118 $ 58,510
======== ======== ==========
Capital expenditures:
Petrochemicals.................................... $ 6,700 $ 9,829 $ 21,126
Pulp chemicals.................................... 9,563 7,063 7,671
-------- -------- ----------
Total............................................... $ 16,263 $ 16,892 $ 28,797
======== ======== ==========
Property, plant and equipment, net:
Petrochemicals.................................... $117,222 $137,114 $ 153,853
Pulp chemicals.................................... 138,614 147,830 164,773
-------- -------- ----------
Total............................................... $255,836 $284,944 $ 318,626
======== ======== ==========
Sales to individual customers constituting 10% or more of total revenues
and export sales were as follows:
YEAR ENDED SEPTEMBER 30,
------------------------------
2002 2001 2000
-------- -------- --------
(DOLLARS IN THOUSANDS)
Major Customers:
British Petroleum plc and subsidiaries............. $ 60,095 $ 86,360 $125,942
Export Sales:
Export revenues.................................... $131,701 $181,925 $460,046
Percentage of total revenues....................... 34% 24% 42%
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STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. FINANCIAL INSTRUMENTS
FOREIGN EXCHANGES
We have previously entered into forward foreign exchange contracts to
reduce risk due to Canadian dollar exchange rate movements. The forward foreign
exchange contracts had varying maturities with none exceeding 18 months. We made
net settlements of United States dollars for Canadian dollars at rates agreed to
at inception of the contracts. We do not engage in currency speculation. The
last of our existing forward exchange contracts expired in March 2000, and we
currently do not intend to enter into any additional forward exchange contracts.
ELECTRICITY CONTRACTS
Our Canadian subsidiaries periodically enter fixed price agreements for a
portion of their electrical energy requirements. We have an agreement relating
to the supply of a portion of the electrical energy at one of our Canadian
sodium chlorate production facilities. This agreement, which was previously
designated as a normal purchase under SFAS No. 133, does not meet the criteria
of a normal purchase based on guidance issued by the Derivative Implementation
Group (the "DIG") and cleared by the Financial Accounting Standards Board in
June 2001. All purchases under this agreement, which expires on December 31,
2002, are used in the ordinary course of business. However, effective July 1,
2001, this agreement is required to be marked-to-market. At September 30, 2002
and 2001, the fair value of this agreement was a gain (loss) of approximately
$0.2 million and ($1.2) million, respectively, based on current market prices
and quantities to be delivered.
CONCENTRATIONS OF RISK
We sell our products primarily to companies involved in the petrochemicals,
acrylic fibers and pulp and paper manufacturing industries. We perform ongoing
credit evaluations of our customers and generally do not require collateral for
accounts receivable. However, letters of credit are required by us on many of
our export sales. Historically, our credit losses have been minimal.
We maintain cash deposits with major banks, which from time to time may
exceed federally insured limits. We periodically assess the financial condition
of these institutions and believe that the likelihood of any possible loss is
minimal.
Approximately 40% of our employees are covered by union agreements.
Approximately 74% of our employees at our Vancouver facility are represented by
the Pulp, Paper and Woodworkers Union. The Vancouver labor agreement was
renegotiated in November 2000 and is subject to further renegotiations in
November of 2003. Approximately 76% of the employees at our Saskatoon facility
are represented by the Communications, Energy and Paperworkers of Canada. Our
collective bargaining agreement with this union was renegotiated on June 25,
2001 and is subject to further renegotiation in September 2004. Approximately
74% of our are members of either an operations and maintenance workers union,
the contract with which is currently being negotiated or an office and lab
workers union, the contract with which expires in March 2003. The primary union
agreement at our Texas City facility expired on May 1, 2002 and a new agreement
was entered into on October 1, 2002 and is subject to renegotiation in April
2004.
INVESTMENTS
It is our policy to invest our excess cash in investment instruments or
securities whose value is not subject to market fluctuations, such as
certificates of deposit, repurchase agreements or Eurodollar deposits with
domestic or foreign banks or other financial institutions. Other permitted
investments include
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STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commercial paper of major United States corporations with ratings of A1 by
Standard & Poor's Ratings Group or P1 by Moody's Investor Services, Inc., loan
participations of major United States corporations with a short term credit
rating of A1/P1 and direct obligations of the United States Government or its
agencies. In addition, we will not invest more than $5 million with any single
bank, financial institution or United States corporation. As a result of the
Chapter 11 filings, the Bankruptcy Court requires excess cash presently held by
the Debtors to be invested in United States Treasury Bills or as certificates of
deposit with Chase Bank, N.A.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheet for cash
and cash equivalents, accounts receivable, accounts payable and certain accrued
liabilities approximate fair value due to the short maturities of these
instruments. The following table presents the carrying values and fair values of
our long term debt (including current maturities) at September 30, 2002:
CARRYING VALUE FAIR VALUE
-------------- ----------
(DOLLARS IN THOUSANDS)
DIP Financing............................................... $57,242 $57,242
Canadian Financing Agreement................................ 5,234 5,234
Saskatoon Refinancing Agreement............................. 15,753 15,753
Due to the uncertainty resulting from the bankruptcy filings discussed in
Note 1, it is difficult to estimate the fair value of the Debtors' borrowings
and other pre-petition liabilities. Due to the DIP Financing, the Canadian
Financing Agreement and the Saskatoon Refinancing Agreement having variable
interest rates, the fair value equals their carrying value.
At September 30, 2002, our forward power contract for a portion of our pulp
chemicals business' power requirements had a fair market value of $0.2 million,
based on our estimate of projected energy prices and quantities to be delivered
under the contract.
12. RELATED PARTY TRANSACTIONS
Koch Capital Services, Inc., an affiliate of Koch Industries, Inc., was one
of Holdings' significant stockholders and had the right to designate a member of
our Board of Directors. Since October 1, 1991, we have had ongoing commercial
relationships in the ordinary course of business with certain affiliates of Koch
Industries, Inc., including agreements for the supply of raw materials, sales of
petrochemicals and transportation of natural gas. During one or more of our
fiscal years ended September 30, 2002, 2001 and 2000:
- we made payments to John Zink Company, an indirect wholly-owned
subsidiary of Koch Industries, Inc., in consideration for certain
contracting and construction services performed at our Texas City
facility; and
- we made payments to Koch Gateway Pipeline Company for the transportation
of natural gas to our acrylic fibers plant through a pipeline in which it
is a partner.
In addition, we made product sales to and purchased raw materials from Koch
Chemical and Koch Nitrogen Company, indirect wholly-owned subsidiaries of Koch
Industries, Inc. in fiscal 2000. These two relationships represented less than
1% of our revenues. In May 2000, we entered into a new 3 1/2 year ammonia supply
agreement with Koch Nitrogen. The new ammonia supply agreement replaced our
prior ammonia supply agreement with Koch Nitrogen and was rejected in our
bankruptcy proceedings. The new ammonia supply agreement required us to purchase
the same annual quantity of ammonia from Koch
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STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Nitrogen but at a revised pricing formula. In connection with the execution of
the new ammonia supply agreement, we made a payment to Koch Nitrogen of $1.2
million to settle a dispute under the old ammonia supply agreement and we also
made a one-time payment to Koch Nitrogen of $1.8 million in exchange for the
revised pricing formula.
13. NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations be accounted for
under the purchase method and requires separate identification and recognition
of intangible assets, other than goodwill. The statement applies to all business
combinations initiated after June 30, 2001 and also applies to all entities
emerging from bankruptcy. SFAS No. 142, which was effective for fiscal periods
beginning after December 15, 2001, requires that an intangible asset that is
acquired shall be initially recognized and measured based on its fair value. The
statement also provides that goodwill should not be amortized, but shall be
tested for impairment annually, or more frequently if circumstances indicate
potential impairment, through a comparison of fair value to its carrying amount.
SFAS No.141 will have an impact on our financial statements upon our emergence
from Chapter 11 pursuant to the application of fresh start accounting. However,
we do not believe that the adoption of SFAS No. 142 will have a significant
impact on our financial statements.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which must be
applied to fiscal years beginning after June 15, 2002, addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. We do not
believe that the adoption of SFAS No. 143 will have a significant impact on our
financial statements.
In August 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of. SFAS 144 is effective for
fiscal years beginning after December 15, 2001, with early adoption permitted.
The adoption of SFAS No. 144 is not expected to have a significant impact on our
financial statements.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 eliminates Statement
No. 4 and as a result, gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria in APB Opinion
No. 30. SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under changed
conditions. The provisions of this Statement related to the rescission of SFAS
No. 4 apply to fiscal years beginning after May 15, 2002. The provisions of this
Statement related to SFAS No. 13 apply to transactions occurring after May 15,
2002. All other provisions of this Statement are effective for financial
statements issued on or after May 15, 2002. The adoption of SFAS No. 145 has not
yet had a significant impact on our financial statements, but could affect our
financial statements after our emergence from Chapter 11.
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 have not yet
adopted SFAS No. 146 nor determined the effect of the adoption of SFAS No. 146
on our financial position or results of operations.
89
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Sterling Chemicals, Inc.
We have audited the accompanying consolidated balance sheets of Sterling
Chemicals, Inc. and subsidiaries (Debtors-in-Possession) (the "Company") as of
September 30, 2002 and 2001 and the related consolidated statements of
operations, changes in stockholder's equity (deficiency in assets) and cash
flows for each of the three years in the period ended September 30, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of September 30,
2002 and 2001 and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 2002 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1, on July 16, 2001, the Debtors (as defined in Note
1) filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The
accompanying financial statements do not purport to reflect or provide for the
consequences of the bankruptcy proceedings. In particular, such financial
statements do no purport to show (a) as to assets, their realizable value on a
liquidation basis or their availability to satisfy liabilities; (b) as to
pre-petition liabilities, the amounts that may be allowed for claims or
contingencies or the status and priority thereof; (c) as to stockholder
accounts, the effect of any changes that may be made in the capitalization of
the Company; or (d) as to operations, the effect of any changes that may be made
in the Company's business.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company's
recurring losses from operations raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also discussed in Note 1. The financial statements do not include adjustments
that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Houston, Texas
December 13, 2002
90
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
------------------------------
2002 2001 2000
-------- -------- --------
(DOLLARS IN THOUSANDS)
Revenues.................................................... $209,181 $241,274 $263,502
Cost of goods sold.......................................... 172,232 214,013 229,732
-------- -------- --------
Gross profit................................................ 36,949 27,261 33,770
Selling, general and administrative expenses................ 11,276 12,396 24,290
Impairment of assets........................................ 4,444 -- 60,000
Other expense............................................... -- 977 --
Reorganization items........................................ 5,958 1,789 --
Interest and debt related expenses, net of interest
income(1)................................................. 20,908 38,652 43,051
-------- -------- --------
Loss before income taxes.................................... (5,637) (26,553) (93,571)
Equity in earnings of joint venture, net of tax............. (2,809) (847) (747)
Provision for income taxes.................................. 11,723 19,575 2,951
-------- -------- --------
Net loss.................................................... $(14,551) $(45,281) $(95,775)
======== ======== ========
---------------
(1) Contractual interest for the fiscal years ended September 30, 2002 and 2001
totaled $55,196 and $45,681, respectively.
The accompanying notes are an integral part of the combined financial
statements.
91
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
COMBINED BALANCE SHEETS
SEPTEMBER 30,
-----------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,764 $ 1,396
Accounts receivable, net.................................. 27,811 36,372
Inventories, net.......................................... 15,407 18,009
Prepaid expenses.......................................... 1,346 604
--------- ---------
Total current assets................................... 48,328 56,381
Property, plant and equipment, net.......................... 102,873 116,728
Due from affiliates......................................... 202,278 183,398
Other assets, net........................................... 10,593 19,121
--------- ---------
Total assets........................................... $ 364,072 $ 375,628
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable.......................................... $ 19,012 $ 16,835
Accrued liabilities....................................... 6,272 5,944
Current portion of long-term debt......................... 4,070 1,206
--------- ---------
Total current liabilities.............................. 29,354 23,985
Pre-petition liabilities -- subject to compromise........... 233,376 233,572
Pre-petition liabilities -- not subject to compromise....... 157,270 139,572
Long-term debt.............................................. 1,164 18,797
Deferred income taxes....................................... 8,413 9,171
Deferred credits and other liabilities...................... 11,378 12,326
Commitments and contingencies (Note 9)
Stockholder's equity (deficiency in assets):
Common stock.............................................. -- --
Additional paid-in capital................................ 92,735 92,735
Accumulated deficit....................................... (137,061) (122,510)
Accumulated other comprehensive loss...................... (32,557) (32,020)
--------- ---------
Total stockholder's equity (deficiency in assets)...... (76,883) (61,795)
--------- ---------
Total liabilities and stockholder's equity
(deficiency in assets).............................. $ 364,072 $ 375,628
========= =========
The accompanying notes are an integral part of the combined financial
statements.
92
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
COMBINED STATEMENTS OF
CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER
COMMON PAID-IN (ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT) LOSS TOTAL
------ ---------- ------------ ------------- --------
(AMOUNTS IN THOUSANDS)
BALANCE, SEPTEMBER 30, 1999.......... -- $92,735 $ 18,546 $(27,500) $ 83,781
Comprehensive income:
Net loss........................... -- -- (95,775) --
Translation adjustment............. -- -- -- (1,533)
Comprehensive loss.............. (97,308)
----- ------- --------- -------- --------
BALANCE, SEPTEMBER 30, 2000.......... -- 92,735 (77,229) (29,033) (13,527)
Comprehensive income:
Net loss........................... -- -- (45,281) --
Pension adjustment................. -- -- -- (52)
Translation adjustment............. -- -- -- (2,935)
Comprehensive loss.............. (48,268)
----- ------- --------- -------- --------
BALANCE, SEPTEMBER 30, 2001.......... -- 92,735 (122,510) (32,020) (61,795)
Net loss........................... -- -- (14,551) --
Pension adjustment................. -- -- -- (192)
Translation adjustment............. -- -- -- (345)
Comprehensive loss.............. (15,088)
----- ------- --------- -------- --------
BALANCE, SEPTEMBER 30, 2002.......... $ -- $92,735 $(137,061) $(32,557) $(76,883)
===== ======= ========= ======== ========
The accompanying notes are an integral part of the combined financial
statements.
93
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
------------------------------
2002 2001 2000
-------- -------- --------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net loss.................................................. $(14,551) $(45,281) $(95,775)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 15,260 17,428 26,050
Impairment of assets................................... 4,444 -- 60,000
Inventory valuation reserve............................ -- 6,167 --
Deferred tax expense (benefit)......................... (1,082) 14,610 1,066
Other.................................................. (209) (20) 66
Change in assets/liabilities:
Accounts receivable.................................. 8,561 9,818 (950)
Inventories.......................................... 2,602 7,076 (2,045)
Prepaid expenses..................................... (742) (303) 1,368
Due from affiliates.................................. (18,880) (34,631) (9,181)
Other assets......................................... 9,395 8,504 8,673
Accounts payable..................................... 2,177 1,453 (2,298)
Accrued liabilities.................................. 328 2,539 7,524
Other liabilities.................................... 16,555 873 4,342
-------- -------- --------
Net cash flows provided by (used in) operating
activities...................................... 23,858 (11,767) (1,160)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures...................................... (6,510) (6,247) (7,604)
Cash flows from financing activities:
Borrowings under (payments on) Canadian Financing
Agreement.............................................. (14,769) 20,003 --
Debt issuance costs....................................... (206) (1,112) --
-------- -------- --------
Net cash provided by (used in) financing activities......... (14,975) 18,891 --
Effect of United States/Canadian exchange rate on cash...... (5) 20 (60)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 2,368 897 (8,824)
Cash and cash equivalents -- beginning of year.............. 1,396 499 9,323
-------- -------- --------
Cash and cash equivalents -- end of year.................... $ 3,764 $ 1,396 $ 499
======== ======== ========
Supplemental disclosures of cash flow information:
Income taxes paid......................................... $ (3,899) $ (1,130) $ (696)
Interest paid, net of interest income received............ (1,267) -- --
The accompanying notes are an integral part of the combined financial
statements.
94
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
On July 23, 1999, Sterling Chemicals, Inc. ("Chemicals"), formerly a
wholly-owned subsidiary of Sterling Chemicals Holdings, Inc. ("Holdings"),
completed a private offering of $295,000,000 of its 12 3/8% Senior Secured Notes
due 2006. On November 5, 1999, Chemicals completed a registered exchange offer
pursuant to which all of these notes were exchanged for publicly registered
12 3/8% Notes with substantially similar terms (the "12 3/8% Notes"). The
12 3/8% Notes are guaranteed by all of Chemicals' existing direct and indirect
United States subsidiaries (other than Sterling Chemicals Acquisitions, Inc.) on
a joint and several basis and are secured by, among other things, a pledge of
100% of the stock of these subsidiaries. These subsidiaries consist of Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc.,
Sterling Chemicals Energy, Inc., Sterling Chemicals International, Inc. and
Sterling Fibers, Inc. and, together with two Canadian subsidiaries of Sterling
Canada, Inc., are collectively referred to as the "Guarantors." The consolidated
financial statements of each of these guarantor subsidiaries have been combined
to produce the accompanying financial statements.
The Guarantors manufacture chemicals for use primarily in the pulp and
paper industry at four plants in Canada and a plant in Valdosta, Georgia and
manufacture acrylic fibers at a plant in Santa Rosa County, Florida. Sodium
chlorate is produced at the four plants in Canada and the Valdosta plant. Sodium
chlorite is produced at one of the Canadian locations. The Guarantors also
license, engineer and oversee construction of large-scale chlorine dioxide
generators, which convert sodium chlorate into chlorine dioxide, for the pulp
and paper industry. The Guarantors produce regular textiles, specialty textiles
and technical fibers at the Santa Rosa plant, as well as licensing their acrylic
fibers manufacturing technology to producers worldwide. In fiscal 2001, they
withdrew from the traditional commodity textile business and significantly
reduced their operations and staffing at their acrylic fibers plant in Santa
Rosa, Florida. The Guarantors continue to produce specialty textile fibers and
technical fibers at this facility.
CHAPTER 11 PROCEEDINGS
The accompanying combined financial statements have been prepared on the
going concern basis of accounting, which contemplates the continuity of
operations, the realization of assets and the satisfaction of liabilities in the
ordinary course of business. On July 16, 2001 (the "Petition Date"), Holdings,
Chemicals and all of the Guarantors, except for the two Canadian subsidiaries of
Sterling Canada, Inc., (collectively the "Debtors") filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy
Code") in the U.S. Bankruptcy Court for the Southern District of Texas (the
"Bankruptcy Court") and began operating their businesses as
debtors-in-possession pursuant to the Bankruptcy Code. The accompanying combined
financial statements have been presented in conformity with the AICPA's
Statement of Position 90-7 "Financial Reporting By Entities In Reorganization
Under the Bankruptcy Code" ("SOP 90-7"). The statement requires a segregation of
liabilities subject to compromise by the Bankruptcy Court as of the Petition
Date and identification of all transactions and events that are directly
associated with the reorganization of the Debtors.
The filing of the Chapter 11 petitions was driven by the Debtors' inability
to meet their funded debt obligations over the long-term, largely brought about
by weak demand for petrochemicals products caused by declines in general
worldwide economic conditions, the relative strength of the U.S. dollar (which
caused the Debtors' export sales to be at a competitive disadvantage) and higher
raw material and energy costs. As a result of these conditions, the Debtors
incurred significant operating losses. Chapter 11 is designed to permit debtors
to preserve cash and to give debtors the opportunity to restructure their debt.
During the pendency of the Chapter 11 cases, with approval of the Bankruptcy
Court, the Debtors assumed favorable pre-petition contracts and leases, rejected
unfavorable pre-petition contracts and leases
95
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and entered into purchase and sale agreements to otherwise dispose of assets.
Most of these actions will be consummated on the effective date of Debtors' the
plan of reorganization (the "Plan").
The consummation of the Plan is the primary objective of the Debtors. On
May 14, 2002, the Debtors filed the Plan with the Bankruptcy Court, along with
an accompanying Disclosure Statement. As a result of negotiations among the key
creditor constituencies in the Chapter 11 cases, including Resurgence Asset
Management, L.L.C. ("Resurgence"), the single largest unsecured creditor and a
proposed equity investor in the reorganized company, a revised Plan and
Disclosure Statement were filed with the Bankruptcy Court on September 13, 2002.
The Plan and the Disclosure Statement were further revised on October 7, 2002
and October 11, 2002, in connection with the hearing in the Bankruptcy Court to
consider the adequacy of the Disclosure Statement. On October 11, 2002, the
Bankruptcy Court issued an order approving the Disclosure Statement and
authorizing the Debtors to commence the process of soliciting votes to accept or
reject the Plan and established a confirmation objection and voting deadline of
November 13, 2002. The approval of the Disclosure Statement and the
authorization to commence the solicitation of votes was made subject to the
conduct of an alternative plan process. As part of that process, alternative
plan proposals were required to be submitted by no later than October 28, 2002.
However, no such proposals were received by the deadline. The Plan was approved
by a large percentage of the votes cast and, on November 20, 2002, the Plan was
confirmed by the Bankruptcy Court.
The Plan provides for the sale of the Debtors' pulp chemicals business to
Superior Propane Inc. ("Superior"), for the transfer of the Debtors' acrylic
fibers business pursuant to a management buyout for little or no consideration,
effective upon consummation of the plan, and for the continuation of the
Debtors' core petrochemicals business, as restructured under the Plan. The
Debtors' pulp chemicals and acrylic fiber businesses represent substantially all
of the Guarantors' operations. A portion of the net proceeds from the sale of
the pulp chemicals business, $80 million, will remain with the Debtors and will
be used to fund the Debtors' obligations under the Plan and to support future
operations of the restructured petrochemicals business. The remaining net
proceeds will be allocated to the holders of the 12 3/8% Notes, who will also
receive approximately $93 million in secured notes in satisfaction of their
claims. As part of the Plan, on December 6, 2002, Holdings was merged into
Chemicals. Holdings' classes of equity interests were cancelled, and the holders
of Holdings' 13 1/2% Senior Secured Discount Notes were issued 65,000 shares of
new common equity of Chemicals. On the effective date of the Plan, these shares
will constitute 1.3% of the common equity interests in Chemicals. Unsecured
creditors and stockholders of Holdings will not receive any distribution under
the Plan due to their structural subordination and the absence of assets at
Holdings. Unsecured creditors of the Debtors (other than unsecured creditors of
Holdings), which include holders of Chemicals' 11 1/4% Senior Subordinated Notes
and 11 3/4% Senior Subordinated Notes, will receive a pro rata share of 11.7% of
the new Chemicals' shares to be issued pursuant to the Plan, thereby
participating in the common equity ownership of the restructured petrochemicals
business, along with Resurgence and its affiliated client accounts (the
"Investor"). The Investor has agreed to provide equity funding of $30 million in
exchange for certain new preferred equity interests in the reorganized company
and to underwrite an additional $30 million of equity funding through a rights
offering for common equity interests in the reorganized company. All, or a
portion of, certain unsecured claims will be paid if contracts associated with
these claims are assumed pursuant to the Plan. Following the satisfaction or
waiver of certain conditions, we expect the Plan to become effective on or
before December 31, 2002, at which time the Debtors will emerge from Chapter 11.
Chemicals has received an exit financing commitment from The CIT
Group/Business Credit, Inc. for a $100 million secured revolving credit facility
for the restructured petrochemicals business (the "Revolver").
96
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Reorganization items reflected in the Statement of Operations for the
fiscal years ended September 30, 2002 and 2001 are composed primarily of
professional fees directly related to the bankruptcy cases and allocated to the
Guarantors by Chemicals.
Emergence from Chapter 11 in accordance with the Plan is dependent upon
several factors, including:
- consummation of the sale of the Debtors' pulp chemicals business to
Superior,
- transfer of the Debtors' acrylic fibers facility pursuant to a management
buyout,
- receipt of investment funds from Resurgence and
- finalization of the new secured revolving credit facility.
While there can be no assurances, the Guarantors believe that the Debtors will
satisfactorily complete these items and emerge from Chapter 11.
The ability of the Debtors to continue as a going concern is dependent upon
the Debtors' emergence from Chapter 11 with the capital structure contemplated
under the Plan. As the Debtors' can give no assurance that they will accomplish
any of the foregoing, there is substantial doubt about Chemicals' and the
Debtors' ability to continue as a going concern. The accompanying financial
statements do not purport to reflect or provide for the consequence of the
bankruptcy proceedings and do not include any adjustments that might result from
the outcome of the going concern uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Guarantors are described below.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of all wholly-owned
and majority-owned subsidiaries of the combined entities. All significant
intercompany accounts and transactions among entities included in the combined
financial statements have been eliminated. The Guarantors' investment in a
cogeneration joint venture in which the Guarantors have a fifty-percent interest
is accounted for under the equity method.
CASH AND CASH EQUIVALENTS
The Guarantors consider all investments with a remaining maturity of three
months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is primarily
determined on the first-in, first-out basis, except for stores and supplies
which are valued at average cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Major renewals and
improvements, which extend the useful lives of equipment, are capitalized. Major
planned maintenance expenses are accrued for during the periods prior to the
maintenance, while routine repair and maintenance expenses are charged to
operations as incurred. Disposals are removed at carrying cost less accumulated
depreciation with any resulting gain or loss reflected in operations.
Depreciation is provided using the straight-line method over
97
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
estimated useful lives ranging from 5 to 25 years, with the predominant life of
the plant and equipment being 15 years.
IMPAIRMENT OF LONG-LIVED ASSETS
Impairment tests of long-lived assets are made when conditions indicate
their carrying cost may not be recoverable. Such impairment tests are based on a
comparison of undiscounted future cash flows or the market value of similar
assets to the carrying cost of the asset. If an impairment is indicated, the
asset value is written down to its estimated fair value. During fiscal 2002 and
fiscal 2001, the Guarantors incurred impairment losses of $4.4 million and $60.0
million, respectively, related to their acrylic fibers business.
PATENTS AND ROYALTIES
The costs of patents are amortized on a straight-line basis over their
estimated useful lives, which approximate ten years. The Guarantors capitalized
the value of their chlorine dioxide generator technology acquired in fiscal 1992
based on the net present value of all estimated remaining royalty payments
associated with this technology. The resulting intangible amount is included in
other assets and is amortized over an average life for these royalty payments of
ten years.
INCOME TAXES
The Guarantors are included in the consolidated United States federal
income tax returns filed by Holdings. The Guarantors' provision for U.S. income
taxes has been allocated by Holdings as if the Guarantors filed their annual tax
returns on a separate return basis. The Guarantors' Canadian subsidiaries file
separate federal Canadian tax returns, as well as returns in the provinces in
which they operate. Deferred income taxes are recorded to reflect the tax effect
of the temporary differences between the financial reporting basis and the tax
basis of the Guarantors' assets and liabilities.
REVENUE RECOGNITION
The Guarantors generate revenues through sales in the open market and
long-term supply contracts and recognize these revenues as the products are
shipped. Deferred credits are amortized over the life of the contracts which
gave rise to them. The Guarantors also generate revenues from the construction
and sale of chlorine dioxide generators, which are recognized using the
percentage of completion method. The Guarantors also receive prepaid royalties,
which are typically recognized over a period of ten years. In addition, the
Guarantors generate revenues from the sale of acrylic fibers manufacturing
technology to producers worldwide, which are recognized when earned. The
Guarantors classify shipping and handling costs associated with product
delivered to customers as costs of goods sold.
FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE
The Canadian companies included in the combined financial statements of the
Guarantors use the Canadian dollar as the functional currency. For financial
reporting purposes, assets and liabilities of these companies denominated in
Canadian dollars are translated into United States dollars at year-end exchange
rates and revenues and expenses are translated at the average monthly exchange
rates. Translation adjustments are included in accumulated other comprehensive
income, while transaction gains and losses are included in operations when
incurred.
98
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
All issued and outstanding shares of the entities included in Guarantors'
financial statements are held directly or indirectly by Chemicals and Holdings
and, accordingly, earnings per share information is not presented.
ENVIRONMENTAL COSTS
Environmental costs are expensed as incurred unless the expenditures extend
the economic useful life of the relevant assets. Costs that extend the economic
life of assets are capitalized and depreciated over the remaining life of those
assets. Liabilities are recorded when environmental assessments or remedial
efforts are probable and the cost can be reasonably estimated.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In preparing disclosures about the fair value of financial instruments, the
Guarantors have assumed that the carrying amount approximates fair value for
cash and cash equivalents, accounts receivable, accounts payable and certain
accrued liabilities due to the short maturities of those instruments. The fair
values of long-term debt instruments allocated to the Guarantors by Chemicals
are estimated based upon quoted market values (if applicable) or on the current
interest rates available for debt with similar terms and remaining maturities.
The fair value of pre-petition liabilities subject to compromise and
pre-petition liabilities not subject to compromise is not possible to determine
given the uncertainty of the impact of the bankruptcy proceedings. Considerable
judgment is required in developing these estimates and, accordingly, no
assurance can be given that the estimated values presented herein are indicative
of the amounts that would be realized in a free market exchange.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Significant estimates include impairment
of long-lived assets, allowance for doubtful accounts, inventories,
environmental reserves, litigation contingencies and provision for taxes. Actual
results could differ from these estimates.
ALLOCATIONS
The Guarantors are directly or indirectly wholly-owned by Chemicals, which
incurs certain direct and indirect expenses for the benefit and support of the
Guarantors. These services include, among others, tax planning, treasury, legal,
risk management and the maintenance of insurance coverage for the Guarantors.
Chemicals allocated $2.2 million, $2.9 million and $4.9 million of such expenses
to the Guarantors in fiscal years 2002, 2001 and 2000, respectively, which are
included in selling, general and administrative expenses. Additionally,
Chemicals allocated $6.0 million and $1.8 million of reorganization items during
fiscal 2002 and fiscal 2001, respectively. Allocations are based on the
Guarantors' proportionate share of the respective amounts and are determined
using various criteria including headcount, payroll, number of vehicles, amount
of pre-petition liabilities and revenue.
99
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations be accounted for
under the purchase method and requires separate identification and recognition
of intangible assets, other than goodwill. The statement applies to all business
combinations initiated after June 30, 2001 and also applies to all entities
emerging from bankruptcy. SFAS No. 142, which was effective for fiscal periods
beginning after December 15, 2001, requires that an intangible asset that is
acquired shall be initially recognized and measured based on its fair value. The
statement also provides that goodwill should not be amortized, but shall be
tested for impairment annually, or more frequently if circumstances indicate
potential impairment, through a comparison of fair value to its carrying amount.
The Guarantors do not believe that the adoption of SFAS No. 141 or SFAS No. 142
will have a significant impact on their financial statements.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which must be
applied to fiscal years beginning after June 15, 2002, addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
Guarantors do not believe that the adoption of SFAS No. 143 will have a
significant impact on their financial statements.
In August 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of. SFAS 144 is effective for
fiscal years beginning after December 15, 2001, with early adoption permitted.
The adoption of SFAS No. 144 is not expected to have a significant impact on the
Guarantors' financial statements.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 eliminates Statement
No. 4 and as a result, gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria in APB Opinion
No. 30. SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under changed
conditions. The provisions of this Statement related to the rescission of SFAS
No. 4 apply to fiscal years beginning after May 15, 2002. The provisions of this
Statement related to SFAS No. 13 apply to transactions occurring after May 15,
2002. All other provisions of this Statement are effective for financial
statements issued on or after May 15, 2002. The adoption of SFAS No. 145 did
not, nor is it expected to, have a significant impact on the Guarantor's
financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting For Costs
Associated with Exit or Disposal Activities." SFAS No. 146 is effective for exit
or disposal activities initiated after December 31, 2002. The Guarantors have
not yet adopted SFAS No. 146 nor determined the effect of the adoption of SFAS
No. 146 on their financial position or results of operations.
RECLASSIFICATION
Certain amounts reported in the financial statements for prior periods have
been reclassified to conform with the current financial statement presentation
with no effect on net loss or stockholder's equity (deficiency in assets).
100
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
SEPTEMBER 30,
-----------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)
Inventories:
Finished products......................................... $ 8,768 $ 11,308
Raw materials............................................. 1,531 1,634
--------- ---------
Inventories at cost......................................... 10,299 12,942
Inventories under exchange agreements..................... (63) 80
Stores and supplies....................................... 5,171 4,987
--------- ---------
$ 15,407 $ 18,009
========= =========
Property, plant and equipment:
Land...................................................... $ 1,355 $ 2,705
Buildings................................................. 106,457 35,004
Plant and equipment....................................... 169,299 246,719
Construction in progress.................................. 6,561 1,271
--------- ---------
Property, plant and equipment at cost..................... 283,672 285,699
Less: accumulated depreciation............................ (180,799) (168,971)
--------- ---------
$ 102,873 $ 116,728
========= =========
Other assets, net:
Patents and technology, net............................... $ -- $ 9,271
Investment in Joint Venture............................... 5,379 4,955
Debt issue costs.......................................... 3,181 4,015
Other..................................................... 2,033 880
--------- ---------
$ 10,593 $ 19,121
========= =========
Accrued liabilities:
Accrued compensation...................................... $ 1,559 $ 614
Accrued interest.......................................... -- 136
Other..................................................... 4,713 5,194
--------- ---------
$ 6,272 $ 5,944
========= =========
4. PRE-PETITION LIABILITIES
LIABILITIES SUBJECT TO COMPROMISE
The principal categories of claims classified as liabilities subject to
compromise under reorganization proceedings are identified below. All amounts
below may be subject to future adjustment depending on Bankruptcy Court action,
further developments with respect to disputed claims or other events, including
the reconciliation of claims filed with the bankruptcy court to amounts recorded
in the accompanying consolidated financial statements. Additional pre-petition
claims may arise from rejection of additional executory contracts or unexpired
leases by the Debtors. Under a confirmed plan of reorganization, all pre-
101
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
petition claims subject to compromise may be paid and discharged at amounts
substantially less than their allowed amounts.
Recorded liabilities subject to compromise under Chapter 11 proceedings as
of September 30, 2002 and 2001, consisted of the following:
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------- -------------
(DOLLARS IN THOUSANDS)
Trade accounts payable...................................... $ 4,250 $ 5,015
Accrued interest............................................ 8,538 8,538
Allocated debt from Chemicals(1)
11 1/4% Notes............................................. 72,415 72,415
11 3/4% Notes............................................. 146,932 146,932
Other....................................................... 1,241 672
-------- --------
Total liabilities subject to compromise..................... $233,376 $233,572
======== ========
---------------
(1) Debt liabilities are presented net of allocated unamortized debt issue costs
of $4.0 million as of September 30, 2002 and 2001.
As a result of the bankruptcy filing, principal and interest payments may
not be made on pre-petition debt without Bankruptcy Court approval or until a
plan of reorganization defining the repayment terms has been confirmed. The
total interest on pre-petition debt that was not paid or charged to earnings was
$7.0 million for the period from July 16, 2001 to September 30, 2001 and $34.5
million for fiscal 2002. Such interest is not being accrued since management
believes it is not probable that it will be treated as an allowed claim. The
Bankruptcy Code generally disallows the payment of interest that accrues
postpetition with respect to unsecured or undersecured claims.
LIABILITIES NOT SUBJECT TO COMPROMISE
The principal categories of claims classified as liabilities not subject to
compromise under reorganization proceedings are identified below. The Guarantors
believe all amounts below are fully secured liabilities that are not expected to
be compromised.
Recorded liabilities not subject to compromise under Chapter 11 proceedings
as of September 30, 2002 and 2001, consisted of the following:
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------- -------------
(DOLLARS IN THOUSANDS)
Allocated 12 3/8% Notes from Chemicals..................... $128,025 $128,025
Accrued interest on 12 3/8% Notes.......................... 29,245 11,310
Employee benefits.......................................... -- 237
-------- --------
Total liabilities not subject to compromise................ $157,270 $139,572
======== ========
5. LONG-TERM DEBT
This note contains information regarding debt of the Guarantors as of
September 30, 2002 and 2001. As a result of the filing of the Chapter 11 cases
previously described, no payments have been made by the Debtors on pre-petition
debt.
102
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Upon the filing of the Chapter 11 cases by the Debtors, an Event of Default
occurred under the Prior Credit Agreement (as defined below) and each of the
indentures governing outstanding notes of Chemicals and Holdings and all of this
indebtedness was accelerated and became immediately due and payable. The Prior
Revolvers (as defined below) were completely paid off with the proceeds of the
initial draw under the DIP Financing (as defined below). However, the Debtors
may pay the indebtedness under the indentures only pursuant to a confirmed plan
of reorganization or order of the Bankruptcy Court. During the pendency of the
Chapter 11 cases, the Debtors will not, for the most part, be subject to the
restrictions contained in the Prior Credit Agreement or any of the indentures.
However, the Debtors and the Guarantors will be subject to the restrictions
contained in the DIP Financing and Sterling Pulp Chemicals, Ltd. ("Sterling
Pulp"), one of the Canadian companies included in the combined financial
statements of the Guarantors, will be subject to the restrictions obtained in
the Canadian Financing Agreement (as defined below).
Effective July 19, 2001, the Debtors (excluding Holdings) entered into a
Revolving Credit Agreement with a group of lenders led by The CIT Group/Business
Credit, Inc. to provide up to $195 million in debtor-in-possession financing
(the "DIP Financing"). By interim order dated July 18, 2001 and final order
dated September 14, 2001, the Bankruptcy Court approved up to $155 million in
lending commitments under the DIP Financing (the "Base Facility"), which was
later increased to $195 million through the entry of a priming order by the
Bankruptcy Court on November 2, 2001 (the "Priming Facility"). In separate
actions, the indenture trustee for the 12 3/8% Notes appealed both the final
order for the Base Facility and the priming order for the Priming Facility to
the United States District Court. After numerous proceedings before the United
States District Court and the Bankruptcy Court, the United States District Court
ultimately upheld the final order for the Base Facility in its original form and
upheld the priming order for the Priming Facility in a modified form. The
indenture trustee appealed these decisions by the United States District Court
to the United States Court of Appeals for the 5th Circuit. The 5th Circuit
consolidated all of the pending appeals and, by agreement of the indenture
trustee, the consolidated appeal is being held in abeyance pending the
effectiveness of the Plan. Under the Plan, the indenture trustee will file a
voluntary dismissal of the consolidated appeal upon the effectiveness of the
Plan. In the event that the Plan does not become effective on or before January
1, 2003, the indenture trustee will be then be free to further pursue the
consolidated appeal if it so desires.
Under the DIP Financing, the Debtors (excluding Holdings) are co-borrowers
and are jointly and severally liable for any indebtedness thereunder. The Base
Facility consists of:
- a $70 million fixed assets revolving credit facility secured by:
- first priority liens on all of the capital stock of the co-borrowers
(other than Chemicals), all of our U.S. production facilities and
related assets and 35% of the capital stock of certain of our
subsidiaries incorporated outside the United States; and
- second priority liens on all accounts receivable, inventory and other
specified assets of Chemicals and the other co-borrowers and 65% of the
capital stock of certain of our subsidiaries incorporated outside the
United States; and
- an $85 million current assets revolving credit facility secured by:
- a first priority lien on all accounts receivable, inventory and other
specified assets of Chemicals and the other co-borrowers;
- a second priority lien on 35% of the capital stock of certain of our
subsidiaries incorporated outside the United States; and
103
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
- third priority liens on the remaining 65% of that stock, all of the
capital stock of the co-borrowers (other than Chemicals) and all of our
U.S. production facilities and related assets.
Upon entry of the priming order, the maximum availability under the current
assets revolving credit facility was increased to $125 million. The monthly
borrowing base was revised to consist of 85% of eligible accounts receivable,
the lesser of $10 million or 33% of specified estimated future royalty payments
related to the Debtors' chlorine dioxide generator technology and 65% of
eligible inventory, with an inventory cap of $62.5 million, and the amount by
which the borrowing base for the current assets revolver was required to exceed
outstanding borrowing was changed to $6 million. During October 2002, an
amendment to the DIP Financing was effected, resulting in abolishment of the
minimum EBITDA covenant unless excess availability (as defined in the amendment)
falls below $25.0 million. In addition, the amount by which the borrowing base
for the current assets revolver must exceed borrowings was increased to $12
million at all times.
If the priming order remains effective and the total commitments under the
current assets revolver are increased to $125 million, the incremental $40
million is secured by first priority liens on all of our U.S. production
facilities and related assets and all of the capital stock of the co-borrowers
(other than Chemicals) to secure up to $40 million under the current assets
revolver, as well as all of the same collateral securing the initial $85 million
current assets revolver. Consequently, after giving effect to the priming order,
the DIP Financing consists of:
- a $70 million fixed assets revolving credit facility secured by:
- second priority liens on all of our U.S. production facilities and
related assets, all of the capital stock of the co-borrowers (other than
Chemicals), all accounts receivable, inventory and other specified
assets of Chemicals and the other co-borrowers and 35% of the capital
stock of certain of our subsidiaries incorporated outside the United
States; and
- a third priority lien on the remaining 65% of that stock; and
- a $125 million current assets revolving credit facility:
- $40 million of which is secured by first priority liens on all of our
U.S. production facilities and related assets, all of the capital stock
of the co-borrowers (other than Chemicals) and 35% of the capital stock
of certain of our subsidiaries incorporated outside the United States
and a second priority lien on the remaining 65% of that stock; and
- all of which is secured by a first priority lien on all accounts
receivable, inventory and other specified assets of Chemicals and the
other co-borrowers, third priority liens on 35% of the capital stock of
certain of our subsidiaries incorporated outside the United States and
fourth priority liens on the remaining 65% of that stock, all of the
capital stock of the co-borrowers (other than Chemicals) and all of our
U.S. production facilities and related assets.
Borrowings under the fixed assets revolving credit facility bear interest,
at Chemicals' option, at an annual rate of either the "LIBOR Rate" (as defined
in the DIP Financing) plus 3.75% or the "Alternate Base Rate" (as defined in the
DIP Financing) plus 2.25%. Borrowings under the current assets revolving credit
facility bear interest, at Chemicals' option, at an annual rate of either the
LIBOR Rate plus 3.50% or the Alternate Base Rate plus 2.00%. At September 30,
2002, the weighted-average interest rate in effect was 6.0%. The DIP Financing
also requires Chemicals and the co-borrowers to pay an aggregate commitment fee
ranging from 0.75% to 1.25% on the unused portion of the commitment for the
fixed assets revolving credit facility, depending on the amount drawn, and an
aggregate commitment fee of 0.5% on the unused portion of the commitment for the
current assets revolving credit facility.
104
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 2002, the total credit available to the Debtors under the
DIP Financing was $139.1 million due to the current assets revolver portion of
the DIP Financing borrowing base limitations discussed above. At September 30,
2002, $57.2 million was drawn under the fixed assets revolver portion of the DIP
Financing and there were no borrowings outstanding under the current assets
revolver. In addition, approximately $3.6 million of letters of credit were
outstanding under the current assets revolver, leaving at September 30, 2002,
unused borrowing capacity under the DIP Financing of approximately $78.3
million. None of these borrowings were allocated to the Guarantors.
As of July 11, 2001, Sterling Pulp entered into a financing agreement with
CIT Business Credit Canada, Inc. ("CIT Canada") to provide up to the Canadian
dollar equivalent of U.S. $30 million (the "Canadian Financing Agreement"). The
initial advance under this facility, approximately U.S. $20 million, was used by
Sterling Pulp to discharge a portion of an intercompany debt and was ultimately
transferred to the Debtors through an intercompany loan. The intercompany loan
was approved by the Bankruptcy Court's interim order entered on July 18, 2001
and final order entered on September 14, 2001, which is a subject of the appeal
of the final order discussed above. Under the Plan, the intercompany loan will
be extinguished upon the Debtor's emergence from Chapter 11. The initial term of
the Canadian Financing Agreement extends to July 2004. CIT Canada has been
notified of the expected termination of the Canadian Financing Agreement
concurrent with the sale of the pulp chemicals business to Superior. All
outstanding balances under the Canadian Financing Agreement will be paid from
the proceeds of the sale. Due to the Chapter 11 filings and the impact of
certain provisions in the DIP Financing, a cash management order entered by the
Bankruptcy Court and the Canadian Financing Agreement, the Debtors are now
subject to certain restrictions pertaining to their ability to transfer cash and
other assets between the Debtors and their non-debtors subsidiaries.
At September 30, 2002, $5.2 million was drawn under the Canadian Financing
Agreement. Borrowings under the Canadian Financing Agreement bear interest at
the CIBC Bank Rate (as defined in the Canadian Financing Agreement) plus between
2.0% and 2.5%, or at the LIBOR Rate plus 3.5%.
The DIP Financing and the Canadian Financing Agreement contain numerous
covenants, including, but not limited to, restrictions on the Debtors' ability
to incur indebtedness, create liens and sell assets, as well as maintenance of
certain financial covenants.
In August 1996, in connection with a recapitalization transaction,
Chemicals allocated $276.8 million of debt to the Guarantors. In addition, $81
million of debt incurred at the time Chemicals acquired its acrylic fibers
business was allocated to the Guarantors. Principal payments are allocated to
the Guarantors by Chemicals as scheduled principal payments are made on a basis
consistent with the original allocation. In addition, the Guarantors have made
payments to Chemicals, from time to time, out of available cash which were
applied by Chemicals as a reduction of the principal of the previously allocated
debt. Interest expense is allocated to the Guarantors based on the terms of
Chemicals' debt agreements. At September 30, 2002, interest rates on the
allocated debt ranged from 11.25% to 12.375%. Debt issue costs relating to
long-term debt were allocated to the Guarantors by Chemicals on a basis
consistent with long-term debt are included in other assets. Debt issue costs
relating to debt not subject to compromise are included in other assets. Debt
issue costs relating to debt that is subject to compromise are reflected as a
valuation against pre-petition liabilities -- subject to compromise.
On July 23, 1999, Chemicals completed a private offering of $295,000,000 of
its 12 3/8% Senior Secured Notes due 2006 which were subsequently exchanged for
the 12 3/8% Notes. The 12 3/8% Notes are guaranteed by all of the Guarantors
(other than the two Canadian subsidiaries of Sterling Canada, Inc.) on a joint
and several basis. Each guarantee ranks equally in right of payment with all of
the relevant Guarantor's existing and future senior indebtedness and senior in
right of payment to all of its existing and future subordinated indebtedness.
However, the 12 3/8% Notes and the guarantees are subordinated to the
105
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
extent of the collateral securing the DIP Financing. Prior to the entry by the
Bankruptcy Court of the priming order, the 12 3/8% Notes and the guarantees were
secured by;
- a second priority lien on all of Chemicals' and the Guarantors' United
States production facilities and related assets;
- a second priority pledge of all of the capital stock of each Guarantor
incorporated in the United States; and
- a first priority pledge of 65% of the stock of certain of the Guarantors'
subsidiaries incorporated outside of the United States.
As a result of the priming order, the second priority liens held by the
12 3/8% Notes on all of the Guarantors' United States production facilities and
related assets and the capital stock of each Guarantor became third priority
liens. The priming order did not affect the priority of the pledge held by the
12 3/8% notes of 65% of the stock of certain of the Guarantors' subsidiaries
incorporated outside of the United States. As discussed above, the Guarantors
anticipate that the priming order will be appealed by the indenture trustee for
the 12 3/8% Notes. The proceeds of the offering of the 12 3/8% Notes were used
to fully repay and terminate Chemicals' three outstanding term loans. Upon
consummation of the offering of the 12 3/8% Notes in 1999, the debt allocated to
the Guarantors by Chemicals increased to $351.3 million.
On July 23, 1999, Chemicals also established two secured revolving credit
facilities providing for up to $155,000,000 in revolving credit loans (the
"Prior Revolvers") under a single Revolving Credit Agreement (the "Prior Credit
Agreement"). Under the Prior Credit Agreement, Chemicals and the Guarantors
(other than the two Canadian subsidiaries of Sterling Canada, Inc.) were
co-borrowers and were jointly and severally liable for any indebtedness
thereunder. The Prior Revolvers consisted of (i) an $85,000,000 revolving credit
facility secured by a first priority lien on all accounts receivable, inventory
and other specified assets of Chemicals and the Guarantors incorporated in the
United States and (ii) a $70,000,000 revolving credit facility secured by a
first priority lien on all United States production facilities and related
assets of Chemicals and the Guarantors incorporated in the United States, all of
the capital stock of Chemicals and the Guarantors incorporated in the United
States and a second priority lien on all accounts receivable, inventory and
other specified assets of Chemicals and the Guarantors incorporated in the
United States. At September 30, 2000, approximately $37.2 million was drawn by
Chemicals under the Prior Revolvers, none of which was allocated to the
Guarantors. As mentioned above, the initial draw under the DIP Financing was
used to repay all amounts under the Prior Revolvers.
106
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. CONDENSED COMBINED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY
The following condensed combined financial statements are presented in
accordance with SOP 90-7:
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, 2002
----------------------------------------------------------
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION COMBINED
PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS
-------------- --------------- ------------ --------
Revenues.................................... $ 77,821 $134,551 $(3,191) $209,181
Cost of goods sold.......................... 67,297 108,126 (3,191) 172,232
-------- -------- ------- --------
Gross profit................................ 10,524 26,425 -- 36,949
Selling, general and administrative
expenses.................................. 4,870 6,406 -- 11,276
Impairment of assets........................ 4,444 -- -- 4,444
Reorganization items........................ 5,958 -- -- 5,958
Interest and debt related expenses, net..... 19,742 1,166 -- 20,908
-------- -------- ------- --------
Income (loss) before income taxes........... (24,490) 18,853 -- (5,637)
Equity in earnings of joint venture, net of
tax....................................... (2,809) -- -- (2,809)
Provision for income taxes.................. 4,212 7,511 -- 11,723
-------- -------- ------- --------
Net income (loss)........................... $(25,893) $ 11,342 $ -- $(14,551)
======== ======== ======= ========
YEAR ENDED SEPTEMBER 30, 2001
----------------------------------------------------------
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION COMBINED
PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS
-------------- --------------- ------------ --------
Revenues.................................... $109,879 $134,989 $(3,594) $241,274
Cost of goods sold.......................... 105,005 112,602 (3,594) 214,013
-------- -------- ------- --------
Gross profit................................ 4,874 22,387 -- 27,261
Selling, general and administrative
expenses.................................. 6,434 5,962 -- 12,396
Other expense............................... 977 -- -- 977
Reorganization items........................ 1,789 -- -- 1,789
Interest and debt related expenses, net..... 38,291 361 -- 38,652
-------- -------- ------- --------
Income (loss) before income taxes........... (42,617) 16,064 -- (26,553)
Equity in earnings of joint venture, net of
tax....................................... (847) -- -- (847)
Provision for income taxes.................. 14,600 4,975 -- 19,575
-------- -------- ------- --------
Net income (loss)........................... $(56,370) $ 11,089 $ -- $(45,281)
======== ======== ======= ========
107
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
CONDENSED COMBINED BALANCE SHEETS
SEPTEMBER 30, 2002
-----------------------------------------------------------------
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION
PROCEEDINGS PROCEEDINGS ELIMINATIONS COMBINED TOTALS
-------------- --------------- ------------ ---------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents.............. $ 192 $ 3,572 $ -- $ 3,764
Accounts receivable, net............... 7,544 24,658 (4,389) 27,813
Inventories, net....................... 9,851 5,556 -- 15,407
Prepaid expenses....................... 152 1,194 -- 1,346
Property, plant and equipment, net..... 43,501 59,372 -- 102,873
Other assets, net...................... 208,583 22,231 (19,409) 211,405
--------- -------- -------- --------
Total Assets......................... $ 269,823 $116,583 $(23,798) $362,608
========= ======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
Current liabilities.................... $ 7,397 $ 26,346 $ (4,389) $ 29,354
Pre-petition liabilities subject to
compromise........................... 233,376 -- -- 233,376
Pre-petition liabilities not subject to
compromise........................... 157,270 -- -- 157,270
Long-term debt......................... 19,409 1,164 (19,409) 1,164
Non-current liabilities................ 7,053 12,738 -- 19,791
Stockholder's Equity (deficiency in
assets).............................. (154,682) 76,335 -- (78,347)
--------- -------- -------- --------
Total Liabilities and Stockholder's
Equity (Deficiency in Assets)........ $ 269,823 $116,583 $(23,798) $362,608
========= ======== ======== ========
SEPTEMBER 30, 2001
-----------------------------------------------------------------
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION
PROCEEDINGS PROCEEDINGS ELIMINATIONS COMBINED TOTALS
-------------- --------------- ------------ ---------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents.............. $ 1,382 $ 14 $ -- $ 1,396
Accounts receivable, net............... 17,092 22,359 (3,079) 36,372
Inventories, net....................... 10,575 7,434 -- 18,009
Prepaid expenses....................... -- 604 -- 604
Property, plant and equipment, net..... 53,967 62,761 -- 116,728
Other assets, net...................... 199,717 22,211 (19,409) 202,519
--------- -------- -------- --------
Total Assets......................... $ 282,733 $115,383 $(22,488) $375,628
========= ======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
Current liabilities.................... $ 9,422 $ 17,642 $ (3,079) $ 23,985
Pre-petition liabilities subject to
compromise........................... 233,572 -- -- 233,572
Pre-petition liabilities not subject to
compromise........................... 139,572 -- -- 139,572
Long-term debt......................... 19,409 18,797 (19,409) 18,797
Non-current liabilities................ 8,144 13,353 -- 21,497
Stockholder's Equity (deficiency in
assets).............................. (127,386) 65,591 -- (61,795)
--------- -------- -------- --------
Total Liabilities and Stockholder's
Equity (Deficiency in Assets)........ $ 282,733 $115,383 $(22,488) $375,628
========= ======== ======== ========
108
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 2002
-------------------------------------------
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION COMBINED
PROCEEDINGS PROCEEDINGS TOTALS
-------------- --------------- --------
(DOLLARS IN THOUSANDS)
Net cash provided by (used in) operating activities.... $ (408) $ 24,266 $ 23,858
Cash used in investing activities:
Capital expenditures................................. (813) (5,697) (6,510)
Cash flows used in financing activities:
Payments on Canadian Financing Agreement............. 31 (14,800) (14,769)
Debt issuance costs.................................. -- (206) (206)
------- -------- --------
Net cash used in financing activities.................. 31 (15,006) (14,975)
Effect of exchange rate changes on cash................ -- (5) (5)
------- -------- --------
Net increase (decrease) in cash and cash equivalents... (1,190) 3,558 2,368
Cash and cash equivalents at:
Beginning of year.................................... 1,382 14 1,396
------- -------- --------
End of year.......................................... $ 192 $ 3,572 $ 3,764
======= ======== ========
YEAR ENDED SEPTEMBER 30, 2001
-------------------------------------------
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION COMBINED
PROCEEDINGS PROCEEDINGS TOTALS
-------------- --------------- --------
(DOLLARS IN THOUSANDS)
Net cash provided by (used in) operating activities.... $(24,084) $ 12,317 $(11,767)
Cash flows from investing activities:
Capital expenditures................................. (1,120) (5,127) (6,247)
Intercompany investing activity...................... 6,764 (6,764) --
-------- -------- --------
Net cash provided by (used in) investing activities.... 5,644 (11,891) (6,247)
Cash flows from financing activities:
Borrowings under Canadian Financing Agreement........ -- 20,003 20,003
Debt issuance costs.................................. -- (1,112) (1,112)
Intercompany loan activity........................... 19,409 (19,409) --
-------- -------- --------
Net cash provided by (used in) financing activities.... 19,409 (518) 18,891
-------- -------- --------
Effect of exchange rate changes on cash................ -- 20 20
-------- -------- --------
Net increase (decrease) in cash and cash equivalents... 969 (72) 897
Cash and cash equivalents at:
Beginning of year.................................... 413 86 499
-------- -------- --------
End of year.......................................... $ 1,382 $ 14 $ 1,396
======== ======== ========
109
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The Guarantors are included in the consolidated federal United States tax
return filed by Holdings. The Guarantors' provision (benefit) for United States
income taxes has been allocated as if the Guarantors filed their annual federal
United States tax returns on a separate return basis. As of September 30, 2002
and 2001, there were no deferred income tax assets included in Due from
Affiliates. For the years ended September 30, 2002, 2001 and 2000, the
Guarantors recorded $5.7 million, $14.6 million and zero, respectively, of
United States income tax expense (benefit) in the provision (benefit) for income
taxes.
Canadian deferred income taxes are recorded to reflect the tax consequences
in future years of differences between the tax basis of assets and liabilities
and the financial reporting amounts at each year-end.
A reconciliation of the Canadian income taxes to the Canadian effective tax
provision follows:
YEAR ENDED SEPTEMBER 30,
------------------------
2002 2001 2000
------ ------ ------
(DOLLARS IN THOUSANDS)
Provision for federal income tax at the statutory rate..... $4,273 $3,713 $2,308
Provincial income taxes at the statutory rate.............. 2,251 2,072 1,114
Federal and provincial manufacturing and processing tax
credits.................................................. (264) (810) (476)
------ ------ ------
Total Canadian tax provision............................... $6,260 $4,975 $2,946
====== ====== ======
The provision for Canadian income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30,
------------------------
2002 2001 2000
------ ------ ------
(DOLLARS IN THOUSANDS)
Current federal............................................ $4,712 $2,135 $1,107
Deferred federal........................................... (703) 768 725
Current provincial......................................... 2,630 1,640 611
Deferred provincial........................................ (379) 432 503
------ ------ ------
Total Canadian tax provision............................... $6,260 $4,975 $2,946
====== ====== ======
110
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Guarantors' Canadian deferred income tax assets and
liabilities are summarized below:
SEPTEMBER 30,
----------------------
2002 2001
--------- ----------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Accrued liabilities....................................... $ 136 $ 452
Accrued postretirement cost............................... 1,418 1,522
Investment tax credits.................................... -- 115
------- --------
1,554 2,089
------- --------
Deferred tax liabilities:
Property, plant and equipment............................. (9,718) (11,260)
Other..................................................... (249) --
------- --------
(9,967) (11,260)
------- --------
Net deferred tax liabilities.............................. $(8,413) $ (9,171)
======= ========
8. EMPLOYEE BENEFITS
The Debtors have received approval from the Bankruptcy Court to pay or
otherwise honor certain of their pre-petition obligations, including employee
wages and salaries, benefits and other employee obligations. Employee interests
in their qualified retirement benefit plans and their savings and investment
plan are held in trust and protected by law.
The Guarantors' United States employees participate in various employee
benefit plans of Chemicals. Costs, assets and liabilities associated with United
States employees participating in these various plans are allocated to the
Guarantors by Chemicals based on the number of employees. In addition, the
Guarantors sponsor various employee benefit plans in Canada.
RETIREMENT BENEFIT PLANS
Chemicals has non-contributory pension plans in the United States which
cover all salaried and wage employees. The benefits under these plans are based
primarily on years of service and employees' pay near retirement. Chemicals'
funding policy is consistent with the funding requirements of federal law and
regulations. Plan assets consist principally of common stocks and government and
corporate securities. The liability relating to United States employees
allocated to the Guarantors by Chemicals for the retirement benefit plans and
included in Due from Affiliates was $3.7 million and $4.0 million at September
30, 2002 and 2001, respectively. The total pension expense (gain) relating to
United States employees allocated to the Guarantors was $(0.3) million, $0.6
million and $1.2 million for the years ended September 30, 2002, 2001 and 2000,
respectively. During fiscal 2001, the Guarantors recorded a curtailment gain of
$2.0 million due to their staffing reductions at their acrylic fibers plant
associated with them significantly reducing those operations.
111
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Guarantors have employer and employee contributory plans in Canada
which cover all salaried and wage employees. Information for Canadian benefit
plans concerning the pension obligation, plan assets, amounts recognized in the
Guarantors' financial statements and underlying actuarial assumptions is stated
below.
SEPTEMBER 30,
-----------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year................... $19,470 $17,608
Currency rate conversion.................................. 430 (855)
Service cost.............................................. 863 713
Interest cost............................................. 1,491 1,293
Plan amendments........................................... -- 196
Actuarial loss (gain)..................................... (257) 985
Benefits paid............................................. (486) (470)
------- -------
Benefit obligation at end of year......................... $21,511 $19,470
======= =======
Change in plan assets:
Fair value at beginning of year........................... $14,856 $17,817
Currency rate conversion.................................. 59 (865)
Actual return on plan assets.............................. (475) (2,348)
Employer contributions.................................... 1,394 722
Benefits paid............................................. (486) (470)
------- -------
Fair value at end of year................................. $15,348 $14,856
======= =======
Development of net amount recognized:
Funded status............................................. $(6,163) $(4,614)
Supplemental retirement plan.............................. (418) --
Unrecognized cost:
Actuarial loss (gain).................................. 5,082 3,449
Prior service cost..................................... 412 453
------- -------
Net amount recognized..................................... $(1,087) $ (712)
======= =======
Amounts recognized in the statement of financial position:
Prepaid pension cost...................................... $ 116 $ 170
Accrued pension cost...................................... (1,395) (882)
Accumulated other comprehensive income.................... 192 --
------- -------
Net amount recognized..................................... $(1,087) $ (712)
======= =======
112
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic pension costs for the Canadian pension plan consist of the
following components:
SEPTEMBER 30,
---------------------------
2002 2001 2000
------- ------- -------
(DOLLARS IN THOUSANDS)
Components of net pension costs:
Service cost-benefits earned during the year.......... $ 863 $ 713 $ 716
Interest on prior year's projected benefit
obligation......................................... 1,491 1,293 1,240
Expected return on plan assets........................ (1,369) (1,281) (1,144)
Net amortization:
Actuarial loss (gain).............................. 240 (89) 28
Prior service cost................................. 41 27 (2)
------- ------- -------
Net pension costs..................................... $ 1,266 $ 663 $ 838
======= ======= =======
Weighted-average assumptions:
Discount rate......................................... 7.3% 7.3% 7.5%
Rates of increase in salary compensation level........ 5.0% 4.5% 4.5%
Expected long-term rate of return on plan assets...... 8.0% 7.5% 7.5%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Chemicals and the Guarantors provide certain health care benefits and life
insurance benefits for retired employees. Substantially all employees become
eligible for these benefits at normal retirement age. The cost of these benefits
are accrued during the period in which the employee renders the necessary
service.
Health care benefits are currently provided to employees who retire with
ten or more years of service except for Canadian employees covered by collective
bargaining agreements. All employees are eligible for postretirement life
insurance. Postretirement health care benefits for United States plans are non-
contributory. Benefit provisions for most hourly and some salaried employees are
subject to collective bargaining. In general, the plans stipulate that retiree
health care benefits are paid as covered expenses are incurred. The liability
relating to United States employees allocated to the Guarantors by Chemicals for
the postretirement benefits other than pensions and included in Due from
Affiliates was $7.6 and $7.7 million at September 30, 2002 and 2001,
respectively. The total postretirement benefits other than pensions expense
(gain) for United States employees allocated to the Guarantors was $(0.1)
million, $0.7 million and $0.7 million for the years ended September 30, 2002,
2001 and 2000, respectively.
113
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Information for Canadian benefit plans with respect to the plan obligation,
the funded status, amounts recognized in the Guarantors' financial statements
and underlying actuarial assumptions is stated below.
SEPTEMBER 30,
-----------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year................... $ 5,551 $ 4,751
Service cost.............................................. 119 238
Interest cost............................................. 192 355
Actuarial loss (gain)..................................... (2,822) 407
Benefits paid............................................. (30) (200)
------- -------
Benefit obligation at end of year......................... $ 3,010 $ 5,551
======= =======
Development of net amount recognized:
Funded status.......................................... $(3,010) $(5,551)
Currency rate conversion............................... 240 191
Unrecognized cost:
Actuarial loss (gain).................................. (2,396) 267
------- -------
Net amount recognized..................................... $(5,166) $(5,093)
======= =======
Net periodic plan costs for the Canadian postretirement benefit consist of
the following components:
SEPTEMBER 30,
----------------------
2002 2001 2000
------ ----- -----
(DOLLARS IN THOUSANDS)
Components of net plan costs:
Service cost.............................................. $ 119 $238 $314
Interest cost............................................. 192 355 329
Net amortization-actuarial loss........................... (160) 7 16
----- ---- ----
Net plan costs............................................ $ 151 $600 $659
===== ==== ====
Weighted-average assumptions:
Discount rate............................................. 6.75% 7.25% 7.50%
Rate of compensation increase............................. 4.00% 4.00% 4.00%
The weighted average annual assumed health care trend rate is assumed to be
11% for 2002. The rate is assumed to decrease gradually to 6.0% in 2006 and
remain level thereafter. Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plans. A one-percentage point
change in assumed health care trend rates would have the following effects:
1% INCREASE 1% DECREASE
----------- -----------
(DOLLARS IN THOUSANDS)
Effect on total of service and interest cost components..... $ 15 $ (13)
Effect on post-retirement benefit obligation................ 127 (111)
114
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SAVINGS AND INVESTMENT PLAN
Chemicals' Sixth Amended and Restated Savings and Investment Plan covers
substantially all United States employees of the Guarantors, including executive
officers. This United States Plan is qualified under Section 401(k) of the
Internal Revenue Code. Each participant has the option to defer taxation of a
portion of his or her earnings by directing the Guarantors to contribute a
percentage of such earnings to this Plan. A participant may direct up to a
maximum of 20% of eligible earnings to this Plan, subject to certain limitations
set forth in the Internal Revenue Code. A participant's contributions become
distributable upon the termination of his or her employment. The Guarantors did
not make any contributions to this Plan in fiscal 2000. Beginning October 1,
2000, the Guarantors began matching 50% of a participant's contributions, to the
extent such contributions do not exceed 7% of such participant's cash
compensation (excluding bonuses, profit sharing and similar types of
compensation). Such contributions amounted to $0.1 million and $0.2 million in
fiscal 2002 and fiscal 2001, respectively.
EMPLOYEE SAVINGS PLAN
The Guarantors introduced an employee savings plan for all eligible
full-time Canadian employees with an effective date of October 1, 2000. Each
participant has the option to contribute a percentage of his or her earnings to
the Canadian savings plan, with no limit on the maximum percentage contributed.
The Guarantors will match 100% of a participant's contributions, to the extent
such contributions do not exceed 3.5% of such participant's cash compensation
(excluding bonuses, profit sharing and similar types of compensation). Such
contributions amounted to $0.3 million and $0.3 million in fiscal 2002 and
fiscal 2001, respectively.
PROFIT SHARING AND BONUS PLANS
In January of 1997, the Holdings' Board of Directors, upon recommendation
of its Compensation Committee, approved the establishment of a profit sharing
plan that is designed to benefit all qualified employees and a bonus plan that
is designed to provide certain exempt salaried employees of the Guarantors with
the opportunity to earn bonuses, depending, among other things, on the annual
financial performance of Holdings.
The Guarantors incurred no expenses for the profit sharing plan or bonus
plan in 2002 or 2001. The Guarantors incurred $2.0 million of expenses related
to each of the profit sharing plan and bonus plan in fiscal 2000.
9. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Guarantors have entered into various long-term noncancellable operating
leases, some of which have been allocated to commonly controlled companies.
Future minimum lease commitments at September 30, 2002, are as follows: fiscal
2003 -- $5.9 million; fiscal 2004 -- $5.2 million; fiscal 2005 -- $4.3 million;
fiscal 2006 -- $3.1 million; and thereafter -- $4.8 million.
All of the Debtors' operating leases are in effect in accordance with their
terms notwithstanding their Chapter 11 filings, unless otherwise ordered by the
Bankruptcy Court. The Bankruptcy Code provides the Debtors with the opportunity
to reject any pre-petition leases that are burdensome or assume any pre-
petition leases that are favorable or otherwise necessary to their business
operations.
115
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ENVIRONMENTAL AND SAFETY MATTERS
The Guarantors' operations involve the handling, production,
transportation, treatment and disposal of materials that are classified as
hazardous or toxic waste and that are extensively regulated by environmental,
health and safety laws, regulations and permit requirements. Environmental
permits required for the Guarantors' 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 the Guarantors' chemical products and the raw materials used to
produce such products and, if so affected, the Guarantors' business and
operations may be materially and adversely affected. In addition, changes in
environmental requirements can cause the Guarantors to incur substantial costs
in upgrading or redesigning their facilities and processes, including their
waste treatment, storage, disposal and other waste handling practices and
equipment.
The Guarantors conduct environmental management programs designed to
maintain compliance with applicable environmental requirements at all of their
facilities. The Guarantors 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. The
Guarantors believe that their procedures for waste handling are consistent with
industry standards and applicable requirements. In addition, the Guarantors
believe that their operations are consistent with good industry practice.
However, a business risk inherent with chemical operations is the potential for
personal injury and property damage claims from employees, contractors and their
employees and nearby landowners and occupants. While the Guarantors believe that
their business operations and facilities generally are operated in compliance
with all applicable environmental, health and safety requirements in all
material respects, they 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 the operations and products of the Guarantors, as
it is with other companies engaged in similar businesses. In addition, a
catastrophic event at any of the Guarantors' facilities could result in the
incurrence of liabilities substantially in excess of their insurance coverages.
A significant ban on all chlorine containing compounds could have a
materially adverse effect on the Guarantors' financial condition and results of
operations. British Columbia had a regulation in place requiring elimination of
the use of all chlorine products, including chlorine dioxide, in the bleaching
process by December 31, 2002. However, on July 5, 2002, British Columbia amended
the regulation, which now permits a monthly average discharge of 0.6 kg of AOX
per air dry metric ton, which is similar to the U.S. Environmental Protection
Agency's regulations governing bleach pulp mills.
The Guarantors operating expenditures for environmental matters, mostly
waste management and compliance, were approximately $3.4 million for fiscal 2002
and $3.9 million for fiscal 2001. The Guarantors also spent approximately $.7
million for environmentally related capital projects in fiscal 2002 and $0.6
million for these types of capital projects in fiscal 2001.
Claims for environmental liabilities arising prior to the Debtors' Chapter
11 filings have been addressed in the Chapter 11 cases. In general, monetary
claims relating to remedial actions at off-site locations used for disposal
prior to the Chapter 11 filings and penalties resulting from violations of
environmental requirements before that time will be treated as general unsecured
claims. Actions by governmental authorities to determine liability for and the
amount of such penalties will generally not be subject to the automatic stay.
The Guarantors will be obliged to comply with environmental requirements in the
conduct of their business as a debtor-in-possession, including the potential
obligation to conduct
116
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
remedial actions at facilities they own or operate, regardless of when the
contamination at those facilities occurred.
A settlement agreement entered into by the EPA, the Florida Department of
Environmental Protection ("FDEP") and an environmental group potentially applies
to the Guarantors' acrylic fibers facility. This settlement agreement imposes a
no-migration standard for injection wells in underground drinking water zones
without regard to actual risk considerations. The Guarantors and several
similarly situated companies have been contesting this settlement. An April 1999
ruling by the United States Court of Appeals for the 11th Circuit may reduce the
likelihood that the no-migration rule is enforceable, although the Guarantors
can give no assurances in that regard. In the event that the no-migration rule
becomes enforceable, the Guarantors may incur material costs in redesigning
their wastewater handling systems. However, in September 2000, the Florida
Department of Environmental Protection awarded the Guarantors a five-year permit
to operate the deepwell injection facilities at their acrylic fibers facilities.
Under this permit, the Guarantors were granted an "injection into an aquifer"
exemption, subject to monitoring of groundwater. As a result, during the life of
this permit, the Guarantors would not be subject to this no-migration rule even
if it became enforceable, assuming that this permit is not revised in any
material way.
The Guarantors are presently involved in discussions with the FDEP
regarding allegations that past or present waste handling practices at their
acrylic fibers facility in Santa Rosa, Florida have adversely affected the water
quality of streams on the property. The results of analysis performed by their
independent contractors have been submitted to the FDEP for review. As a
proactive measure, their acrylic fibers facility made significant reductions in
the level of certain spent precipitates disposed of in the existing, on-site
landfill. Additionally, their acrylic fibers facility has requested the
consolidation of their EPA HISWA permit application and their FDEP RCRA Part B
permits which would be administered by the FDEP. At this time the Guarantors do
not know the nature and extent of remedial actions, if any, that may ultimately
be a required under future permit. As part of the Plan, our acrylic fibers
business will be transferred to the existing local management of that business
in a management buyout for little or no consideration concurrent with our
emergence from Chapter 11.
LEGAL PROCEEDINGS
As previously discussed, the Debtors filed petitions for reorganization
under Chapter 11 of the Bankruptcy Code on July 16, 2001. As a result of the
commencement of the Chapter 11 cases, an automatic stay was imposed against the
commencement or continuation of legal proceedings against the Debtors, including
those Guarantors incorporated in the United States, outside of the Bankruptcy
Court. The automatic stay does not apply, however, to governmental authorities
exercising their police or regulatory powers, including the application of
environmental laws. Claimants 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 may object and seek a determination from the Bankruptcy Court as to the
allowability of such claim. Claimants who desire to liquidate their claims in
legal proceedings outside of the Bankruptcy Court are required to obtain relief
from the automatic stay by order of the Bankruptcy Court. If such relief is
granted, the automatic stay remains in effect with respect to the collection of
liquidated claim amounts. As a general rule, all claims against the Debtors that
seek a recovery from assets of the Debtors' estates have been or will be
addressed in the Chapter 11 cases and paid only pursuant to the terms of a plan
of reorganization.
117
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Other Claims
The Guarantors are subject to various other claims and legal actions that
arise in the ordinary course of their business. The Guarantors believe that the
ultimate liability, if any, with respect to these claims and legal actions will
not have a material effect on their financial position, results of operations or
cash flows, although the Guarantors cannot give any assurances to that effect.
Claims and legal actions against the Debtors that existed as of the Chapter 11
filing date are subject to the automatic stay, and recoveries sought thereon
from assets of the Debtors are required to be dealt with in the Chapter 11
cases.
PLEDGE OF COMMON STOCK
In order to secure the repayment of the DIP Financing, the following
pledges of stock were made by the holders of that stock:
- In order to secure the fixed assets revolving credit facility, a first
priority pledge of 100% of the common stock of the Guarantors
incorporated in the United States and 35% of the common stock of the
Guarantors incorporated outside the United States, and a second priority
pledge of the remaining 65% of that stock; and
- In order to secure the current assets revolving credit facility, a third
priority pledge of 100% of the common stock of the Guarantors
incorporated in the United States and 65% of the common stock of the
Guarantors incorporated outside the United States and a second priority
pledge of the remaining 35% of that stock; and
As a result of the priming order, in order to secure the additional $40
million of the current assets revolving credit facility, there is a first
priority pledge of 100% of the common stock of the Guarantors incorporated in
the United States and 35% of the common stock of the Guarantors incorporated
outside the United States, and a second priority pledge of the remaining 65% of
that stock, which will result in the lowering by one level of priority of each
of the pledges described above.
In order to secure the repayment of the 12 3/8% Notes, the holders of the
following stock initially made a second priority pledge of 100% of the common
stock of each of the Guarantors incorporated in the United States and a first
priority pledge of 65% of the common stock of each of the Guarantors
incorporated outside of the United States. If the priming order remains
effective, the priority of the pledge of the common stock of the Guarantors
incorporated in the United States will be a third priority pledge.
10. FINANCIAL INSTRUMENTS
FOREIGN EXCHANGE
The Guarantors have previously entered into forward foreign exchange
contracts to reduce risk due to Canadian dollar exchange rate movements. The
forward foreign exchange contracts had varying maturities with none exceeding 18
months. The Guarantors made net settlements of United States dollars for
Canadian dollars at rates agreed to at inception of the contracts. The
Guarantors do not engage in currency speculation. The last of the Guarantors'
existing forward exchange contracts expired in March 2000, and they do not
currently intend to enter into any additional forward exchange contracts.
ELECTRICITY CONTRACTS
The Guarantors' Canadian subsidiaries periodically enter fixed price
agreements for a portion of their electrical energy requirements. The Guarantors
have an agreement relating to the supply of a portion of the electrical energy
at one of their Canadian sodium chlorate production facilities. This agreement,
which was previously designated as a normal purchase under SFAS No. 133, does
not meet the criteria of a
118
STERLING CHEMICALS GUARANTORS
(DEBTORS-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
normal purchase based on guidance issued by the Derivative Implementation Group
(the "DIG") and cleared by the Financial Accounting Standards Board in June
2001. All purchases under this agreement, which expires on December 31, 2002,
are used in the ordinary course of business; however, effective July 1, 2001,
this agreement is required to be marked-to-market. At September 30, 2002 and
2001, the fair value of this agreement was a gain (loss) of approximately $0.2
million and $(1.2) million, respectively, based on estimated market prices and
quantities to be delivered.
CONCENTRATIONS OF RISK
The Guarantors sell their products primarily to companies involved in the
acrylic fibers and pulp and paper manufacturing industries. The Guarantors
perform ongoing credit evaluations of their customers and generally do not
require collateral for accounts receivable. However, letters of credit are
required by the Guarantors on many of their export sales. Historically, the
Guarantors' credit losses have been minimal.
The Guarantors maintain cash deposits with major banks, which from time to
time may exceed federally insured limits. The Guarantors periodically assess the
financial condition of these institutions and believe that any possible loss is
minimal.
Approximately 26% of the Guarantors' employees are covered by union
agreements. None of these union agreements expire within the next year. These
agreements are not affected by the Chapter 11 cases.
INVESTMENTS
It is the policy of the Guarantors to invest their excess cash in
investment instruments or securities whose value is not subject to market
fluctuations, such as certificates of deposit, repurchase agreements or
Eurodollar deposits with domestic or foreign banks or other financial
institutions. Other permitted investments include commercial paper of major
United States corporations with ratings of A1 by Standard & Poor's Ratings Group
or P1 by Moody's Investor Services, Inc., loan participations of major United
States corporations with a short term credit rating of A1/P1 and direct
obligations of the United States Government or its agencies. In addition, not
more than $5 million will be invested by the Guarantors with any single bank,
financial institution or United States corporation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheet for cash
and cash equivalents, accounts receivable, accounts payable and certain accrued
liabilities approximate fair value due to the short maturities of these
instruments. The fair value of pre-petition liabilities subject to compromise
and pre-petition liabilities not subject to compromise is not possible to
determine given the uncertainty of the impact of the bankruptcy proceedings. Due
to the Canadian Financing Agreement having variable interest rates, the fair
value equals its carrying value.
119
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Sterling Canada, Inc.
Sterling Fibers, Inc.
Sterling Chemicals International, Inc.
Sterling Chemicals Energy, Inc.
Sterling Pulp Chemicals, Inc.
Sterling Pulp Chemicals US, Inc.
We have audited the accompanying combined balance sheets of the Guarantors
(Debtors-in-Possession) (as defined in Note 1) as of September 30, 2002 and 2001
and the related combined statements of operations, changes in stockholder's
equity (deficiency in assets) and cash flows for each of the three years in the
period ended September 30, 2002. These financial statements are the
responsibility of the Guarantors' management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of the Guarantors as of September 30,
2002 and 2001 and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 2002 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1, on July 16, 2001, the Debtors (as defined in Note
1) filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The
accompanying financial statements do not purport to reflect or provide for the
consequences of the bankruptcy proceedings. In particular, such financial
statements do no purport to show (a) as to assets, their realizable value on a
liquidation basis or their availability to satisfy liabilities; (b) as to
pre-petition liabilities, the amounts that may be allowed for claims or
contingencies or the status and priority thereof; (c) as to stockholder
accounts, the effect of any changes that may be made in the capitalization of
the Guarantors; or (d) as to operations, the effect of any changes that may be
made in the Guarantors' business.
The accompanying financial statements have been prepared assuming that the
Guarantors will continue as a going concern. As discussed in Note 1, the
Debtors' recurring losses from operations raise substantial doubt about the
Debtors' and, therefore, about the Guarantors' ability to continue as a going
concern. Management's plans concerning these matters are also discussed in Note
1. The financial statements do not include adjustments that might result from
the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Houston, Texas
December 13, 2002
120
STERLING CHEMICALS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
SUPPLEMENTAL FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL FIRST SECOND THIRD FOURTH
YEAR QUARTER QUARTER QUARTER QUARTER
------ -------- -------- -------- --------
Revenues............................ 2002 $124,974 $122,569 $200,815 $180,369
2001 253,854 199,057 155,254 135,400
Gross profit (loss)................. 2002 10,097 9,496 30,228 25,648
2001 9,014 (10,736) (7,103) (5,020)
Net income (loss)(1)................ 2002 (14,687) (15,362) 6,943 (12,880)
2001 (23,877) (46,039) (75,420) (36,374)
---------------
(1) During the fourth quarter of fiscal 2002, we incurred an impairment loss of
$4.4 million related to our acrylic fibers facility. Reorganization items
incurred in fiscal 2002 and 2001 as a result of our Chapter 11 proceedings
were $17.0 million and $5.4 million, respectively. Contractual interest
expense not paid or accrued was $49 million in fiscal 2002 and $10.3 million
in fiscal 2001. During the third quarter of fiscal 2001, tax expense of
$56.8 million was recorded to provide a valuation allowance against all of
our U.S. deferred tax assets. During the second quarter fiscal 2001,
approximately $7.1 million in pre-tax charges were recorded in connection
with the withdrawal from the traditional commodity textile business of our
acrylic fibers operations which related to $2.0 million in severance
payments and a write-down of finished goods and stores inventory to their
net realizable value.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As noted above, on December 6, 2002, Holdings was merged into Chemicals. At
the time of the merger, Chemicals was essentially reorganized such that, from a
corporate governance standpoint, is equivalent to Holdings prior to the merger,
including identical directors, officers, committees and members. Consequently,
for purposes of this Part III any references pertaining to our Board, officers,
committees, compensation plans and similar matters include the corresponding
counterparts at Holdings prior to the merger. As such, any references to "we,"
"our," "ours," "their" and "us" pertain to either Holdings or Chemicals
depending on whether the time period involved is before or after the merger,
respectively.
BOARD OF DIRECTORS
Our Board of Directors oversees our management, reviews our long-term
strategic plans and exercises direct decision making authority in key areas.
Only two of our six directors are employed by us, and only non-employee
directors are eligible to serve on our Audit and Compliance Committee or our
Compensation Committee.
Personal information on each of our directors is provided below. With the
exception of David G. Elkins, who was appointed to our Board upon his promotion
to President on January 24, 2001, and Richard K. Crump, who was appointed to our
Board upon his promotion to Co-Chief Executive Officer on December 18, 2001,
each of our current directors was elected by our stockholders at our last annual
meeting in January of 2001.
121
Our Board held 18 meetings in fiscal 2002. On average, our directors
attended 98% of the meetings of our Board or any of our Board committees on
which they served. None of our directors attended less than 75% of the meetings
of our Board and all committees on which he served.
Robert W. Roten
Age 68
Director since August 1996 Mr. Roten has been Chairman of our Board of
Directors since December 18, 2001. He spent the
first 25 years of his career with Monsanto
Company and served as Vice President for sales
and marketing for El Paso Products Company from
1981 to 1983. Mr. Roten was President of
Materials Exchange, Inc., a Houston-based
petrochemicals and plastics marketing firm,
from 1983 until 1986. He served as our Vice
President -- Commercial from August of 1986
until September of 1991, when he became our
Vice President -- Corporate Development. Mr.
Roten served as our Executive Vice President
and Chief Operating Officer from April of 1993
until August of 1996, and served as our
President and Chief Executive Officer from
August 21, 1996 until April of 1998. Mr. Roten
served as the Vice Chairman of our Board of
Directors from April of 1998 until his
appointment as our non-executive Chairman of
the Board on December 18, 2001. Mr. Roten is
currently a principal in Double R Companies,
Inc., a private investment company, and
President of Hickory Acquisition Group, a
chemical asset acquisition company in which he
has been a principal and a director since April
of 1999. Mr. Roten is also currently President
of Xnet, Inc., a Houston-based computer and
systems consulting company, and has served on
its Board of Directors since June of 1995.
David G. Elkins
Age 60
Director since January 2001 Mr. Elkins has been our President since January
24, 2001 and our Co-Chief Executive Officer
since September 18, 2001. Prior to his
appointment as our President, Mr. Elkins served
as our General Counsel and Corporate Secretary
since January 1, 1998 and our Executive Vice
President -- Administration and Law since May
1, 2000. Prior to May 1, 2000, Mr. Elkins
served as one of our Vice Presidents. Mr.
Elkins previously was a senior partner in the
law firm of Andrews & Kurth L.L.P., where he
specialized in corporate and securities
matters. Mr. Elkins also serves as a director
of The Houston Exploration Company, a New York
Stock Exchange listed company, Memorial Hermann
Hospital System, a nonprofit corporation, and
Guilford Mills, Inc.
Richard K. Crump
Age 56
Director since December 2001 Mr. Crump has served as our Co-Chief Executive
Officer since December 18, 2001. Prior to that
time, Mr. Crump served as our Executive Vice
President -- Operations since May 1, 2000, our
Vice President -- Strategic Planning from
December 1, 1996 until May 1, 2000, our Vice
President -- Commercial from October of 1991
until December 1, 1996 and our
Director -- Commercial from August of 1986
until October of 1991. Prior to joining us, Mr.
Crump was Vice President of Sales for Rammhorn
Marketing from 1984 until August of 1986 and
Vice President of Materials Management for El
Paso Products Company from 1976 through 1983.
122
Frank J. Hevrdejs
Age 57
Director since August 1996 Mr. Hevrdejs is a principal and President of
The Sterling Group, L.P., which he co-founded
in 1982. Mr. Hevrdejs has actively participated
in acquisitions of over 40 businesses in the
past 20 years. He is Chairman of First Sterling
Ventures Corp., an investment company, and a
director of Enduro Holdings, Inc., a structural
and electrical manufacturing company, and
Fibreglass Holdings, Inc., a truck accessory
manufacturer. He is also a founding director
and a member of the Compensation Committee of
Mail-Well, Inc., a NYSE company that
manufactures envelopes and provides commercial
printing services, and a director and member of
the Compensation Committee and Audit Committee
of Eagle USA, an air-freight company. Mr.
Hevrdejs previously served as a director of
Chase Bank of Texas, National Association, a
national banking association, and is currently
a member of the Advisory Board of Chase
Manhattan Bank, N.A.
Hunter Nelson
Age 50
Director since August 1996 Mr. Nelson is currently a principal of The
Sterling Group, L.P. Prior to joining The
Sterling Group in 1989, he served as vice
president of administration and general counsel
of Fiber Industries, Inc., a producer of
polyester fibers. Mr. Nelson was previously a
partner in the law firm of Andrews & Kurth
L.L.P., specializing in corporate and
securities laws. Mr. Nelson served on the Board
of Directors of Sterling Diagnostic Imaging,
Inc. until it was sold in May of 1999.
Rolf H. Towe
Age 64
Director since January 1998 Mr. Towe has served as Senior Managing Director
of The Clipper Group, L.P. since its formation
in 1991 and is Vice President of Clipper Asset
Management, Inc. He was the Chairman of
Executive Partner Limited, an executive
consulting firm, from 1989 to 1995. Earlier in
his career, Mr. Towe held various management
positions over a period of nearly 20 years in
Union Carbide Corporation, a multinational
chemicals and plastics manufacturer. Mr. Towe
also serves as a director of several private
companies.
When the Plan is consummated, the existing board of directors will resign
and, pursuant to the Plan, the initial board of directors of reorganized
Chemicals will consist of nine directors, to be designated as follows: (a) the
Investor will be entitled to designate five directors; (b) the creditors
committee will be entitled to designate one director; and (c) the unofficial
secured noteholders committee will be entitled to designate one director. From
and after the consummation of the Plan, the Investor will continue to be
entitled to designate a number of directors of reorganized Chemicals roughly
proportionate to its equity ownership of reorganized Chemicals, but in any event
not less than a majority of such directors for so long as the Investor holds at
least 35% of the common stock of reorganized Chemicals (on a fully diluted
basis).
The persons designated as initial board members of reorganized Chemicals
are:
James B. Rubin
Age 48 Mr. Rubin is Co-Chairman and Chief Investment
Officer of Resurgence Asset Management, L.L.C.
("Resurgence"). He has managed the investment
portfolios of Resurgence and its predecessors
since 1989. He currently serves as a member of
the Board of Directors of Levitz Home
Furnishings, Inc. and Furniture.com, Inc.
123
Robert T. Symington
Age 38 Mr. Symington is a Managing Director of
Resurgence. Mr. Symington joined Resurgence in
1992. He currently serves as a member of the
Board of Directors of Levitz Home Furnishings,
Inc.
Byron J. Haney
Age 41 Mr. Haney is a Managing Director of Resurgence.
Mr. Haney joined Resurgence in 1994. Mr. Haney
currently serves on the Board of Directors of
Levitz Home Furnishings, Inc.
Marc S. Kirschner
Age 60 Mr. Kirschner is a Managing Director and
General Counsel of Resurgence. Mr. Kirschner
joined Resurgence in 2001. Prior to joining
Resurgence, Mr. Kirschner headed the Business
Practice Group and the Bankruptcy/Restructuring
Practice in the New York office of the law firm
Jones, Day, Reavis & Pogue. Mr. Kirschner
currently serves on the Board of Directors of
Levitz Home Furnishings, Inc.
Keith R. Whittaker
Age 30 Mr. Whittaker is an Associate of Resurgence.
Mr. Whittaker joined Resurgence in 2001. Mr.
Whittaker was formerly with Triarc Companies,
Inc. and the Investment Banking Department of
Bear Stearns & Co
Ronald A. Rittenmeyer
Age 55 Mr. Rittenmeyer has served as Chairman of the
Board of Directors, Chief Executive Officer and
President of Safety-Kleen, Incorporated since
August 31, 2001. Mr. Rittenmeyer has also
served as Plan Administrator of AFD fund since
December 1, 2001. Prior to that time, he served
as President and Chief Executive Officer of
AmeriServe, Incorporated from February 14, 2000
until December 1, 2001. From September 1998
until February 2000 he served as Chairman of
the Board of Directors, President and Chief
Executive Officer of RailTex, Inc., San
Antonio, Texas. Prior to joining RailTex, Inc.,
Mr. Rittenmeyer served as President and Chief
Operating Officer of Merisel and Chief
Operating Officer of Burlington Northern
Railroad and held various positions at Frito
Lay, Inc.
John Gildea
Age 58 Mr. Gildea has been a managing director and
principal of Gildea Management Company since
1990. Gildea Management Company and its
affiliates have been the investment -5- advisor
to the Network Funds which specialized in
distressed company and special situation
investments. Mr. Gildea has served on the Board
of Directors of a number of restructured or
restructuring companies, including Amdura,
American Healthcare Management, America Service
Group, GenTek, Inc., Konover Property Trust and
UNC Incorporated. Mr. Gildea also serves on the
Board of Directors of several UK based
investment trusts.
In addition, David G. Elkins and Richard K. Crump, current members of the
existing Board of Directors, will be members of reorganized Chemicals' Board of
Directors.
DIRECTOR COMPENSATION
Our employees who serve as members of our Board do not receive additional
compensation for serving on our Board or any Board committees, although all of
our directors are reimbursed for their travel expenses related to their services
as a director. Each of our non-employee directors is currently paid a fee of
$5,000 per quarter for his service as a director. Our non-employee directors
also receive $1,000 for each
124
Board meeting held in person that they attend and $400 for each telephonic
meeting in which they participate that lasts at least 30 minutes. Each of our
non-employee directors that serves as the Chairman of one of our Board
committees is paid $1,700 for each meeting of that committee that he attends,
and our other non-employee directors that serve on our Board committees are paid
$700 per meeting. In addition, each of our non-employee directors that serves as
the Chairman of one of our Board Committees is paid an annual retainer of $1,000
for service as Chairman on that committee.
BOARD COMMITTEES
Our Board of Directors has created various standing committees to help
carry out its duties, including a Compensation Committee and an Audit and
Compliance Committee. Generally speaking, our Board committees work on key
issues in greater detail than would be possible at full Board meetings. We do
not have a standing nominating committee.
COMPENSATION COMMITTEE
Our Compensation Committee is currently comprised of two of our
non-employee directors, Frank J. Hevrdejs (Chairman) and Rolf H. Towe, and met
four times in fiscal 2002. Our Compensation Committee is responsible for
discharging the compensation responsibilities of our Board, reviews general
compensation issues, determines the compensation of all of our senior executives
and other key employees and recommends and administers our employee benefit
plans that provide benefits to our senior executives. Our Compensation Committee
consults, from time to time, with outside experts concerning the performance of
its duties.
AUDIT AND COMPLIANCE COMMITTEE
Our Audit and Compliance Committee is currently comprised of two of our
non-employee directors, Hunter Nelson (Chairman) and Robert W. Roten, and met
five times in fiscal 2002. This Committee operates under a written charter
adopted by our Board. Our Audit and Compliance Committee appoints our
independent auditors, meets with these auditors to review their report on the
financial statements of our business and approves the audit and other services
to be provided by these auditors. In addition, our Audit and Compliance
Committee reviews our Form 10-K and Form 10-Q reports and our practices in
preparing published financial statements. Our Audit and Compliance Committee
also provides oversight with respect to the establishment of and adherence to
corporate compliance programs, codes of conduct and other policies and
procedures concerning our business and our compliance with all relevant laws.
Mr. Nelson is considered "independent" under the listing standards of the
New York Stock Exchange, the American Stock Exchange and the National
Association of Securities' Dealers and the standards set forth in Section 10A of
the 1934 Act pursuant to the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"). Mr.
Roten is a party to a Consulting Agreement with Holdings dated as of January 1,
2002, pursuant to which Mr. Roten is paid $10,000 per month and is reimbursed
his expenses in exchange for consulting and advisory services. Due to the
existence of this Consulting Agreement, Mr. Roten is not considered independent
under any of the listing standards or the standards set forth in Sarbanes-Oxley.
Following emergence from Chapter 11 pursuant to the Plan, our Board of Directors
will need to bring the composition of the Audit Committee into compliance with
Sarbanes-Oxley.
EXECUTIVE OFFICERS OF THE COMPANY
Personal information with respect to each of our executive officers is set
forth below.
David G. Elkins
Age 60 Mr. Elkins has been our President since January
24, 2001 and our Co-Chief Executive Officer
since September 18, 2001. Prior to his
appointment as our President, Mr. Elkins served
as our General Counsel and Corporate Secretary
since January 1, 1998 and our Executive Vice
President -- Administration and Law since May
1, 2000. Prior to May 1, 2000, Mr. Elkins
served as
125
one of our Vice Presidents. Mr. Elkins
previously was a senior partner in the law firm
of Andrews & Kurth L.L.P., where he specialized
in corporate and securities matters. Mr. Elkins
also serves as a director of The Houston
Exploration Company, a New York Stock Exchange
listed company, Memorial Hermann Hospital
System, a nonprofit corporation, and Guilford
Mills, Inc.
Richard K. Crump
Age 56 Mr. Crump has served as our Co-Chief Executive
Officer since December 18, 2001. Prior to that
time, Mr. Crump served as our Executive Vice
President -- Operations since May 1, 2000, our
Vice President -- Strategic Planning from
December 1, 1996 until May 1, 2000, our Vice
President -- Commercial from October of 1991
until December 1, 1996 and our
Director -- Commercial from August of 1986
until October of 1991. Prior to joining us, Mr.
Crump was Vice President of Sales for Rammhorn
Marketing from 1984 until August of 1986 and
Vice President of Materials Management for El
Paso Products Company from 1976 through 1983.
Paul G. Vanderhoven
Age 49 Mr. Vanderhoven has been our Chief Financial
Officer since March 21, 2001 and our Vice
President -- Finance since October of 2000.
Prior to becoming our Chief Financial Officer,
Mr. Vanderhoven served as our Corporate
Controller from October of 1989 through March
21, 2001, and our Manager Finance from August
of 1986 through October of 1989. Before joining
us, Mr. Vanderhoven held various positions with
Monsanto Company from 1977 through August of
1986.
Kenneth M. Hale
Age 40 Mr. Hale has been our General Counsel since
January 24, 2001 and one of our Vice Presidents
since October 1, 2002. Mr. Hale joined us on
December 1, 1997 as Assistant General Counsel
and served in that capacity until his promotion
to Senior Counsel on July 1, 2000. Prior to
joining us, Mr. Hale was an associate attorney
at the law firm of Andrews & Kurth L.L.P. from
January 1994 until December 1, 1997, and at the
law firm of Honigman Miller Schwartz and Cohn
from May 1990 until December 1993, where he
specialized in mergers and acquisitions,
finance, securities and general corporate
matters.
We have entered into an employment agreement with Mr. Elkins which is
described in detail in this Form 10-K under Executive Compensation.
The existing senior officers of Chemicals will serve initially in the same
capacities upon our emergence from Chapter 11.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our officers,
directors and anyone who beneficially owns at least 10% of our common stock to
file reports regarding their ownership of our common stock and any changes in
that ownership with the SEC. We believe that, during fiscal 2002, our officers,
directors and 10% stockholders complied with all Section 16(a) filing
requirements. In making these statements, we have relied on our review of copies
of these reports furnished to us and written representations from our officers
and directors.
126
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table shows the compensation we paid during the three fiscal
years ended September 30, 2002 to each individual who served as our Chief
Executive Officer or acted in a similar capacity during fiscal 2002 and our
other four most highly compensated officers during fiscal 2002.
LONG-TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------------------
----------------------------- RESTRICTED SECURITIES
FISCAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) AWARD(S) OPTIONS/SARS COMPENSATION(3)
--------------------------- ------ --------- -------- ---------- ------------ ---------------
Frank P. Diassi(4)......... 2002 $ 93,750 $ 0 $0 $ 0 $47,801(5)
Chairman of the Board.... 2001 419,278 719,250 0 0 35,586
and Co-CEO............... 2000 350,016 0 0 0 29,568
David G. Elkins(6)......... 2002 446,542 136,500 0 0 39,021(7)
President and Co-CEO..... 2001 372,292 438,847 0 500,000 32,378(8)
2000 218,750 50,000 0 0 20,162
Richard K. Crump(9)........ 2002 409,365 126,625 0 0 18,532
Co-CEO................... 2001 316,667 318,425 0 0 19,403
2000 214,583 0 0 0 8,953
Paul G. Vanderhoven(10).... 2002 252,667 79,200 0 0 7,651
Vice
President -- Finance... 2001 204,583 112,495 0 0 6,694
and CFO.................. 2000 144,667 10,000 0 4,000 561
---------------
(1) Includes amounts paid under our Supplemental Pay Plan and amounts deferred
under our 401(k) Savings and Investment Plan.
(2) Includes amounts paid under our Bonus Plan, our Retention Bonus Plan and our
Profit Sharing Plan and other bonuses paid by us as follows:
FISCAL RETENTION PROFIT OTHER
YEAR BONUS PLAN BONUS PLAN SHARING PLAN BONUSES
------ ---------- ---------- ------------ --------
Frank P. Diassi.......... 2002 $ 0 $ 0 $ 0 $ 0
2001 700,000 0 19,250 0
2000 0 0 0 0
David G. Elkins.......... 2002 0 136,500 0 0
2001 305,500 0 12,925 120,422
2000 0 0 0 50,000
Richard K. Crump......... 2002 0 126,625 0 0
2001 305,500 0 12,925 0
2000 0 0 0 0
Paul G. Vanderhoven...... 2002 0 79,200 0 0
2001 104,300 0 8,195 0
2000 0 0 0 10,000
127
(3) Includes premiums for group life insurance and premiums for executive life
insurance paid by us and matching contributions paid by us under our 401(k)
Savings and Investment Plan as follows:
FISCAL EXECUTIVE 401(K) MATCHING
YEAR GROUP LIFE LIFE CONTRIBUTIONS
------ ---------- --------- ---------------
Frank P. Diassi................... 2002 $ 2,607 $ 0 $ 0
2001 10,556 19,080 5,950
2000 10,488 19,080 0
David G. Elkins................... 2002 6,103 24,472 7,000
2001 3,639 18,385 8,006
2000 2,527 17,635 0
Richard K. Crump.................. 2002 3,902 7,630 7,000
2001 2,870 8,527 8,006
2000 1,323 7,630 0
Paul G. Vanderhoven............... 2002 855 0 6,796
2001 708 0 5,986
2000 561 0 0
(4) Mr. Diassi was appointed Co-Chief Executive Officer on September 18, 2001
and terminated his employment as Chairman of the Board and Co-Chief
Executive Officer effective as of December 18, 2001. Consequently, his
annual compensation for fiscal 2001 reflects compensation paid to him in
his capacity as Chairman of the Board for approximately 11 1/2 months and
compensation paid to him in his capacities as Chairman of the Board and
Co-Chief Executive Officer for approximately 1/2 month. In addition, his
annual compensation for fiscal 2002 reflects compensation paid to him in
his capacities as Chairman of the Board and Co-Chief Executive Officer for
approximately 2 1/2 months. Mr. Diassi's annual compensation for fiscal
2000 reflects compensation paid to him in his capacity as Chairman of the
Board.
(5) Includes unused and accrued vacation time paid to Mr. Diassi at the
termination of his employment of $45,193.
(6) Mr. Elkins was promoted to President on January 24, 2001 and Co-Chief
Executive Officer on September 18, 2001, meaning that his annual
compensation for fiscal 2001 reflects compensation paid to him in his prior
capacities as Executive Vice President -- Administration and Law, General
Counsel and Secretary for approximately 3 1/2 months and compensation paid
to him in his capacity as President (including approximately two weeks as
Co-Chief Executive Officer) for approximately 8 1/2 months. Mr. Elkins'
annual compensation for fiscal 2000 reflects compensation paid to him in
his capacities as Executive Vice President -- Administration and Law,
General Counsel and Secretary.
(7) Includes premiums for liability insurance paid by us of $1,445.
(8) Includes premiums for liability insurance paid by us of $2,348.
(9) Mr. Crump was promoted to Co-Chief Executive Officer on December 18, 2001,
meaning that his annual compensation for fiscal 2002 reflects compensation
paid to him in his prior capacity as Executive Vice President -- Operations
for approximately 2 1/2 months and compensation paid to him in his capacity
as Co-Chief Executive Officer for approximately 9 1/2 months. Mr. Crump's
annual compensation for fiscal 2001 and fiscal 2000 reflects compensation
paid to him in his capacity as Executive Vice President -- Operations.
(10) Mr. Vanderhoven was promoted to Chief Financial Officer on March 21, 2001,
meaning that his annual compensation for fiscal 2001 reflects compensation
paid to him in his prior capacities as Corporate Controller and Vice
President -- Finance for approximately 5 1/2 months and compensation paid
to him in his capacities as Chief Financial Officer and Vice
President -- Finance for approximately 6 1/2 months. Mr. Vanderhoven's
annual compensation for fiscal 2000 reflects compensation paid to him in
his capacities as Corporate Controller and Vice President -- Finance.
128
OPTION GRANTS IN LAST FISCAL YEAR
We did not grant any options to purchase shares of our common stock in
fiscal 2002 to any of our executive officers named in the Executive Compensation
Table.
AGGREGATE EXERCISES (NONE) AND YEAR-END OPTION VALUES
The following table provides information on the value of unexercised stock
options, as of September 30, 2002, held by each of our executive officers named
in the Executive Compensation Table. There were no exercises of options or stock
appreciation rights during fiscal 2002 by any of these officers, and none of
these officers held any stock appreciation rights at September 30, 2002.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS/SARS AT
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002*
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Frank P. Diassi....................... 0 0 -- --
David G. Elkins....................... 560,000 0 -- --
Richard K. Crump...................... 50,265 0 -- --
Paul G. Vanderhoven................... 6,400 3,600 -- --
---------------
* The "value" of unexercised options is based on the amount, if any, by which
the market price of a share of our common stock on the relevant date exceeds
the exercise price of the option. The actual gain, if any, that one of our
officers realizes from the exercise of options will depend on the market price
of a share of our common stock at the time of exercise. An "In-The-Money"
option is an option for which the exercise price is lower than the market
price of a share of our common stock on the relevant date. None of our
officers held options with an exercise price below the market price of a share
of our common stock as of September 30, 2002.
PENSION PLANS
Salaried Employees' Pension
Plan Most of our salaried employees, including each
of our executive officers named in the
Executive Compensation Table, participate in
our defined benefit Salaried Employees' Pension
Plan. We determine the pension costs under this
Plan each year on an actuarial basis and make
all necessary contributions. The pension
benefits payable under this Plan are determined
by multiplying the employee's "vested
percentage" by the sum of (i) the number of
years the employee is given credit as having
worked for us times 1.2% of his or her "Average
Earnings" plus (ii) the number of years the
employee is given credit as having worked for
us (not to exceed 35) times 0.45% of the amount
by which his or her "Average Earnings" exceeds
the average (without indexing) of his or her
Social Security taxable wage bases during the
35-year period ending on December 31 of the
year in which he or she attains Social Security
retirement age. Generally, an employee's
"Average Earnings" will be either the average
compensation received by the employee during
the three years in which the employee was paid
the most in his or her final five years of
employment or the average compensation received
by the employee during the last 36 months of
his or her employment, whichever is larger,
excluding amounts received under our Profit
Sharing, Retention Bonus, Supplemental Pay and
Bonus Plans. However, due to certain
limitations imposed
129
under the Internal Revenue Code, benefits
payable to an employee under this Plan are
effectively limited in amount to those benefits
that would be payable to an employee having
Average Earnings of $200,000.
Pension Benefit Equalization
Plan Each of our salaried employees who is eligible
to participate in our Pension Plan is also
eligible to participate in our Pension Benefit
Equalization Plan. Our Equalization Plan pays
additional benefits to employees whose benefits
under our Pension Plan are limited as a result
of specified limitations under the Internal
Revenue Code. The amount of benefits payable
under our Equalization Plan is designed to
eliminate the effect of these limitations on
the aggregate pension benefits payable to the
participants but not provide any additional
benefits beyond that amount. These benefits are
generally payable at the times we pay benefits
under our Pension Plan. We have paid benefits
under our Equalization Plan to former
employees.
Supplemental Employee
Retirement Plan Each of our employees who are a part of
management or who are considered "highly
compensated" and subject to limitations on the
amount of Pension Plan benefits they may
receive under the Internal Revenue Code is also
eligible to participate in our Supplemental
Employee Retirement Plan. Our Supplemental Plan
pays additional benefits to employees whose
benefits under our Pension Plan are limited as
a result of such employee's Average Earnings
exceeding $200,000 or due to the removal of
certain Social Security integration benefits
from the Pension Plan. The amount of benefits
payable under our Supplemental Plan is designed
to eliminate the effect of these limitations on
the aggregate pension benefits payable to the
participants but not provide any additional
benefits beyond that amount. These benefits are
generally payable at the same time as when we
pay benefits under our Pension Plan. We have
paid benefits under our Supplemental Plan to
former employees.
The following table sets forth the aggregate amount of annual normal
retirement benefits that would be payable under our Pension Plan, Equalization
Plan and Supplemental Plan if an employee retired during calendar 2002 at the
age of 65 with the years of service shown (assuming the continued existence of
our Pension Plan, Equalization Plan and Supplemental Plan without substantial
change and payment in the form of a single life annuity).
YEARS OF SERVICE
AVERAGE ----------------------------------------------------
EARNINGS 15 20 25 30 35
-------- -------- -------- -------- -------- --------
$125,000.. $ 28,275 $ 37,700 $ 47,125 $ 56,550 $ 65,975
150,000.. 34,463 45,950 57,438 68,925 80,413
175,000.. 40,650 54,200 67,750 81,300 94,850
200,000.. 46,838 62,450 78,063 93,675 109,288
250,000.. 59,213 78,950 98,688 118,425 138,163
300,000.. 71,588 95,450 119,313 143,175 167,038
400,000.. 96,338 128,450 160,563 192,675 224,788
450,000.. 108,713 144,950 181,188 217,425 253,663
500,000.. 121,088 161,450 201,813 242,175 282,538
130
For our executive officers, the compensation covered by these Plans is
solely the base pay component of the compensation reported under the salary
column in the Executive Compensation table appearing in this Form 10-K and may,
as to a particular executive officer for a given year, differ by more than 10%
from that executive officer's total annual compensation reported in the
Executive Compensation table, depending on the amount of bonuses and other
annual compensation paid to that executive officer during the relevant year.
As of September 30, 2002, the credited years of service under these Plans
of each of our executive officers named in the Executive Compensation Table
were:
Frank P. Diassi............................................. 5 years
David G. Elkins............................................. 5 years
Richard K. Crump............................................ 16 years
Paul G. Vanderhoven......................................... 26 years
Assuming retirement at age 65 (or after five years of service, if later)
and the continuation of their current levels of base salary until retirement,
the total retirement benefits payable to each of our executive officers named in
the Executive Compensation Table under our Pension, Equalization and
Supplemental Plans would be:
NET PAYMENT
GROSS PAYMENT REDUCTION FOR PAYMENTS UNDER EQUALIZATION
UNDER ALL PLANS UNDER PENSION PLAN AND SUPPLEMENTAL PLANS
--------------- ---------------------- ----------------------
Frank P. Diassi(1)............. $ 30,801 $ 13,825 $16,976
David G. Elkins(2)............. 52,453 27,852 24,601
Richard K. Crump............... 130,442 75,150 55,292
Paul G. Vanderhoven............ 128,213 114,989 13,224
---------------
(1) Figures for Mr. Diassi reflect current payments.
(2) Excludes supplemental pension benefits payable to Mr. Elkins under his
Employment Agreement.
All of the benefits appearing in the pension plan table are computed on a
single-life annuity basis and are not subject to any deduction for Social
Security or other offset amounts. However, our Supplemental Plan does contain an
alternative formula for determining benefits which includes a Social Security
offset. We have never used this alternative formula to determine the amount of
any benefits paid under our Supplemental Plan.
EMPLOYMENT AGREEMENT -- DAVID G. ELKINS
On November 12, 1997, we entered into an Employment Agreement with Mr.
Elkins. We assumed Mr. Elkins' Employment Agreement in our bankruptcy
proceedings on April 17, 2002. Under his Employment Agreement, Mr. Elkins is
entitled to a base salary of not less than $364,000 per year (subject to
increase at the discretion of our Board) and he participates in our bonus and
incentive plans. In addition, when Mr. Elkins signed his Employment Agreement,
we granted Mr. Elkins 5,000 shares of Holdings' common stock (all of which have
been or will be cancelled pursuant to the Plan) and options to purchase 60,000
shares of Holdings' common stock for $12 per share (all of which have been or
will be cancelled pursuant to the Plan). On December 14, 1998, we reduced the
exercise price of these options to $6 per share. Mr. Elkins was also granted the
right to purchase up to 80,000 shares of Holdings' common stock but that right
expired on April 30, 1998 without having been exercised. Upon Mr. Elkins'
promotion to President, we granted Mr. Elkins options to purchase 250,000 shares
of Holdings' common stock for $1 per share and options to purchase 250,000
shares of Holdings' common stock for $0.50 per share (all of which were
completely vested upon their grant), which grants are referred to in his amended
Employment Agreement.
Either we or Mr. Elkins may terminate Mr. Elkins' Employment Agreement at
any time, for any reason or for no reason. However, if we terminate Mr. Elkins'
employment for any reason or if Mr. Elkins
131
terminates his employment for Good Reason (as defined in the Employment
Agreement), Mr. Elkins is entitled, without cost, to continue coverage under our
medical and dental insurance plans for 36 months. If Mr. Elkins' Employment
Agreement is terminated under certain circumstances, all vesting and similar
requirements and all conditions to entitlement to benefits under various plans
and programs are deemed satisfied.
Under his Employment Agreement, Mr. Elkins is entitled to participate in,
and receive benefits under, most of our employee benefit plans as if his
employment with us commenced on January 1, 1993 or, in the case of our
post-retirement healthcare plan, January 1, 1988. In addition, Mr. Elkins is
entitled under his Employment Agreement to receive pension benefits which are
supplemental to the pension benefits payable to Mr. Elkins under our Pension
Plan, Equalization Plan and Supplemental Plan in an amount equal to 1.2% of his
average monthly income times the number of years elapsed since January 1, 1993.
Under Mr. Elkins' Employment Agreement, as long as Mr. Elkins is employed by us,
we are required to maintain, for the benefit of Mr. Elkins or his estate, $2
million of life insurance and $5 million of excess liability insurance and to
pay up to $5,000 per year for his personal legal, accounting and tax/financial
planning fees and expenses. Finally, if income is imputed to Mr. Elkins with
respect to certain payments made to him under his Employment Agreement, he is
entitled to receive additional amounts equal to all income taxes attributable to
such imputed income.
KEY EMPLOYEE PROTECTION PLAN
On January 26, 2000, our Board approved our Key Employee Protection Plan,
which was subsequently amended several times. This Plan was established by our
Board to help us retain certain of our employees and motivate them to continue
to exert their best efforts on our behalf during periods when we may be
susceptible to a change of control, and to assure their continued dedication and
objectivity during those periods. This Plan was approved by the Bankruptcy Court
in our bankruptcy proceedings on October 31, 2001. A select group of management
or highly compensated employees has been designated as participants under the
Plan and their respective applicable multipliers and other variables for
determining benefits have been established. Our Compensation Committee is
authorized to designate additional management or highly compensated employees as
participants under our Key Employee Protection Plan and set their applicable
multipliers. Our Compensation Committee may also terminate any participant's
participation under this Plan on 60 days' notice if it determines that the
participant is no longer one of our key employees.
As defined under our Key Employee Protection Plan, any participant under
the Plan that terminates his or her employment for "Good Reason" or is
terminated by us for any reason other than "Misconduct" or "Disability" within
his or her "Protection Period" is entitled to benefits under the Plan. A
participant's Protection Period commences 180 days prior to the date on which a
specified change of control occurs and ends either two years or 18 months after
the date of that change of control, depending on the size of the participant's
applicable multiplier. A participant may also be entitled to receive payments
under the Plan in the absence of a change of control but at a reduced level of
payment. If a participant becomes entitled to benefits under our Key Employee
Protection Plan, we are required to provide the participant with a lump sum cash
payment that is determined by multiplying the participant's applicable
multiplier by the sum of the participant's highest annual base compensation
during the last three years plus the participant's targeted bonus for the year
of termination, and then deducting the sum of any other separation, severance or
termination payments made by us to the participant under any other plan or
agreement or pursuant to law, plus 50% of the aggregate cash compensation paid
to the participant by us or our successor following the confirmation of a plan
of reorganization in our bankruptcy proceedings. In addition, if the participant
is entitled to a lump sum payment under the Plan in the absence of a change of
control, his or her applicable multiplier is reduced by 50%. Similarly, if a
participant becomes entitled to benefits under the Plan in connection with the
liquidation of all or substantially all of our assets for salvage or equivalent
value, the lump sum amount payable to him or her is reduced by 25%. If a
participant is not one of our senior executives, he or she is not entitled to
receive the lump sum payment if his or her termination date is after his or her
normal retirement date. Finally, a pro rata portion of any lump sum amount paid
to a
132
participant under the Plan must be repaid by the participant if the participant
is rehired by us or our successor within one year after the participant's
termination date.
In addition to the lump sum payment, the participant is entitled to receive
any accrued but unpaid compensation, compensation for unused vacation time and
any unpaid vested benefits earned or accrued under any of our benefit plans
(other than qualified plans). Also, for a period of 24 months (including 18
months COBRA coverage), the participant will continue to be covered by all of
our life, health care, medical and dental insurance plans and programs (other
than disability), as long as the participant makes a timely COBRA election and
pays the regular employee premiums required under our plans and programs and by
COBRA. However, if the participant is not one of our senior executives, the
participant is not entitled to continued coverage under our plans and programs
if his or her termination date is after his or her normal retirement date. In
addition, our obligation to continue to provide coverage under our plans and
programs to any participant ceases if and when the participant becomes employed
on a full-time basis by a third party which provides the participant with
substantially similar benefits.
If any payment or distribution under our Key Employee Protection Plan to
any participant is subject to excise tax pursuant to Section 4999 of the
Internal Revenue Code, the participant is entitled to receive a gross-up payment
from us in an amount such that, after payment by the participant of all taxes on
the gross-up payment, the amount of the gross-up payment remaining is equal to
the excise tax imposed under Section 4999 of the Internal Revenue Code. However,
the maximum amount of any gross-up payment is 25% of the sum of the
participant's highest annual base compensation during the last three years plus
the participant's targeted bonus for the year of payment.
We may terminate our Key Employee Protection Plan at any time and for any
reason but any termination does not become effective as to any participant until
90 days after we give the participant notice of the termination of the Plan. In
addition, we may amend our Key Employee Protection Plan at any time and for any
reason but any amendment that reduces, alters, suspends, impairs or prejudices
the rights or benefits of any participant in any material respect does not
become effective as to that participant until 90 days after we give him or her
notice of the amendment of the Plan. In addition, no termination of our Key
Employee Protection Plan, or any of these types of amendments to the Plan, can
be effective with respect to any participant if the termination or amendment is
related to, in anticipation of or during the pendency of a change of control, is
for the purpose of encouraging or facilitating a change of control or is made
within 180 days prior to any change of control. Finally, no termination or
amendment of our Key Employee Protection Plan can affect the rights or benefits
of any participant that are accrued under the Plan at the time of termination or
amendment or that accrue thereafter on account of a change of control that
occurred prior to the termination or amendment or within 180 days after such
termination or amendment.
SUPPLEMENTAL PAY PLAN
On March 8, 2001, our Board approved our Supplemental Pay Plan, which was
approved by the Bankruptcy Court in our bankruptcy proceedings on October 31,
2001. Historically, we have paid our senior level employees below-market
salaries with the opportunity to earn above-market compensation through stock
based incentives and significant bonuses in years when we achieve targeted
levels of EBITDA. Due to our financial difficulties, the opportunity to earn
additional compensation through these programs was significantly reduced, if not
entirely eliminated. As a result, our Board established this Plan to address
their concern that the overall compensation provided to our senior level
employees would always be below-market and, consequently, not adequate to retain
these employees or attract new highly-qualified employees. A select group of
management or highly compensated employees has been designated as participants
under the Plan and their respective benefits have been established. Each payment
under the Plan is a specified percentage of the participant's annual base salary
as of February 28, 2002 and payments are paid on or before the tenth day after
the last day of each calendar quarter. The participant must be employed by us on
the relevant payment date in order to be eligible to receive that payment under
the Plan. We may amend or terminate our Supplemental Pay Plan at any time but
any amendment or termination of the Plan can only become effective on a payment
date and may not affect the rights of
133
participants under the Plan that have accrued as of that effective date,
including the right to receive supplemental pay on that payment date.
RETENTION BONUS PLAN
On July 13, 2001, our Board approved our Retention Bonus Plan, which was
subsequently amended. This Plan was established by our Board to help us retain
our employees whose resignations would cause significant disruption to our
operations and whose skills would be particularly difficult and costly to
replace, to improve their morale during the pendency of our bankruptcy
proceedings and help us incentivize these employees to work diligently toward
the resolution of our bankruptcy proceedings. The Plan was approved by the
Bankruptcy Court in our bankruptcy proceedings on October 31, 2001. A select
group of management or highly compensated employees was designated as
participants under the Plan and their respective benefits were established. Each
participant in the Plan was entitled to payments under the Plan on specified
dates, unless the participant's employment with us terminated prior to that
payment date for any reason other than a termination by the participant for
"Good Reason" or a termination by us for any reason other than "Misconduct" or
"Disability" (as such terms are defined in the Plan). Payments under the Plan
were based on specified percentages of the participant's annual compensation,
including payments under our Supplemental Pay Plan. Each participant who became
entitled to payments under the Plan was paid 25% of the total amount payable to
that participant on April 15, 2002, an additional 25% on October 15, 2002 and
the final 50% on November 20, 2002.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Frank J. Hevrdejs and Mr. Rolf H. Towe served during fiscal 2002 as
members of our Compensation Committee. Neither of them was at any time during
fiscal 2002, or at any other time, an officer or employee of Holdings or
Chemicals. Further, none of our executive officers served as a member of the
Board of Directors or Compensation Committee, or other committee serving an
equivalent function, of another entity that has one or more of its executive
officers serving as a member of our Board of Directors or Compensation Committee
at any time during fiscal 2002.
COMPENSATION COMMITTEE
Our executive compensation program is administered by the Compensation
Committee of our Board of Directors. This committee, which is comprised of
non-employee directors, is responsible for discharging the compensation
responsibilities of our Board. This committee reviews general compensation
issues and determines the compensation of all of our senior executives and other
key employees and recommends and administers our employee benefit plans that
provide benefits to our senior executives.
134
PERFORMANCE GRAPH
The following Stock Performance Graph compares Holdings' cumulative total
stockholder return on shares of our common stock for a five-year period with the
cumulative total return of the Standard & Poor's Stock Index and the Standard &
Poor's Chemicals Index. The graph assumes $100 was invested on September 30,
1997 in shares of our common stock, the S&P 500 Index and the S&P Chemicals
Index and that dividends were reinvested.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG STERLING CHEMICALS HOLDINGS, INC., THE S & P 500 INDEX
AND THE S & P DIVERSIFIED CHEMICALS INDEX
LOGO
CUMULATIVE TOTAL RETURN
--------------------------------------------------
9/97 9/98 9/99 9/00 9/01 9/02
------ ------ ------ ------ ------ -----
STERLING CHEMICALS HOLDINGS, INC........... 100.00 59.18 28.57 16.59 1.63 0.33
S & P 500.................................. 100.00 109.05 139.37 157.88 115.85 92.12
S & P DIVERSIFIED CHEMICALS................ 100.00 100.39 103.49 80.67 86.55 81.59
---------------
* $100 invested on 9/30/97 in stock or index, including reinvestment of
dividends. Fiscal year ending September 30.
Copyright (C) 2002, Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. All rights reserved. www.researchdatagroup.com/S&P.htm
In connection with our recapitalization in August 1996, Holdings' common
stock was delisted from the New York Stock Exchange and is now included in the
OTC Electronic Bulletin Board maintained by the National Association of
Securities Dealers, Inc. We believe that this delisting, combined with the
contemporaneous significant reductions in the overall number of outstanding
shares and record holders of our common stock, and our bankruptcy proceedings,
have significantly reduced the liquidity of the trading market for shares of
Holdings' common stock.
135
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the ownership
of our common stock as of December 13, 2002 by (i) each of our directors, (ii)
each of our executive officers named in the Executive Compensation Table, (iii)
all those known by us to be the beneficial owner of more than 5% of our common
stock and (iv) all of our directors and executive officers as a group. Unless
otherwise noted, the mailing address of each such owner is 1200 Smith Street,
Suite 1900, Houston, Texas 77002-4312. The stock ownership of the persons to be
designated as board members of reorganized Chemicals upon our emergence from
Chapter 11 is not presented, as such shares are not yet issued.
PERCENT OF
NUMBER OF RIGHT TO OUTSTANDING
NAME SHARES OWNED(1) ACQUIRE(2) TOTAL SHARES
---- --------------- ---------- ----- -----------
Frank P. Diassi.......................... 0 0 0 0
Robert W. Roten.......................... 0 0 0 0
Frank J. Hevrdejs........................ 0 0 0 0
Hunter Nelson............................ 0 0 0 0
Rolf H. Towe............................. 0 0 0 0
David G. Elkins.......................... 0 0 0 0
Richard K. Crump......................... 0 0 0 0
Paul G. Vanderhoven...................... 0 0 0 0
Directors and Officers as a Group (8
persons)............................... 0 0 0 0
---------------
(1) Includes shares of our common stock for which the named person:
- has sole voting and investment power or
- has shared voting and investment power with his or her spouse.
(2) Shares of our common stock that can be acquired through the exercise of
outstanding warrants or stock options within 60 days. All of the outstanding
warrants and stock options will be cancelled pursuant to the Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
One of the directors, Robert W. Roten, is a party to a Consulting Agreement
with Holdings dated January 1, 2002 pursuant to which Mr. Roten is paid $10,000
per month and is reimbursed his expenses in exchange for consulting and advisory
services. Mr. Roten will no longer be a director after our emergence from
Chapter 11.
ITEM 14. 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 Co-Chief Executive Officers and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Securities Exchange Act Rule 13a-14. Based upon that
evaluation, the Co-Chief Executive Officers 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.
PART IV
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
1. Consolidated Financial Statements
136
See "Item 8. Financial Statements and Supplementary Data -- Index to
Financial Statements." In addition, the consolidated financial statements of
Sterling Canada, Inc. and Sterling Pulp Chemicals, Ltd. for the years ended
September 30, 2002, 2001, and 2000 are filed as Exhibits 99.4 and 99.5 hereto.
2. All schedules for which provision is made in Regulation S-X are not
required under the related instruction or are inapplicable and, therefore,
have been omitted.
3. Exhibits
The following exhibits are filed as part of this Form 10-K:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
**2.1 -- Certificate of Ownership and Merger merging Sterling
Chemicals Holdings, Inc. into Sterling Chemicals, Inc.
2.2 -- Joint Plan of Reorganization of Sterling Chemicals Holdings,
Inc., et. al., Debtors, dated October 14, 2002, incorporated
herein by reference to Exhibit 2.1 of our Form 8-K filed
with the SEC on November 26, 2002.
2.3 -- First Modification to Joint Plan of Reorganization of
Sterling Chemicals Holdings, Inc., et. al., Debtors, dated
November 18, 2002, incorporated herein by reference to
Exhibit 2.2 of our Form 8-K filed with the SEC on November
26, 2002.
2.4 -- Plan Supplement Pursuant to Section 12.15 to Joint Plan of
Reorganization of Sterling Chemicals Holdings, Inc., et.
al., Debtors, dated November 13, 2002 (forms of
reorganization documents), incorporated herein by reference
to Exhibit 2.3 of our Form 8-K filed with the SEC on
November 26, 2002.
2.5 -- Notice of Designation of Board of Directors Pursuant to
Section 6.11 of Joint Plan of Reorganization dated November
15, 2002 of Sterling Chemicals Holdings, Inc., et. al.
Debtors, incorporated herein by reference to Exhibit 2.4 of
our Form 8-K filed with the SEC on November 26, 2002.
2.6 -- Order Confirming the Joint Plan of Reorganization of
Sterling Chemicals, Inc. and Debtors dated November 20,
2002, incorporated herein by reference to Exhibit 2.5 of our
Form 8-K filed with the SEC on November 26, 2002.
**3.1 -- Amended and Restated Certificate of Incorporation of
Sterling Chemicals, Inc.
**3.2 -- Audit and Compliance Committee Charter of Sterling
Chemicals, Inc.
**3.3 -- Restated Bylaws of Sterling Chemicals, Inc.
4.1 -- Indenture dated as of August 15, 1996 between Sterling
Chemicals, Inc. and Fleet National Bank governing the
11 3/4% Senior Subordinated Notes due 2006 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.7
to the Registration Statement on Form S-1 of STX Acquisition
Corp. and STX Chemicals Corp. (Registration No. 333-04343).
4.1(a) -- First Supplemental Indenture dated October 1, 1997 governing
the 11 3/4% Senior Subordinated Notes due 2006 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.4
to our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998.
4.1(b) -- Second Supplemental Indenture dated March 16, 1998 governing
the 11 3/4% Senior Subordinated Notes due 2006 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.5
to our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998.
4.1(c) -- Instrument of Resignation, Appointment and Acceptance dated
effective as of July 27, 2001 among Sterling Chemicals,
Inc., State Street Bank and Trust Company (successor to
Fleet National Bank) and HSBC Bank USA related to the
11 3/4% Senior Subordinated Notes due 2006 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.18
to our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2001.
137
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
4.2 -- Indenture dated as of April 7, 1997 between Sterling
Chemicals, Inc. and Fleet National Bank governing the
11 1/4% Senior Subordinated Notes due 2007 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.1
to our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997.
4.2(a) -- First Supplemental Indenture dated March 16, 1998 governing
the 11 1/4% Senior Subordinated Notes due 2007 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.6
to our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998.
4.2(b) -- Instrument of Resignation, Appointment and Acceptance dated
effective as of July 27, 2001 among Sterling Chemicals,
Inc., State Street Bank and Trust Company (successor to
Fleet National Bank) and HSBC Bank USA related to the
11 1/4% Senior Subordinated Notes due 2006 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.19
to our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2001.
4.3 -- Indenture dated as of July 23, 1999 among Sterling
Chemicals, Inc., as Issuer, Sterling Canada Inc., Sterling
Chemicals Energy, Inc., Sterling Chemicals International,
Inc., Sterling Fibers, Inc., Sterling Pulp Chemicals US,
Inc., and Sterling Pulp Chemicals, Inc., as Guarantors, and
Harris Trust Company of New York, as Trustee, incorporated
by reference from Exhibit 4.9 to our Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1999.
4.4 -- Second Deed of Trust, Assignment of Leases and Rents,
Security Agreement and Fixture Filing dated as of July 23,
1999 by Sterling Chemicals, Inc., Trustor, to John Dorris,
Trustee for the benefit of Harris Trust Company of New York,
Beneficiary, incorporated by reference from Exhibit 4.10 to
our Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999.
4.5 -- Second Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing dated as of July 23, 1999
between Sterling Fibers, Inc., Mortgagor, and Harris Trust
Company of New York, Mortgagee, incorporated by reference
from Exhibit 4.11 to our Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999.
4.6 -- Second Leasehold Deed to Secure Debt, Assignment and
Security Agreement dated as of July 23, 1999 by Sterling
Pulp Chemicals, Inc., Grantor, to Harris Trust Company of
New York, as Collateral Agent, and U.S. Bank Trust National
Association, as Georgia co-agent, incorporated by reference
from Exhibit 4.12 to our Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999.
4.7 -- Security Agreement dated as of July 23, 1999 among Sterling
Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp
Chemicals, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Fibers, Inc., Sterling Chemicals Energy, Inc., and Sterling
Chemicals International, Inc., as Assignors, and Harris
Trust Company of New York, as Collateral Agent, incorporated
by reference from Exhibit 4.13 to our Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1999.
4.8 -- Stock Pledge and Security Agreement dated as of July 23,
1999 among Sterling Chemicals, Inc., Sterling Canada, Inc.,
and Sterling Pulp Chemicals US, Inc., as Pledgors, and
Harris Trust Company of New York, as Collateral Agent,
incorporated by reference from Exhibit 4.14 to our Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1999.
4.9 -- Stock Pledge and Security Agreement dated as of July 23,
1999 among Sterling Chemicals, Inc. and Sterling Canada,
Inc., as Pledgors, and Harris Trust Company of New York, as
Collateral Agent, incorporated by reference from Exhibit
4.15 to our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1999.
138
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
4.10 -- Revolving Credit Agreement dated as of July 19, 2001 among
Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling
Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc.,
Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and
Sterling Chemicals International, Inc., as the Borrowers,
The CIT Group/Business Credit, Inc., as the Administrative
Agent, and various financial institutions, as the Lenders,
incorporated by reference from Exhibit 4.1 to our Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
2001.
4.10(a) -- First Amendment to Revolving Credit Agreement dated as of
August 17, 2001 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Borrowers, The CIT Group/Business Credit, Inc.,
as the Administrative Agent, and various financial
institutions, as the Lenders, incorporated by reference from
Exhibit 4.18(a) of our Annual Report on Form 10-K for the
fiscal year ended September 30, 2001.
4.10(b) -- Second Amendment to Revolving Credit Agreement dated as of
August 29, 2001 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Borrowers, The CIT Group/Business Credit, Inc.,
as the Administrative Agent, and various financial
institutions, as the Lenders, incorporated by reference from
Exhibit 4.18(b) of our Annual Report on Form 10-K for the
fiscal year ended September 30, 2001.
4.10(c) -- Third Amendment to Revolving Credit Agreement dated as of
September 7, 2001 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Borrowers, The CIT Group/Business Credit, Inc.,
as the Administrative Agent, and various financial
institutions, as the Lenders, incorporated by reference from
Exhibit 4.18(c) of our Annual Report on Form 10-K for the
fiscal year ended September 30, 2001.
4.10(d) -- Fourth Amendment to Revolving Credit Agreement dated as of
October 10, 2001 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Borrowers, The CIT Group/Business Credit, Inc.,
as the Administrative Agent, and various financial
institutions, as the Lenders, incorporated by reference from
Exhibit 4.18(d) of our Annual Report on Form 10-K for the
fiscal year ended September 30, 2001.
4.10(e) -- Fifth Amendment to Revolving Credit Agreement dated as of
June 14, 2002 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Borrowers, The CIT Group/Business Credit, Inc.,
as the Administrative Agent, and various financial
institutions, as the Lenders, incorporated by reference from
Exhibit 4.1 to our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002.
**4.10(f) -- Sixth Amendment to Revolving Credit Agreement dated as of
August 19, 2002 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Borrowers, The CIT Group/Business Credit, Inc.,
as the Administrative Agent, and various financial
institutions, as the Lenders.
**4.10(g) -- Seventh Amendment to Revolving Credit Agreement dated as of
September 26, 2002 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Borrowers, The CIT Group/Business Credit, Inc.,
as the Administrative Agent, and various financial
institutions, as the Lenders.
139
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
**4.10(h) -- Eighth Amendment to Revolving Credit Agreement dated as of
December 6, 2002 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Borrowers, The CIT Group/Business Credit, Inc.,
as the Administrative Agent, and various financial
institutions, as the Lenders.
4.11 -- Fixed Assets Secured Parties Deed of Trust, Assignment of
Leases and Rents, Security Agreement and Fixture Filing
dated as of July 19, 2001 by Sterling Chemicals, Inc.,
Trustor, to R. Christian Brose, Trustee for the benefit of
The CIT Group/Business Credit, Inc., as Administrative and
Collateral Agent, Beneficiary, incorporated by reference
from Exhibit 4.4 to our Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2001.
4.12 -- Current Assets Secured Parties Deed of Trust, Assignment of
Leases and Rents, Security Agreement and Fixture Filing
dated as of July 19, 2001 by Sterling Chemicals, Inc.,
Trustor, to R. Christian Brose, Trustee for the benefit of
The CIT Group/Business Credit, Inc., as Administrative and
Collateral Agent, Beneficiary, incorporated by reference
from Exhibit 4.5 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2001.
4.13 -- Fixed Assets Secured Parties Mortgage, Assignment of Leases
and Rents, Security Agreement and Fixture Filing dated as of
July 19, 2001 by Sterling Fibers, Inc., Mortgagor, to The
CIT Group/Business Credit, Inc., Mortgagee, incorporated by
reference from Exhibit 4.6 to our Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2001.
4.14 -- Current Assets Secured Parties Mortgage, Assignment of
Leases and Rents, Security Agreement and Fixture Filing
dated as of July 19, 2001 by Sterling Fibers, Inc.,
Mortgagor, to The CIT Group/Business Credit, Inc.,
Mortgagee, incorporated by reference from Exhibit 4.7 to our
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2001.
4.15 -- Fixed Assets Secured Parties Leasehold Deed to Secure Debt,
Assignment and Security Agreement dated as of July 19, 2001
by Sterling Pulp Chemicals, Inc. to The CIT Group/Business
Credit, Inc., as Administrative Agent, incorporated by
reference from Exhibit 4.8 to our Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2001.
4.16 -- Current Assets Secured Parties Leasehold Deed to Secure
Debt, Assignment and Security Agreement dated as of July 19,
2001 by Sterling Pulp Chemicals, Inc. to The CIT
Group/Business Credit, Inc., as Administrative Agent,
incorporated by reference from Exhibit 4.9 to our Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
2001.
4.17 -- Fixed Assets Secured Parties Security Agreement dated as of
July 19, 2001 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Grantors, and The CIT Group/Business Credit,
Inc., as Administrative Agent for each of the Fixed Assets
Secured Parties, incorporated by reference from Exhibit 4.10
to our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2001.
4.18 -- Current Assets Secured Parties Security Agreement dated as
of July 19, 2001 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Grantors, and The CIT Group/Business Credit,
Inc., as Administrative Agent for each of the Current Assets
Secured Parties, incorporated by reference from Exhibit 4.11
to our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2001.
140
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
4.19 -- Fixed Assets Secured Parties Obligor Pledge Agreement dated
as of July 19, 2001 among Sterling Chemicals, Inc., Sterling
Canada, Inc. and Sterling Pulp Chemicals US, Inc., as the
Pledgors, and The CIT Group/Business Credit, Inc., as
Administrative Agent for each of the Fixed Assets Secured
Parties, incorporated by reference from Exhibit 4.12 to our
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2001.
4.20 -- Current Assets Secured Parties Obligor Pledge Agreement
dated as of July 19, 2001 among Sterling Chemicals, Inc.,
Sterling Canada, Inc. and Sterling Pulp Chemicals US, Inc.,
as the Pledgors, and The CIT Group/Business Credit, Inc., as
Administrative Agent for each of the Current Assets Secured
Parties, incorporated by reference from Exhibit 4.13 to our
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2001.
4.21 -- Revolving Credit Agreement dated as of July 23, 1999 among
Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling
Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc.,
Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and
Sterling Chemicals International, Inc., as the Borrowers,
The CIT Group/Business Credit, Inc., as the Administrative
Agent, Credit Suisse First Boston, as the Documentation
Agent, DLJ Capital Funding, Inc., as the Syndication Agent,
and various financial institutions, as the Lenders,
incorporated by reference from Exhibit 4.1 to our Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1999.
4.21(a) -- First Amendment to Revolving Credit Agreement dated
effective as of December 17, 1999 among Sterling Chemicals,
Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US,
Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc.,
Sterling Chemicals Energy, Inc. and Sterling Chemicals
International, Inc., as the Borrowers, The CIT
Group/Business Credit, Inc., as the Administrative Agent,
Credit Suisse First Boston, as the Documentation Agent, DLJ
Capital Funding, Inc., as the Syndication Agent, and various
financial institutions, as the Lenders, incorporated by
reference from Exhibit 4.20(a) of our Annual Report on Form
10-K for the fiscal year ended September 30, 1999.
4.22 -- Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing dated as of July 23, 1999 by
Sterling Chemicals, Inc., Trustor, to Linda H. Earle,
Trustee for the benefit of The CIT Group/Business Credit,
Inc., as Administrative and Collateral Agent, Beneficiary,
incorporated by reference from Exhibit 4.2 to our Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1999.
4.23 -- Mortgage, Assignment of Leases and Rents, Security Agreement
and Fixture Filing dated as of July 23, 1999 by Sterling
Fibers, Inc., Mortgagor, to The CIT Group/Business Credit,
Inc., Mortgagee, incorporated by reference from Exhibit 4.3
to our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1999.
4.24 -- Leasehold Deed to Secure Debt, Assignment and Security
Agreement dated as of July 23, 1999 by Sterling Pulp
Chemicals, Inc. to The CIT Group/Business Credit, Inc., as
Administrative Agent, and U.S. Bank Trust National
Association, as Georgia co-agent, incorporated by reference
from Exhibit 4.4 to our Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999.
4.25 -- Fixed Assets Security Agreement dated as of July 23, 1999
among Sterling Chemicals, Inc., Sterling Canada, Inc.,
Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals,
Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc.
and Sterling Chemicals International, Inc., as the Grantors,
and The CIT Group/Business Credit, Inc., as Administrative
Agent for each of the Fixed Assets Secured Parties,
incorporated by reference from Exhibit 4.5 to our Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1999.
141
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
4.26 -- Current Assets Security Agreement dated as of July 23, 1999
among Sterling Chemicals, Inc., Sterling Canada, Inc.,
Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals,
Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc.
and Sterling Chemicals International, Inc., as the Grantors,
and The CIT Group/Business Credit, Inc., as Administrative
Agent for each of the Current Assets Secured Parties,
incorporated by reference from Exhibit 4.6 to our Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1999.
4.27 -- Obligor Pledge Agreement dated as of July 23, 1999 among
Sterling Chemicals, Inc., Sterling Canada, Inc. and Sterling
Pulp Chemicals US, Inc., as the Pledgors, and The CIT
Group/Business Credit, Inc., as Administrative Agent for
each of the Fixed Assets Secured Parties, incorporated by
reference from Exhibit 4.8 to our Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999.
4.28 -- Senior Debt Intercreditor Agreement dated as of July 23,
1999 among Harris Trust Company of New York, as Trustee, The
CIT Group/Business Credit, Inc., as Administrative Agent,
and Sterling Chemicals, Inc., incorporated by reference from
Exhibit 4.17 to our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999.
4.29 -- Financing Agreement dated as of July 11, 2001 between
Sterling Pulp Chemicals, Ltd. and CIT Business Credit Canada
Inc., incorporated by reference from Exhibit 4.14 to our
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2001
4.29(a) -- Letter Agreement dated July 26, 2001 between Sterling Pulp
Chemicals, Ltd. and CIT Business Credit Canada Inc. amending
the Financing Agreement in certain respects, incorporated by
reference from Exhibit 4.41(a) of our Annual Report on Form
10-K for the fiscal year ended September 30, 2001.
4.29(b) -- Letter Agreement dated September 14, 2001 between Sterling
Pulp Chemicals, Ltd. and CIT Business Credit Canada Inc.
amending the Financing Agreement in certain respects,
incorporated by reference from Exhibit 4.41(b) of our Annual
Report on Form 10-K for the fiscal year ended September 30,
2001.
4.29(c) -- Letter Agreement dated January 30, 2002 between Sterling
Pulp Chemicals, Ltd. and CIT Business Credit Canada Inc.
amending the Financing Agreement in certain respects,
incorporated by reference from Exhibit 4.1 of our Quarterly
Report on Form 10-Q for the quarterly period ended December
31, 2001.
4.30 -- Demand Debenture dated as of July 11, 2001 by Sterling Pulp
Chemicals, Ltd. in favor of CIT Business Credit Canada Inc.,
as Holder, and the Lenders, incorporated by reference from
Exhibit 4.15 to our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2001.
4.31 -- Debenture Pledge Agreement dated as of July 11, 2001 between
Sterling Pulp Chemicals, Ltd. and CIT Business Credit Canada
Inc., incorporated by reference from Exhibit 4.16 to our
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2001.
4.32 -- Deed of Hypothec dated as of July 13, 2001 between Sterling
Pulp Chemicals, Ltd. and CIBC Mellon Trust Company, as
holder of power of attorney for all present and future
holders of the Demand Debenture dated July 11, 2001 by
Sterling Pulp Chemicals, Ltd. in favor of CIT Business
Credit Canada Inc., incorporated by reference from Exhibit
4.17 to our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2001.
4.33 -- Credit Agreement dated as of July 24, 2002, among Sterling
Pulp Chemicals (Sask) Ltd., as Borrower, Bank of Montreal,
as Agent, and the other Lenders from time to time a party
thereto, incorporated by reference from Exhibit 4.2 of our
Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 2001.
10.1 -- Third Amended and Restated Key Employee Protection Plan,
incorporated by reference from Exhibit 10.2 of our Annual
Report on Form 10-K for the fiscal year ended September 30,
2001.
142
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.2 -- Amended and Restated Supplemental Pay Plan, incorporated by
reference from Exhibit 10.1 to our Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2001.
**10.2(a) -- First Amendment to Amended and Restated Supplemental Pay
Plan.
10.3 -- Amended and Restated Retention Bonus Plan, incorporated by
reference from Exhibit 10.4 of our Annual Report on Form
10-K for the fiscal year ended September 30, 2001.
10.4 -- Amended and Restated Supplemental Bonus Plan, incorporated
by reference from Exhibit 10.5 of our Annual Report on Form
10-K for the fiscal year ended September 30, 2001.
10.5 -- Second Amended and Restated Severance Pay Plan, incorporated
by reference from Exhibit 10.6 of our Annual Report on Form
10-K for the fiscal year ended September 30, 2001.
10.6 -- Sterling Chemicals Holdings, Inc. Omnibus Stock Awards and
Incentive Plan, as amended, incorporated by reference from
Exhibit 10.3 to our Annual Report on Form 10-K for the
fiscal year ended September 30, 2000.
10.7 -- Sterling Chemicals, Inc. Amended and Restated Salaried
Employees' Pension Plan (Effective as of May 1, 1996),
incorporated by reference from Exhibit 10.4 to our Annual
Report on Form 10-K for the fiscal year ended September 30,
2000.
10.7(a) -- First Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
January 31, 1997), incorporated by reference from Exhibit
10.4(a) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.7(b) -- Second Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
January 1, 1997), incorporated by reference from Exhibit
10.4(b) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.7(c) -- Third Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
November 1, 1998), incorporated by reference from Exhibit
10.4(c) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.7(d) -- Fourth Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
December 31, 1998), incorporated by reference from Exhibit
10.4(d) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.7(e) -- Fifth Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
April 1, 1999), incorporated by reference from Exhibit
10.4(e) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.7(f) -- Sixth Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
May 14, 1999), incorporated by reference from Exhibit
10.4(f) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.8 -- Sterling Chemicals, Inc. Pension Benefit Equalization Plan,
incorporated by reference from Exhibit 10.10 to our
Registration Statement on Form S-1 (Registration No.
33-24020).
10.9 -- Sterling Chemicals, Inc. Amended and Restated Supplemental
Employee Retirement Plan, incorporated by reference from
Exhibit 10.34 to our Annual Report on Form 10-K for the
fiscal year ended September 30, 1989 (Commission File Number
1-10059).
10.10 -- Sterling Chemicals, Inc. Amended and Restated Hourly Paid
Employees' Pension Plan (Effective as of May 1, 1996),
incorporated by reference from Exhibit 10.3(c) to our Annual
Report on Form 10-K for the fiscal year ended September 30,
1996.
143
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.10(a) -- First Amendment to the Sterling Chemicals, Inc. Amended and
Restated Hourly Paid Employees' Pension Plan (Effective as
of December 31, 1998), incorporated by reference from
Exhibit 10.7(a) to our Annual Report on Form 10-K for the
fiscal year ended September 30, 2000.
10.10(b) -- Second Amendment to the Sterling Chemicals, Inc. Amended and
Restated Hourly Paid Employees' Pension Plan (Effective as
of December 17, 1998), incorporated by reference from
Exhibit 10.7(b) to our Annual Report on Form 10-K for the
fiscal year ended September 30, 2000.
10.10(c) -- Third Amendment to the Sterling Chemicals, Inc. Amended and
Restated Hourly Paid Employees' Pension Plan (Effective as
of September 20, 1999), incorporated by reference from
Exhibit 10.7(c) to our Annual Report on Form 10-K for the
fiscal year ended September 30, 2000.
10.11 -- Sterling Chemicals, Inc. Sixth Amended and Restated Savings
and Investment Plan dated as of October 1, 2000,
incorporated by reference from Exhibit 10.8 to our Annual
Report on Form 10-K for the fiscal year ended September 30,
2000.
10.11(a) -- First Amendment to the Sixth Amended and Restated Savings
and Investment Plan dated as of October 1, 2000,
incorporated by reference from Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the quarterly period ended December
31, 2001.
10.12 -- Sterling Chemicals ESOP, incorporated by reference from
Exhibit 10.6 to our Annual Report on Form 10-K for the
fiscal year ended September 30, 1996.
10.12(a) -- Sterling Chemicals ESOP (First Amendment) (Effective as of
December 27, 1996), incorporated by reference from Exhibit
10.9(a) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.12(b) -- Sterling Chemicals ESOP (Second Amendment) (Effective as of
August 21, 1996), incorporated by reference from Exhibit
10.9(b) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.12(c) -- Third Amendment to Sterling Chemicals ESOP (Effective as of
January 31, 1997), incorporated by reference from Exhibit
10.9(c) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.12(d) -- Fourth Amendment to Sterling Chemicals ESOP (Effective as of
November 1, 1998) incorporated by reference from Exhibit
10.9(d) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.12(e) -- Fifth Amendment to Sterling Chemicals ESOP (Effective as of
December 31, 1998) incorporated by reference from Exhibit
10.9(e) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
**10.13 -- Articles of Agreement between Sterling Chemicals, Inc., its
successors and assigns, and Texas City, Texas Metal Trades
Council, AFL-CIO Texas City, Texas, September 28, 2002 to
May 1, 2004.
10.14 -- Agreement between Sterling Pulp Chemicals Ltd., North
Vancouver, British Columbia, and Pulp, Paper and Woodworkers
of Canada, Local 5, British Columbia, effective December 1,
2000 to November 30, 2003, incorporated by reference from
Exhibit 10.15 to our Annual Report on Form 10-K for the
fiscal year ended September 30, 2001.
10.15 -- Form of Indemnity Agreement executed between the Company and
each of its officers and directors, incorporated by
reference from Exhibit 10.17 to our Annual Report on Form
10-K for the fiscal year ended September 30, 1996.
**10.16 -- Employment Agreement dated as of January 23, 2001 between
David G. Elkins and the Company.
**10.17 -- Consulting Agreement dated as of January 1, 2002 between
Robert W. Roten and Sterling Chemicals Holdings, Inc.
144
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
+10.18 -- Amended and Restated Production Agreement dated March 31,
1998 between BP Chemicals, Inc. and Sterling Chemicals,
Inc., incorporated by reference from Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1998.
+10.19 -- Second Amended and Restated Production Agreement dated
effective as of August 1, 1996 between BP Chemicals Inc. and
Sterling Chemicals, Inc., incorporated by reference from
Exhibit 10.3 to our Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998.
+10.19(a) -- Amendment to Second Amended and Restated Production
Agreement dated as of March 1, 2001 between Sterling
Chemicals, Inc. and BP Chemicals Inc., incorporated by
reference from Exhibit 10.1 to our Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2001.
+10.20 -- Amended and Restated Product Sales Agreement dated effective
as of January 1, 1998 between BASF Corporation and Sterling
Chemicals, Inc., incorporated by referenced from Exhibit
10.11 to our Annual Report on Form 10-K for the fiscal year
ended September 30, 1997.
10.21 -- License Agreement dated August 1, 1986 between Monsanto
Company and Sterling Chemicals, Inc. incorporated by
reference from Exhibit 10.25 to our Registration Statement
on Form S-1 (Registration No. 33-24020).
+10.22 -- Joint Venture Agreement dated March 31, 1998 between
Sterling Chemicals, Inc. and BP Chemicals, Inc.,
incorporated by reference from Exhibit 10.4 to our Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
1998.
+10.22(a) -- First Amendment to Joint Venture Agreement dated effective
as of March 31, 1998 between Sterling Chemicals, Inc. and BP
Chemicals Inc., incorporated by reference from Exhibit
10.26(a) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 1998.
**10.23 -- Asset and Stock Purchase Agreement among Sterling Chemicals,
Inc. and Sterling Canada, Inc., Sterling Pulp Chemicals US
Inc., Sterling Pulp Chemicals, Inc. and Sterling Chemicals
Acquisitions, Inc. as Sellers and Superior Propane Inc. as
Purchasers, dated as of November 13, 2002.
**10.24 -- Investment Agreement dated as of October 11, 2002 between
Sterling Chemicals Holdings, Inc. and Sterling Chemicals,
Inc. and Resurgence Asset Management, L.L.C.
**21.1 -- Subsidiaries of Sterling Chemicals Holdings, Inc.
**99.1 -- Certification of CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
**99.2 -- Certification of CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
**99.3 -- Certification of CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
**99.4 -- Sterling Canada, Inc. consolidated financial statements and
notes thereto for the years ended September 30, 2002, 2001
and 2000, including independent auditors' report.
**99.5 -- Sterling Pulp Chemicals, Ltd. financial statements and notes
thereto for the years ended September 30, 2002, 2001 and
2000, including independent auditors' report.
---------------
** Filed herewith.
+ Confidential treatment has been requested with respect to portions of this
Exhibit, and such request has been granted.
(b) Reports on Form 8-K.
i. On August 23, 2002, we filed a Current Report on Form 8-K reporting
Items 3 and 7 of such Form related to the filing of the Debtors' Monthly
Operating Reports with the Bankruptcy Court.
145
ii. On September 26, 2002, we filed a Current Report on Form 8-K
reporting Items 3 and 7 of such Form related to the filing of the Debtors'
Monthly Operating Reports with the Bankruptcy Court.
iii. On October 25, 2002, we filed a Current Report on Form 8-K
reporting Items 3 and 7 of such Form related to the filing of the Debtors'
Monthly Operating Reports with the Bankruptcy Court.
iv. On November 14, 2002, we filed a Current Report on Form 8-K
reporting Items 5 and 7 of such Form related to our sale of the pulp
chemicals business.
v. On November 26, 2002, we filed a Current Report on Form 8-K
reporting Items 3 and 7 of such Form related to the confirmation of the
plan of reorganization.
vi. On December 2, 2002, we filed a Current Report on Form 8-K
reporting Items 3 and 7 of such Form related to the filing of the Debtors'
Monthly Operating Reports with the Bankruptcy Court.
146
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STERLING CHEMICALS, INC.
(Registrant)
By /s/ DAVID G. ELKINS
------------------------------------
(David G. Elkins)
President and Co-Chief Executive
Officer
By /s/ RICHARD K. CRUMP
------------------------------------
(Richard K. Crump)
Co-Chief Executive Officer
Date: December 13, 2002
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF EACH OF
THE REGISTRANTS AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
Principal Executive Officers:
/s/ DAVID G. ELKINS President and Co-Chief December 13, 2002
------------------------------------------------ Executive Officer
(David G. Elkins)
/s/ RICHARD K. CRUMP Co-Chief Executive Officer December 13, 2002
------------------------------------------------
Richard K. Crump)
Principal Finance Officer:
/s/ PAUL G. VANDERHOVEN Vice President-Finance and December 13, 2002
------------------------------------------------ Chief Financial Officer
(Paul G. Vanderhoven)
Principal Accounting Officer:
/s/ JOHN R. BEAVER Corporate Controller December 13, 2002
------------------------------------------------
(John R. Beaver)
/s/ ROBERT W. ROTEN Chairman of the Board of December 13, 2002
------------------------------------------------ Directors
(Robert W. Roten)
/s/ FRANK J. HEVRDEJS Director December 13, 2002
------------------------------------------------
(Frank J. Hevrdejs)
/s/ T. HUNTER NELSON Director December 13, 2002
------------------------------------------------
(T. Hunter Nelson)
/s/ ROLF H. TOWE Director December 13, 2002
------------------------------------------------
(Rolf H. Towe)
147
CERTIFICATIONS
I, David G. Elkins, certify that:
1. I have reviewed this annual report on Form 10-K of Sterling Chemicals,
Inc. and subsidiaries;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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
annual 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.
/s/ DAVID G. ELKINS
--------------------------------------
(David G. Elkins)
President and Co-Chief Executive
Officer
Date: December 13, 2002
148
CERTIFICATIONS
I, Richard K. Crump, certify that:
1. I have reviewed this annual report on Form 10-K of Sterling Chemicals,
Inc. and subsidiaries;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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
annual 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.
/s/ RICHARD K. CRUMP
--------------------------------------
(Richard K. Crump)
Co-Chief Executive Officer
Date: December 13, 2002
149
CERTIFICATIONS
I, Paul G. Vanderhoven, certify that:
1. I have reviewed this annual report on Form 10-K of Sterling Chemicals,
Inc. and subsidiaries;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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
annual 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.
/s/ PAUL G. VANDERHOVEN
--------------------------------------
(Paul G. Vanderhoven)
Vice President -- Finance and
Chief Financial Officer
Date: December 13, 2002
150
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
**2.1 -- Certificate of Ownership and Merger merging Sterling
Chemicals Holdings, Inc. into Sterling Chemicals, Inc.
2.2 -- Joint Plan of Reorganization of Sterling Chemicals Holdings,
Inc., et. al., Debtors, dated October 14, 2002, incorporated
herein by reference to Exhibit 2.1 of our Form 8-K filed
with the SEC on November 26, 2002.
2.3 -- First Modification to Joint Plan of Reorganization of
Sterling Chemicals Holdings, Inc., et. al., Debtors, dated
November 18, 2002, incorporated herein by reference to
Exhibit 2.2 of our Form 8-K filed with the SEC on November
26, 2002.
2.4 -- Plan Supplement Pursuant to Section 12.15 to Joint Plan of
Reorganization of Sterling Chemicals Holdings, Inc., et.
al., Debtors, dated November 13, 2002 (forms of
reorganization documents) , incorporated herein by reference
to Exhibit 2.3 of our Form 8-K filed with the SEC on
November 26, 2002.
2.5 -- Notice of Designation of Board of Directors Pursuant to
Section 6.11 of Joint Plan of Reorganization dated November
15, 2002 of Sterling Chemicals Holdings, Inc., et. al.
Debtors, incorporated herein by reference to Exhibit 2.4 of
our Form 8-K filed with the SEC on November 26, 2002.
2.6 -- Order Confirming the Joint Plan of Reorganization of
Sterling Chemicals, Inc. and Debtors dated November 20,
2002, incorporated herein by reference to Exhibit 2.5 of our
Form 8-K filed with the SEC on November 26, 2002.
**3.1 -- Amended and Restated Certificate of Incorporation of
Sterling Chemicals, Inc.
**3.2 -- Audit and Compliance Committee Charter of Sterling
Chemicals, Inc.
**3.3 -- Bylaws of Sterling Chemicals, Inc.
4.1 -- Indenture dated as of August 15, 1996 between Sterling
Chemicals, Inc. and Fleet National Bank governing the
11 3/4% Senior Subordinated Notes due 2006 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.7
to the Registration Statement on Form S-1 of STX Acquisition
Corp. and STX Chemicals Corp. (Registration No. 333-04343).
4.1(a) -- First Supplemental Indenture dated October 1, 1997 governing
the 11 3/4% Senior Subordinated Notes due 2006 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.4
to our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998.
4.1(b) -- Second Supplemental Indenture dated March 16, 1998 governing
the 11 3/4% Senior Subordinated Notes due 2006 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.5
to our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998.
4.1(c) -- Instrument of Resignation, Appointment and Acceptance dated
effective as of July 27, 2001 among Sterling Chemicals,
Inc., State Street Bank and Trust Company (successor to
Fleet National Bank) and HSBC Bank USA related to the
11 3/4% Senior Subordinated Notes due 2006 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.18
to our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2001.
4.2 -- Indenture dated as of April 7, 1997 between Sterling
Chemicals, Inc. and Fleet National Bank governing the
11 1/4% Senior Subordinated Notes due 2007 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.1
to our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997.
4.2(a) -- First Supplemental Indenture dated March 16, 1998 governing
the 11 1/4% Senior Subordinated Notes due 2007 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.6
to our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998.
151
EXHIBIT
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4.2(b) -- Instrument of Resignation, Appointment and Acceptance dated
effective as of July 27, 2001 among Sterling Chemicals,
Inc., State Street Bank and Trust Company (successor to
Fleet National Bank) and HSBC Bank USA related to the
11 1/4% Senior Subordinated Notes due 2006 of Sterling
Chemicals, Inc., incorporated by reference from Exhibit 4.19
to our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2001.
4.3 -- Indenture dated as of July 23, 1999 among Sterling
Chemicals, Inc., as Issuer, Sterling Canada Inc., Sterling
Chemicals Energy, Inc., Sterling Chemicals International,
Inc., Sterling Fibers, Inc., Sterling Pulp Chemicals US,
Inc., and Sterling Pulp Chemicals, Inc., as Guarantors, and
Harris Trust Company of New York, as Trustee, incorporated
by reference from Exhibit 4.9 to our Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1999.
4.4 -- Second Deed of Trust, Assignment of Leases and Rents,
Security Agreement and Fixture Filing dated as of July 23,
1999 by Sterling Chemicals, Inc., Trustor, to John Dorris,
Trustee for the benefit of Harris Trust Company of New York,
Beneficiary, incorporated by reference from Exhibit 4.10 to
our Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999.
4.5 -- Second Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing dated as of July 23, 1999
between Sterling Fibers, Inc., Mortgagor, and Harris Trust
Company of New York, Mortgagee, incorporated by reference
from Exhibit 4.11 to our Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999.
4.6 -- Second Leasehold Deed to Secure Debt, Assignment and
Security Agreement dated as of July 23, 1999 by Sterling
Pulp Chemicals, Inc., Grantor, to Harris Trust Company of
New York, as Collateral Agent, and U.S. Bank Trust National
Association, as Georgia co-agent, incorporated by reference
from Exhibit 4.12 to our Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999.
4.7 -- Security Agreement dated as of July 23, 1999 among Sterling
Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp
Chemicals, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Fibers, Inc., Sterling Chemicals Energy, Inc., and Sterling
Chemicals International, Inc., as Assignors, and Harris
Trust Company of New York, as Collateral Agent, incorporated
by reference from Exhibit 4.13 to our Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1999.
4.8 -- Stock Pledge and Security Agreement dated as of July 23,
1999 among Sterling Chemicals, Inc., Sterling Canada, Inc.,
and Sterling Pulp Chemicals US, Inc., as Pledgors, and
Harris Trust Company of New York, as Collateral Agent,
incorporated by reference from Exhibit 4.14 to our Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1999.
4.9 -- Stock Pledge and Security Agreement dated as of July 23,
1999 among Sterling Chemicals, Inc. and Sterling Canada,
Inc., as Pledgors, and Harris Trust Company of New York, as
Collateral Agent, incorporated by reference from Exhibit
4.15 to our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1999.
4.10 -- Revolving Credit Agreement dated as of July 19, 2001 among
Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling
Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc.,
Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and
Sterling Chemicals International, Inc., as the Borrowers,
The CIT Group/Business Credit, Inc., as the Administrative
Agent, and various financial institutions, as the Lenders,
incorporated by reference from Exhibit 4.1 to our Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
2001.
152
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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4.10(a) -- First Amendment to Revolving Credit Agreement dated as of
August 17, 2001 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Borrowers, The CIT Group/Business Credit, Inc.,
as the Administrative Agent, and various financial
institutions, as the Lenders, incorporated by reference from
Exhibit 4.18(a) of our Annual Report on Form 10-K for the
fiscal year ended September 30, 2001.
4.10(b) -- Second Amendment to Revolving Credit Agreement dated as of
August 29, 2001 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Borrowers, The CIT Group/Business Credit, Inc.,
as the Administrative Agent, and various financial
institutions, as the Lenders, incorporated by reference from
Exhibit 4.18(b) of our Annual Report on Form 10-K for the
fiscal year ended September 30, 2001.
4.10(c) -- Third Amendment to Revolving Credit Agreement dated as of
September 7, 2001 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Borrowers, The CIT Group/Business Credit, Inc.,
as the Administrative Agent, and various financial
institutions, as the Lenders, incorporated by reference from
Exhibit 4.18(c) of our Annual Report on Form 10-K for the
fiscal year ended September 30, 2001.
4.10(d) -- Fourth Amendment to Revolving Credit Agreement dated as of
October 10, 2001 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Borrowers, The CIT Group/Business Credit, Inc.,
as the Administrative Agent, and various financial
institutions, as the Lenders, incorporated by reference from
Exhibit 4.18(d) of our Annual Report on Form 10-K for the
fiscal year ended September 30, 2001.
4.10(e) -- Fifth Amendment to Revolving Credit Agreement dated as of
June 14, 2002 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Borrowers, The CIT Group/Business Credit, Inc.,
as the Administrative Agent, and various financial
institutions, as the Lenders, incorporated by reference from
Exhibit 4.1 to our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002.
**4.10(f) -- Sixth Amendment to Revolving Credit Agreement dated as of
August 19, 2002 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Borrowers, The CIT Group/Business Credit, Inc.,
as the Administrative Agent, and various financial
institutions, as the Lenders.
**4.10(g) -- Seventh Amendment to Revolving Credit Agreement dated as of
September 26, 2002 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Borrowers, The CIT Group/Business Credit, Inc.,
as the Administrative Agent, and various financial
institutions, as the Lenders.
**4.10(h) -- Eighth Amendment to Revolving Credit Agreement dated as of
December 6, 2002 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Borrowers, The CIT Group/Business Credit, Inc.,
as the Administrative Agent, and various financial
institutions, as the Lenders.
153
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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4.11 -- Fixed Assets Secured Parties Deed of Trust, Assignment of
Leases and Rents, Security Agreement and Fixture Filing
dated as of July 19, 2001 by Sterling Chemicals, Inc.,
Trustor, to R. Christian Brose, Trustee for the benefit of
The CIT Group/Business Credit, Inc., as Administrative and
Collateral Agent, Beneficiary, incorporated by reference
from Exhibit 4.4 to our Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2001.
4.12 -- Current Assets Secured Parties Deed of Trust, Assignment of
Leases and Rents, Security Agreement and Fixture Filing
dated as of July 19, 2001 by Sterling Chemicals, Inc.,
Trustor, to R. Christian Brose, Trustee for the benefit of
The CIT Group/Business Credit, Inc., as Administrative and
Collateral Agent, Beneficiary, incorporated by reference
from Exhibit 4.5 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2001.
4.13 -- Fixed Assets Secured Parties Mortgage, Assignment of Leases
and Rents, Security Agreement and Fixture Filing dated as of
July 19, 2001 by Sterling Fibers, Inc., Mortgagor, to The
CIT Group/Business Credit, Inc., Mortgagee, incorporated by
reference from Exhibit 4.6 to our Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2001.
4.14 -- Current Assets Secured Parties Mortgage, Assignment of
Leases and Rents, Security Agreement and Fixture Filing
dated as of July 19, 2001 by Sterling Fibers, Inc.,
Mortgagor, to The CIT Group/Business Credit, Inc.,
Mortgagee, incorporated by reference from Exhibit 4.7 to our
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2001.
4.15 -- Fixed Assets Secured Parties Leasehold Deed to Secure Debt,
Assignment and Security Agreement dated as of July 19, 2001
by Sterling Pulp Chemicals, Inc. to The CIT Group/Business
Credit, Inc., as Administrative Agent, incorporated by
reference from Exhibit 4.8 to our Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2001.
4.16 -- Current Assets Secured Parties Leasehold Deed to Secure
Debt, Assignment and Security Agreement dated as of July 19,
2001 by Sterling Pulp Chemicals, Inc. to The CIT
Group/Business Credit, Inc., as Administrative Agent,
incorporated by reference from Exhibit 4.9 to our Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
2001.
4.17 -- Fixed Assets Secured Parties Security Agreement dated as of
July 19, 2001 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Grantors, and The CIT Group/Business Credit,
Inc., as Administrative Agent for each of the Fixed Assets
Secured Parties, incorporated by reference from Exhibit 4.10
to our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2001.
4.18 -- Current Assets Secured Parties Security Agreement dated as
of July 19, 2001 among Sterling Chemicals, Inc., Sterling
Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling
Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling
Chemicals Energy, Inc. and Sterling Chemicals International,
Inc., as the Grantors, and The CIT Group/Business Credit,
Inc., as Administrative Agent for each of the Current Assets
Secured Parties, incorporated by reference from Exhibit 4.11
to our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2001.
4.19 -- Fixed Assets Secured Parties Obligor Pledge Agreement dated
as of July 19, 2001 among Sterling Chemicals, Inc., Sterling
Canada, Inc. and Sterling Pulp Chemicals US, Inc., as the
Pledgors, and The CIT Group/Business Credit, Inc., as
Administrative Agent for each of the Fixed Assets Secured
Parties, incorporated by reference from Exhibit 4.12 to our
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2001.
154
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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4.20 -- Current Assets Secured Parties Obligor Pledge Agreement
dated as of July 19, 2001 among Sterling Chemicals, Inc.,
Sterling Canada, Inc. and Sterling Pulp Chemicals US, Inc.,
as the Pledgors, and The CIT Group/Business Credit, Inc., as
Administrative Agent for each of the Current Assets Secured
Parties, incorporated by reference from Exhibit 4.13 to our
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2001.
4.21 -- Revolving Credit Agreement dated as of July 23, 1999 among
Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling
Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc.,
Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and
Sterling Chemicals International, Inc., as the Borrowers,
The CIT Group/Business Credit, Inc., as the Administrative
Agent, Credit Suisse First Boston, as the Documentation
Agent, DLJ Capital Funding, Inc., as the Syndication Agent,
and various financial institutions, as the Lenders,
incorporated by reference from Exhibit 4.1 to our Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1999.
4.21(a) -- First Amendment to Revolving Credit Agreement dated
effective as of December 17, 1999 among Sterling Chemicals,
Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US,
Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc.,
Sterling Chemicals Energy, Inc. and Sterling Chemicals
International, Inc., as the Borrowers, The CIT
Group/Business Credit, Inc., as the Administrative Agent,
Credit Suisse First Boston, as the Documentation Agent, DLJ
Capital Funding, Inc., as the Syndication Agent, and various
financial institutions, as the Lenders, incorporated by
reference from Exhibit 4.20(a) of our Annual Report on Form
10-K for the fiscal year ended September 30, 1999.
4.22 -- Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing dated as of July 23, 1999 by
Sterling Chemicals, Inc., Trustor, to Linda H. Earle,
Trustee for the benefit of The CIT Group/Business Credit,
Inc., as Administrative and Collateral Agent, Beneficiary,
incorporated by reference from Exhibit 4.2 to our Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1999.
4.23 -- Mortgage, Assignment of Leases and Rents, Security Agreement
and Fixture Filing dated as of July 23, 1999 by Sterling
Fibers, Inc., Mortgagor, to The CIT Group/Business Credit,
Inc., Mortgagee, incorporated by reference from Exhibit 4.3
to our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1999.
4.24 -- Leasehold Deed to Secure Debt, Assignment and Security
Agreement dated as of July 23, 1999 by Sterling Pulp
Chemicals, Inc. to The CIT Group/Business Credit, Inc., as
Administrative Agent, and U.S. Bank Trust National
Association, as Georgia co-agent, incorporated by reference
from Exhibit 4.4 to our Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999.
4.25 -- Fixed Assets Security Agreement dated as of July 23, 1999
among Sterling Chemicals, Inc., Sterling Canada, Inc.,
Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals,
Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc.
and Sterling Chemicals International, Inc., as the Grantors,
and The CIT Group/Business Credit, Inc., as Administrative
Agent for each of the Fixed Assets Secured Parties,
incorporated by reference from Exhibit 4.5 to our Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1999.
4.26 -- Current Assets Security Agreement dated as of July 23, 1999
among Sterling Chemicals, Inc., Sterling Canada, Inc.,
Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals,
Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc.
and Sterling Chemicals International, Inc., as the Grantors,
and The CIT Group/Business Credit, Inc., as Administrative
Agent for each of the Current Assets Secured Parties,
incorporated by reference from Exhibit 4.6 to our Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1999.
155
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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4.27 -- Obligor Pledge Agreement dated as of July 23, 1999 among
Sterling Chemicals, Inc., Sterling Canada, Inc. and Sterling
Pulp Chemicals US, Inc., as the Pledgors, and The CIT
Group/Business Credit, Inc., as Administrative Agent for
each of the Fixed Assets Secured Parties, incorporated by
reference from Exhibit 4.8 to our Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999.
4.28 -- Senior Debt Intercreditor Agreement dated as of July 23,
1999 among Harris Trust Company of New York, as Trustee, The
CIT Group/Business Credit, Inc., as Administrative Agent,
and Sterling Chemicals, Inc., incorporated by reference from
Exhibit 4.17 to our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999.
4.29 -- Financing Agreement dated as of July 11, 2001 between
Sterling Pulp Chemicals, Ltd. and CIT Business Credit Canada
Inc., incorporated by reference from Exhibit 4.14 to our
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2001.
4.29(a) -- Letter Agreement dated July 26, 2001 between Sterling Pulp
Chemicals, Ltd. and CIT Business Credit Canada Inc. amending
the Financing Agreement in certain respects, incorporated by
reference from Exhibit 4.41(a) of our Annual Report on Form
10-K for the fiscal year ended September 30, 2001.
4.29(b) -- Letter Agreement dated September 14, 2001 between Sterling
Pulp Chemicals, Ltd. and CIT Business Credit Canada Inc.
amending the Financing Agreement in certain respects,
incorporated by reference from Exhibit 4.41(b) of our Annual
Report on Form 10-K for the fiscal year ended September 30,
2001.
4.29(c) -- Letter Agreement dated January 30, 2002 between Sterling
Pulp Chemicals, Ltd. and CIT Business Credit Canada Inc.
amending the Financing Agreement in certain respects,
incorporated by reference from Exhibit 4.1 of our Quarterly
Report on Form 10-Q for the quarterly period ended December
31, 2001.
4.30 -- Demand Debenture dated as of July 11, 2001 by Sterling Pulp
Chemicals, Ltd. in favor of CIT Business Credit Canada Inc.,
as Holder, and the Lenders, incorporated by reference from
Exhibit 4.15 to our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2001.
4.31 -- Debenture Pledge Agreement dated as of July 11, 2001 between
Sterling Pulp Chemicals, Ltd. and CIT Business Credit Canada
Inc., incorporated by reference from Exhibit 4.16 to our
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2001.
4.32 -- Deed of Hypothec dated as of July 13, 2001 between Sterling
Pulp Chemicals, Ltd. and CIBC Mellon Trust Company, as
holder of power of attorney for all present and future
holders of the Demand Debenture dated July 11, 2001 by
Sterling Pulp Chemicals, Ltd. in favor of CIT Business
Credit Canada Inc., incorporated by reference from Exhibit
4.17 to our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2001.
4.33 -- Credit Agreement dated as of July 24, 2002, among Sterling
Pulp Chemicals (Sask) Ltd., as Borrower, Bank of Montreal,
as Agent, and the other Lenders from time to time a party
thereto, incorporated by reference from Exhibit 4.2 of our
Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 2001.
10.1 -- Third Amended and Restated Key Employee Protection Plan,
incorporated by reference from Exhibit 10.2 of our Annual
Report on Form 10-K for the fiscal year ended September 30,
2001.
10.2 -- Amended and Restated Supplemental Pay Plan, incorporated by
reference from Exhibit 10.1 to our Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2001.
**10.2(a) -- First Amendment to Amended and Restated Supplemental Pay
Plan.
10.3 -- Amended and Restated Retention Bonus Plan, incorporated by
reference from Exhibit 10.4 of our Annual Report on Form
10-K for the fiscal year ended September 30, 2001.
156
EXHIBIT
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10.4 -- Amended and Restated Supplemental Bonus Plan, incorporated
by reference from Exhibit 10.5 of our Annual Report on Form
10-K for the fiscal year ended September 30, 2001.
10.5 -- Second Amended and Restated Severance Pay Plan, incorporated
by reference from Exhibit 10.6 of our Annual Report on Form
10-K for the fiscal year ended September 30, 2001.
10.6 -- Sterling Chemicals Holdings, Inc. Omnibus Stock Awards and
Incentive Plan, as amended, incorporated by reference from
Exhibit 10.3 to our Annual Report on Form 10-K for the
fiscal year ended September 30, 2000.
10.7 -- Sterling Chemicals, Inc. Amended and Restated Salaried
Employees' Pension Plan (Effective as of May 1, 1996),
incorporated by reference from Exhibit 10.4 to our Annual
Report on Form 10-K for the fiscal year ended September 30,
2000.
10.7(a) -- First Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
January 31, 1997), incorporated by reference from Exhibit
10.4(a) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.7(b) -- Second Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
January 1, 1997), incorporated by reference from Exhibit
10.4(b) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.7(c) -- Third Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
November 1, 1998), incorporated by reference from Exhibit
10.4(c) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.7(d) -- Fourth Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
December 31, 1998), incorporated by reference from Exhibit
10.4(d) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.7(e) -- Fifth Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
April 1, 1999), incorporated by reference from Exhibit
10.4(e) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.7(f) -- Sixth Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan (Effective as of
May 14, 1999), incorporated by reference from Exhibit
10.4(f) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.8 -- Sterling Chemicals, Inc. Pension Benefit Equalization Plan,
incorporated by reference from Exhibit 10.10 to our
Registration Statement on Form S-1 (Registration No.
33-24020).
10.9 p -- Sterling Chemicals, Inc. Amended and Restated Supplemental
Employee Retirement Plan, incorporated by reference from
Exhibit 10.34 to our Annual Report on Form 10-K for the
fiscal year ended September 30, 1989 (Commission File Number
1-10059).
10.10 -- Sterling Chemicals, Inc. Amended and Restated Hourly Paid
Employees' Pension Plan (Effective as of May 1, 1996),
incorporated by reference from Exhibit 10.3(c) to our Annual
Report on Form 10-K for the fiscal year ended September 30,
1996.
10.10(a) -- First Amendment to the Sterling Chemicals, Inc. Amended and
Restated Hourly Paid Employees' Pension Plan (Effective as
of December 31, 1998), incorporated by reference from
Exhibit 10.7(a) to our Annual Report on Form 10-K for the
fiscal year ended September 30, 2000.
10.10(b) -- Second Amendment to the Sterling Chemicals, Inc. Amended and
Restated Hourly Paid Employees' Pension Plan (Effective as
of December 17, 1998), incorporated by reference from
Exhibit 10.7(b) to our Annual Report on Form 10-K for the
fiscal year ended September 30, 2000.
157
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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10.10(c) -- Third Amendment to the Sterling Chemicals, Inc. Amended and
Restated Hourly Paid Employees' Pension Plan (Effective as
of September 20, 1999), incorporated by reference from
Exhibit 10.7(c) to our Annual Report on Form 10-K for the
fiscal year ended September 30, 2000.
10.11 -- Sterling Chemicals, Inc. Sixth Amended and Restated Savings
and Investment Plan dated as of October 1, 2000,
incorporated by reference from Exhibit 10.8 to our Annual
Report on Form 10-K for the fiscal year ended September 30,
2000.
10.11(a) -- First Amendment to the Sixth Amended and Restated Savings
and Investment Plan dated as of October 1, 2000,
incorporated by reference from Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the quarterly period ended December
31, 2001.
10.12 -- Sterling Chemicals ESOP, incorporated by reference from
Exhibit 10.6 to our Annual Report on Form 10-K for the
fiscal year ended September 30, 1996.
10.12(a) -- Sterling Chemicals ESOP (First Amendment) (Effective as of
December 27, 1996), incorporated by reference from Exhibit
10.9(a) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.12(b) -- Sterling Chemicals ESOP (Second Amendment) (Effective as of
August 21, 1996), incorporated by reference from Exhibit
10.9(b) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.12(c) -- Third Amendment to Sterling Chemicals ESOP (Effective as of
January 31, 1997), incorporated by reference from Exhibit
10.9(c) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.12(d) -- Fourth Amendment to Sterling Chemicals ESOP (Effective as of
November 1, 1998) incorporated by reference from Exhibit
10.9(d) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
10.12(e) -- Fifth Amendment to Sterling Chemicals ESOP (Effective as of
December 31, 1998) incorporated by reference from Exhibit
10.9(e) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
**10.13 -- Articles of Agreement between Sterling Chemicals, Inc., its
successors and assigns, and Texas City, Texas Metal Trades
Council, AFL-CIO Texas City, Texas, September 28, 2002 to
May 1, 2004.
10.14 -- Agreement between Sterling Pulp Chemicals Ltd., North
Vancouver, British Columbia, and Pulp, Paper and Woodworkers
of Canada, Local 5, British Columbia, effective December 1,
2000 to November 30, 2003, incorporated by reference from
Exhibit 10.15 to our Annual Report on Form 10-K for the
fiscal year ended September 30, 2001.
10.15 -- Form of Indemnity Agreement executed between the Company and
each of its officers and directors, incorporated by
reference from Exhibit 10.17 to our Annual Report on Form
10-K for the fiscal year ended September 30, 1996.
**10.16 -- Employment Agreement dated as of January 23, 2001 between
David G. Elkins and the Company.
**10.17 -- Consulting Agreement dated as of January 1, 2002 between
Robert W. Roten and Sterling Chemicals Holdings, Inc.
+10.18 -- Amended and Restated Production Agreement dated March 31,
1998 between BP Chemicals, Inc. and Sterling Chemicals,
Inc., incorporated by reference from Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1998.
+10.19 -- Second Amended and Restated Production Agreement dated
effective as of August 1, 1996 between BP Chemicals Inc. and
Sterling Chemicals, Inc., incorporated by reference from
Exhibit 10.3 to our Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998.
158
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
+10.19(a) -- Amendment to Second Amended and Restated Production
Agreement dated as of March 1, 2001 between Sterling
Chemicals, Inc. and BP Chemicals Inc., incorporated by
reference from Exhibit 10.1 to our Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2001.
+10.20 -- Amended and Restated Product Sales Agreement dated effective
as of January 1, 1998 between BASF Corporation and Sterling
Chemicals, Inc., incorporated by referenced from Exhibit
10.11 to our Annual Report on Form 10-K for the fiscal year
ended September 30, 1997.
10.21 -- License Agreement dated August 1, 1986 between Monsanto
Company and Sterling Chemicals, Inc. incorporated by
reference from Exhibit 10.25 to our Registration Statement
on Form S-1 (Registration No. 33-24020).
+10.22 -- Joint Venture Agreement dated March 31, 1998 between
Sterling Chemicals, Inc. and BP Chemicals, Inc.,
incorporated by reference from Exhibit 10.4 to our Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
1998.
+10.22(a) -- First Amendment to Joint Venture Agreement dated effective
as of March 31, 1998 between Sterling Chemicals, Inc. and BP
Chemicals Inc., incorporated by reference from Exhibit
10.26(a) to our Annual Report on Form 10-K for the fiscal
year ended September 30, 1998.
**10.23 -- Asset and Stock Purchase Agreement among Sterling Chemicals,
Inc. and Sterling Canada, Inc., Sterling Pulp Chemicals US
Inc., Sterling Pulp Chemicals, Inc. and Sterling Chemicals
Acquisitions, Inc. as Sellers and Superior Propane Inc. as
Purchasers, dated as of November 13, 2002.
**10.24 -- Investment Agreement dated as of October 11, 2002 between
Sterling Chemicals Holdings, Inc. and Sterling Chemicals,
Inc. and Resurgence Asset Management, L.L.C.
**21.1 -- Subsidiaries of Sterling Chemicals Holdings, Inc.
**99.1 -- Certification of CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
**99.2 -- Certification of CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
**99.3 -- Certification of CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
**99.4 -- Sterling Canada, Inc. consolidated financial statements and
notes thereto for the years ended September 30, 2002, 2001
and 2000, including independent auditors' report.
**99.5 -- Sterling Pulp Chemicals, Ltd. financial statements and notes
thereto for the years ended September 30, 2002, 2001 and
2000, including independent auditors' report.
---------------
** Filed herewith.
+ Confidential treatment has been requested with respect to portions of this
Exhibit, and such request has been granted.
159