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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-50132
STERLING CHEMICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0502785
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (IRS EMPLOYER IDENTIFICATION NO.)
1200 SMITH STREET, SUITE 1900
HOUSTON, TEXAS 77002-4312 (713) 650-3700
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes____ No X
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No____
As of July 31, 2003, Sterling Chemicals, Inc. had 2,825,000 shares of
common stock outstanding.
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IMPORTANT INFORMATION REGARDING THIS FORM 10-Q
Unless otherwise indicated, references to "we," "us," "our" and "ours" in
this Form 10-Q refer collectively to Sterling Chemicals, Inc. and its
wholly-owned subsidiaries.
Readers should consider the following information as they review this Form 10-Q:
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made or incorporated by reference from
time to time by us or our representatives are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements other than statements of historical fact are, or may be
deemed to be, forward-looking statements. Forward-looking statements include,
without limitation, any statement that may project, indicate or imply future
results, events, performance or achievements, and may contain or be identified
the words "expect," "intend," "plan," "predict," "anticipate," "estimate,"
"believe," "should," "could," "may," "might," "will be," "will continue," "will
likely result," "project," "forecast," "budget" and similar expressions.
Statements in this report that contain forward-looking statements include, but
are not limited to, information concerning our possible or assumed future
results of operations and statements about the following subjects:
- the cyclicality of the petrochemicals industry;
- current and future industry conditions;
- the potential effects of market and industry conditions and
cyclicality on our business strategy, results of operations or
financial position;
- the adequacy of our liquidity;
- our environmental management programs and safety initiatives;
- our market sensitive financial instruments;
- future uses of and requirements for financial resources;
- future contractual obligations;
- business strategy;
- growth opportunities;
- competitive position;
- expected financial position;
- future cash flows;
- future dividends;
- financing plans;
- budgets for capital and other expenditures;
- plans and objectives of management;
- outcomes of legal proceedings;
- compliance with applicable laws; and
- adequacy of insurance or indemnification.
Such statements are based upon current information and expectations and
inherently are subject to a variety of risks and uncertainties that could cause
actual results to differ materially from those expected or expressed in
forward-looking statements. Such risks and uncertainties include, among others,
the following:
- the timing and extent of changes in commodity prices;
- petrochemicals industry production capacity and operating rates;
- market conditions in the petrochemicals industry, including the
supply-demand balance for our products;
- competition, including competitive products and pricing pressures;
- obsolescence of product lines;
- the timing and extent of changes in global economic and business
conditions;
- increases in raw materials and energy costs, including the cost of
natural gas;
- our ability to obtain raw materials and energy at acceptable prices,
in a timely manner and on acceptable terms;
- regulatory initiatives and compliance with governmental regulations;
- compliance with environmental laws and regulations;
- customer preferences;
- the availability of skilled personnel;
- our ability to attract or retain high quality employees;
-i-
- operating hazards attendant to the petrochemicals industry;
- casualty losses;
- changes in foreign, political, social and economic conditions;
- risks of war, military operations, other armed hostilities,
terrorist acts and embargoes;
- changes in technology, which could require significant capital
expenditures in order to maintain competitiveness;
- effects of litigation;
- cost, availability and adequacy of insurance;
- adequacy of our sources of liquidity; and
- various other matters, many of which are beyond our control.
The risks included here are not exhaustive. Other sections of this report
and our other filings with the Securities and Exchange Commission, including,
without limitation, our Annual Report on Form 10-K for the fiscal year ended
September 30, 2002 (our "Annual Report"), include additional factors that could
adversely affect our business, results of operations and financial performance.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Known Events, Trends, Uncertainties and Risk Factors"
contained in our Annual Report. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements. Forward-looking
statements included in this report speak only as of the date of this report and
are not guarantees of future performance. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, no
assurances can be given that such expectations will prove to have been correct.
We expressly disclaim any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statement to reflect any change in
our expectations with regard thereto or any change in events, conditions or
circumstances on which any forward-looking statement is based. All subsequent
written and oral forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by these cautionary
statements.
SUBSEQUENT EVENTS
All statements contained in this Form 10-Q, including the forward-looking
statements discussed above, are made as of August 12, 2003, unless those
statements are expressly made as of another date. We disclaim any responsibility
for the correctness of any information contained in this Form 10-Q to the extent
such information is affected or impacted by events, circumstances or
developments occurring after August 12, 2003 or by the passage of time after
such date and, except as required by applicable securities laws, we do not
intend to update such information.
DOCUMENT SUMMARIES
Statements contained in this Form 10-Q describing documents and agreements
are provided in summary form only and such summaries are qualified in their
entirety by reference to the actual documents and agreements filed as exhibits
to our Annual Report, other periodic reports we file with the Securities and
Exchange Commission or this Form 10-Q.
AVAILABLE INFORMATION
Access to our annual reports on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K, and amendments to those reports, filed with or
furnished to the Securities and Exchange Commission pursuant to Section 13(a) of
the Exchange Act, as well as any Beneficial Ownership Reports that have been
electronically filed by our directors, officers and stockholders that own at
least 10% of our capital securities, may be obtained through our website
(http://www.sterlingchemicals.com). Our website provides a hyperlink to a
third-party website where these reports may be viewed and printed at no cost as
soon as reasonably practicable after such materials have been electronically
filed or furnished. The contents of our website are not, and shall not be deemed
to be, incorporated into this report.
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STERLING CHEMICALS, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ................................................................ 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk .......................... 20
Item 4. Controls and Procedures ............................................................. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................................... 21
Item 6. Exhibits and Reports on Form 8-K .................................................... 21
3
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
REORGANIZED PREDECESSOR
STERLING STERLING
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
Revenues ............................................. $ 120,610 $ 136,392
Cost of goods sold ................................... 129,672 118,509
--------- ---------
Gross profit (loss) .................................. (9,062) 17,883
Selling, general and administrative expenses ......... 3,907 2,159
Other expense ........................................ 157 --
Reorganization items ................................. -- 4,597
Interest and debt related expenses, net of interest
income (1) ........................................... 2,243 11,437
--------- ---------
Loss from continuing operations before income taxes .. (15,369) (310)
Provision (benefit) for income taxes ................. (5,594) 21
--------- ---------
Loss from continuing operations ...................... (9,775) (331)
Income (loss) from discontinued operations, net of tax
expense .............................................. (342) 7,274
--------- ---------
Net income (loss) .................................... (10,117) 6,943
Preferred stock dividends ............................ 1,255 --
--------- ---------
Net income (loss) attributable to common stockholders $ (11,372) $ 6,943
========= =========
Net loss per share of common stock, basic and diluted $ (4.03) $ --
========= =========
Weighted average shares of common stock outstanding:
Basic and diluted ................................. 2,825 --
(1) Contractual interest for the three-month period ended June 30, 2002
totaled $23,046.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
REORGANIZED PREDECESSOR
STERLING STERLING
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
Revenues ............................................. $ 242,978 $ 198,314
Cost of goods sold ................................... 254,402 183,601
--------- ---------
Gross profit (loss) .................................. (11,424) 14,713
Selling, general and administrative expenses ......... 8,593 5,738
Other income ......................................... (3,521) --
Reorganization items ................................. -- 9,278
Interest and debt related expenses, net of interest
income (1) ........................................... 3,844 22,504
--------- ---------
Loss from continuing operations before income taxes .. (20,340) (22,807)
Provision (benefit) for income taxes ................. (7,025) 46
--------- ---------
Loss from continuing operations ...................... (13,315) (22,853)
Income (loss) from discontinued operations, net of tax
expense .............................................. (976) 14,434
--------- ---------
Net loss ............................................. (14,291) (8,419)
Preferred stock dividends ............................ 2,462 --
--------- ---------
Net loss attributable to common stockholders ......... $ (16,753) $ (8,419)
========= =========
Net loss per share of common stock, basic and diluted $ (5.93) $ --
========= =========
Weighted average shares of common stock outstanding:
Basic and diluted ................................. 2,825 --
(1) Contractual interest for the six-month period ended June 30, 2002 totaled
$46,411.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
REORGANIZED STERLING PREDECESSOR STERLING
------------------------------------ --------------------
JUNE 30, 2003 DECEMBER 31, 2002 SEPTEMBER 30, 2002
------------- ----------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 66,231 $ 99,818 $ 9,843
Accounts receivable, net ............................. 56,005 41,814 70,306
Inventories .......................................... 31,903 31,011 32,836
Prepaid expenses ..................................... 3,437 4,561 3,678
Deferred tax asset ................................... 12,343 11,988 --
Assets held for sale ................................. -- -- 215,178
--------- --------- ---------
Total current assets ............................... 169,919 189,192 331,841
Property, plant and equipment, net ...................... 278,435 283,378 117,222
Goodwill ................................................ 48,463 48,463 --
Other assets ............................................ 21,933 22,998 40,585
--------- --------- ---------
Total assets ....................................... $ 518,750 $ 544,031 $ 489,648
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 30,993 $ 31,214 $ 30,591
Accrued liabilities .................................. 21,976 26,635 31,720
Current portion of long-term debt .................... -- -- 57,242
Liabilities related to discontinued operations ....... -- -- 90,110
--------- --------- ---------
Total current liabilities ............................ 52,969 57,849 209,663
Pre-petition liabilities - subject to compromise ........ -- -- 508,895
Pre-petition liabilities - not subject to compromise .... -- -- 362,836
Long-term debt .......................................... 94,275 94,275 --
Deferred tax liability .................................. 52,860 59,597 --
Deferred credits and other liabilities .................. 93,758 93,131 19,731
Redeemable preferred stock .............................. 32,632 30,170 --
Commitments and contingencies (Note 7)
Stockholders' equity (deficiency in assets):
Common stock, $.01 par value ......................... 28 28 --
Additional paid-in capital ........................... 208,065 210,527 (141,786)
Accumulated deficit .................................. (15,837) (1,546) (419,437)
Accumulated other comprehensive income ............... -- -- (50,254)
--------- --------- ---------
Total stockholders' equity (deficiency in assets) .... 192,256 209,009 (611,477)
--------- --------- ---------
Total liabilities and stockholders' equity (deficiency in
assets) ................................................. $ 518,750 $ 544,031 $ 489,648
========= ========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
REORGANIZED PREDECESSOR
STERLING STERLING
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
Cash flows from operating activities:
Net loss from continuing operations .................................. $(13,315) $(22,853)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ..................................... 13,259 11,463
Interest amortization ............................................. 188 1,827
Deferred tax benefit .............................................. (7,092) --
Other ............................................................. (1) 10,158
Change in assets/liabilities:
Accounts receivable ............................................... (14,191) (27,741)
Inventories ....................................................... (892) (2,693)
Prepaid expenses .................................................. 1,124 (3,058)
Other assets ...................................................... (200) (868)
Accounts payable .................................................. (220) 28,201
Accrued liabilities ............................................... (4,659) (6,278)
Other liabilities ................................................. 627 (5,819)
-------- --------
Net cash used in operating activities ................................ (25,372) (17,661)
-------- --------
Cash flows used in investing activities:
Capital expenditures .............................................. (7,239) (6,169)
Cash flows from financing activities:
Net borrowings under DIP Facility ................................. -- 25,055
Net increase (decrease) in cash and cash equivalents from continuing
operations ........................................................... (32,611) 1,225
Net increase in cash and cash equivalents from discontinued operations (976) 281
Cash and cash equivalents - beginning of period ...................... 99,818 623
-------- --------
Cash and cash equivalents - end of period ............................ $ 66,231 $ 2,129
======== ========
Supplemental disclosures of cash flow information:
Net interest paid ................................................. $ 4,480 $ 2,701
Cash paid for reorganization items ................................ 13,115 6,830
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Overview:
On July 16, 2001, Sterling Chemicals Holdings, Inc. ("Holdings"), Sterling
Chemicals, Inc. and most of their U.S. subsidiaries (collectively, the
"Debtors") filed voluntary petitions for reorganization under Chapter 11
("Chapter 11") of the United States Bankruptcy Code in the U.S. Bankruptcy Court
for the Southern District of Texas (the "Bankruptcy Court"). A plan of
reorganization (as modified, the "Plan of Reorganization") was filed with the
Bankruptcy Court on May 14, 2002 and was confirmed on November 20, 2002. On
December 19, 2002, the Plan of Reorganization became effective and the Debtors
emerged from bankruptcy pursuant to the terms of the Plan of Reorganization.
During the period from July 16, 2001 through December 19, 2002, the Debtors
operated their respective businesses as debtors-in-possession pursuant to the
United States Bankruptcy Code, and the financial statements covered by this
period have been presented in conformity with the AICPA's Statement of Position
90-7, "Financial Reporting By Entities In Reorganization Under the Bankruptcy
Code" ("SOP 90-7").
The filing of the Chapter 11 petitions was driven by the Debtors'
inability to meet their funded debt obligations over the long-term, largely
brought about by weak demand for petrochemicals products caused by declines in
general worldwide economic conditions, the relative strength of the U.S. dollar
(which caused their export sales to be at a competitive disadvantage) and higher
raw materials and energy costs. As a result of these conditions, the Debtors
incurred significant operating losses. The reorganization, effected through the
bankruptcy filings, permitted the Debtors to preserve cash and gave them the
opportunity to restructure their debt. As the market for our petrochemicals
products remains highly cyclical, the capital structure of Reorganized Sterling
has been designed with the goal of ensuring that we have sufficient liquidity
during cyclical downturns in the markets for our petrochemicals products,
although we cannot give any assurances that our new capital structure will
provide us with sufficient liquidity over any specific period.
On December 6, 2002, Holdings was merged with and into Predecessor
Sterling. Under the terms of the merger and the Plan of Reorganization, all
equity interests in Holdings were cancelled upon consummation of the merger and
we issued 65,000 shares of Reorganized Sterling common stock to the holders of
Holdings' 13-1/2% Senior Secured Discount Notes in full payment of their claims.
Upon the effectiveness of the Plan of Reorganization, the unsecured creditors of
the Debtors (other than unsecured creditors of Holdings), which included holders
of Predecessor Sterling's 11-1/4% Senior Subordinated Notes and 11-3/4% Senior
Subordinated Notes, received pro rata shares of 11.7% of Reorganized Sterling's
common stock (on a fully diluted basis) and warrants to acquire 949,367 shares
of Reorganized Sterling's common stock at an exercise price of $52 per share
(subject to adjustment). In addition, upon the effectiveness of the Plan of
Reorganization, Resurgence Asset Management, L.L.C., on behalf of itself and
certain of its and its affiliates' managed funds and accounts (collectively, the
"Investor"), paid $30 million for certain shares of convertible preferred stock
of Reorganized Sterling. An additional $30 million was contributed to
Reorganized Sterling pursuant to a rights offering made available to the
Debtors' unsecured creditors (other than unsecured creditors of Holdings), which
offering was underwritten by the Investor. Upon the effectiveness of the Plan of
Reorganization, Reorganized Sterling issued 2,175,000 shares of its common stock
under the terms of the rights offering.
On December 19, 2002, the Debtors emerged from bankruptcy pursuant to the
terms of the Plan of Reorganization. Under the Plan of Reorganization, the
Debtors' pulp chemicals business was sold to Superior Propane, Inc. ("Superior
Propane") for approximately $373 million and the Debtors' acrylic fibers
business was sold to local management of that business for nominal
consideration. A portion of the net proceeds from the sale of the Debtors' pulp
chemicals business, approximately $80 million, remained with Reorganized
Sterling, which continues to own and operate the Debtors' core petrochemicals
business. The remaining net proceeds from the sale were paid to the holders of
Predecessor Sterling's 123/8% Senior Secured Notes (the "123/8% Notes"), who
also received approximately $94.3 million in principal amount of new 10% Senior
Secured Notes due 2007 issued by Reorganized Sterling (the "New Notes") in
satisfaction of their claims. In addition, on the Effective Date of the Plan of
Reorganization, Reorganized Sterling established a new revolving credit facility
providing up to $100 million in revolving credit loans (subject to borrowing
base limitations) with The CIT Group/Business Credit, Inc., as administrative
agent and a lender, and certain other lenders (the "New Revolver"). We had not,
as of June 30, 2003, borrowed any money under the New Revolver, although we had
approximately $1.6 million in letters of credit outstanding under the New
Revolver as of June 30, 2003.
For financial reporting purposes, the effective date of the Plan of
Reorganization is considered to have been the close of business on December 19,
2002 (the "Effective Date"). In this Form 10-Q, we are referred to as
"Predecessor Sterling" for periods on or before December 19, 2002 and as
"Reorganized Sterling" for periods after December 19, 2002. Due to the Debtors'
5
emergence from Chapter 11 and the implementation of fresh-start accounting (see
Note 3), our financial results have been separately presented under these
headings for periods on or before December 19, 2002 and for periods after
December 19, 2002, respectively. Our financial statements as of and for the
three and six-month periods ended June 30, 2003 are not comparable to those of
Predecessor Sterling for the same periods ended June 30, 2002. Additionally, in
December 2002, we changed our fiscal year-end from September 30 to December 31.
Interim Financial Information:
In our opinion, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments necessary to present fairly our
consolidated financial position and consolidated results of operations and cash
flows for the applicable three and six-month periods ended June 30, 2003 and
2002. All such adjustments are of a normal and recurring nature. The results of
operations and cash flows for the periods presented are not necessarily
indicative of the results to be expected for the full year. Certain amounts
reported in the financial statements for the prior periods have been
reclassified to conform with the current financial statement presentation with
no effect on net loss or stockholders' equity (deficiency in assets).
The accompanying unaudited condensed consolidated financial statements
should be, and are assumed to have been, read in conjunction with the
consolidated financial statements and notes included in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2002 (the "Annual Report") and
with the transition report on Form 10-Q/A for the three months ended December
31, 2002 (the "Transition Report"). The accompanying condensed consolidated
balance sheet as of September 30, 2002 has been derived from the audited
consolidated balance sheet as of September 30, 2002 included in the Annual
Report, and the accompanying condensed consolidated balance sheet as of December
31, 2002 has been derived from the consolidated balance sheet as of December 31,
2002 included in the Transition Report. The accompanying condensed consolidated
financial statements as of and for the three and six-month periods ended June
30, 2003 have been reviewed by Deloitte & Touche LLP, our independent public
accountants, whose report is included herein.
Recent Developments:
In June 2003, we restarted the acrylonitrile unit at our Texas City
facility, which had been shut down since February 2001. We completed the restart
of two of the three reactors of the unit in July 2003, with the third reactor
scheduled to be restarted during the third quarter of 2003. In addition, in June
2003 we entered into an expanded acrylonitrile relationship agreement with BP
Chemicals Inc. ("BP"). Our acrylonitrile relationship with BP is governed by a
variety of documents, including a Production Agreement, under which BP has the
right, but not the obligation, to purchase acrylonitrile from us up to a
specified percentage of our annual rated production capacity, and a Joint
Venture Agreement, pursuant to which we and BP formed ANEXCO, LLC, a 50/50 joint
venture that markets all of the parties' respective sales of acrylonitrile
everywhere in the world other than the United States, Canada, Mexico, Turkey and
the European Union. Under the Production Agreement, BP furnishes the necessary
raw materials and pays us a conversion fee for any acrylonitrile it elects to
purchase and reimburses us for a specified portion of our fixed costs related to
acrylonitrile production irrespective of whether BP purchases any acrylonitrile
under the Production Agreement. Under the expanded acrylonitrile relationship
agreement, BP's right to purchase acrylonitrile from us under the Production
Agreement was significantly increased and the Joint Venture Agreement was
modified in a manner that, together with the modifications to the Production
Agreement, is intended to provide us with the ability to operate our
acrylonitrile facility at optimal three-reactor rates throughout the
acrylonitrile market cycles.
In addition, in July 2003, we entered into a new sodium cyanide supply
agreement with E.I. du Pont de Nemours and Company ("DuPont") which allows us to
enhance the value of hydrogen cyanide produced as a by-product from our
acrylonitrile operations. We expect to restart the sodium cyanide plant, which
is located at our Texas City facility but owned by DuPont, during the third
quarter of 2003. The sodium cyanide plant has been shut down since February
2001.
2. STOCK-BASED COMPENSATION PLAN
On December 6, 2002, Holdings was merged with and into Predecessor
Sterling. Under the terms of the merger and the Plan of Reorganization, all
equity interests in Holdings, including all options issued under Holdings' stock
based incentive plans, were cancelled upon consummation of the merger. In
connection with the implementation of the Plan of Reorganization, we adopted our
2002 Stock Plan. Under our 2002 Stock Plan, officers and key employees, as
designated by our Board of Directors, may be issued stock options, stock awards,
stock appreciation rights or stock units. Our 2002 Stock Plan may be amended or
modified from time to time by our Board of Directors in accordance with its
terms. We have reserved 379,747 shares of our common stock for issuance under
our 2002 Stock Plan (subject to adjustment as provided for in our 2002 Stock
Plan). On February 11, 2003, we granted options to purchase 348,500 shares of
our common stock under our 2002 Stock Plan at an exercise price of $31.60 per
share.
6
We account for our stock-based compensation arrangements using the
intrinsic value method in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and related interpretations. Under APB 25, if the exercise price of
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. All stock options issued
under our 2002 Stock Plan were granted with exercise prices at estimated fair
value at the time of grant. Therefore, no compensation expense has been
recognized under APB 25.
The following table illustrates the effect on net loss and earnings per
share assuming that compensation costs for stock options issued under our 2002
Stock Plan had been determined using the estimated market value at the grant
dates amortized on a pro rata basis over the vesting period as required under
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," for the three and six months ended June 30, 2003.
There were no options outstanding prior to February 11, 2003.
THREE MONTHS SIX MONTHS
ENDED JUNE ENDED JUNE
30, 2003 30, 2003
-------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss attributable to common stockholders, as reported ..... $(11,372) $(16,753)
Add: Stock-based employee compensation expense included in
reported net loss, net of related tax effects ................. -- --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects ........................................... 594 891
-------- --------
Pro forma net loss ............................................ $(11,966) $(17,644)
======== ========
Loss per share of common stock as reported, basic and diluted . $ (4.03) $ (5.93)
Pro forma loss per share of common stock, basic and diluted ... $ (4.24) $ (6.25)
3. FRESH-START ACCOUNTING
Upon our emergence from bankruptcy on December 19, 2002, we implemented
fresh-start accounting under the provisions of SOP 90-7 and became a new
reporting entity. Under SOP 90-7, our reorganization value was allocated to our
assets and liabilities, our accumulated deficit was eliminated and new preferred
and common equity was issued pursuant to the Plan of Reorganization. In
connection with our Plan of Reorganization, our financial advisor, Greenhill &
Co., LLC ("Greenhill") prepared a valuation of our business. In preparing its
valuation, Greenhill considered a number of factors including valuations by
other parties and the application of various valuation methods, including
discounted cash flow analysis, comparable company analysis and precedent
transaction analysis. Based on Greenhill's valuation, the estimated
reorganization value was allocated as follows (dollars in thousands):
Long-term debt $ 94,275
Redeemable preferred stock 30,000
Stockholders'equity 210,725
--------
Total $335,000
========
In connection with the cancellation of certain debt of Holdings and
Predecessor Sterling pursuant to the Plan of Reorganization, on December 19,
2002 we recorded a $457.8 million gain related to the cancellation of that debt.
Also in connection with fresh-start accounting, we changed our method of
accounting for periodic turnaround maintenance for our manufacturing units. We
previously accrued the cost of these turnarounds in advance, but we now expense
all costs for turnarounds as they are incurred. A one-time credit to reverse a
$5.2 million existing accrual for turnaround expenses was recorded as part of
our fresh-start accounting transactions. A reconciliation of the adjustments
recorded in connection with our debt restructuring, the adoption of fresh-start
accounting and the accounting for discontinued operations at December 19, 2002
is presented below:
7
PREDECESSOR REORGANIZED
STERLING STERLING
DECEMBER DISCONTINUED REORGANIZATION FRESH-START DECEMBER
19, 2002 OPERATIONS ADJUSTMENTS ADJUSTMENTS 19, 2002
-------- ---------- ----------- ----------- --------
ASSETS: (dollars in thousands, unaudited)
Current assets:
Cash and cash equivalents $ 5,839 $ 358,108 $(274,120) $ -- $ 89,827
Accounts receivable, net 87,435 (35,771) 2,226 -- 53,890
Inventories 44,832 (17,852) 91 -- 27,071
Prepaid expenses 6,658 (1,388) -- 80 5,350
Deferred tax asset -- -- -- 11,134 11,134
--------- --------- --------- --------- --------
Total current assets 144,764 303,097 (271,803) 11,214 187,272
Property, plant and equipment, net 253,875 (139,940) -- 170,121 284,056
Goodwill -- -- -- 48,463 48,463
Other assets 45,212 (6,039) (3,027) (13,059) 23,087
--------- --------- --------- --------- --------
Total assets $ 443,851 $ 157,118 $(274,830) $ 216,739 $542,878
========= ========= ========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 45,976 $ (16,684) $ 343 $ (719) $ 28,916
Accrued liabilities 31,860 (7,240) 791 (1,044) 24,367
Current portion of long-term debt 52,327 (10,127) (42,200) -- --
--------- --------- --------- --------- --------
Total current liabilities 130,163 (34,051) (41,066) (1,763) 53,283
Pre-petition liabilities subject to compromise 512,760 (2,159) (510,601) -- --
Pre-petition liabilities not subject to
compromise 372,326 -- (372,326) -- --
Long-term debt -- -- 94,275 -- 94,275
Deferred tax liability 13,835 (13,835) -- 59,597 59,597
Deferred credits and other liabilities 39,189 (15,011) 45,970 24,850 94,998
Commitments and contingencies
Redeemable preferred stock -- -- 30,000 -- 30,000
Stockholders' equity (deficiency in assets):
Common stock, $.01 par value -- -- -- 28 28
Additional paid-in capital (141,786) -- 30,000 322,483 210,697
Retained earnings (accumulated deficit) (434,465) 188,891 448,918 (203,344) --
Accumulated other comprehensive income (48,171) 33,283 -- 14,888 --
--------- --------- --------- --------- --------
Total stockholders' equity (deficiency in
assets) (624,422) 222,174 478,918 134,055 210,725
--------- --------- --------- --------- --------
Total liabilities and stockholders' equity
(deficency in assets) $ 443,851 $ 157,118 $(274,830) $ 216,739 $542,878
========= ========= ========= ========= ========
Reorganization adjustments reflect the forgiveness of debt, including related
accrued interest and certain pre-petition liabilities, in consideration for new
debt and new common stock, resulting in a gain from debt restructuring of $457.8
million, partially offset by an expense of approximately $8.9 million for
professional fees incurred in connection with the reorganization. Fresh-start
adjustments primarily reflect the recording of property, plant and equipment at
fair market value, the recording of a net deferred tax liability arising out of
the difference between the book and tax basis of certain assets and liabilities
(along with the resulting amount of goodwill recorded) and the recognition of
previously unrecognized pension and other post-employment benefits liabilities.
4. DISPOSAL OF LONG LIVED ASSETS
Pursuant to the Plan of Reorganization, on December 19, 2002, the Debtors'
pulp chemicals business was sold to Superior Propane for approximately $373
million and the Debtors' acrylic fibers business was sold to local management of
that business for nominal consideration. In accordance with SFAS No. 144,
"Accounting for the Impairment and Disposal of Long Lived Assets," we have
reported the operating results of these businesses as discontinued operations in
the consolidated statement of operations and cash flows for Predecessor
Sterling, and the assets and liabilities of these businesses have been presented
separately as assets held for sale and liabilities related to discontinued
operations in Predecessor Sterling's consolidated balance sheet.
8
The carrying amounts of the major classes of assets held for sale and
liabilities related to discontinued operations as of September 30, 2002 were as
follows:
PREDECESSOR STERLING
SEPTEMBER 30, 2002
(Dollars in Thousands)
--------------------------------------------
ACRYLIC
PULP CHEMICALS FIBERS
BUSINESS BUSINESS TOTAL
-------- -------- -----
ASSETS HELD FOR SALE:
Current assets ............................. $ 59,109 $11,429 $ 70,538
Property, plant and equipment, net ......... 138,614 -- 138,614
Other assets ............................... 4,890 1,136 6,026
-------- ------- --------
Total .................................... $202,613 $12,565 $215,178
======== ======= ========
LIABILITIES RELATED TO DISCONTINUED OPERATIONS:
Current liabilities ........................ 32,080 2,385 34,465
Deferred credits and other liabilities ..... 42,390 13,255 55,645
-------- ------- --------
Total .................................... $ 74,470 $15,640 $ 90,110
======== ======= ========
For the three and six months ended June 30, 2002, the amount of revenue
and net income (loss) (including gains or losses recorded on the sales)
attributable to the discontinued operations were as follows:
PREDECESSOR STERLING
--------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2002
------------- -------------
(Dollars in Thousands)
REVENUES:
Pulp chemicals business ........ $ 59,271 $ 115,643
Acrylic fibers business ........ 5,152 9,427
-------- ---------
Total ........................ $ 64,423 $ 125,070
======== =========
NET INCOME (LOSS):
Pulp chemicals business ........ 8,117 16,653
Acrylic fibers business ........ (843) (2,219)
-------- ---------
Total ........................ $ 7,274 $ 14,434
======== =========
5. INVENTORIES
PREDECESSOR
REORGANIZED STERLING STERLING
--------------------------------------- ------------------
JUNE 30, 2003 DECEMBER 31, 2002 SEPTEMBER 30, 2002
------------- ----------------- ------------------
(Dollars in Thousands)
Inventories consisted of the following:
Finished products ..................... $13,600 $12,228 $15,470
Raw materials ......................... 11,639 12,259 9,656
Inventories under exchange agreements . 814 550 1,682
Stores and supplies ................... 5,850 5,974 6,028
------- ------- -------
$31,903 $31,011 $32,836
======= ======= =======
9
6. LONG-TERM DEBT
Pursuant to the Plan of Reorganization, on December 19, 2002, we issued
approximately $94.3 million in principal amount of New Notes to the holders of
Predecessor Sterling's 123/8% Notes. The New Notes are senior secured
obligations and rank equally in right of payment with all of our other existing
and future senior indebtedness and senior in right of payment to all of our
existing and future subordinated indebtedness. The New Notes are guaranteed by
Sterling Chemicals Energy, Inc. ("Sterling Energy"), one of our wholly owned
subsidiaries. Sterling Energy's guaranty ranks equally in right of payment with
all of its existing and future senior indebtedness and senior in right of
payment to all of its existing and future subordinated indebtedness. The New
Notes are secured by a first priority lien on all of our United States
production facilities and related assets.
The New Notes bear interest at an annual rate of 10%, payable
semi-annually on June 15 and December 15 of each year. Under certain
circumstances, for any interest period ending on or before December 19, 2004, we
may elect to pay interest on the New Notes through the issuance of additional
New Notes rather than the payment of cash. However, if we pay interest through
the issuance of additional New Notes rather than the payment of cash, the
interest rate for the relevant period is increased to 133/8%. We made our first
interest payment on the New Notes, in cash, during June 2003. Subject to
compliance with the terms of the New Revolver, we may redeem the New Notes at
any time at a redemption price of 100% of the outstanding principal amount
thereof plus accrued and unpaid interest. In addition, in the event of a
specified change of control or the sale of our facility in Texas City, Texas, we
are required to offer to repurchase the New Notes at 101% of the outstanding
principal amount thereof plus accrued and unpaid interest. We are also required
to offer to repurchase the New Notes at 100% of the outstanding principal amount
thereof plus accrued and unpaid interest in the event of certain other sales of
assets.
The indenture governing the New Notes contains numerous covenants and
conditions, including, but not limited to, restrictions on our ability to incur
indebtedness, create liens, sell assets, make investments, make capital
expenditures, engage in mergers and acquisitions and pay dividends. The
indenture also includes various circumstances and conditions that would, upon
their occurrence and subject in certain cases to notice and grace periods,
create an event of default thereunder. However, the indenture does not require
us to satisfy any financial ratios or maintenance tests.
On the Effective Date of the Plan of Reorganization, we established the
New Revolver with The CIT Group/Business Credit, Inc., individually and as
administrative agent, and certain other lenders, which provides up to $100
million in revolving credit loans. The New Revolver has an initial term ending
on September 19, 2007. Under the New Revolver, Reorganized Sterling and Sterling
Energy are co-borrowers and are jointly and severally liable for any
indebtedness thereunder. The New Revolver is secured by first priority liens on
all accounts receivable, inventory and other specified assets owned by
Reorganized Sterling or Sterling Energy, as well as all of the issued and
outstanding capital stock of Sterling Energy.
Borrowings under the New Revolver bear interest, at our option, at an
annual rate of either the Alternate Base Rate plus 0.75% or the "LIBO Rate" (as
defined in the New Revolver) plus 2.75%. The "Alternate Base Rate" is equal to
the greater of the "Base Rate" as announced from time to time by JPMorgan Chase
Bank in New York, New York or 0.50% per annum above the latest "Federal Funds
Rate" (as such terms are defined in the New Revolver). Under the New Revolver,
we are also required to pay an aggregate commitment fee of 0.50% (payable
monthly) on any unused portion of the New Revolver. Available credit under the
New Revolver is subject to a monthly borrowing base of 85% of eligible accounts
receivable plus the lesser of $50 million and 65% of eligible inventory. In
addition, the borrowing base for the New Revolver must exceed outstanding
borrowings thereunder by $8 million at all times. As of June 30, 2003, the total
credit available under the New Revolver was $41.7 million due to borrowing base
limitations. We had not, as of June 30, 2003, borrowed any money under the New
Revolver, although we had approximately $1.6 million in letters of credit
outstanding under the New Revolver as of June 30, 2003, leaving unused borrowing
capacity under the New Revolver of approximately $40.1 million.
The New Revolver contains numerous covenants and conditions, including,
but not limited to, restrictions on our ability to incur indebtedness, create
liens, sell assets, make investments, make capital expenditures, engage in
mergers and acquisitions and pay dividends. The New Revolver also contains a
covenant that requires us to earn a specified amount of earnings before
interest, income taxes, depreciation and amortization ("EBITDA") on a monthly
basis if, for 15 consecutive days, unused availability under the New Revolver
plus cash on hand is less than $20 million. The New Revolver includes various
circumstances and conditions that would, upon their occurrence and subject in
certain cases to notice and grace periods, create an event of default
thereunder.
7. COMMITMENTS AND CONTINGENCIES
Product Contracts:
We have certain long-term agreements that provide for the dedication of
100% of our production of acetic acid, plasticizers, sodium cyanide, disodium
iminodiacetic acid ("DSIDA") and methanol, each to one customer. We also have
various sales and conversion agreements that dedicate significant portions of
our production of styrene and acrylonitrile to certain customers. Some of these
agreements provide for cost recovery plus an agreed profit margin based upon
market prices.
10
We are currently litigating in the Bankruptcy Court the assumption of our
contracts with Monsanto Company ("Monsanto") governing the production of DSIDA
and related cure costs. Until this litigation is completed, we cannot determine
whether we will assume these contracts and restart the DSIDA unit or reject
these contracts. In addition, Monsanto has indicated that it may seek to
terminate the DSIDA contracts in the event that we assume the DSIDA contracts.
As a result, we filed a motion with the Bankruptcy Court seeking to include the
issue of whether Monsanto has the right to terminate the DSIDA contracts
following assumption. On March 26, 2003, the Bankruptcy Court held a hearing on
our motion and on May 1, 2003, the Bankruptcy Court denied our motion on
non-justiciability grounds. The rejection or termination of the DSIDA contracts
would have a negative impact on our business, financial position, results of
operations and cash flows compared to those that would be achieved if we assumed
the DSIDA contracts, although we do not expect that impact to be material.
On July 1, 2000, we, in conjunction with BP, entered into a multiyear
contract with Methanex for the purchase of our 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. The initial term of these
agreements expires December 31, 2003 and Methanex has elected not to renew these
agreements. We are currently analyzing various alternatives for our methanol
plant.
Environmental Regulations:
Our operations involve the handling, production, transportation, treatment
and disposal of materials that are classified as hazardous or toxic waste and
that are extensively regulated by environmental, health and safety laws,
regulations and permit requirements. Environmental permits required for our
operations are subject to periodic renewal and can be revoked or modified for
cause or when new or revised environmental requirements are implemented.
Changing and increasingly strict environmental requirements can affect the
manufacturing, handling, processing, distribution and use of our products and
the raw materials used to produce our products and, if so affected, our
business, financial position, results of operations and cash flows may be
materially and adversely affected. In addition, changes in environmental
requirements can cause us to incur substantial costs in upgrading or redesigning
our facility and processes, including our emission producing practices and
equipment and our waste treatment, storage, disposal and other waste handling
practices and equipment.
We conduct environmental management programs designed to maintain
compliance with applicable environmental requirements. We routinely conduct
inspection and surveillance programs designed to detect and respond to leaks or
spills of regulated hazardous substances and to correct identified regulatory
deficiencies. We continue to participate in Responsible Care(R) initiatives as a
part of our membership in several trade groups, which are partner associations
in the American Chemistry Council. Notwithstanding our efforts and beliefs, a
business risk inherent with chemical operations is the potential for personal
injury and property damage claims from employees, contractors and their
employees and nearby landowners and occupants. While we believe that our
business operations and facility are operated in compliance, in all material
respects, with all applicable environmental, health and safety requirements, we
cannot be sure that past practices or future operations will not result in
material claims or regulatory action, require material environmental
expenditures or result in exposure or injury claims by employees, contractors
and their employees or the public. Some risk of environmental costs and
liabilities is inherent in our operations and products, as it is with other
companies engaged in similar businesses.
In light of our historical expenditures and expected future results of
operations and sources of liquidity, we believe we will have adequate resources
to conduct our operations in compliance with applicable environmental and health
and safety requirements. Nevertheless, we may be required to make significant
site and operational modifications that are not currently contemplated in order
to comply with changing facility permitting requirements and regulatory
standards. Additionally, we have incurred and may continue to incur liability
for investigation and cleanup of waste or contamination at our own facility or
at facilities operated by third parties where we have disposed of waste. We
continually review all estimates of potential environmental liabilities but can
give no assurances that all potential liabilities arising out of our past or
present operations have been identified or fully assessed or that the amount
necessary to investigate and remediate such conditions will not be significant
to us. It is our policy to make safety, environmental and replacement capital
expenditures a priority in order to assist us in ensuring adequate safety and
compliance at all times.
On December 13, 2002, the Texas Commission for Environmental Quality
adopted a revised State Implementation Plan (the "SIP") for compliance with the
ozone provisions of the Clean Air Act. The SIP is currently being reviewed by
the Environmental Protection Agency ("EPA") and further revisions to these rules
will begin this fall. Under the current SIP, we would be required to reduce
emissions of nitrogen oxide at our Texas City, Texas facility by approximately
80%. Emissions of highly reactive volatile organic carbons ("HRVOCs"), such as
ethylene and propylene, will require additional monitoring by the end of 2004,
and a site-
11
wide cap on emissions of HRVOCs will be imposed in 2006. We believe that we
would need to make between $25 and $35 million in capital improvements in order
to comply with these new regulations. We anticipate that the majority of these
capital expenditures and other expenses would need to be incurred over a
four-year period beginning January 1, 2004.
Legal Proceedings:
As previously discussed, the Debtors filed voluntary petitions for
reorganization under Chapter 11 on July 16, 2001. As a result of the
commencement of the Chapter 11 cases, an automatic stay was imposed against the
commencement or continuation of legal proceedings against the Debtors outside of
the Bankruptcy Court. Claimants with alleged claims against the Debtors were
required to assert their claims in the Chapter 11 cases by timely filing a proof
of claim, to which the Debtors were allowed to file an objection and seek a
determination from the Bankruptcy Court as to whether such claims were
allowable. Claimants who desired to liquidate their claims in legal proceedings
outside of the Bankruptcy Court were required to obtain relief from the
automatic stay by order of the Bankruptcy Court before doing so. If such relief
was granted, the automatic stay remained in effect with respect to the
collection of liquidated claim amounts. On November 20, 2002, the Bankruptcy
Court entered an order confirming the Plan of Reorganization. The Effective Date
under the Plan of Reorganization occurred on December 19, 2002. As a general
rule, all claims against the Debtors that sought a recovery from assets of the
Debtors' estates have been addressed in the Chapter 11 cases and have been or
will be paid only pursuant to the terms of the Plan of Reorganization or
negotiated settlements.
A number of issues remain outstanding before the Bankruptcy Court,
including the allowability and classification of certain claims, the amount of
rejection damages payable to some parties whose contracts were rejected in the
bankruptcy proceedings and similar matters. We do not believe that the outcome
of any of these issues will have a material adverse effect on our business,
financial position, results of operations or cash flows, although we cannot give
any assurances to that effect. In addition, as mentioned above, we are currently
litigating in the Bankruptcy Court the assumption of our contracts with Monsanto
governing the production of DSIDA and related cure costs.
Ethylbenzene Release. A description of this release can be found under
"Legal Proceedings" in Note 9 of the "Notes to Consolidated Financial
Statements" contained in the Annual Report. The four lawsuits listed below and
one intervention, currently involving a total of approximately 263 plaintiffs
(excluding the Nettie Allen, et al. case, which was settled), were filed based
on this release alleging personal injury, property damage and nuisance claims:
- Nettie Allen, et al. v. Sterling Chemicals, Inc., et al.; Case No.
00-CV0304; In the 10th Judicial District Court of Galveston County,
Texas;
- 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;
- Bobbie Adams, et al. v. Sterling Chemicals International, Inc., et
al.; Case No. 00-CV0311; In the 212th Judicial District Court of
Galveston County, Texas; and
- Olivia Ellis v. Sterling Chemicals, Inc.; Case No. JC5000305; In
Justice Court No. 5 of Galveston County, Texas.
The Bankruptcy Court has, with our support, lifted the automatic stay for
all known claims arising out of the Zabrina Alexander, et al., Nettie Allen, et
al. and Bobbie Adams, et al. cases allowing the plaintiffs to proceed against
our liability insurance policies. As a condition to the lifting of the automatic
stay, these plaintiffs waived their right to seek any recoveries against us
directly and must look solely to insurance proceeds to satisfy their claims. On
May 15, 2003, the Nettie Allen et al. case was settled through mediation and an
order dismissing the case was entered on July 11, 2003. The settlement of this
case did not have a material impact on our financial statements. Settlement
negotiations in the Olivia Ellis case are ongoing and we believe that this case
will settle without a material adverse impact in the near future, although we
cannot give any assurances to that effect.
We believe that all or substantially all of our future out-of-pocket costs
and expenses relating to these lawsuits and intervention, including settlement
payments and judgments, will be covered by our liability insurance policies or
indemnification agreements with third parties. We do not believe that the claims
and litigation arising out of these lawsuits will have a material adverse effect
on our business, financial position, results of operations or cash flows,
although we cannot give any assurances to that effect. To the extent that the
lawsuits or intervention seek a recovery from assets of the Debtors' estates,
the claims have been addressed in the Chapter 11 cases and have been or will be
paid only pursuant to the terms of the Plan of Reorganization or a negotiated
settlement.
Other Claims:
We are subject to various other claims and legal actions that arise in the
ordinary course of our business. Claims and legal actions against the Debtors
that existed as of the Chapter 11 filing date are subject to the discharge
injunction provided for in the
12
Plan of Reorganization, and recoveries sought thereon from assets of the Debtors
are subject to the terms of the Plan of Reorganization.
Effective as of December 19, 2001, Mr. Frank P. Diassi elected to
terminate his employment with us. Mr. Diassi had served as our executive
Chairman of the Board since 1996. Mr. Diassi was elected Co-Chief Executive
Officer along with David G. Elkins, our former President, in September 2001. Mr.
Diassi asserted that he had "good reason" to terminate his employment and
claimed that he was entitled to receive payments under certain of our employee
retention and severance plans. We settled Mr. Diassi's claim on March 17, 2003,
and the Bankruptcy Court approved the settlement on April 9, 2003. Pursuant to
the terms of the settlement, we paid Mr. Diassi $300,000, plus $150,000 in
attorneys' fees, and Mr. Diassi waived any and all claims against us. An accrual
for this matter was recorded on our balance sheet upon emergence from bankruptcy
on December 19, 2002 and the settlement amounts were paid during April 2003.
8. NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
which requires the consolidation of variable interest entities, as defined. FIN
46 immediately applied to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003. We do not expect the
adoption of FIN 46 to have an impact on our financial statements.
In May 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 is intended to
result in more consistent reporting of contracts as either freestanding
derivative instruments subject to Statement 133 in its entirely, or as hybrid
instruments with debt host contracts and embedded derivative features. SFAS No.
149 is effective for contracts entered into or modified after June 30, 2003. We
do not expect the adoption of SFAS No. 149 to have an impact on our financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 requires certain financial instruments that embody obligations of the
issuer and have characteristics of both liabilities and equity to be classified
as liabilities. SFAS No. 150 is effective for all financial instruments created
or modified after May 31, 2003 and to other instruments at the beginning of the
first interim period beginning after June 15, 2003. Our only such financial
instrument is our preferred stock, which has historically been, and will
continue to be, classified as a liability. Therefore we do not expect the
adoption of SFAS No. 150 to have an impact on our financial statements.
13
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of Sterling Chemicals, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Sterling Chemicals, Inc. and subsidiaries (the "Company") as of June 30, 2003
(Successor Company balance sheet), and the related condensed consolidated
statements of operations and cash flows for the three and six-month periods
ended June 30, 2003 (Successor Company operations) and for the three and
six-month periods ended June 30, 2002 (Predecessor Company operations). These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
As discussed in Note 1 to the financial statements, on November 20, 2002, the
Bankruptcy Court entered an order confirming the plan of reorganization which
became effective after the close of business on December 19, 2002. Accordingly,
the accompanying financial statements have been prepared in conformity with
AICPA Statement of Position 90-7, "Financial Reporting for Entities in
Reorganization Under the Bankruptcy Code," for the Successor Company as a new
entity with assets, liabilities, and a capital structure having carrying values
not comparable with prior periods as described in Notes 1 and 3.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheets of the
Company as of September 30, 2002 (Predecessor Company balance sheet), and the
related consolidated statements of operations, stockholders' equity (deficiency
in assets), and cash flows for the year then ended (not presented herein)
(Predecessor Company operations); and in our report dated December 13, 2002, we
expressed an unqualified opinion on those consolidated financial statements and
included an explanatory paragraph concerning matters that raise substantial
doubt about the Company's ability to continue as a going concern. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of September 30, 2002 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
DELOITTE & TOUCHE LLP
Houston, Texas August 12, 2003
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our condensed
consolidated financial statements (including the Notes thereto) included in Item
1, Part I of this report.
OVERVIEW
On July 16, 2001, Sterling Chemicals Holdings, Inc. ("Holdings"), Sterling
Chemicals, Inc. and most of their U.S. subsidiaries (collectively, the
"Debtors") filed voluntary petitions for reorganization under Chapter 11
("Chapter 11") of the United States Bankruptcy Code in the U.S. Bankruptcy Court
for the Southern District of Texas (the "Bankruptcy Court"). A plan of
reorganization (as modified, the "Plan of Reorganization") was filed with the
Bankruptcy Court on May 14, 2002 and was confirmed on November 20, 2002. On
December 19, 2002, the Plan of Reorganization became effective and the Debtors
emerged from bankruptcy pursuant to the terms of the Plan of Reorganization.
During the period from July 16, 2001 through December 19, 2002, the Debtors
operated their respective businesses as debtors-in-possession pursuant to the
United States Bankruptcy Code, and the financial statements covered by this
period have been presented in conformity with the AICPA's Statement of Position
90-7, "Financial Reporting By Entities In Reorganization Under the Bankruptcy
Code" ("SOP 90-7").
The filing of the Chapter 11 petitions was driven by the Debtors'
inability to meet their funded debt obligations over the long-term, largely
brought about by weak demand for petrochemicals products caused by declines in
general worldwide economic conditions, the relative strength of the U.S. dollar
(which caused their export sales to be at a competitive disadvantage) and higher
raw materials and energy costs. As a result of these conditions, the Debtors
incurred significant operating losses. The reorganization, effected through the
bankruptcy filings, permitted the Debtors to preserve cash and gave them the
opportunity to restructure their debt. As the market for our petrochemicals
products remains highly cyclical, the capital structure of Reorganized Sterling
has been designed with the goal of ensuring that we have sufficient liquidity
during cyclical downturns in the markets for our petrochemicals products,
although we cannot give any assurances that our new capital structure will
provide us with sufficient liquidity over any specific period.
On December 6, 2002, Holdings was merged with and into Predecessor
Sterling. Under the terms of the merger and the Plan of Reorganization, all
equity interests in Holdings were cancelled upon consummation of the merger and
we issued 65,000 shares of Reorganized Sterling common stock to the holders of
Holdings' 13-1/2% Senior Secured Discount Notes in full payment of their claims.
Upon the effectiveness of the Plan of Reorganization, the unsecured creditors of
the Debtors (other than unsecured creditors of Holdings), which included holders
of Predecessor Sterling's 11-1/4% Senior Subordinated Notes and 11-3/4% Senior
Subordinated Notes, received pro rata shares of 11.7% of Reorganized Sterling's
common stock (on a fully diluted basis) and warrants to acquire 949,367 shares
of Reorganized Sterling's common stock at an exercise price of $52 per share
(subject to adjustment). In addition, upon the effectiveness of the Plan of
Reorganization, Resurgence Asset Management, L.L.C., on behalf of itself and
certain of its and its affiliates' managed funds and accounts (collectively, the
"Investor"), paid $30 million for certain shares of convertible preferred stock
of Reorganized Sterling. An additional $30 million was contributed to
Reorganized Sterling pursuant to a rights offering made available to the
Debtors' unsecured creditors (other than unsecured creditors of Holdings), which
offering was underwritten by the Investor. Upon the effectiveness of the Plan of
Reorganization, Reorganized Sterling issued 2,175,000 shares of its common stock
under the terms of the rights offering.
On December 19, 2002, the Debtors emerged from bankruptcy pursuant to the
terms of the Plan of Reorganization. Under the Plan of Reorganization, the
Debtors' pulp chemicals business was sold to Superior Propane, Inc. ("Superior
Propane") for approximately $373 million and the Debtors' acrylic fibers
business was sold to local management of that business for nominal
consideration. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment and Disposal of Long Lived
Assets," we have reported the operating results of these businesses as
discontinued operations in the condensed consolidated statements of operations
and cash flows for Predecessor Sterling, and the assets and liabilities of these
businesses have been presented separately as assets held for sale and
liabilities related to discontinued operations in Predecessor Sterling's
condensed consolidated balance sheet. A portion of the net proceeds from the
sale of the Debtors' pulp chemicals business, approximately $80 million,
remained with Reorganized Sterling, which continues to own and operate the
Debtors' core petrochemicals business. The remaining net proceeds from the sale
were paid to the holders of Predecessor Sterling's 123/8% Senior Secured Notes
(the "123/8% Notes"), who also received approximately $94.3 million in principal
amount of new 10% Senior Secured Notes due 2007 issued by Reorganized Sterling
(the "New Notes") in satisfaction of their claims. In addition, on the Effective
Date of the Plan of Reorganization, Reorganized Sterling established a new
revolving credit facility providing up to $100 million in revolving credit loans
(subject to borrowing base limitations) with The CIT Group/Business Credit,
Inc., as administrative agent and a lender, and certain other lenders (the "New
Revolver"). We had not, as of June 30, 2003, borrowed any money under the New
Revolver, although we had approximately $1.6 million in letters of credit
outstanding under the New Revolver as of June 30, 2003.
15
For financial reporting purposes, the effective date of the Plan of
Reorganization is considered to have been the close of business on December 19,
2002 (the "Effective Date"). In this Form 10-Q, we are referred to as
"Predecessor Sterling" for periods on or before December 19, 2002 and as
"Reorganized Sterling" for periods after December 19, 2002. Due to the Debtors'
emergence from Chapter 11 and the implementation of fresh-start accounting (see
Note 3 to the condensed consolidated financial statements), our financial
results have been separately presented under these headings for periods on or
before December 19, 2002 and for periods after December 19, 2002, respectively.
Our financial statements for the three and six-month periods ended June 30, 2003
are not comparable to those of Predecessor Sterling for the same periods ended
June 30, 2002. Additionally, in December 2002, we changed our fiscal year-end
from September 30 to December 31.
RECENT DEVELOPMENTS
In June 2003, we restarted the acrylonitrile unit at our Texas City
facility, which had been shut down since February 2001. We completed the restart
of two of the three reactors of the unit in July 2003, with the third reactor
scheduled to be restarted during the third quarter of 2003. In addition, in June
2003, we entered into an expanded acrylonitrile relationship agreement with BP
Chemicals Inc. ("BP"). Our acrylonitrile relationship with BP is governed by a
variety of documents, including a Production Agreement, under which BP has the
right, but not the obligation, to purchase acrylonitrile from us up to a
specified percentage of our annual rated production capacity, and a Joint
Venture Agreement, pursuant to which we and BP formed ANEXCO, LLC, a 50/50 joint
venture that markets all of the parties' respective sales of acrylonitrile
everywhere in the world other than the United States, Canada, Mexico, Turkey and
the European Union. Under the Production Agreement, BP furnishes the necessary
raw materials and pays us a conversion fee for any acrylonitrile it elects to
purchase and reimburses us for a specified portion of our fixed costs related to
acrylonitrile production irrespective of whether BP purchases any acrylonitrile
under the Production Agreement. Under the expanded acrylonitrile relationship
agreement, BP's right to purchase acrylonitrile from us under the Production
Agreement was significantly increased and the Joint Venture Agreement was
modified in a manner that, together with the modifications to the Production
Agreement, is intended to provide us with the ability to operate our
acrylonitrile facility at optimal three-reactor rates throughout the
acrylonitrile market cycles.
In addition, in July 2003, we entered into a new sodium cyanide supply
agreement with E.I. du Pont de Nemours and Company ("DuPont") which allows us to
enhance the value of hydrogen cyanide produced as a by-product from our
acrylonitrile operations. We expect to restart the sodium cyanide plant, which
is located at our Texas City facility but owned by DuPont, during the third
quarter of 2003. The sodium cyanide plant has been shut down since February
2001.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Revenues, Cost of Goods Sold and Net Loss
Our revenues were approximately $120.6 million for the three months ended
June 30, 2003, compared to Predecessor Sterling's approximately $136.4 million
in revenues for the three months ended June 30, 2002. This decrease in revenues
resulted primarily from a decrease in styrene sales volumes due to reduced
overall demand in the styrene market. We recorded a net loss attributable to
common stockholders of approximately $11.4 million for the three months ended
June 30, 2003, compared to a net income attributable to common stockholders of
approximately $6.9 million that Predecessor Sterling recorded for the same
period in 2002. This reduction in net earnings was primarily due to reduced
demand for styrene and increased costs for raw materials and energy, along with
the costs incurred to restart our acrylonitrile facilities during the second
quarter of 2003.
Revenues from our styrene operations were approximately $89.0 million for
the quarter ended June 30, 2003, a decrease of approximately 18% from
Predecessor Sterling's approximately $108.2 million in revenues from those
operations for the quarter ended June 30, 2002. This decrease in revenues from
our styrene operations was primarily due to lower sales volumes during the
quarter ended June 30, 2003 compared to those realized in the quarter ended June
30, 2002. Our total sales volumes for styrene for the quarter ended June 30,
2003 decreased approximately 32% from those realized by Predecessor Sterling
during the quarter ended June 30, 2002, primarily due to reduced overall demand
in the styrene market. Direct sales prices for styrene during the quarter ended
June 30, 2003 increased approximately 17% compared to those realized during the
quarter ended June 30, 2002. However, the increase in direct sales prices for
styrene during the quarter ended June 30, 2003 was primarily the result of, and
more than offset by, higher prices for raw materials and natural gas. During the
quarter ended June 30, 2003, prices for benzene and ethylene, the two primary
raw materials required for styrene, increased approximately 20% and 21%,
respectively, from the prices paid for these products in the quarter ended June
30, 2002. The average price for natural gas for the quarter ended June 30, 2003
increased 65% compared to the average price for natural gas during the six
months ended June 30, 2002. Due to the factors discussed above, margins on our
styrene sales for the quarter ended June 30, 2003 decreased from those realized
by Predecessor Sterling during the quarter ended June 30, 2002.
16
Our acrylonitrile unit remained shut down during all but the last few days
of the quarter ended June 30, 2003 and continued to be primarily responsible for
our loss from continued operations during the quarter ended June 30, 2003.
Revenues from our other petrochemicals operations, including acetic acid,
plasticizers and methanol, were $28.0 million for the quarter ended June 30,
2003, an increase of 3% from the $27.1 million in revenues received by
Predecessor Sterling from these operations during the quarter ended June 30,
2002, primarily due to improved revenues from our methanol relationship with
Methanex Corporation, which expires at the end of 2003.
Selling, General and Administrative ("SG&A") Expenses
Our SG&A expenses for the three months ended June 30, 2003 were
approximately $3.9 million compared to Predecessor Sterling's approximately $2.2
million in SG&A expenses for the three months ended June 30, 2002. This increase
was largely due to the inclusion in the current period of bankruptcy related
professional fees that were classified as reorganization items during the three
months ended June 30, 2002 pursuant to SOP 90-7, and ongoing matters related to
our recent emergence from bankruptcy, including litigation related to the
possible assumption of our DSIDA contracts with Monsanto, final determinations
as to the classification and allowed amount of disputed claims, final
determinations of the amount of rejection damages assessed for contracts we
rejected in our bankruptcy proceedings and continuing filing obligations with
the Bankruptcy Court (see Note 7 to the consolidated financial statements).
Reorganization Items
There were no reorganization items incurred during the three months ended
June 30, 2003, as we emerged from bankruptcy prior to the beginning of the year
and items previously recorded as reorganizations items are now included in SG&A.
In the three months ended June 30, 2002, we recorded $4.6 million in
reorganization items, which consisted primarily of professional fees incurred in
connection with the Debtors' Chapter 11 proceedings.
Interest Expense
Our total interest expense of $2.2 million for the quarter ended June 30,
2003 was substantially lower than the $11.4 million in interest expense we
recorded for the quarter ended June 30, 2002, primarily due to the cancellation
of our pre-existing senior secured debt upon emergence from bankruptcy.
Provision (Benefit) for Income Taxes
During the quarter ended June 30, 2003, we recorded an approximate $5.6
million benefit for income taxes compared to a less than $0.1 million provision
for income taxes for the quarter ended June 30, 2002.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Revenues, Cost of Goods Sold and Net Loss
Our revenues were approximately $243.0 million for the six months ended
June 30, 2003, compared to Predecessor Sterling's approximately $198.3 million
in revenues during the six months ended June 30, 2002. This increase in revenues
resulted primarily from an increase in styrene sales prices. The increase in
styrene sales prices between these two periods was primarily a result of large
increases in raw materials and energy prices. Styrene sales volumes decreased
during the six months ended June 30, 2003 compared to the six months ended June
30, 2002, primarily due to reduced overall demand in the styrene market. We
recorded a net loss attributable to common stockholders of approximately $16.8
million for the six months ended June 30, 2003, compared to the net loss
attributable to common stockholders of approximately $8.4 million that
Predecessor Sterling recorded for the same period in 2002. This increased net
loss was also primarily due to reduced demand for styrene and increased costs
for raw materials and energy, along with the costs incurred to restart our
acrylonitrile facilities during the first six months of 2003.
Revenues from our styrene operations were approximately $179.5 million for
the six months ended June 30, 2003, an increase of approximately 25% from
Predecessor Sterling's approximately $143.3 million in revenues from those
operations for the same period ended June 30, 2002. This increase in revenues
from our styrene operations was primarily due to higher sales volumes and
directs sales prices during the first three months of 2003 compared to those
realized during the first three months of 2002. Our total sales volumes for
styrene during the six months ended June 30, 2003 decreased approximately 8%
from those realized by Predecessor Sterling during the six months ended June 30,
2002, primarily due to reduced overall demand in the styrene market. Direct
sales prices for styrene in the six months ended June 30, 2003 increased
approximately 33% compared to those realized during the six months ended June
30, 2002. However, the increase in direct sales prices for styrene during the
six months ended June 30, 2003 was primarily the result of, and more than offset
by, higher prices for raw materials and natural gas. During the six months ended
June 30, 2003, prices for benzene and ethylene, the two primary raw materials
required for styrene, increased approximately 41% and 32%, respectively, from
the prices paid for these products in the six months ended June 30, 2002. The
17
average price for natural gas for the six months ended June 30, 2003 increased
96% compared to the average price for natural gas during the six months ended
June 30, 2002. Due to the factors discussed above, margins on our styrene sales
for the six months ended June 30, 2003 decreased from those realized by
Predecessor Sterling during the six months ended June 30, 2002.
Our acrylonitrile unit remained shut down during all but the last few days
of the six months ended June 30, 2003 and continued to be primarily responsible
for our loss from continued operations during the period. Revenues from our
other petrochemicals operations, including acetic acid, plasticizers and
methanol, were $59.1 million for the six months ended June 30, 2003, an increase
of 12% from the $52.8 million in revenues received by Predecessor Sterling from
these operations during the six months ended June 30, 2002, primarily due to
improved revenues from our methanol relationship with Methanex Corporation,
which expires at the end of 2003.
Selling, General and Administrative ("SG&A") Expenses
Our SG&A expenses for the six months ended June 30, 2003 were
approximately $8.6 million compared to Predecessor Sterling's approximately $5.7
million in SG&A expenses for the six months ended June 30, 2002. This increase
was primarily due to the inclusion in the current period of bankruptcy related
professional fees that were classified as reorganization items during the six
months ended June 30, 2002 pursuant to SOP 90-7, and ongoing matters related to
our recent emergence from bankruptcy, including litigation related to the
possible assumption of our DSIDA contracts with Monsanto, final determinations
as to the classification and allowed amount of disputed claims, final
determinations of the amount of rejection damages assessed for contracts we
rejected in our bankruptcy proceedings and continuing filing obligations with
the Bankruptcy Court (see Note 7 to the consolidated financial statements).
Other Income
Our other income for the six months ended June 30, 2003 was $3.5 million,
which consisted of a Texas sales tax refund of approximately $3.7 million
reduced by other expense of $0.2 million.
Reorganization Items
There were no reorganization items incurred during the six months ended
June 30, 2003, as we emerged from bankruptcy prior to the beginning of the year
and items previously recorded as reorganization items are now included in SG&A.
In the six months ended June 30, 2002, we recorded $9.3 million in
reorganization items, which consisted primarily of professional fees incurred in
connection with the Debtors' Chapter 11 proceedings.
Interest Expense
Our total interest expense of $3.8 million for the six months ended June
30, 2003 was substantially lower than the $22.5 million in interest expense we
recorded for the same period ended June 30, 2002, primarily due to the
cancellation of our pre-existing senior secured debt upon emergence from
bankruptcy.
Provision (Benefit) for Income Taxes
During the six months ended June 30, 2003, we recorded an approximate $7.0
million benefit for income taxes compared to a less than $0.1 million provision
for income taxes for the six months ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Pursuant to the Plan of Reorganization, on December 19, 2002, we issued
approximately $94.3 million in principal amount of New Notes to the holders of
Predecessor Sterling's 123/8% Notes. The New Notes are senior secured
obligations and rank equally in right of payment with all of our other existing
and future senior indebtedness and senior in right of payment to all of our
existing and future subordinated indebtedness. The New Notes are guaranteed by
Sterling Chemicals Energy, Inc. ("Sterling Energy"), one of our wholly owned
subsidiaries. Sterling Energy's guaranty ranks equally in right of payment with
all its existing and future senior indebtedness and senior in right of payment
to all of its existing and future subordinated indebtedness. The New Notes and
Sterling Energy's guaranty are secured by a first priority lien on all of our
United States production facilities and related assets.
The New Notes bear interest at an annual rate of 10%, payable
semi-annually on June 15 and December 15 of each year. Under certain
circumstances, for any interest period ending on or before December 19, 2004, we
may elect to pay interest on the New Notes through the issuance of additional
New Notes rather than the payment of cash. However, if we pay interest through
the issuance of additional New Notes rather than the payment of cash, the
interest rate for the relevant period is increased to 133/8%. We made our first
interest payment on the New Notes, in cash, during June 2003. Subject to
compliance with the terms of the New
18
Revolver, we may redeem the New Notes at any time at a redemption price of 100%
of the outstanding principal amount thereof plus accrued and unpaid interest. In
addition, in the event of a specified change of control or the sale of our
facility in Texas City, Texas, we are required to offer to repurchase the New
Notes at 101% of the outstanding principal amount thereof plus accrued and
unpaid interest. We are also required to offer to repurchase the New Notes at
100% of the outstanding principal amount thereof plus accrued and unpaid
interest in the event of certain other sales of assets.
The indenture governing the New Notes contains numerous covenants and
conditions, including, but not limited to, restrictions on our ability to incur
indebtedness, create liens, sell assets, make investments, make capital
expenditures, engage in mergers and acquisitions and pay dividends. The
indenture also includes various circumstances and conditions that would, upon
their occurrence and subject in certain cases to notice and grace periods,
create an event of default thereunder. However, the indenture does not require
us to satisfy any financial ratios or maintenance tests.
On the Effective Date of the Plan of Reorganization, we established the
New Revolver with The CIT Group/Business Credit, Inc., individually and as
administrative agent, and certain other lenders which provides up to $100
million in revolving credit loans. The New Revolver has an initial term ending
on September 19, 2007. Under the New Revolver, Reorganized Sterling and Sterling
Energy are co-borrowers and are jointly and severally liable for any
indebtedness thereunder. The New Revolver is secured by first priority liens on
all accounts receivable, inventory and other specified assets owned by
Reorganized Sterling or Sterling Energy, as well as all of the issued and
outstanding capital stock of Sterling Energy.
Borrowings under the New Revolver bear interest, at our option, at an
annual rate of either the Alternate Base Rate plus 0.75% or the "LIBO Rate" (as
defined in the New Revolver) plus 2.75%. The "Alternate Base Rate" is equal to
the greater of the "Base Rate" as announced from time to time by JPMorgan Chase
Bank in New York, New York or 0.50% per annum above the latest "Federal Funds
Rate" (as such terms are defined in the New Revolver). Under the New Revolver,
we are also required to pay an aggregate commitment fee of 0.50% (payable
monthly) on any unused portion of the New Revolver. Available credit under the
New Revolver is subject to a monthly borrowing base of 85% of eligible accounts
receivable plus the lesser of $50 million and 65% of eligible inventory. In
addition, the borrowing base for the New Revolver must exceed outstanding
borrowings thereunder by $8 million at all times. As of June 30, 2003, the total
credit available under the New Revolver was $41.7 million due to borrowing base
limitations. We had not, as of June 30, 2003, borrowed any money under the New
Revolver, although we had approximately $1.6 million in letters of credit
outstanding under the New Revolver as of June 30, 2003, leaving unused borrowing
capacity under the New Revolver of approximately $40.1 million.
The New Revolver contains numerous covenants and conditions, including,
but not limited to, restrictions on our ability to incur indebtedness, create
liens, sell assets, make investments, make capital expenditures, engage in
mergers and acquisitions and pay dividends. The New Revolver also contains a
covenant that requires us to earn a specified amount of earnings before
interest, income taxes, depreciation and amortization ("EBITDA") on a monthly
basis if, for 15 consecutive days, unused availability under the New Revolver
plus cash on hand is less than $20 million. The New Revolver includes various
circumstances and conditions that would, upon their occurrence and subject in
certain cases to notice and grace periods, create an event of default
thereunder.
We expect that the restart of our acrylonitrile facilities will use
approximately $15 to $20 million of additional working capital during the third
quarter of 2003. We believe that our cash on hand, together with credit
available under the New Revolver and other internally generated funds, will be
sufficient to meet our liquidity needs for the reasonably foreseeable future,
although we cannot give any assurances to that effect.
Working Capital
Our working capital at June 30, 2003 was $117.0 million, a decrease from
our working capital of $131.3 million on December 31, 2002. This decrease was
primarily due to a reduction in cash and cash equivalents and accrued
liabilities, partially offset by an increase in accounts receivable.
Cash Flow
Net cash used in our operations was $25.4 million for the six months ended
June 30, 2003, compared to net cash used in Predecessor Sterling's operations of
approximately $17.7 million during the same period in 2002. This increase in
cash used was primarily due to an increase in accounts receivable. Net cash flow
used in our investing activities was $7.2 million for the six months ended June
30, 2003, compared to net cash flow used in Predecessor Sterling's investing
activities of $6.2 million during the six months ended June 30, 2002. There were
no financing activities for the six months ended June 30, 2003, compared to cash
provided by Predecessor Sterling's financing activities of $25.1 million during
the same period in 2002, which related to borrowings under our
debtor-in-possession credit facility during our bankruptcy proceedings.
19
Capital Expenditures
Our capital expenditures were $7.2 million during the six months ended
June 30, 2003, compared to $6.2 million of expenditures by Predecessor Sterling
during the six months ended June 30, 2002. Our capital expenditures primarily
related to routine safety, environmental and equipment replacement matters in
both periods. During the remainder of 2003, capital expenditures are anticipated
to be approximately $10 to $15 million primarily for routine safety,
environmental and equipment replacement matters.
CRITICAL ACCOUNTING POLICIES, USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the condensed consolidated
financial statements and related notes. Actual results could differ from those
estimates. On an ongoing basis, management reviews its estimates, including
those related to the allowance for doubtful accounts, recoverability of
long-lived assets, deferred tax asset valuation allowance, litigation,
environmental liabilities, pension and post-retirement benefits and various
other operating allowances and accruals, based on currently available
information. Changes in facts and circumstances may alter such estimates and
affect our results of operations and financial position in future periods.
NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
which requires the consolidation of variable interest entities, as defined. FIN
46 immediately applied to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003. We do not expect the
adoption of FIN 46 to have an impact on our financial statements.
In May 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 is intended to
result in more consistent reporting of contracts as either freestanding
derivative instruments subject to Statement 133 in its entirely, or as hybrid
instruments with debt host contracts and embedded derivative features. SFAS No.
149 is effective for contracts entered into or modified after June 30, 2003. We
do not expect the adoption of SFAS No. 149 to have an impact on our financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 requires certain financial instruments that embody obligations of the
issuer and have characteristics of both liabilities and equity to be classified
as liabilities. SFAS No. 150 is effective for all financial instruments created
or modified after May 31, 2003 and to other instruments at the beginning of the
first interim period beginning after June 15, 2003. Our only such financial
instrument is our preferred stock, which has historically been, and will
continue to be, classified as a liability. Therefore we do not expect the
adoption of SFAS No. 150 to have an impact on our financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial results can be affected by volatile changes in raw
materials, natural gas and finished product sales prices. Due to the sale of our
pulp chemicals business, which had significant operations in Canada, we are no
longer susceptible to market risk exposure in the form of currency exchange rate
movements. Additionally, we do not currently have exposure to changing U.S.
interest rates, as there are no draws outstanding under our New Revolver.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, as of the end of the period covered by this
report, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)). Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are adequate to ensure that
information we are required to disclose in reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
In connection with our evaluation, no change was identified in our
internal control over financial reporting that occurred during our most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information under "Legal Proceedings" and "Other Claims" in Note 7 to
the consolidated financial statements included in Item 1 of Part I of this
report is hereby incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are filed as part of this Form
10-Q:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
2.1 - Certificate of Ownership and Merger merging Sterling Chemicals
Holdings, Inc. into Sterling Chemicals, Inc. (incorporated by
reference from Exhibit 2.1 to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 2002).
2.2 - Joint Plan of Reorganization of Sterling Chemicals Holdings,
Inc., et al., dated October 14, 2002 (incorporated by reference
from Exhibit 2.1 to the Company's Form 8-K filed on November 26,
2002).
2.3 - First Modification to Amendment to Joint Plan of Reorganization
of Sterling Chemicals Holdings, Inc., et al., dated November 18,
2002 (incorporated by reference from Exhibit 2.2 to the Company's
Form 8-K filed on November 26, 2002).
3.1 - Amended and Restated Certificate of Incorporation of Sterling
Chemicals, Inc. (incorporated by reference from Exhibit 3.1 to
the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2002).
3.2 - Certificate of Designations, Preferences, Rights and Limitations
of Series A Convertible Preferred Stock of Sterling Chemicals,
Inc. (incorporated by reference from Exhibit 4 to the Company's
Registration Statement on Form 8-A filed on December 19, 2002).
**3.3 - Restated Bylaws of Sterling Chemicals, Inc. (conformed copy).
+**10.1 - Acrylonitrile Expanded Relationship and Master Modification
Agreement dated June 19, 2003 between BP Chemicals Inc. and
Sterling Chemicals, Inc.
**10.2 - Tenth Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan.
**10.3 - Sixth Amendment to the Sterling Chemicals, Inc. Hourly Paid
Employees' Pension Plan.
**10.4 - Fourth Amendment to the Sixth Amended and Restated Savings and
Investment Plan.
**10.5 - Eighth Amendment to the Sterling Chemicals ESOP.
**14.1 - Sterling Chemicals, Inc. Code of Ethics for the Chief Executive
Officer and Senior Financial Officers
**15.1 - Letter of Deloitte & Touche LLP regarding unaudited interim
financial information.
**31.1 - Rule 13a-14(a) Certification of the Chief Executive Officer
**31.2 - Rule 13a-14(a) Certification of the Chief Financial Officer
**32.1 - Section 1350 Certification of the Chief Executive Officer
**32.2 - Section 1350 Certification of the Chief Financial Officer
+ Portions of the exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
** Filed or furnished herewith
21
(b) Reports on Form 8-K.
1. On April 30, 2003, we furnished a Current Report on Form 8-K reporting
Items 7 and 9 related to the filing of the Debtors' Monthly Operating
Reports with the Bankruptcy Court.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
STERLING CHEMICALS, INC.
(Registrant)
Date: August 12, 2003 /s/ RICHARD K. CRUMP
-------------------------------------------
Richard K. Crump
President and Chief Executive Officer
Date: August 12, 2003 /s/ PAUL G. VANDERHOVEN
-------------------------------------------
Paul G. Vanderhoven
Senior Vice President-Finance and Chief
Financial Officer
(Principal Financial Officer)
23
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
2.1 - Certificate of Ownership and Merger merging Sterling Chemicals
Holdings, Inc. into Sterling Chemicals, Inc. (incorporated by
reference from Exhibit 2.1 to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 2002).
2.2 - Joint Plan of Reorganization of Sterling Chemicals Holdings,
Inc., et al., dated October 14, 2002 (incorporated by reference
from Exhibit 2.1 to the Company's Form 8-K filed on November 26,
2002).
2.3 - First Modification to Amendment to Joint Plan of Reorganization
of Sterling Chemicals Holdings, Inc., et al., dated November 18,
2002 (incorporated by reference from Exhibit 2.2 to the Company's
Form 8-K filed on November 26, 2002).
3.1 - Amended and Restated Certificate of Incorporation of Sterling
Chemicals, Inc. (incorporated by reference from Exhibit 3.1 to
the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2002).
3.2 - Certificate of Designations, Preferences, Rights and Limitations
of Series A Convertible Preferred Stock of Sterling Chemicals,
Inc. (incorporated by reference from Exhibit 4 to the Company's
Registration Statement on Form 8-A filed on December 19, 2002).
**3.3 - Restated Bylaws of Sterling Chemicals, Inc. (conformed copy).
+**10.1 - Acrylonitrile Expanded Relationship and Master Modification
Agreement dated June 19, 2003 between BP Chemicals Inc. and
Sterling Chemicals, Inc.
**10.2 - Tenth Amendment to the Sterling Chemicals, Inc. Amended and
Restated Salaried Employees' Pension Plan.
**10.3 - Sixth Amendment to the Sterling Chemicals, Inc. Hourly Paid
Employees' Pension Plan.
**10.4 - Fourth Amendment to the Sixth Amended and Restated Savings and
Investment Plan.
**10.5 - Eighth Amendment to the Sterling Chemicals ESOP.
**14.1 - Sterling Chemicals, Inc. Code of Ethics for the Chief Executive
Officer and Senior Financial Officers
**15.1 - Letter of Deloitte & Touche LLP regarding unaudited interim
financial information.
**31.1 - Rule 13a-14(a) Certification of the Chief Executive Officer
**31.2 - Rule 13a-14(a) Certification of the Chief Financial Officer
**32.1 - Section 1350 Certification of the Chief Executive Officer
**32.2 - Section 1350 Certification of the Chief Financial Officer
+ Portions of the exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
** Filed or furnished herewith